Trading Notes for Today, January 22nd

Notes to Note: 

Wednesday was another day of drifting and looking for conviction or stimulus to drive markets in a defined direction. Blame the ECB meeting that takes place today as the debate over whether Draghi actually starts the stimulus in Europe or another delay in action. The outcome will have an impact on both global and US markets today. The bias is towards action, but there are also plenty of variables in play on the type of action taken and  how it will be interpreted. The concept longer term is going to benefit the European markets and that is the outcome to watch more than the response today.

To start IEV, iShares Europe 350 Index ETF has reversed off the low in anticipation of the action and the follow through could lead the fund to $45 as a near term target. As with any longer term outlook you have to let the trend establish and then unfold. There will be doubts and volatility along the way, but this could be the reversal I was looking for in October when the ECB failed to take action.

Earnings are focused on the airlines today with LUV and UAL reporting this morning prior to the open. SBUX, GE, MCD and ROK announce after the close. Busy day and one that will certainly have some influence on the sectors in focus.

It is back to the grind today and the attempt to define a direction for the broad indexes. Futures are pointing slightly¬†higher and the ECB announcement will be prior to the open today… watching to see what and how we trade and react to the news short term.¬†I¬†continue to be cautious and take it one day at a time.

MAJOR INDEXES:

The ten-year bond moved higher as yields hit the 1.85% mark up 5 basis points. I expect the volatility in the bond sector remain high moving forward. This is a good time to protect profits and manage the risk of any positions. Shorting the rallies or hedging on the rally to manage the risk would be prudent. Money flow will shift if the stock market rallies and the global markets find some calm.

The NASDAQ closed at 4667 up 0.27% on Wednesday. The index has gained 32¬†points for¬†the week. A consolidation¬†pattern or trading¬†range for the index remains in place¬†and we bounced off the bottom of the range¬†support at 4555 last¬†week.¬†We have to watch how this unfolds as¬†swings have been more volatile over the last month. The bounce Friday is the third test of support with the second test and bounce creating a lower high. Respect the uncertainty and don’t force trades. QID hit stop at $40. Looking at the long side entry today if the bounce follows through.

The S&P 500 index closed at 2032 or up 0.47% on Wednesday. The index has gained 12 points this week. Remained below the 50 DMA and confirmed bounced off the 1992 support level again for the third time. The second test and bounce created a lower high. If we push back above the January 8th high we retool our approach. Short trade in SDS hit stop at $22.50. Looking at the long side entry today if the bounce follows through.

The Russell 2000 index fell 4 points on Wednesday. It is still within the trading range after testing the 200 DMA again. Watching how this unfolds near term. Not showing much in terms of momentum short term.

The Volatility index closed lower on Wednesday at 18.8 as hope is creeping in from the ECB outlook. The index remains elevated, but some of the fear evaporated on modest buying. Watching SVXY today as the downside could move back toward the 16 level on the index.

The Dollar (UUP) gave up some ground on the euro optimism closing at $24.62 (UUP). The dollar index (DXY) has moved above the long term resistance and continues to progress closing at 92.74. The stronger dollar remains in play and the move from the franc just added one more piece to consider. Talk of stimulus on Tuesday from the ECB is putting more pressure on the euro to move in response to the stimulus. The weakness and uncertainty globally is one key reason for the rally and unless that shifts near term the dollar my remain strong for the foreseeable future.

Crude Oil jumped Wednesday more than 5%… fell on Thursday 5%… Friday up 5.8%… Tuesday down 5.2%… Wednesday up 2.4%. Bottoming process in play? Must be as all this volatility has led to $47.70 price level and building a base. There is certainly some volatility in play as investors determine what they really believe. Some speculation about a short squeeze in play against the heavy short positions on crude.¬†The ECB outlook along with more stimulus globally could spark a speculation rally in crude on hopes consumption will rise. Watch for trade opportunity.

There is plenty of speculation in the markets currently as investors struggle with uncertainty about both the US and Global economic picture. The downside has taken on the leadership role for now, but as we all know that can change quickly as the bounce on Friday showed. Watching for a follow through on the buying this week. If the global markets find belief the upside may return to short term on the hype. This remains a high risk environment short term.

Moves that matter…¬†

Homebuilders reacted to the KB Homes data on earnings, but the slowing news was the bigger impact. Earnings over all have been mixed, but the banking sector is showing weakness in mortgage business as another negative indicator looking forward. Tested the 200 DMA on Friday and bounced, Tested again on Tuesday. Jury is still out on the sector, but the downside is set up technically for more selling. Watching to see how this unfolds and swing trade opportunities.

Banks (KBE) produced earnings result that plainly stunk! The reasons for the missed numbers were as diverse as the number of companies announcing. Regulation expense, less mortgages, slower bond trading, slower stock trading, slower IPO business, and plenty of other reasons were behind the missed earnings and decline in stock prices. The downside is in play, but the contrarian outlook is to let the news settle and look for the upside trades off the lows.

What to watch¬†this week…

Treasury bonds are technically overbought and look setup to short any rallies going forward. The challenge with that is the emotions and money flow into the bond any time something spooks the market. This is one to watch as we start the trading week.

Volatility index hit the highs at 23.25 and is working its way lower. More buying takes the index lower again as another attempt off the support levels is in play. SVXY short trade is looking better as the trade short term on the rally.

Europe is on the top of the heap for opportunities if the ECB follows through. The ripple effect of all the central bank action is a rally in global stocks. EEM broke through resistance on Wednesday. China hit new near term high. EFA broke the micro term downtrend line. Watch for follow through on the news today.

Sectors of Interest for Trading:

I still don’t trust¬†this environment and lack of conviction in either direction. The speculation on what each news event means or will do is frustrating to the longer term outlook, but short term trades are looking better as the news is more tradable than the last five weeks. Needless to say,¬†news is driving and the day-to-day volatility and trading. Patience is required along with some good old fashion research. We will be patient¬†as¬†today promises to be interesting with the ECB.

Gold Miners (GDX) The sector has benefited from the bounce in gold. Wednesday lost 1.7%¬†as the worries over ECB actions are seen to be negative to gold? Interesting interpretations on actions. The song, “Twisting” is coming to mind. Twist the news to say what you want the stocks to do… Watching and managing the stops as this unfolds. But, I do believe the upside in gold still has some room to run.

REITs (IYR) flight to quality is the story. Money is moving were it treated the best with the least volatility. Some testing of the move last week near the highs. Steady as the defensive money continues to flow in to the sector. Slightly overbought, but that can continue as relative strength is high. Hold and watch for the opportunities as this moves forward. WEDNESDAY: tested 0.1% and near $81. Test of $80 would be of interest short term. Watching the money flow in sectors short term could turn on news.

China (FXI) uptrend remains, albeit volatile, off the October low. Technically the upside is in favor and worth trading if we can move through resistance and stomach the volatility that is likely to remain. Still testing the highs with consistent tests as we go. We will see how this unfolds on Wednesday, need to move through the $42.12 level. THURSDAY:  Got the move to near term high and looking for follow through on the upside based on global optimism.

Watch List Opportunities:

  1. S&P 500 Strategy¬†–¬†updated
  2. Sector Rotation Strategy- updated
  3. ONLY ETF Strategy- updated
  4. Pattern Trade Strategy Рupdated
  5. ONE EGG Strategy – updated

Pattern Trade Setups:

  1. Volatility is back… we have to remain patient and selective with any positions. Manage the risk accordingly.¬†Manage your stops along with the current volatility intraday. Not posting much as we will let this unfold.
  2. QLD – entry $135. break downtrend line and reversal off support. NASDAQ has been leading on the bounce off support the last three trading days. Swing trade on the move higher.
  3. TBT Р entry $41.60. base and bottom reversal. If stocks rally looking for bonds to fall modestly enough for trade opportunity on the breakout.
  4. SPXL – entry $85.50. trendline break and bottom reversal swing trade. Stocks trying to move higher again after test of support again.
  5. SVXY – entry $56.90. bottom reversal. VIX index receding as the fear subsides, but uncertainty still in play. Watch for swing trade on the reversal.

Pattern Trade Tracking:

  1. BABA – entry $100.40 (15 cents above posted entry). Resistance and trend reversal. Bounce off support and break of resistance would be entry. Trendline break at 105.25 would be point to add to position. Stop $99.90
  2. GILD – entry $104. bottom reversal and trendline break. Fundamental news driving the upside reversal. Trendline break entry point. Stop $102.40.
  3. VXX – entry $33.60. Resistance breakout. Volatility is picking up short term and looking for the follow through on the upside move as uncertainty rises. $33.60 (raised stop). Volatility starting to drop…. honor the stop.
  4. TSEM – entry $13.45. descending triangle. Confirmation break on the upside from consolidation and uptrend resumption. Stop $13
  5. GDX Рentry $19. Break from consolidation bottom. Look for trade on the upside move in gold miners short term. $20.50 short term trade target. NUGT gives you the leverage. Stop $21.50 (target price + profit).
  6. WFM – entry $48. Flag. Longer term outlook very positive off earnings. Look to hold this position going forward. May add to our long term strategy below. Stop $46.90
NOTE: The pattern trades above are setups that I see for a potential swing trade or short term trade opportunities. Some will fail to follow through on the pattern, some will break and trade according to the pattern. The key is to use discipline in the trades. Entry, Exit and Target on all trades is vital. I am posting these as opportunities that I see when doing scans daily. You can use them as a teaching tool or you can trade them, either way please use discipline. The best way to treat these as a learning tool is to assume a $100,000 portfolio and each positions receives a 5% allocation. If we state to take a 1/2 position as an example you would only allocate 2.5% to that position. I would use a downside risk of $500 per trade as a maximum loss. That will help  you learn position sizing and risk management. All investing comes with risk. Our job as investors is to manage the risk. Keep your focus and discipline in place.
Long Term Opportunities: 
Nice bounce back from the selling and now attempting to make a push on the upside. We have to be patient with these and use different approach as they are long term holdings.
  • Facebook (FB) – $73.15 entry (10/16) added 1000 shares back on the long term outlook following the choppy drop in markets. 10/28 – Earning¬†were good, but the outlook showed higher costs and the first reaction is sell the shares from traders. Still trading sideways range as investors sort out the facts and fiction. Testing the bottom of the current range and bounced … bounce (we added to our positions. 500 @ $77.50 – 1/8) Watching how the downside plays out. (Bought 20 of¬†the $75 puts for March on¬†the downside break $4.25).¬†TODAY:¬† Bounce produced some hope, but still needs to break the downtrend from the December high and it was close on Wednesday. Looking for confirmation on the upside.
  • Twitter (TWTR) – ¬†Added 500 shares at $42.80 (10/28). This is a long term holding and we will manage the downside risk going forward. (hit stops on our put contracts on the reversal last week.)¬†Bounced back to resistance and sold the puts… Looking to buy shares on break above $39.20. (Added 500 shares at $39.20 Friday.) TODAY:¬†Small bounce, but watching how this unfold in respect to the broader indexes.¬†
  • Bank of America (BAC) We own the Jan 2016 $17 Calls at $1.85/200 contracts (added 100 contracts on pullback). Banks were¬†gaining some ground and I still like our position going forward. We add our long positions in stocks back (Added 2500 shares at the $16.35 mark ¬†on 10/21). Stop is $15. (ADDED 2500 shares at $17.15 and target is $18 on the move short term as trade in¬†the position.) (50 Feb 17 puts @ 60 cents. ADDED) &¬†¬†(ADDED 250 June 16 put contracts @ 0.95 cents 1/14)¬†TODAY:¬†Attempting to hold support near the $15 mark…. we will see how this unfolds here. If holds looking to unwind some of our put contracts.
  • Whole Foods Market (WFM)¬†11/20/14 Start coverage. The outlook has improved after making changes to the stores and adding new stores. The earning validated what I have been following for the last year and the company should be at the front side of a long term upside based on fundamental growth. Adding 1000 Shares at $48 to start the position.¬†Small range as market keeps stock in check. TODAY:¬†¬†Cleared the $52¬†resistance of late and move up to maintain the uptrend.¬†I like what we are seeing and may look to add to our position on confirmation of the move.