Trading Notes for the Week of January 19th

Notes to Note: 

The trading week was full of news and events that kept investors on the defensive. The lack of confidence and clarity only added to the volatility which allows the news to have the impact day-to-day and intraday. The most interesting news of the week had to be the Swiss National Bank sending a tsunami through the currency markets when they decided to remove the peg to the euro at $1.20. The Swiss franc jumped 32% in less than a half hour. This added to the five day streak of selling before the modest bounce on Friday to end the week. Support again holds at the 1992 mark for now.

Oil jumped Wednesday more than 5%… fell on Thursday 5%… and ended Friday up 5.8%. Bottoming process in play? 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 commodity did close up 1.7% for the week after all was said and done, but the future isn’t any clearer relative to demand. Thus, this remains a sector with increased volatility and speculation generating big swings in both direction. Unless you like high risk trading, I would wait for a base to build and some clarity in direction before putting money to work.

Earnings from the banks did nothing to help the cause and retail laid an egg as well. We managed some how to hold support again, but as stated above, if we cannot manage a higher low on the bounce the sellers may use that as weakness on the buyers behalf and push the indexes lower. This is where the challenge on the short side of the market takes root. We all know markets move faster on the downside and the reversals can be equally as fast. Each move is different and has to be respected, don’t assume anything and use your discipline to trade the move.

MAJOR INDEXES:

The ten-year bond moved lower falling to 1.71% to start Friday, but manage to move back to 1.81%. I expect the volatility in the bond sector continue to be 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 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 4634¬†up 1.4% on Friday. The index lost 1.5% or and¬†down 70¬†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 to end the 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. If this bounce creates another lower high, adding to the QID trade is the play for the week. if we eclipse the last high we punt and watch. Respect the uncertainty and don’t force trades. QID entry hit as short trade against the index on 1/12¬†with stop at $40. Manage your risk.

The S&P 500 index closed at 2019 or up 1.3% on Friday. The index lost 1.2% or down 25 points this week. Remained below the 50 DMA and confirmed bounced off the 1992 support level again for the second third time. The second test and bounce created a lower high. If this bounce creates another lower high, adding to the SDS trade is the play for the week. If we push back above the January 8th high we retool our approach. Short trade in SDS hit entry point in trading 1/13 with stop at $22.50. Manage the risk short term.

The Russell 2000 index fell only 8 points for the week after a 23 point gain on Friday. This has been the better looking of the indexes, but the drop on Thursday rattled investors only to return to the previous level on Friday. It is still within the trading range and tested the 200 DMA again. The challenge is in the other major indexes short term and we will watch how this unfolds on the week.

The Volatility index moved higher on the week with the intraday volatility a bigger story than the day-to-day volatility. It closed at 20.95¬†on the week and remains elevated, but some of the building fear evaporated on Friday’s buying. The 25 level is the high from the October move and it is within distance depending on how we trade on the week. We are seeing just how much investors don’t like uncertainty about the future. The default is to sell as panic sets in. We are at that crossroad again with a bias towards selling this¬†week.

The Dollar (UUP) hit new highs closing at $24.59 (UUP). The dollar index (DXY) has moved above the long term resistance of 89 closing at 92.64. The stronger dollar remains in play and the move from the franc just added one more piece to consider. 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 remains one of the components that was a catalyst to the selling. The last three days speculation has returned relative to a bottom being put in for crude at the $45 level. Some rumblings of a short squeeze pushing crude up more than 5% the last thirty minutes of trading on Wednesday. The sellers return to push oil lower by 5% and the buyers were back to gain 5.8% on Friday. Crude ended the week slightly higher over, but the volatility may be a signal for a bottom short term. Doji reversal on Tuesday has followed through, but watch to see how trading starts the week in the commodity. Crude closed at $49.13 and back near the $50 level? The downtrend is well established on weakening demand. Speculation doesn’t change the view just the trading swings. Patience.

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. Watching for a follow through on the buying from Friday. This remains a high risk environment short term.

Moves that matter…¬†

Homebuilders reacted to the KB Homes data to start the week, but the delayed reaction came the next day nearly a 5% decline in ITB. 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. Jury is still out on the sector, but the downside is set up technically for more selling. Watching to see how this unfolds.

Banks (KBE) produced earnings result that plainly stunk! The reasons for the missed numbers were as diverse as the number of companies announcing. The sector lost 3.3% for the week after bouncing back 1.5% on Friday. Regulations, mortgages, bond trading, 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.

Swiss National Bank move relative to the euro and the franc have put some issues in play globally that will take time to understand the impact. This will be chewed up hundreds of different ways with speculation relative to the outcome and impact. It is a story that will continue to unfold going forward.

Treasury bond yields continue to drop on the rush to buy bonds. Friday the yield fell to 1.71% before closing at 1.81% as stocks rallied and oil moved higher on the day. As speculation on all the events above and the fear factor play out look for volatility in the bond to increase as well. The 10 basis point swing on Friday is significant volatility for a stable asset. Could offer some interesting swing trade opportunities with the volatility.

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.

Banks¬†and Financials are set up for short as it hit the 200 DMA. Bounce of Friday offered relief, but didn’t really change my mind for now. FAZ is the short ETF for financials and could offer entry opportunity on a rally in the sector.

Volatility index hit the highs at 23.25 and closed near 21 on Friday. More buying takes the index lower again as another attempt off the support levels is in play. VXX remains the trade of choice until the buyers validate a shift in sentiment and worries.

Sectors of Interest for Trading:

I still don’t like the chop of this environment and lack of conviction in either direction. The five days of selling followed by a bounce off support does not change my mind about the upside or the downside. The news is driving and the day-to-day volatility only escalates the risk of the trade. We will be patient to see how the week starts.

Gold Miners (GDX) The sector has benefited from the bounce in gold. Last week face challenges from the Swiss National Bank announcement, but recovered to continue the upside move and closed higher on Friday at $22.16. Uptrend is in ply off the December low and the stops have been adjusted accordingly on the move. Let it run and manage the volatility as it unfolds.

REITs (IYR) flight to quality is the story. Money is moving were it treated the best with the least volatility. No test of the move last week as the uptrend continues to push higher. 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.

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. Monday China’s government lower margin and the markets fell 7%. We will see how this unfolds on Tuesday in the US, but downside is likely to be in play…. look at the bounce or ignore that is the question now.

Watch List Opportunities:

  1. S&P 500 Strategy¬†–¬†updated SVXY, SDS (raised stop)
  2. Sector Rotation Strategy- updated
  3. ONLY ETF Strategy- updated UCO, TBT, ERX, SIL
  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.

Pattern Trade Tracking:

  1. 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).
  2. TSEM – entry $13.45. descending triangle. Confirmation break on the upside from consolidation and uptrend resumption. Stop $13
  3. ACAD – entry $33.60. triangle breakout. Looking to continue the upside trend following the break higher. Stop $33.60 HIT STOP
  4. 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 $20.50 (target price).
  5. 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 below previous support.
  • 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 on Friday, 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:¬†Positively ugly response to earnings and we just manage what we are dealt short term.
  • 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 $50.80 resistance, and¬†holding up well for now as we remain patient. breakout confirmation still needed¬†on the upside.