Trading Notes for Today, October 22nd

Notes to Note: 

Correction? What Correction? The buyers have stepped in to push the markets off their lows. However, the number of buyers according to the volume is not overwhelming. The lack of sellers has allowed the buyers to push stocks higher following the short covering on Friday. Does this mean the sellers are done? I would not count them out as they are likely to take another shot at this markets short term. The volatility index fell to 16.3 and well below our target of 17.5. If it breaks below this support level 13.6 could be next. That would allow even more buying short term.

The earnings are now being ignored relative to the downside catalyst? Amazing how a couple of up days makes McDonald’s, Chipotle and others look okay. This will be something to watch going forward as we all know fundamentals eventually it matter, just a matter of when.

Apple announced after-hours on Monday and beat estimates as the iPhone 6 sales were strong. It was rewarded with a 2.7% gain and moved back at the top of the two month trading range. Need to break through this level if it is going to make a run higher near term. Entry at $103 if it can gain upside momentum on the earnings news.

Small caps resumed the buy-side after a test on Friday. 1090 resistance cleared, check.  1110 resistance cleared, check. 1120 is the next point to conquer on the bounce off the lows. Already higher than many predicted for the lagging sector. Watch, manage your stop on positions and let it run for now.

Semiconductors bounced from the oversold conditions as well, but could not get through the 580 resistance on Monday… made it on Tuesday and in fact filled the gap left on the selling which was our target for the trade on SOXX below in the trading pattern notes.¬†Let it run for now and tighten your stops.

Biotech made solid moves higher¬†last week and IBB made a follow through move on the day. Cleared the 50 DMA on Tuesday and back to the top side of the range.¬†If it makes it through this level who knows. I didn’t believe it would run up 3.2% Tuesday to hit this level as quickly. Take what it gives and manage your stops.

Fed Fisher recommends to end QE now as planned. Must have not been believed by the bond traders as the yields moved lower showing the move to safety is still in motions.

Going with the bounce momentum for now with the confirmation of the move on Monday and solid gains on Tuesday. If we had some volume to go with it I would like it even more. How far do we go?¬†Anyone’s guess simply put. The rationale behind the buying is a bounce… if the fundamentals changed and I didn’t read about it! I will be looking for the key data points to confirm the bounce or else we treat it like a trade short term.

Some thoughts on news/events impacting investor psyche:

* ¬†Trading environment remains challenge short term. Fear subsided further on Tuesday¬†as the VIX index below¬†the 17¬†level and back towards the 13.5¬†support zone as a possibility short term. The¬†sellers took their best shot¬†and over the last month produced what amounted to a ten percent push lower prior to the bounce that started last Thursday. The micro trend is still down¬†and in control of for now. Monitor the bounce and take what trades work for your strategies, but remember the objective is to manage risk as well as money.¬†Don’t let your emotions get the best of you and remain true to your investment strategy.

* FOMC¬†meeting is coming… plenty of bantering about what the Fed will say, do or not do. The Presidents are making comments all over the board to appease the markets and the global community. I am willing to wait and see how they handle the meeting and the outcome.

* ¬†Clarity is the primary issue with stocks. Without the ability to forecast with some confidence investors react to news and worries which creates a choppy environment. We are in the process of building a second ‘V’ bottom potentially off the October 15th low. This would be a much deep V than the one in August if it completes the process. Not a likely event, but one to watch as the market attempts to gain some clarity moving forward.

Sectors to Watch:

S&P 500 index followed through on upside bounce move and closed at 1940 (50% fibanocci retracement). More importantly we closed above the 1900 mark and the 200 DMA. 50 DMA is overhead the previous trendline. How much gas is in the tank for the move higher? Volume is a issue from my perspective as it has been very light on the buy side the last two days.

Bonds (TLT & IEF) The uncertainty towards the Fed remains in play as stated below. The current view it that rates will remain low as the Fed attempts to help everything from US income inequality to more jobs for global growth in Europe. The mandate has become to spread out and the effectiveness is equally as spread. Watching for the downside in bonds to materialize, but patient for now. Closed at the entry at $51.80 on TBT. This is a trade back to $54 initially and we will watch for the entry today.

Treasury yields continued decline with the 10-year bond now yielding 2.18% and the 30-year bond at 2.95% currently. The speculation is for rates to rise in response to the Fed hiking rates next year… not happening as fear wins. If we remember the FOMC minutes from the last meeting, the Fed is worried about the stronger dollar… the impact of higher US rates to the global economies and low unemployment rates in the US. In other words the Fed wants rates to remain low longer to help the world economies. I believe this is the greatest risk facing the financial markets currently… if rates rise too abruptly it could trigger a sell off in bonds raising yields and impacting the outlook for growth as cost rise proportionately to the cost of debt. The downside trade is TBF which is the non-leveraged short for the 20+ year Treasury bond if rates start to rise again. If Humpty-Dumpty (treasury bonds) fall as yields rise, all the worlds Treasuries and banks will not be able to put Humpty back together again. This is most definitely a sector to watch going forward. Don’t let the short term fear factors driving rates lower be a distraction from the longer term outcome for the sector, but in the same vein we have to let the speculation and fear play out.

Crude oil remains a big question market relative to the price short term. The stronger dollar has pushed prices lower along with weaker demand. Closed at $82.93 and holding support with a modest bounce. The impact to the stocks are obvious as XLE has declined to support at the $78.90 level for now. Bounce in play and $83.60 is the level to clear short term. The leaders on the bounce are CHK, HP, WMB, EOG & TSO. Watch and scan for the leaders and the opportunities.

Impact of Crude oil on other sectors is important to watch. While lower prices in crude are a positive for the price of gasoline you have to extrapolate that to the potential economic impact in the US. Trucking costs decline, jet fuel declines, etc. All of the pass through benefits to the consumer are a positive for the economic picture. Some believe the benefits will not pass through to the consumer, but the Airlines, Trucking companies and others will keep the profits to add to their bottom line. If that is true, then we should look at who stands to benefit the most going forward. Since Airlines spend approximately one-third of their revenue on jet fuel and if prices fall 20% doesn’t that translate to a stronger bottom line without much effort? Sounds like a good reason to scan the Airline sector for stocks like DAL, AAL, SKYW, JBLU & LUV which are the current leaders.¬†You get the point… it is good to look where opportunities will improve going forward despite what is happening in the world. The only wild card to this situation is the Ebola situation as it will put more stress on airlines and travelers. Remember the objective is to outline what we believe could happen and then let the charts validate the truth or reality going forward. Transports (IYT) and Trucking stocks are worth attention as well (USAK, YRCW, ARCB, PTSI, & MRTN).

We will track to see how this unfolds going forward and what trades or investments materialize.

Model Position Notes: 

Below are some notes on positions in models and what we are watching looking forward:

  • Volatility index (VIX) fell back near the 16.3 level on Tuesday. This was below our target for the index, but the buyers took control. We added the SVXY trade posted to the S&P 500 model as a short on the VIX. Nice move on Monday and¬†equally nice on Tuesday. We will look to take some gains on the trade today. Sell half and see how it trades out today.
  • REITs (IYR) the break higher on Monday pushed through the entry point for the trade we posted to the S&P 50o model as a trade on the Fed intervention into the keeping rates low again. Solid bounce continued on Tuesday and we will push the stop back near the break-even point on the day.
  • NOTE… this is a bounce trade until it validates to be more.
Watch List Opportunities:
  1. S&P 500 Model – updated model table – Added positions on Monday.
  2. Pattern Trading Model below updated. Added positions on Monday.
  3. Long Term Opportunities – added positions on Monday.

Pattern Trade Setups:

  1. Nice move on Tuesday to continue the upside move. Manage the positions and keep going forward. Looking for a test of the current move, but don’t see much in terms of the sellers willing to retest the lows currently. Patience and let it run. This is turning into more of a move upside than I thought initially, why you always let the market decide.
  2. TBT – entry $51.80. bottom reversal. Bonds overbought? look for yields to move up slightly as the positive in stocks influence yield short term.
  3. USO – entry $31.87. bottoming pattern. break higher on oil to $85-87 range. Speculation driven move no fundamental change. Trade only on the move.
  4. SSYS – entry $120. bottom reversal and breakout. momentum turning up near term for technology. Trade only.

Pattern Trade Tracking:

  1. QLD – entry $114.50. Bottom reversal continuation. Quick upside, but needs volume to keep the move alive. $121 target for trade.
  2. TNA –¬†entry $62.50. bottom reversal breakout. Tested and needs to move through the next level if we are going higher. Target $66.50.
  3. SSO Рentry $107.60. bottom reversal. Tested support at the $107 level and bounced, took entry on the trade. Stop $105.80.
  4. SOXX – entry $77.80. bottom reversal. Setting up for bounce off the lows. Broke higher on Thursday and looking for follow through on the move. Stop $77.
  5. ERX – entry $71.15. bottom reversal. Oversold bounce on Thursday. Followed through for entry and target of $84. Oil bounced as well off the lows. Stop $68.
  6. SOXL – entry $75.60. bottom reversal. This is a trade setup only and not willing to chase is the Intel news spikes too high. Target $87. Stop $75. SOLD 1/2 on pop $84 on Friday. raising stop to $77.10 on balance.
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: 
Both positions held on in the storm Monday and Tuesday. Exercising some patience as the issue of the Fed unfolds. These are long term holdings and we don’t want to over react tot he short term news. If the short term volatility made any rationale sense we would trade the events, but they are too news and emotion drive for now. There will be opportunities on the other side of this and we will take advantage of that as it arises.
  • Facebook (FB) – Testing the break higher and has held up well in the recent choppy markets. $73.15 entry point to add 1000 shares back on the long term outlook. Earning are 10/28 and we will watch to see how we traded into that timeline.
  • Twitter (TWTR) –¬†Tested lower and wanted to add on a break from the trading pattern at $50. Took entry 10/20 for 1000 shares at $50 and stop at $46.
  • Bank of America (BAC) We own the Jan 2016 $17 Calls at $1.85. Banks are selling in the current push lower, watch and manage the position.¬†Want to add our long positions in stocks back near term if we hold support and make some progress relative to sentiment. Added 2500 shares today at the $16.35 mark. Stop is $15.