Updated Trading Notes for July 15th

Notes from Monday’s Trading: 

The challenge for investors remains a market driven by speculation of the economy improving, and any good news, today see Citigroup earnings and mortgage settlement, only adds fuel to the fire. Financials were up 0.6% on the day, but the positive momentum in the sector will need to continue if the broad indexes are going to recover from the selling last week and move to higher ground.

The high (gap open) to low (near low of day close) trading day left a concerned view for me as we go forward. The conviction seemed to be lacking overall, but it was positive nonetheless. The extended move on the upside makes everyone cautious, and we have to be careful not to read more into this that is there. That said, it is important to proceed with caution.

Utilities were one of the downside leaders dropping 1.1% and putting in notice the downside is alive and well. Worries relative to interest rates climbing remain a drag on the sector. Short side trades are worth some attention at least as a hedge on any holdings.

Gold sold off 2.3% and technically changed the reversal off the June low. Miners were lower as well. This is worth our attention for a follow through on the downside and a short opportunity. IF… it holds support here watch the strength or conviction of the buyers.

Rumblings again in Russia and Ukraine issues. RUSL lost 1.8% and watching to see if this develops more downside pressure. RUSS is the short side trade on Russia and move back above $10.50 gets interesting.

Notes to Note: 

Below are notes of interest and what we are watching looking forward:

  • Citigroup sets the tone for the banks with better than expected earnings. They are also in the midst of settling the mortgage issues for $7 billion. Cleared the $48.45 resistance or top of trading range and looks prepared to head higher. KBE started higher on the news, but gave up the gains into the afternoon. Watch for upside to continue if JP Morgan beats expectations on Tuesday.
  • There is plenty of worry about the consumer (XRT) and their willingness to spend. The luxury end of the sector is doing well, but the lower to middle portion is experiencing a slow down. The warnings from WalMart, Target, Family Dollar and others are on record and earnings reports will be closely watched. The retail ETF has been unable to eclipse the January high of $88.40. This remains a sector to watch for warnings about the US economy going forward. June sales reports are due Tuesday morning.
  • Gold ran lower giving up more than 2% on Monday. Profit taking was the headline, but the speculation that was driving the price has quieted down leaving speculators to go other places. Gold miners lost nearly 3% in response and silver dropped 2.3%. This is just the latest commodity to drop from recent bounces.
  • Crude oil remains in a slump. After testing the $100 mark it closed near the $101 level on Monday. Still looking for direction and unwilling to short the commodity without some clarity near term. Speculation from Ukraine and Iraq are still on the table.
  • Volatility made a move on the upside last week with the VIX index making a move above 13. Monday the VIX retreated to 11.4 and SVXY gaining more than 3% on the day. Worry once again looks to be short lived as the buyers again buy the dip.
  • Telecom (IYZ) attempting to move to new highs again. Still not convincing on the upside, but worth our attention this week.
  • China (FXI) as we noted in the weekend notes, did make the reversal and continuation of the upside on Monday. The gap open avoided the entry price to add the position, but we will watch how it trades near resistance at the $38.40 mark.
  • Emerging Markets (EEM) pushed back near the current highs after some brief selling last week. Holding a move above the $44.20 level would be of interest.
  • Transports (IYT) breaking from the consolidation pattern near the $149 mark. This is a positive for the major indexes overall. Lower gasoline and oil prices would help if the prices remain lower near term.
  • Dow closes above the 17,000 mark for whatever that bit of data is worth.

Practice patience and trade with discipline.

Market Story & Outlook:

Temporary fear from Portugal’s financials stability, Ukraine and Iraq continue to deal with geopolitical issues that threaten oil production, and optimism in the US markets are still being fueled by the belief the economy is getting stronger. The focus remains on a optimistic outlook both domestically and internationally. Any hiccups along the way are soon pushed to the side on the belief of improvement going forward. Thus, markets started a recovery on Friday and followed through on Monday. Remember, regardless of what we believe, the outlook is positive and that is keeping buyers engaged with the trend line moving higher.
Earnings are the current chapter in the story of the markets and they started off with positive results thus far. I am not going to attempt to understand the rationale behind slower economic growth and higher stock prices. But, the stock buybacks have been the key ingredient to keep prices rising. Throw in some mergers and acquisition activity and you have plenty of ‘reasons’ for stocks to go higher. This earnings period is going to be interesting relative to the reaction from investors as the data is released going forward. The financial sector has started on a positive foot, but there is plenty to come.
Until there is a reason to doubt the projections about the future the trend move up and we move with the trend.

Sectors to Watch:

  1. S&P 500 index tested 19060 support, bounced and is moving back towards the previous high. After a very mixed week of trading in the index with the leadership being tested, but back on the upside as we start a new week of trading.
  2. NASDAQ Index tested the 4350 level held and has bounced back with a solid gain on Monday. The index is still in a positive trend and continues to hold above support. The leadership from technology, telecom and large caps stocks (The NASDAQ 100 index) continues the leadership for the broad index. Keep your stops in place and see how it plays out near term.
  3. Small Caps (IWM) – Small caps tested the 200 day moving average and the held above the $115 support. Watching to see if the upside resumes with a close above the $116 as a trade opportunity. Not overly impressive on Monday, but did hold support.
  4. Energy (XLE) broke the $98.72 support and bounced nicely on Monday. Still have plenty of work to do if we are to  bounce above the previous highs. Patience for now on direction.
  5. Technology (XLK) false test lower and broke higher above the $39 mark on Monday. The semiconductors (SOXX) are consolidating near the high and worth watching as well.  FDN tested $58, held and solid move on Monday to continue the upside trek. IGV made solid move on the upside as well with IGN the laggard of the sector. Watch and manage your risk.
  6. Healthcare remains in a leadership role with technology. The biotech (IBB), pharma (XPH), providers (IHF) and devices (IHI) are all lending help to the sector following the current test on the downside.
  7. Consumer Staples (XLP) moved off the lows and held last week. This is a defensive sector on the rebound and could offer some upside opportunity as well. Watch for entry at the $45.25 which was hit on Monday.
  8. Utilities (XLU) down 1.1% on worries relative to interest rates and growth rotation. I am not convinced that is the big worry, but the choppy trading range developing since April is in play. Watch the downside risk on test of $41. SDP is short ETF trade. (thin volume)
  9. We stated there would be opportunities if the Friday move continued to start the week. That is exactly what happened on Monday. Focus, discipline and patience.


Sector Rotation Model (updated – 7/14/14)

ONLY ETF Model (updated – 7/14/14)

S&P 500 Index Model (Updated – 7/14/14)

ONE EGG Model (New Scan Results Posted – 7/14/14)

Pattern Trading Setup:

  1. Nice start to the week on Monday and looking for follow through as scan for reversal and breakout opportunities.
  2. SPWR – entry $39. Tested $36 support and held with an upside opportunity short term.
  3. ALXN – entry $165. Trading range move higher. Healthcare is a leading sector.
  4. MSFT – entry $42.30. Break from consolidation. Software sector bouncing back.
  5. EEM – entry $44.30. Break from consolidation. Upside opportunity still in play.

Pattern Trade Tracking & Follow Up:

  1. T – entry $35.60. Reverse head and shoulders pattern. Telecom wants to break higher. Stop $34.75.
  2. GILD – entry $83.50. Cup and handle pattern. Biotech remains one of the leaders. Stop $86
  3. AAPL – Entry $91.10. Test of support is shallow ABC pattern. Run back to previous high and beyond if momentum picks up. Stop $93.30
  4. DBB – Entry $16.75. Break resistance and continuation of reversal. Cooper reversing along with steel. Added position on test lower and continuation of upside.  Stop 16.75.
  5. QQQ – entry $92.63. test reversal. Tested the trend line and looking for bounce back to upside as trade opportunity. Stop 94.
  6. PFG – entry $48. trading range. Insurance joining upside move with breakout. Stop $49
  7. SMH – entry $45.65. Triangle breakout. the consolidation pattern is breaking to the upside. technology leadership. Stop $49.50.
  8. AMAT – entry $20.20. Flag following a trading range break on upside. Look for volume to pick up on the move higher. Stop $22.15
  9. CURE – entry $81.42. Ascending triangle. looking for upside follow through on breakout. Stop $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.

Facebook (FB) Update: (see Facebook research page for archive of posts)

  • 5/27 – Moved above the $60 mark and held… looking for a trade opportunity on the upside. $63.50 next level of resistance for the stock.
  • 5/29 – Add 500 at $63.55 follow through today. Added the shares and set the stop at $61.30.
  • 6/6 – See above on pattern breakout to add to existing position. Add additional 500 shares.
  • 6/10 – Adding shares today on the move higher in pre-market. Added 500 @ $64.20 on Tuesday. News of Facebook adding the President of PayPal to staff prompted investors off the sideline on the idea. Watch and manage the risk after the euphoria evaporates.
  • 7/11 – Added the position back of 1000 shares at $65.15. Upside opportunity is still in play.