Week of February 2nd Notes

Jim’s Market Notes:

They are all on the verge of breaking key support levels of the six week consolidation and trading range; the S&P 500 index is down 3.1%, the Dow fell 3.7% and the NASDAQ is off 2.1%. The month of January came to an end with an exclamation point the last two hours of trading on Friday, falling 1.3%. Talk about a bad start to the year, but then we have to remember that 2014 started virtually the same way down more than 3% in January. In fact, last year was one that volatility ruled the year gyrating up and down throughout the year, but manage to post a profit for the year. Make sure your seat belt is fastened we may encounter rough air again in 2015.

What is wrong? Why the selling to start the year? It is just a hangover from where we ended 2014, but we have more facts? Blame the economy, blame earnings, blame the global markets, blame Russia, China, those in Washington DC or even the Federal Reserve. In reality there is plenty of blame to go around. The events leading up to now have been like a scale with one side piling up the good events and the other the bad events. Based on the current tally the bad events are outweighing the good ones, and that is shifting the sentiment towards the sellers taking control of the market direction. The only way to change the trend is for more good events to take place moving forward to balance out the scale, until then momentum is on the sellers side.

Understanding the environment you are trading in is the first key to not losing your money without a fighting chance. The market is a battleground and you have to be well trained to fight

Action Taken: “Vision without action is a daydream… Action w/0 vision is a nightmare.” Japanese Proverb.

I added short positions (see the respective tables for trades) in response to the move on Friday in the S&P 500 index, Russell 2000 index, Financial sector and Technology sector. The weakness or lack of follow through to the buyers on Thursday was the catalyst for the entry. The chart below shows the trading range for the S&P 500 index. First the move back to 2020 on Thursday set up a possible bottom support test and reversal. For that to succeed it needed to follow through on Friday. If it failed to do so, and moved back below 2012 mark, was a short signal to me. Unfortunately that is what happened Friday in the first hour of trading. The risk of the trade is the key to the entry… If I was wrong the stop would have been a close back above the 2025 mark or 13 -15 points which is roughly 0.5%. If I am right and the trade proceeds below the support at 1992 and to the next level of support 1972 that would be a 40 point swing or approximately a 2% gain. A good risk reward set up for the trade. More importantly it would hedge any long positions that would remain open by not hitting their respective stops. Money management is about the portfolio not just one trade. Too often investors forget that key ingredient in the investment process.

Chart

Details of the entries and stops are on the respective tables for each trade taken. The risk of this market remains elevated for buyers (long positions). The short side is setting up, but the risk is equally elevated as a uptrend/bull market dies hard. Don’t assume any trade is right… manage it in light of the risk of the current environment. Stops in place, focused disciplined and patience as it all unfolds one day at a time.

Outlook for the Week:

The NASDAQ is in the best positions of the major indexes. Earnings from AMZN, NFLX, AAPL and GOOG are the reason. All the stock posted solid earnings and were rewarded with a big bounce. The question: will they be able to maintain the optimism if the other indexes crumble further this week? A break of support that is confirmed in the other indexes make for a high probability the NASDAQ will join the downside party. Therefore, we will approach the week with a downside bias, but be mindful that bulls die hard. The downside got the initial catalyst from the economic data remaining weak and GDP numbers¬†dropping on the revisions from 3.2% to 2.6%. Significant enough to get the attention of investors. Oil price destruction remains in play as well. The reduction in rigs in the Gulf took it’s toll on Friday. Jobs lost¬†due to the oil prices… etc, etc, etc. The news is there, the facts continue to add to downside of the scale, believing it is the only thing between a correction and the current trading range.

The volatility index (VIX) is showing the acceleration in uncertainty from investors. Closing at 21 on Friday puts the index back near the top of the current range and could accelerate if the shift in belief about the outlook accelerates on the downside. Hope is still alive and well, but eventually that will turn to survival mode and selling in stocks will accelerate. Thus, we will keep an eye on the index this week and if the opportunity presents itself add to the VXX positions. The close above $35.30 on Friday triggered a buy signal as the end of day selling accelerated. The move offers clear sailing to the $44.50 level reached in the October sell off. Trend is higher off the December low, and for those with a strong stomach, offers opportunity looking forward.

If the short side continues to play out and the support is broken we will add to our positions. But, for now we have to let this story unfold and define the direction according to the belief of investors. Be patient as the week begins and keep your stops in place and look for possible downside opportunities.

Money Management Strategies Links:

  1. S&P 500 Strategy РAdded Positions РManage Risk.
  2. Sector Rotation StrategyР Added short trades to Watch List
  3. ONLY ETF StrategyРAdded Positions РManage Risk.
  4. ONE EGG Strategy –¬†Watching the short side trades
  5. Pattern Trading Strategy РBelow РAdded Position and stops hit
  6. Long Term Strategy – Below – nearing stops on BAC

Pattern Trade Setups:

  1. Volatility is back as concerns over earnings and data continue plague the outlook. Bounced on Thursday, but failed to hold the move on Friday and we added the short trades in response to the move.  Manage risk with your stops and see where we go this week. It is a choppy market and reversal happen at the drop of the hat these days.

Pattern Trade Tracking:

  1. SDS – entry $22.90. Made move toward the break higher and retreated. Looking for that to happen again today. Patience as this is a hedge against our positions on the downside.
  2. QID – entry $40.70. Made move towards the resistance and retreated as well. Could happen again today despite earnings positives. This is hedge as well against positions and looking for the short term risk protection.
  3. SKF Рentry $55.30. Break from  bottoming range. Break through would mean downside move in the financials which have been the weakest sector in the S&P 500. Volume is thin in the ETF use limit orders to keep the spread under control. Stop $54.
  4. SOXS – entry $14.50. Bottom reversal. Trading within the range and a trades setup back to the top of the range initially, but could break through the top and move to $17.50 if the negative sentiment rises. Stop $14.
  5. INFI – entry $15.65. micro-downtrend break. biotech remains a leader and setup is good. Stop $14.30.
  6. SKUL – entry $10.40. Ascending triangle. $10.25 breakout on Friday and follow through for entry. Stop $10.
  7. VIPS – entry $23. Flag. Break above short term resistance and trade to $24.75. Stop $22.
  8. ENPH – entry $11.10. bottom reversal within the trading range. Semiconductors have been a leader and looking for move at least midway in the range to $12.60. Stop $10.85.
  9. TSEM – entry $13.45. descending triangle. Confirmation break on the upside from consolidation and uptrend resumption. Stop $15 HIT STOP.
  10. GDX – entry $19. Break from consolidation bottom. Look for trade on the upside move in gold miners short term. $20.50 short term trade target.
  11. 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 $51.50
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: 
Long term positions take time to manage and patience to let them unfold. The short term can be managed with hedging or trading off the longer term positions. The goal is to build the position and manage the risk. Sometimes the short term news and events cause anxiety… the goal is to mitigate the risk and protect the downside as we allow the stock time and room to grow. If you don’t like long term holdings don’t read the data below.
  • 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. (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 – looking to roll them forward if we test the bounce).¬†TODAY:¬† Earnings¬†beat, but like last quarter speculation on expenses weighing down the stock.¬†Sold lower on Friday as result of the speculation.
  • 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. Looking to buy shares on break above $39.20. (Added 500 shares at $39.20¬†on¬†1/9.) TODAY:¬†Sold lower with large cap worries… watching how this unfolds near term. Bounced on Friday, but still needs shift in sentiment short term.
  • Bank of America (BAC) We own the Jan 2016 $17 Calls at $1.15 (avg price)/300 contracts. 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. TODAY:¬†¬†Testing support again and¬†investor resolve. Not pretty in the financial sector.
  • 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 and moved up to maintain the uptrend.¬†Watch and see how broad indexes move and impact going forward. Influence wasn’t good on Friday, but the long term view is still positive.