The Week in Crayons
Despite ending the week somewhat off their new highs, the markets for the most part continued the slow and relentless rally that began about a month ago. As has been the case during that time, sellers have been few and far between and price action once again occurred on muted volume with relatively little volatility. Not much has changed since last week from a technical perspective and most of the analysis I mentioned in last Friday’s post still stands.
Looking at a chart of the e-mini futures contract for the S&P 500, we can see that we are still in the same narrow rising channel that has contained our rally after breaking out at the start of the year. Price is for the most part in the same range it was in last week except for a failed attempt above 1320 which occurred during the middle of the week off the back of strong eps reports(most notably AAPL). We are now very close to last year’s highs which should serve as a strong magnet for price action as the bulls will eventually try to push price to new highs mirroring the action that has already occurred in the nasdaq composite index.
However, we remain oversold and are beginning to see signs of waning momentum. Notice that we printed a yellow candle on our SG22 momo trend bars on Friday’s close, the first such bar in over a month. This is a hint that upward momentum is slowing down and traders should begin to exercise caution in regards to our current swing up. The first key level to watch if this weakness persists is the 1300 area. This was support last week, and a break below it would also likely take price out of our rising channel. After that, the rising 20 day moving average would likely become the next key area of support which would also coincide with the mid 1280′s which supported price nicely after breaking past our last major pivot high formed in late October. Trader’s should be wary that price dropping into these levels shouldn’t necessarily be seen as a sign to short this market as sellers have been virtually non-existant so far this year and a retracement at this point may end up taking the form of a benign sideways drift instead of a deep price pullback. If price were to remain in our channel and continue squeezing higher, look for the 1340 area to become a major test as we begin to probe last year’s highs.
While this type of slow rise can be frustrating to traders that feel they have not capitalized enough on it can be frustrating, continue to remain patient and wait for the proper setups to appear as we work off our oversold nature very close to some stiff resistance on the longer term charts.
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The Week in Crayons
The markets continued their slow march up this week with little to no real pull backs as the bulls relentlessly stepped in to support the markets any time there was a hint of a drop. We have now drifted in one direction(up) with relatively light volume and volatility for about a month on most of the major indices which is in stark contrast to the highly volatile back and forth movement we experienced for most of the latter portion of 2011. While we can’t truly know until we experience a substantial retracement on the current move, it appears that the market has had a change of character recently and is more likely to be bullish to neutral instead of the neutral to bearish undertone that characterized the back end of last year’s trading. In fact, the start to 2012 is somewhat reminiscent of the start we had in 2011 which also began with a slow and steady march up that seemed to defy gravity.
Looking at a near term chart of the e-mini futures contract for the S&P 500, we can see this low volatility uptrend clearly. Notice how the last several week’s worth of price action is confined to a single narrow range channel. As mentioned earlier, this is in stark contrast to the volatile oscillation that occurred prior to this move. We are now clearly above several key areas of resistance including all of the major moving averages and are poised to challenge last year’s highs. However, Stochastics has had an oversold reading for the entirety of the breakout and while we can continue this slow squeeze all the way to the highs, risk reward does not favor chasing momentum here unless your time frame is less than one to two days for a trade.
Of course, action has been completely bullish for several weeks now, and someone looking to short this should realize that the potential for us to squeeze to last year’s highs is very real. In fact, the nasdaq composite has already formed new highs this week and could be a harbinger of things to come from its relatively weaker peers. In addition to the possibility of a continued squeeze higher, another thorn in the short seller’s case right now is the potential change in character in the markets which could lead to a benign correction that drifts either sideways or slightly down and fails to offer proper rewards commensurate with the risk taken at this point.
As we can see on an older chart of the e-mini futures contract for the S&P 500, this exact scenario occurred during the end of 2010/beginning of 2011. Notice the long narrow channel which contained price action neatly for practically three months. Also note that we were oversold for basically the entire time as well.
While this scenario doesn’t have to play out exactly the same(and likely won’t), it should offer traders a hint of what can possibly occur over the next couple of months and serve as a good warning for those that are looking to short this type of action prematurely. On the other side of the coin, looking at the steep drops that occurred at the end of that run should also serve as a warning for anyone looking to chase extended price action into areas of potential distribution.
We are now a few weeks into the new year and while the character of the market appears to have changed, astute traders should keep an eye on price action and wait for the market to conform to their expectations/scenarios, instead of allowing the market to force them into poor trading decisions.
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The Week in Crayons
While the markets opened down on Friday looking tired and ready to roll over after a week of positive gains, they gained traction midday and eventually rallied to close just below the days high’s. Friday’s price action was part of a larger pattern of afternoon strength that has become prevalent during the early stages of the 2012. While this is typically bullish in nature as it shows that sellers are having difficulty in gaining control of the markets from the buyers, traders should also take into account that sellers are consistently attempting to push the market down but are eventually becoming overwhelmed as buyers continue to step in during intra-day pullbacks. Another key factor to consider is that this price action is occuring at relatively strong levels of resistance.
This behavior is evident as we look at a chart of the e-mini futures contract for the S&P 500. Notice the string of candles with long lower wicks over the last couple of weeks. Most of these are some form of doji candle and reflect indecision as the markets attempt to find a fair price. While there are a few hammer candles sprinkled into the mix and the overall pattern looks fairly bullish, context should always be taken into consideration when examining candles for clues on future price behavior. While a hammer candle often signals a potential for a bullish reversal, this must occur after a prior downtrend in order to be viewed as a valid signal. When hammer candles occur after a long uptrend, they instead hint at future weakness as sellers are beginning to appear even if they have yet to truly gain control of a market. While this is not necessarily a bearish signal, it certainly is a warning that bullish momentum is beginning to wane.
Another point to consider is the strongly oversold Stochastics reading we are printing on the S&P futures. We have been oversold for a few weeks now and are certainly due for some sort of pullback as price attempts to find equilibrium at new levels. However, traders should not take these signs of temporary weakness as flat out bearish signals as overall price action this year has been strongly bullish. There has been a consistent bid throughout the last two weeks and price is now clearly above the critical 200 day moving average. We have also just cleared the pivot high formed in late October and are in the process of forming a critical higher pivot high indicating that we are now techically in an uptrend.
One level to watch if we pull back is 1260. This was the scene of our breakout at the start of the year and held as support when we tested the gap created from that breakout. This will likely also coincide with the rising 20 day moving average which should provide additional price support as well. Past that, the next key level would be around the 200 day moving average in the neighborhood of 1242 or so. Depending on the timing, this could also coincide with the bottom trendline of the symmetrical triangle we formed over the last quarter of 2011 which would also likely support falling price action. If those two levels do not hold, 1200 would be a likely area of conflict and would present a critical test regarding the state of the markets.
Looking at the overall picture, traders should recognize that while the potential for a squeeze higher is possible, the odds are not in favor of buying now when you consider that we are at levels of fairly strong resistance while the market is showing signs of becoming tired after a nice 3-4 week rally. Now is the time to identify key levels of support on stocks and patiently wait for them as the markets begin to work off their oversold nature whether it be through a retracement or a slow sideways drift.
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The Year in Crayons
The last week of 2011 in the markets was mostly uneventful as price action basically drifted sideways finishing the week right around where it started, capping off a year that also finished right around where it started. Of course, while the action this week was fairly quiet on low holiday volume, most of this year’s sideways action was done in a much more spectacular fashion as bulls and bears both were trapped on several occasions resulting in explosively volatile moves up and down the charts as the markets figured out the edges of our broad range of consolidation.
Looking at a chart of the e-mini futures contract for the S&P 500, we can see that this year’s action was littered with several bull and bear traps as we probed the key levels of our wide trading range. We can basically divide the year into two periods;
(1)The massive head and shoulders pattern we formed in the first eight months of the year.
(2)The two staged recovery during the last few months as the bulls clawed their way out of the huge hole formed during the breakdown from period one.
Dividing the two phases of this year’s action is the slightly rising neckline of the head and shoulders pattern which supported price action strongly during phase one, but ultimately became a key level of resistance as it became a price ceiling during the second phase of the year. Keep an eye on this trendline as it figures to affect the direction of future price action as we open trading in 2012.
In examining the first period of trading of 2011, one important point to keep in mind is the context under which it took place. We had rallied sharply over the previous two years after a disastrous plunge during the back end of 2008 and there was quite a bit of debate as to whether the markets could break past the highs we formed just prior to the 2008 crash on the back of quantitative easing or if we would drop back down to new lows on a “double dip” move. Each of the key points of the head and shoulders pattern were moments where either the bulls or the bears became convinced that their scenario would win out only to see the market “inexplicably” run away from them. Of course, eventually in late July, the bears finally won out after a strong hammer candle fooled the bulls into thinking that the neckline would indeed hold on the “too obvious and easy” to see head and shoulders pattern.
This spectacular fall led to the second phase of our year’s action in which the previously shell shocked bears now dared to dream of a double dip while the bulls desperately tried to recapture the gains they had made during the previous year’s rally. The markets first attempt at stabilizing after the steep drop we experienced in late July and early August occurred during a volatile two month stretch that featured several swift moves as bulls and bears repeatedly fooled each other as price sharply fluctuated between the extremes of the short term range. In late september, price action finally exited this range to the downside, but ultimately failed as the market instead formed a double bottom as price quickly reversed course and headed higher. The bear trap formed during this false break down can be viewed as the sister move to the bull trap that led to the breakdown from the neckline and amazingly led price back to and through the level from which we had initially broken down from to begin the second phase of the year. Even more amazingly, volatility actually expanded during this tremendous squeeze and even continued for another month as price spectacularly failed at the new price ceiling formed by the neckline from the head and shoulders pattern and threatened to break down back to our lows after several days of repeated distribution with no buyers in sight. However, the bulls eventually stepped in and were able to push the markets back to ground zero to end the year and form a big doji candle on the yearly chart.
Below is a yearly chart of the SPDRs S&P 500 trust etf (SPY) showing the action of the last couple of decades. As we can see, this year’s action formed a doji candle reflecting the indecision that marred most of the year’s trading. This was to be expected after three years of strongly trending action (one down, two up) and is likely to be followed by more indecisive behavior as we are firmly in the middle of a fifteen year range that has now had two major tops and two major bottoms defining it.
The two multi-year tops occurred during the overly exuberant heights of the dot-com era and the real estate boom. The two bottoms occurred during the desperate depths this country experienced shortly after 9-11-01 and after the financial collapse/debacle that led to our most recent recession. These are all MAJOR events and traders should keep in mind that price will likely stay contained within these parameters until there is a proper catalyst to push it through. Of course, part of the reason why trading was so erratic this year is because the threat of major catalysts has become pervasive during the current environment. For instance, the last three years of free money can be construed as the third “good times” era of the last couple of decades and may end up culiminating in another major top if we continue to fall back on quantitative easing. On the other hand, the continued threat of insolvency across the world can ultimately lead to a calamitous drop either to or below this multi-year range and ultimately lead to another major bottom at some point in the next few years.
As we close this year and look towards the next, traders should step back and look at the big picture as they develop their game plan for the coming year(s). Good luck as you enter 2012.
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The Week in Crayons
Although the markets opened the week in an ugly fashion, they quickly reversed course and drifted higher for most of the week. Other than a few moments of weakness, there was almost no selling pressure this week as the bulls roamed freely while the bears sat back and let them have their holiday break. However, any illusions (delusions?) of a “Santa Claus Rally” are just that as we have not moved significantly from a technical perspective for quite some time now. The silver lining to this recent lack of movement is that volatility has calmed down allowing the markets to rest constructively as they digest the explosive move they had after making what looked like disastrous new lows in early October.
Looking at a chart of the e-mini futures contract for the S&P 500, we can see the recent constriction in price action as all of this month’s candles are clearly inside of the pivot high and low we formed from late October to late November. Keep an eye on these two areas as there will be significant implications concerning them once they are breached.
A move above them will likely signal a new rally and lead to a retest of this year’s highs while a move below them would invalidate our bounce from this year’s lows and probably lead to a retest and possible failure of those lows as well. However, in the short term, we are now testing the key 200 day moving average once again as we bounce between several important moving averages. Watch for the rising 20 day moving average to support price action if it stalls here as the bulls attempt to clear the recent highs we formed in early December. If the bulls fail here as we close out the year, watch for 1200 to be the first line of support followed by much stronger support at the 1140 level which forms the key pivot we discussed earler.
Next week’s trading will close out the year, and traders should expect action to remain light and mostly muted as the holiday season winds down. Watch the edges of our range this week as price is not likely to move with any real conviction as many of the big boys are on vacation and not likely to return until the start of the new year.
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The Week in Crayons
After taking last week off, the bulls came back ready to work this week lifting us well off our recent lows in all of the broad market indices. Once again as has become par for the course, price action changed course immediately and quite violently as we surged upward negating much of our recent fall with one huge day of buying. Our current environment continues to be a field of landmines trapping both bulls and bears alike each time setiment suddenly shifts depending on what news item or rumor happens to come up. However, while price action has been extremely volatile, it has been contained within a reasonably well defined range for the most part. While there are still plenty of mixed signals and the possibility of strong moves in either direction, the likely scenario is one in which we continue to probe the extremities of our trading range as the markets continue to find their proper value.
Looking at a chart of the e-mini futures contract for the S&P 500, we can see that for the most part we have actually been in a pretty well sustained uptrend after bottoming out early August. While we actually formed new lows in early October, this proved to be a false breakdown and price quickly reverted back its rising channel. This move up culminated with a false breakout above this channel as buyers got ahead of themselves and eventually cascaded down over the last couple of weeks as supply finally overwhelmed demand. The downward momentum was finally reversed this week as we formed a critical higher low pivot price around the 1150 area. While this channel isn’t perfect and has had trouble holding price action on several occassions, it does give us a rough picture of the strengthening price action over the last half year or so.
As we approach the close of 2011, too reference points that are likely to become key levels of support and resistance are the recent pivot low and high we just formed at around 1150 and 1290. The more immediate area of concern would be the recent pivot low we just formed. A break below that would place us firmly out of our rising channel as well as invalidating the higher low we formed and would almost certainly lead to a retest of the year’s lows. A break above our recent pivot high around 1290 however could lead to several scenarios depending on the action prior to a breakout. If we were to surge past it early next week, it would likely be part of an unsustainable squeeze higher destined to fail. On the other hand, if price action were to consolidate and give demand a chance to catch up with the overhead supply then the chances of a breakout holding above this area increase tremendously. As long as price remains in between these two reference points, the markets can be viewed as being in a neutral state of range bound behavior.
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The Week in Crayons
I mentioned last week that the bulls would likely be tested this week as the bears attempt to regain control of this market, and while the bulls can use the light trading / short week excuse to defend themselves, the bottom line is that they failed that test this week as we not only closed red on each session, but saw downward momentum actually increase as we followed through on last week’s breakdown. While we are oversold and due for a bounce, we have now negated much of the feel good rally we had in October and find ourselves back in the middle of the trading morass we resided in for several months this year. While a bounce from our current levels would still be very positive step in leaving behind are summer lows, the recent weakness gives us a strong reminder that we continue to chop around in a broad range consolidation and it appears we will be flying the same holding pattern for a bit longer as we continue to deal with the same regurgitated mess in Europe we have been dealing with all year.
Looking at a chart of the e-mini futures contract for the S&P 500, we can see clearly that we are right smack in the middle of the 1100-1200 mess we were stuck in for several months after breaking down from our yearly highs. While we are still well off the lows we formed around 1080, we are forming new lows on Stochastics creating a bearish divergence hinting that we may have more weakness in store even if we can hold these levels and create an important higher pivot low.
Traders looking for a an oversold bounce should keep this in mind and continue to use the hit and run tactics that have been the only option available to swing traders for most of this year as we are likely to stall out on any bounces into the heavy supply just above our current price action. The 1180 -1200 area will likely be the first area of distribution if we bounce next week and traders should watch the action in this area closely as failure to get above our October breakout will potentially form a bear flag, not a new leg up. If we can reclaim 1200 and emerge from our current range, look for more supply to emerge just above 1215 or so as we begin to encounter several key moving averages. However, if we continue to have trouble finding a bid, we will likely test 1100 in short order which would serve as a critical level of support for the bulls to defend. Traders waiting for the Santa Clause rally should be very careful here and wait for momentum to clearly turn upward before getting sucked into any of the fakeouts that have become all to common this year.
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The Week in Crayons
We had another week of mostly sideways action again as upward momentum in the broad markets continues to wane. While we finished off on a weak note, the bigger picture remains neutral as we have mostly traded in the same range for several weeks now. We are now at the bottom of this near term range and a hold above these levels would be a big win for the bulls as we approach the typically bullish holiday season. However, price action has been weakening throughout the recent consolidation and needs to firm up in order for us to resume upwards.
Looking at a chart of the e-mini futures contract for the S&P 500, we can see the falling momentum clearly as this week’s close broke the upward trend we had maintained since breaking out of our late summer range. While the markets have shown impressive strength in holding above the key 1200 area as they digest the late October run, we are now below several key moving averages and on the wrong side of a short term trendline.
With momentum still on the decline as illustrated by both the declining stochastics readings as well as the red Momo Trend Bars, odds are that the bulls will be tested yet again next week as the bears desperately try to regain control and push price action back down to our previous range. If we pull back furthur, watch for the area around 1200 to 1800 to become a likely area for bulls to defend. If we fall and stay below that, it would likely signify a win by the bears and a return to the 1100 to 1180 mess we chopped around in from August to early October. If the bulls can regain control and push price back up, the first level that would need to be retested would be the 200 day moving average at about 1259. This would likely coincide with the top of our recently contracting wedge and would probably serve as a stalling point for the bulls.
As we approach the traditionally bullish holiday season, astute traders should continue to scan for strong setups that have begun to develop during our recent consolidation and patiently wait for momentum to turn back up and take price action with it.
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The Week in Crayons
Despite some rather volatile moves from day to day, this week’s action in the broad markets was still basically sideways as we continue to digest the massive gains we made through out the month of October. While volatility is still somewhat high for “prototypical” consolidation, most of this week’s action was contained within the ranges of our most recent price action on all of the major indexes and is for the most part technically healthy. As I mentioned last week, we were likely to chop around this week as we contended with overhead supply while being buoyed by several layers of support just underneath us. That scenario is likely to continue into the near future as we are still basically in the same situation and probably need another week or two of healthy consolidation in order to try and make our way back to the upper part of our yearly range.
Looking at a chart of the e-mini futures contract for the S&P 500, we can see that while we have mostly gone sideways over the last two weeks, we are still technically in the uptrend that we began in mid-October as we broke from our summer range around the 1200 level. While we are still making higher lows at this point, notice the waning momentum now that we are firmly wedged between most of our important moving averages as we well as facing very strong technical resistance at our recent highs around 1280 which coincide with the neckline of the head and shoulders pattern we formed over the first half of the year. Note the emergence of some yellow and red candles on our Momo Trend Bars indicating a likely end to this particular thrust upwards. Also, stochastics is now firmly moving lower giving us another clue that momentum is slowing down.
Of course, momentum is supposed to slow down after the ridiculous pace we had as we shot up from our year’s lows, so in and of itself it doesn’t necessarily mean we are headed lower, but it does give us a clue that we are likely in need of more consolidation. If we were to have a more substantial pull back, look to the area around our previous breakout around 1200 as a likely level of support. A hold around this level would give the bulls a strongly definable higher pivot low confirming that the recent downtrend is broken. Of course, the market does what it wants to do, not what we want it to do, and if it decides it wants to squeeze higher, traders should not chase as any move above our recent highs is probably suspect and likely to fail and return to our current range [unless there is some substantial news event behind it.]
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The Week In Crayons
After breaking out sharply last week from the cup and handle pattern I mentioned a couple of weeks ago, the markets spent this week consolidating those gains while holding some key levels of support in the process. We have now worked off some of the overbought conditions we had built up while rallying sharply from last month’s lows as we head into the typically bullish holiday season. However, not everything is peachy as the markets also regressed back to their recent paradoxical pattern of volatile consolidation with this week’s action.
I thought I would change up things a little this week and share the type of chart I typically look at when watching the intraday action in the futures and forex markets. Instead of the typical candles you would normally expect to see on a chart, this chart uses the Momo Trend Bars our resident wizard @jstantrades designed for the Ninja Trader platform. These candles do a nice job of showing the momentum of the price action allowing the trader to not get too caught up in the actions of each individual candlestick and instead observe the overall swings of the instrument. In this case, we are looking at the e-mini futures contract for the S&P 500. Looking at this chart we can see that momentum has obviously been bullish for the better part of a month now, but has started to wane as we pulled back this week after hitting some stiff levels of supply.
While we were able to hold the now swiftly rising 20 day moving average, we are now back under the key 200 day moving average as we form a broadening rising wedge. This is typically a bearish pattern and hints that we likely have some more consolidation coming as we come to terms with our new price levels. However, this doesn’t necessarily mean that we are reversing lower, only that the recent move up is having trouble sustaining itself. In fact, we actually have now formed higher highs and higher lows as we work our way out of the ditch we dug a few months ago. Now that price is wedged between many key averages, there is a good probability that it will chop back and forth as it comes to terms with this area. This would actually be a healthy sign as volatility would again quiet down in order for true demand to build up for the next move up into overhead supply. The breakout area from our last range (1200-1210) should serve as the first line of defense as it did earlier this week for the bulls, while last week’s highs around 1290 should serve as the near term resistance. If we lose 1200, 1600 becomes a likely stalling point while 1100-1080 become the critical lines in the sand for the bulls to defend. While this market continues to tax many swing traders, it has recently shown signs of improving, and continued chopping in this area should help many charts begin to set up for nice runs into the year’s close.
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The Week in Crayons
Although this week’s action in the markets was relatively quiet as we mostly drifted sideways, it was actually quite productive as we were able to consolidate the rapid gains we made over the last couple of weeks in a rather benign manner instead of the violent swings up and down that have become typical of our current environment. While we are still facing some stiff overhead supply in all of the major indexes, we have now established some short and intermediate term support as we continue to regain the losses we incurred this summer.
Looking at a chart of the SPDRs S&P 500 etf (SPY), we can see that we closed the week breaking a critical price level as we were finally able to eclipse the area around $123.50. This level was the scene of a tremendous bull trap in early August as we fell sharply lower after forming what appeared to be a strong reversal hammer candle. We encountered this level a second time one month later and once again fell sharply as supply completely overwhelmed the lack of demand at these prices. This time however, price action consolidated just below this level showing that the bulls were finally beginning to assert themselves at this area and were able to push the close above it on Friday afternoon.
Notice the bullish cup and handle pattern we have formed over the last few weeks as well. Significantly, it came after what now appears to be a false breakdown earlier this month giving us a good clue that while we may not be ready to press to new highs we have likely formed a near to intermediate term bottom. The critical 200 day moving average now looms over us and will likely serve as a magnet for price action as bulls and bears eagerly await for a retest of this important indicator. If Friday’s breakout fails and we cannot in fact push past our near term ceiling, we now have several areas of support at which buyers will likely step up. The bottom of the handle we just formed around $120 has held up well over the last week and would likely be the first line of defense for the bulls while the $118 area which lines up with both the 20 and 50 day moving averages likely serving as more significant support. If more bad news out of Europe torpedoes our markets yet again, look for $112 to be the key battleground.
While we are certainly not out of the woods yet as the possibility for bad news coming out of the Eurozone could still potentially derail our markets, we are now entering what has seasonally been a good time to buy equities and appear to have formed the bottom of what I consider to be a broad corrective range. Another week or two of quiet action would go a long ways towards setting up some decent charts and swing traders should start watching for potential chart setups to ease their way back into this market.
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The Week in Crayons
It is often said that the market takes the stairs up and the elevator down. While it is somewhat of a cliché, it is an apt description of typical market behavior as our fear impulses usually overpower our greed in a normal environment. However, in the current environment we have more of a crazy seesaw thing going on as each swift fall is quickly followed by a quick rise as bears and bulls keep jumping on one end or the other as we oscillate between the edges of our range. What is happening is that each side’s fear is fueling the 
other side’s greed causing each oscillation to become somewhat exagerrated as they continue to squeeze each other. This type of action is of course indicative of wildly differing opinions on the value of a given equity and illustrates that we are still not sure of where our markets are supposed to be right now. While we started last week staring into the abyss as contemplated a sub 10,000 dow, we closed this week considerably higher and are now looking at the stars as the Nasdaq composite approaches its yearly highs. While the very strong bounce we’ve had over the last two weeks tells us that we have likely found a near term bottom, the nature of this market’s behavior suggests that we are likely still in a broad corrective range as opposed to getting ready to resume the uptrend we formed in early 2009.
Looking at a chart of SPY, we can see just how precarious things were as we started last week breaking down from a channel and forming new 52 week lows. While we zoomed straight back to the top of the channel in very short order, we are now very extended as we come up to some stiff resistance. Volume has been decreasing as we probed higher this week showing that less buyers are willing to step up as we come into our near term price ceiling. On the positive side, SPY was able to convincingly breach its 50 day moving average convincingly, and is now well above its short term averages as it begins to test the upper levels of our recent range.
These should provide support for price action in the event of a pull back. If they do not hold, the $112 level will become the critical line in the sand that the bulls need to defend in order to show progress in reclaiming control from the bears. If we continue to squeeze higher, another important point of control for this market will be the area around $128. This coincides with the very important 200 day moving average as well as the neckline from the head and shoulders pattern we formed during the first half of this year.
Looking at the bigger picture, this market continues to trap both sides as it reverts violently from its extreme edges and traders should keep this in mind instead of getting caught up in the euphoria or despair that seems to appear out of thin air after every move.
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The Week in Crayons
After briefly flirting with disaster during the early part of the week, the markets rebounded sharply, and ran right back to the levels that have contained most of the price action for the last two months. The action continues to be violent and frothy telling us that participants are still very undecided as to what the proper price for equities is at the current time. While price has been somewhat contained in a channel during the last two months, it has been marred by high volatility and cannot be considered to be healthy consolidation at this point.
Looking at a chart of the average true range of the S&P Spdrs 500 trust series etf (SPY), we can see that volatility has actually increased recently after somewhat quieting down. Looking strictly at the volatility, we have now emerged from a “consolidation” phase into a new “thrust” phase in the markets.
The initial thrust was downwards as as we broke down from our channel and formed new 52 week lows, but the next thrust was decidedly up as we rebounded sharply from that move. The million dollar question of course is, which of those moves was the fakeout? While we can guess, the fact remains that we are in a highly charged market that continues to oscillate in an extreme fashion which is just as likely to race down to its recent lows as it is to charge up towards the top of our recent price action depending on what news comes out of Europe each night. However, traders should take note that the market now has a downward bias and must prove it is ready to move upwards before traders can trust it for anything more than a one to two day scalp. One of the keys I will be looking for to show that the market is getting healthier would be for volatility to die down while we hold the current price levels before attempting to break out to the upper side of this range.
The downward bias to our current environment is evident when we examine the price action of the S&P Spdrs 500 trust series etf (SPY). Note the downward slope of all of its key moving averages. Also note how we have failed sharply each we have approached the 50 day moving average.
Watch how we behave as we contend with both the 50 and the 20 day moving averages into next week as they will both likely exert downward pressure on price action as the bulls attempt to push price through the heavy overhead supply. If the bulls are able to win that battle, then a retest of the $122 area would be the next logical step. If we fall back from here, a significant battle should take place around the $112 area. This will likely be a major tell for our near term direction. If the bulls can hold this area and bounce back up to reclaim some of the short term averages they will have gone a long ways towards regaining control of this market. However, if we lose $112, it would tell us that the bears are in complete control now and we would very likely go on to break our newly formed lows as well.
As I have maintained for several weeks now, this remains a day trader’s market, and continues to be a very difficult environment to swing trade or invest in, and traders should exercise extreme caution and patience until conditions improve.
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In the Spotlight — DXY0
Over the last few years, the U.S. Dollar has had a strong inverse relationship with the markets and has been a significant factor in determining the ultimate direction equities have taken. One of the most important engines of the bull market rally we experienced from 2009 until a few months ago, was the devaluation of the U.S. Dollar through the actions of the FED which led to a “risk on” environment in which money flowed to the riskier assets capable of providing investors with healthy returns. However, there is obviously another side to that coin and we have seen its effects over the last few months in our current “risk off” environment as scared money has fled those assets in favor of the safe haven the U.S. Dollar provides.
Looking at a chart of the U.S. Dollar index (DXY0) we can see that the dollar has been on a furious rally since threatening to break down to historic lows in late August. It has now broken above a bearish consolidation pattern it had been forming for several months and is back firmly in a long term channel as well as holding above all of its key moving averages.
It is somewhat extended here, and a pull back would give the markets a chance to catch their collective breath as they try to hold their current levels. However, it appears that the U.S. Dollar has broken its multi-year downtrend and is likely to continue to grow stronger over the next few months. Astute traders should continue to keep a close eye on the dollar through instruments such as the dollar index or the eur/usd forex spot pair as it has and will continue to be a very important indicator of our market’s strength.
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The Week in Crayons
After spending nearly two months trying to stabilize from the free fall we had in early August, the markets finally broke out from the rising channel that has contained our price action during that time. Unfortunately for many market participants, it was to the downside. The swift move down was felt by most equity classes as the U.S. Dollar raged to the upside on the heels of this week’s FOMC meeting. Keep an eye on dollar strength as it will continue to put pressure on the markets now that the “free money” trade is apparently off the table.
The sharp mid week reversal is evident if we look at a chart of the SPDRs S&P 500 etf (SPY). I wrote last week that the real battle for the bulls would be in holding the now rising 20 day moving average if we pulled back off the top of our range.
Well, so much for that. We blew right past those levels on Wednesday’s plunge and eventually found support at a very important level of support at $112. While this level has held as support on several occasions now, our lows just above $110 now become a magnet that will likely need to be retested at some point in the near future. This week’s action was undoubtedly negative, and any bounce back to the 20 sma(which is now turning back south) should be looked at with suspiscion.
Looking at the bigger picture as we examine a weekly chart of SPY, we can see that we are beginning to fail at our 200 period moving average as we attempt to hold on to the $112 area. Notice that this area not coincidentally is also the site of our eventual breakout from last years multimonth consolidation following the flash crash in early May. If we fail here, the lows of that range become a critical level of support that the bulls must hold. Note that the measured move from the bear flag we appear to be completing here would indicate a drop right to those same levels.
While many have disputed whether or not our recent consolidation was in fact a bear flag, it had many of the characteristics of one and has certainly had the psychological makeup of one. It is important for technical traders to step back and understand what participants are doing instead of getting hung up on the exact criteria that define a pattern. While many declared that the head and shoulders pattern we completed earlier this year was too “obvious” and too well publicized to work, it obviously ended up being a valid pattern that saw its target move completed in a matter of days. While this may or not be a bear flag, and we may or may not ultimately fail from here, traders should be aware that there is a strong potential for a move southward to the key lows we formed last summer and should remain on the sidelines or with significant cash levels until we stabilize. If we are able to hold at these levels, the $122 area now becomes a significant price ceiling that the bulls need to overcome.
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The Week in Crayons
While we continue to remain mired in the middle of a broad bear flag in the markets, each week that we hold the lows of this channel is a positive step towards building a viable base. We closed green each day this week, and now find ourselves yet again at the upper levels of our recent range. We have multiple levels of overhead supply and are likely to stall out as we begin to probe these resistance areas.
Looking at a chart of the SPDRs S&P 500 trust etf, we can see that we are now approaching a descending 50 day moving average as well as some topping candles we formed just under $124 a couple of weeks ago.
While this area now becomes a critical level for the bulls to overcome, the real battle will be on holding the now rising 20 day moving average in the likely event that we are held in check at these levels. If we blow past these levels, look at $126 to serve as stiff resistance as this was the bottom of the head and shoulders pattern we broke down from in early August. If we pull back and cannot hold our 20 day moving average, look for a retest and probable probe below the bottom of our rising channel.
As I mentioned for the last several weeks, we remain in a poor swing trading environment and traders should continue to take very quick trades as we oscillate between the extremeties of our trading range.
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The Week in Crayons
“Despite the bearish undertone to this week’s close, not much has really changed in the markets over the last few weeks. We continue to probe the boundaries of our bear flaggish pattern as the markets come to terms with our new price neighborhood. While many bulls are understandably frustrated or worried that we stalled out this week, as I mentioned a couple of weeks ago it was highly unlikely that we would have a V shaped recovery back to our highs in a couple of weeks.”
That was the intro to last week’s review, and as befits our markets indecisive behavior, it basically still applies to this week’s action as well. We have yet to make any kind of definitive move out of our current price levels and continue to erratically bounce and drop as we approach our near term boundaries.
Looking at a chart of the SPDR’s S&P 500 etf (SPY), we can clearly see that we are still mired in a rather large bear flag. While we were able to find some support into Friday’s close and stay well above Tuesday’s strong reversal candle, it is very important to note that we failed in holding above the 20 day moving average and fell quite short of last week’s topping candles before we turned back down towards the bottom of our short term channel.
This price action has bearish implications and suggests furthur movement to the downside. Tuesday’s lows just above $114 now become the new line in the sand for bulls to defend. If SPY cannot hold that level, it would likely suggest a retest of our recent lows. On the positive side, the markets have seen some reduction in volatility as we continue to slowly meander upwards in this ascending channel. If the bulls can reclaim the 20 day moving average while seeing a further reduction in volatility, this flag could become a nice launching point for a rally back towards the bottom of our previous range.
We remain in a precarious place in the markets right now and traders should continue to maintain a cautious posture as they wait for a better environment to appear.
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The Week in Crayons
Despite the bearish undertone to this week’s close, not much has really changed in the markets over the last few weeks. We continue to probe the boundaries of our bear flaggish pattern as the markets come to terms with our new price neighborhood. While many bulls are understandably frustrated or worried that we stalled out this week, as I mentioned a couple of weeks ago it was highly unlikely that we would have a V shaped recovery back to our highs in a couple of weeks.
Looking at a chart of the SPDRs S&P 500 etf (SPY), we can see we are still for the most part in what appears to be a bear flag. Notice the topping wicks on Wednesday’s and Thursday’s candles as we came up into resistance at the top of our channel. This led to Friday’s swift reversal and drop back to the middle of our near term range where we eventually found support at the 20 day moving average. While there is certainly more room to the downside, traders shouldn’t get to bent out of shape about this pullback unless we were to breach support at about the $112 area.
One interesting thing to note is that while flag continuation patterns typically occur within periods of reduce volatility and volume, our current retracement has still exhibited some rather volatile candles as well as some spikes in volume that are atypical of your run of the mill continuation pattern. While the jury is obviously still out on the state of our markets, this does lend some credence to the theory that we are currently in the process of forming a base out of this flag pattern. Watch the price area around the 20 day moving average as we move into next week. If we can find support here and work our way back up to the top of our channel, we are likely to seek out a test of the 50 day moving average somewhere around $125. If we cannot hold here, then look for support at the floor of our channel somewhere around $114-$112. We remain in a difficult environment for swing trading, and I would recommend for traders to continue to value capital preservation over growth until we see better conditions.
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In the Spotlight — HOS
Like many equities, Hornbeck Offshore Services (HOS) has rallied sharply off of a potential double bottom earlier this month and now finds itself underneath some overhead supply. The $25 level was the scene of an early January breakout and had supported HOS throughout the first half of the year and could now be setting up as a key area of resistance. Just above this level, we find all of its long term averages converging and turning downwards. While HOS has the potential to squeeze higher with the rest of the markets, watch for reversal candles around this level as a signal for a high probability short opportunity.
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In the Spotlight — DPZ
After printing a wide assortment of spinning tops and doji candles over the last several days, Domino’s Pizza Inc. (DPZ) finally had a decisive candle as it closed at its highs on Tuesday while pushing its way through a near term downtrend and its 20 day moving average. It has shown great strength relative to the rest of the market, and looks ready retest and possibly make new highs soon. Keep an eye on it to see if it can build on Tuesday’s momentum into the rest of the week.
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In the Spotlight — DBA
While the broad markets are sitting just above their most recent lows and threatening to break down even lower, many commodities in the agricultural sector have been behaving strongly. One way to take advantage of this relative strength is with the Powershares DB Agricultural Fund etf (DBA). DBA was able to break its multi-month downtrend last week and is currently sitting above all of its key moving averages as they begin to curl upwards underneath it. Keep an eye on DBA into next week for signs of continued strength, as it is one of the few charts in the current environment that has not seen much technical damage.
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The Week in Crayons
A poor finish this week erased most of the bounce the bulls were able to manage from last week’s lows and has brought the markets back to the brink of another breakdown as we sit just above those critical levels that held us. While the weak action is certainly not positive, it should have been expected as it is quite unreasonable to think that we were going to “V” bounce right back to the top of our yearly range after such a drastic fall from the top. The lows held for now, and we are basically in no man’s land as the markets begin to assimilate themselves to their new price neighborhood. Several classic fear indicators such as the VIX, bonds and gold have soared this week and indicate that the potential for lower prices is still quite strong, so traders looking to trade to the long side should play it cautiously for now and wait to see if we can hold these lows through the next couple of weeks. Those looking to short this market either just missed their trade or are now booking profits and waiting for better risk reward setups to appear.
Looking at a chart of the SPDRs S&P 500 trust etf (SPY), we can see that we are either in the midst of forming a wide range bear flag, or have just broken down from a narrower rising flag and getting ready to break to new lows. Notice the rising volume on the drop as opposed to the rather light volume as we drifted higher.
The $112 price area now becomes a critical level of support, and if we lose this level, we are likely to retest $110 and probably form new lows in short order. Those looking for higher prices need to see us hold these levels and close the gap we formed on Thursday’s action. One small silver lining for the bulls is Friday’s seemingly negative action. While at first glance it appears to be a bearish candle like a gravestone doji, trader’s should keep in mind that context is very important to candlestick analysis. In this particular case, a gravestone doji or shooting star is formed at the end of an uptrend and hints that the bulls are losing control of the current market. However, in a downtrend such as the one we are currently experiencing in the intermediate time frame, this inverted candle is actually a hint that bulls are starting to push action higher even if they weren’t able to hold it. Of course, without confirmation it means nothing, but those hoping for a bounce should keep an eye on the coming price action to see if we do indeed get some support here. The healthiest behavior for the markets right now would be to continue to back fill these levels as volatility decreases. Even if the bulls cannot probe much higher from here, it would be a decent victory if they can stall out the current flag and turn it into a base.
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The Week in Crayons
After a continued surge lower during the early part of the week, the market finally found some support as buyers started to cautiously step in at levels that hadn’t been significant since the months following last year’s flash crash. The million dollar question now is, are we pausing before a continued fall, or did we find another multimonth bottom here? The great thing about trading is, that we don’t have to guess, we can just wait and let the market show us what it will do.
Looking at a chart of the SPDRs S&P 500 trust etf (SPY), we can see what appears to be a rather wide bear flag forming at our current levels.
While the protypical flag formation is usually narrower, I would not necessarily discount this developing pattern just yet as it seems our current markets prefer to go big or go home. As I mentioned last week, look for volatility to begin to contract as we come to terms with our new price “neighborhood”. A quiet retracement into the middle of this week’s range would be constructive for the bulls, but if we print some fat red candles down to $112 next week, then look for a probe lower as the bears continue to test the dip buyers mettle.
A key signal that we have formed a productive bottom here would be a break AND HOLD above about $119-$120 on SPY. As we can see on a 15 minute chart, this was the level we ended last week at, and becomes a key gap area the bulls need to reclaim.
Watch this level into next week as it was the ceiling for the market this week and could become a key floor for price action if the bulls can get above it next week. If we drift lower, $115 should offer decent support. Another key level of support to watch into next week is the ascending trenline marking the higher pivot lows.
This continues to be a difficult period for swing trading, and my advice is to back off unless you are taking very quick (or day) trades, or are a position trader that likes the current levels of support on a particular equity.
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What Would Gandalf Do?
As a short term swing trader, the bloodbath we have experienced in the equities markets over the last couple of weeks has obliterated practically all of the setups I favor. For the most part, my watch lists are now littered with broken charts that will need a long time to repair themselves. However, for position traders that look for stocks at sharp discounts, now is the time to begin bargain shopping. While I personally don’t take many position trades, I do look at the weekly charts during times like these and see if I can find some charts that are approaching long term support. Basically, I look for a strong battleground the stock is approaching, and wait for Gandalf to hold off the bears and shout:
Below are some of the charts I have found that are near Gandalf levels.
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The Week in Crayons
After half a year of broad range consolidation on slowly expanding volatility, this week’s brutal distribution took most of our main indexes well below our 2011 range while sending volatility levels higher than they have been since the “flash crash” we had last year. From a technical analysis perspective, healthy consolidation should take place in a quiet manner with decreasing volatility, while expanding volatility usually signals an impending reversal. The swan dive we saw in the S&P 500 index this week shows us what happens when volatility cannot quiet down as traders continue to disagree on the proper price levels for a market. Below is a chart of the average true range of the SPDRs S&P 500 trust series etf (SPY). Notice the growing volatility as we chopped around throughout the first half of 2011.
We are now at pretty high levels of volatility, and while it is not completely out of the question that they continue higher, the likely scenario in the coming weeks is that of diminishing volatility as we begin to back fill and retest the levels we have blown through over the last week.
Looking at a chart of SPY, we can see that we almost reached the measured move from the head and shoulders pattern we formed throughout this year in two days. We eventually found some support around the $117 area which funny enough also happens to be the price level we were at just before last year’s flash crash. Much of the fuel for those two days of brutal selling was likely from burned buy the dippers that emerged on Wednesday’s hammer candle that ended up being a vicious bull trap.
Watch for choppy action as we begin to find equilibrium around these levels, with Wednesday’s price action serving as a pretty stiff level of resistance as trader’s that are still involved from that day waiting for those levels in order to get out of dodge. Friday’s lows are likely to be retested in the coming weeks as well, as the bears are likely to see if they can force the market lower now that they have gained control of the intermediate time frame.
Looking at the long term time frame, the bulls are still in control, but their grip is tenuous at best right now. @captkirk888 , one of the great traders in our stockguy22.com virtual trading floor shared this longer term chart of SPX with us. It is interesting to note that each time we have dipped below the 20 period moving average on the monthly chart, we have for all intents and purposes been in a bear market.
This week’s close puts us right on the average, and it appears that the bulls will have their work cut out in keeping us above it in the coming weeks if we are to stop from slipping into the bear market scenario. Also, note the Slow Stochastics readings. They are beginning to turn under 80 which has also been a fairly good indicator of the long term health of the S&P 500.
While the picture is looking quite gloomy for the bulls right now, one small glimmer of hope resides in the Nasdaq Composite. In looking at the PowerShares QQQtrust (QQQ), we can see that the Nasdaq is actually still in its yearly consolidation range and was able to find support at its base on Friday showing great relative strength over its peers.
Of course, QQQ is still at risk from many of the harbingers of reversal that already took down its peers as it is seeing massive volatility growth as it attempts to consolidate and is now well under its 200 day moving average on heavy volume. The question over the coming weeks as the markets begin to quiet down and realign is whether QQQ will follow its peers down as we head lower, or whether it will become the new leader that pulls the rest of the markets up as it recaptures it higher price levels. This is a question that is likely not to be answered anytime soon, and as I have repeatedly stated, traders should continue to trade lightly if at all during this tough environment and patiently wait for better times.
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In the Spotlight — SLV
While silver has lagged gold over the recent months, both stand to benefit as jittery investors flee the market for safer havens. While gold has pressed on to new all time highs, silver as seen in the iShares Silver trust etf (SLV) is noticeably behind its shiny brother. However, after a brutal fall in early May, SLV has built a decent base and is now flagging above its key moving averages as they curl upwards just below its price action. This type of action typically precedes a strong move higher, and traders should keep an eye on equities tied to the precious metals as they are currently one of a very small group of equities offering decent setups.
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In the Spotlight — MFN
While most of the markets have been backpedaling over the last few weeks, Minefinders Corp. has been pushing forward towards the all time highs it formed in late April. It has been flagging in a pretty tight pattern over the last couple of weeks on light volume and was able to hold its rising 20 day moving average on Monday. If it can bounce upwards from this support, it has a good chance of breaking out of its bull flag and possibly break its April levels and enter “clear skies”.
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The Week in Crayons
As befits the state of our current markets, we took the elevator down this week to revisit the lower portion of our yearly trading range and pulled the rug from under the bulls that had pressed their longs as we approached the top of our range. We remain in a poor trading environment at this time as we continue to see volatility expand while price stays in an overall static state. As I have mentioned over the last several months, traders should remain patient and trade lightly and take quick profits in this environment while waiting for better conditions to emerge.
Looking at the action for 2011 on the SPDR’s S&P 500 etf (SPY), it becomes clear that although price has fluctuated quite a bit, we have essentially gone nowhere. In fact, most of the key moving averages are now zig zagging sideways as we chop around in search of our next direction. The last moving average that still has some upward slope to it is the key 200 day moving average, and it is starting to flatten out as we begin to really test it.
Friday’s action brought about the second retest of this moving average and gave us our first breach of it although we eventually held and closed higher. Keep in mind, that the more often a market tests a level, the more likely that it will eventually break. Friday’s close also left us below a critical level that had stymied us throughout late June. Watch the price action just below $130 early next week, as it will likely offer up as strong resistance if good news doesn’t emerge over the weekend to prop us back up. If we open and hold below this area, the bears are likely to press their shorts and try to get a retest of our June lows as well as a close below the 200 day moving average. A break below these levels would complete the head and shoulder pattern I mentioned a couple of weeks ago and could be the impetus for a further move down. However, keep in mind that traders that have tried to jump in early on the next major move have repeatedly been burned, and the prudent approach continues to be to wait for the market to align itself properly and prove to us that it is ready to break out of this range one way or the other. If the fools in Congress were able to give us some good news over the weekend and we are able to open above $130, watch for a gap test around $133 and eventual resistance at the mid $134′s as we encounter our most recent pivot highs as well as a descending trendline. Because of the uncertainty surrounding the markets at this time, traders should continue to maintain a defensive posture and wait patiently for a better environment to emerge.
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In the Spotlight — RENN
The weakness in the market over the last few days has negated many setups that were looking promising coming into the week. Renren (RENN) is one stock that has shown relative strength as it has held up remarkably well in a hostile environment. It has formed a cup and handle over the last two months, and looks ready to challenge a key resistance level at $12. If the market can stabilize here and bounce, RENN should offer a quick trade to this key level on any break of Thursday’s highs.
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In the Spotlight — DXY0 — NGD
While precious metal stocks have all had a nice rise over the last couple of weeks, they may be setting up for an even nicer run in the near future. Looking at a weekly chart of the U.S. Dollar index (DXY0) we can see that it has been forming a bear flag over the last couple of months just underneath a long term trading range. If the U.S. Dollar were to fail these levels and make its way down to the lows we formed in 2008, it would likely have bullish repercussions for gold and silver related equities.
One of the many gold miners with an appealing chart is New Gold Inc. (NGD). It is currently consolidating just below the all time highs it formed in April of this year and is likely to break past them if gold prices continue to go higher.
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In the Spotlight — MAKO
Mako Surgical Group (MAKO) has been stair stepping its way higher for almost a year now, and finds itself once again wedged between lateral resistance and its rising multi-month trendline. MAKO has all of its key moving averages beneath it as it approaches the apex of its most recent ascending triangle pattern, and may be getting ready to resume its trend. Watch for a move above $32.50 to signal a likely retest of its recent highs at the very least, and a possible move higher especially if good volume accompanies the move. Any move below its moving averages or rising trendline would break its long term trend and give us a clear cut message that MAKO needs more time to consolidate the impressive move it has made since the late part of 2010. Keep in mind that MAKO is schedule to report earnings on 8-8-11.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
Are we rotating?
Rotating tires is a basic maintenance procedure all drivers should perform in order to extend the life of their tires while also maximizing traction to insure safer driving 
conditions. A stock market rally does the same thing, but instead of tires it rotates sectors. In this way, sectors that have run too much too fast can consolidate while the sectors that have lagged can catch up while the overall trend remains intact. Over the last few weeks of consolidation, it appears that we may be in the process of a major rotation as the tech companies of the Nasdaq take the torch from the small cap names in the Russell 2000 that have led us for several months.
Below you will find charts of the S&P 500 (SPY), the Russell 2000 (IWM) and the Nasdaq composite index (QQQ). Notice the stark difference between this week's action versus April of this year. During the early part of the year, the small caps were making new highs while the S&P 500 and the Nasdaq composite lagged noticeably. In fact, it wasn't until IWM formed a second pivot high in May that the other two indexes were able to finally clear their February highs (QQQ barely doing so after a furious charge).
However, contrast that to the action this week when QQQ broke out convincingly to new highs while the Russell 2000 and S&P 500 remain close to their initial February highs. While this divergence lends credence to the theory that we are now rotating into tech names, it also shows that the market is still in a bit of a mixed state as only one of the major indexes has been able to eclipse the highs we made in May. With many of the major earnings reports in the Nasdaq composite out of the way now, watch for some quieter action in QQQ over the coming weeks as it begins to realign itself with its peers. Keep an eye on the interplay between these three indexes in the coming weeks as they will give us significant clues as to where the money is flowing as we continue to come to terms with this broad range of consolidation we have been trapped in for most of 2011.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
In the Spotlight — REE
REE was one of the rare earth plays that saw some aggressive buying at the close on Thursday afternoon and may be gearing up for some nice momo in the coming days. It was able to break a multi-month downtrend on above average volume, most of it notably coming in the last 15 minutes of the day. Keep this on your radar in case there is a strong follow through in the coming days.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
In the Spotlight — NR
As I mentioned earlier this week when spotlighting PDC, several names in the oil and gas sector are starting to run. Newpark Resources (NR) is one of the more attractive charts that has yet to breakout. It has been mired in a 70 cent range for the most part after a strong move in early May. It now has all of its key moving averages coiled underneath it as it probes the upper part of this band of congestion. A break above $9.40 or so should lead to a swift test of $10, and a likely break over that level in the near future.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
In the Spotlight — WFC
Wells Fargo Company (WFC) will report earnings in the pre-market session on Tuesday morning along with several other financials. The heavily beat down sector is sure to see movement one way or the other depending on the market's reaction to the reports. Below is a weekly chart of WFC's price action over the last two years. Focusing on these longer term levels should give traders a good idea of where price is likely to head and stall out during emotionally charged days such as earnings reports.
If the reaction is negative and WFC opens and holds below Monday's hammer lows at $26.37, it is likely to retest last week's low price just above $25 and perhaps even move towards the $24 area. If it were to gap down to these levels, then it would be prudent for traders to not chase the move keep an eye for waning momentum. If the reaction to the eps reports are positive and WFC can rally past the low $27 area, then it is likely to retest the price action just below $29 that has been a significant psychological price level over the last two years. If price were to gap up to these levels, it would again be prudent for traders to not chase and instead keep an eye out for a countermove instead.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
In the Spotlight — PDC
The oil and gas sector looks to be perking up, and Pioneer Drilling (PDC) is just one of the many charts that look ready to head higher. It has now tested the low $16 area on two occasions and fallen back, but bounced back quickly on the last attempt and had a huge volume surge on Friday. Keep an eye on this one to see if buyers continue to pile in to it.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
The Week in Crayons
The markets spent the better part of this week showing us that what comes up must come down as we retraced about half of the fast and furious rally we had a couple of 
weeks ago. As has been typical in the current environment, bulls that chased price action at the highs of our range were punished after two consecutive gap downs brought us back to the middle of our range at the beginning of this week. As befits being in the middle of a broad range of consolidation, the market continues to send us mixed signals as it tries to find some equilibrium in its price action.
The bevy of mixed signals we are getting right now are plain to see if we look at a daily chart of the SPDR's S&P 500 etf (SPY). While we are still in a technically healthy consolidation amidst a strong uptrend, some signs of topping action are now beginning to show up. In fact, the year's price action so far is starting to resemble a head and shoulders pattern that is currently working on its right shoulder.
The top of this shoulder is also an “abandoned baby top” candle formation which is also a bearish reversal pattern in and of itself. Don't forget that these reversal patterns are also forming against a backdrop of increased volatility, a classic harbinger of reversal action. However, while the signs of a reversal are looming over the market, the fact remains that we are still holding up very well, especially when you consider the dearth of bad news regarding sovereign debt issues across the world. The run we had in early July was very strong, and we found support on a swiftly rising 20 day moving average at the end of the week. We are also under a rising 200 day moving average which recently held us a strong level of support. While some ominous signs of reversal are creeping in, traders should step back and realize that the overall trend is still up, and dip buyers are still supporting this market. We are still in the chop zone, and traders should remain nimble and light while keeping an eye on the bigger picture until the market reveals which direction it will take once we are truly done with this corrective range.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
EROC
After breaking out on huge volume in mid-April, Eagle Rock Energy (EROC) has been consolidating in a narrowing range as it comes to terms with its new price levels. It has successfully held its breakout level on three occasions now, and is approaching the apex of its symmetrical triangle. Aggressive traders can buy in anticipation of a breakout using $10.50-$10.30 or so as a stop while more conservative traders should wait for a confirming breakout on volume out of the triangle.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
Vonage
Vonage (VG) has experienced some range contraction over the last few days, and is now poised to break over some near term resistance in the $4.80 area. Its price action is now wedged between this resistance and several key moving averages just underneath it that should provide support and possibly the catalyst it needs to move higher.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
Looking for drugs?
Apparently drug demand is strong judging by Valeant Pharmaceuticals (VRX) recent performance. It has been consolidating quietly for about three months now just under its 52 week highs and is starting to get interesting. While this setup may need a little more time, it offers one of the few remaining setups that is not extended while also not being a laggard. Keep an eye on its narrowing range, and wait for break out of it on strong volume.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren’t a member, what are you waiting for?
AET
The Healthcare sector has shown great relative strength over the last several weeks with stocks like CVH, HUM, WCG and UNH leading the way. Aetna (AET) is probing its recent highs here on the daily chart and is poised to follow its peers higher in the near future.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren’t a member, what are you waiting for?
DNDN
After some strong selling on high volume, DNDN had a sharp reversal in the after market on Thursday on news, and had a strong follow through on Friday on high volume as well. Looks like plenty of bears might be trapped and ready to be squeezed. A move over $41.50 or so would confirm a breakout from its recent consolidation and would likely offer a quick trade for a point or two.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
Not today…
Wow! What a week! After several weeks of spinning our wheels as we chopped erratically at the lower edges of our yearly range, the markets finally got in gear, peeled out and ripped off a massive five day run that negated a month's worth of distribution. All the bears that piled in on last week's tepid action were left in a cloud of smoke as the markets roared away from them like something out of a Fast and the Furious 
movie. The only thing missing was the bulls toughly spitting out cheesy lines like:
“Chances are, sooner or later this markets gonna pull back….BUT NOT TODAY.”
So where do we go now? We have gone from oversold to overbought in one week and are now back to the the levels that held us back at the beginning of the year on all of our main indexes. While the last five days have the look and feel of a real bull run, don't forget that just last week everything looked awful as we flirted with a breakdown below levels that held us when Japan was at the brink of a nuclear disaster. Keep an eye on the big picture and realize that we are basically in the middle of a broad range of consolidation and are likely to trade sideways as we digest our newly found gains.
Looking at a six month daily chart of the S&P 500 etf(SPY), we can see that this week's action brings us back to key levels that have impacted the market throughout 2011.
This price level around $134 will be a key battleground going into the summer, and will likely be another area in which we chop back and forth as the bulls and bears continue to wrestle for control of this market. If we can breach and hold above these levels, than we are likely to retest the yearly highs and likely make new highs as we continue to define the upper reaches of our broad range. The more likely case is either sideways action or even a pull back from these levels, in which case the $130 area that held us back last month will now become a key level of support moving forward.
If we erase a lot of the daily noise and look at a weekly chart of this year's action on SPY, the range bound nature of the market becomes a little clearer to see. Notice how almost all of the action is bound between the mid $134's and mid $126's.
While the possibility that this week's action was the result of end of the month window dressing/ pre-holiday run up, also notice the impressive size of this week's candle. We started off at the lows of the range and finished practically at the top of the range. This is a huge change in character after the month of incessant selling, and tells us that we are likely to fiddle with the upper parts of this range in the near future. Because of this apparent change in character, I would be more likely to buy a dip at these levels instead of entering shorts.
However, the market has shown an amazing ability to trap and reverse suddenly on both bulls and bears alike, and traders should stay on their toes as we move into the lazy days of summer. Traders that have yet to lock in profits and those anticipating a pull back from these levels should watch the intraday charts before attempting to call a top on this bounce. Looking at a 15 minute chart of this week's action on SPY, it is obvious that we have yet to reach any point at which shorting into this rally would make any sense at all.
Keep an eye on Friday's highs, as they coincide with important levels on the longer time frames and should serve as resistance early next week. Another level to keep an eye on should we pull back is the price area around $132. This coincides with both the 50 and 100 day moving averages on the daily chart as well as the top of Thursday's base which served as the launching point for Friday's rally. Lastly, we have now had several weeks of volatile action and while its easy to get caught up in these wild swings, traders should keep a level head and realize that volatility is cyclical just like price action, and likely to calm down in the near future, especially as we enter the typically quiet months of summer.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
A Broken Record
The markets exhibited more erratic consolidation this week in what is becoming a bit of a broken record. We have now probed the lower edges of our multi-month range for
three consecutive weeks and market participants have yet to come to any sort of consensus as to whether this level should hold or not. In fact, the level of confusion regarding this price area seems to be increasing as volatility continues to expand instead of narrowing. While this behavior is not suggestive of a healthy environment, it is also atypical of the standard technical continuation patterns, and is a subtle hint that we are perhaps ready to conclude our recent two month price correction. However, the possibility of a continued flush downwards is very real, and as I have mentioned for several weeks now, traders are better served keeping action to a minimum until the markets start behaving in a healthier manner.
Looking at a daily chart of the S&P 500 etf (SPY), we can see the glut of wide range candles over the last few weeks as we continue to zig zag back and forth in confusion at the lower ranges of 2011 price range.
Notice the growing volume as we digest these price levels. This is also atypical of normal consolidation, and illustrates the growing turnover of shares at these levels as market participants continue to come to terms with these price levels. As I mentioned last week, a test of the 200 day moving average was likely, and we did in fact tag it on Thursday and quickly rallied from that point, but Friday's persistent selling negated most of that move. These lows should hold us over the near term, but traders should be wary until the market is able to display more strength before attempting to buy this dip.
The expanding volatility that we have experienced over the last few weeks is easily seen when we take a look at a 15 minute chart of SPY.
While we were able to overcome the $128 level I mentioned last week, the the bulls were stiffly rejected just under the critical $130 level and we now find ourselves back at the bottom of the broadening wedge we have formed throughout the month. In order for the bulls to gain any sort of control over the current market, they need to push and hold SPY over the $130 area. Traders looking for a market bounce next week should continue to monitor the intraday charts and wait for a sign that the bulls have regained control. Another push above $128 followed by some narrow range consolidation just below $130 would be ideal for those looking to enter any long trades. However, traders need to keep an eye on the intraday behavior as all pops have been sold up to this point. If we continue to flounder at these levels and continue to retest the low $126 area, than it is only a matter of time before we roll over and begin another leg down in this recent correction. As always, keep a level head and let the market show you where it plans to go before entering any trades.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
The Week in Crayons
The markets exhibited more erratic behavior this week as we continue to probe what appears to be the lower edges of our current broad range of consolidation. While most of the week was again marred with heavy distribution, we did have a couple of days where the dip buyers came in and started to alleviate some of the massive downward pressure we have encountered over the last few weeks. While we have had a pretty significant drop from the highs of the year and things have looked pretty disastrous at times, it is important to note that we are basically at the price levels that we started the year at on most of the major indexes.
Looking at a chart of the S&P 500 etf (SPY), we can see that the year's opening price of $126.66 eventually held as support during the tsunami induced disaster in Japan earlier this year and appears to have held up as support this week.
As I wrote last week, once we approach critical levels of support or resistance, they begin to act as a magnet for price action as more and more market participants begin to question whether or not those critical levels will hold on a subsequent retest. While a furthur probe into the March 16th lows or a dip below our 200 sma are not out of the question, this area should hold as support barring any sort of disastrous news coming out of Europe over the weekend. The uptick in volume as we tested support this week is another clue that we may have found our level of support for the near term. However, as I have stated several times over the last few weeks, wait until the markets prove to us that they are ready to bounce before trying to catch a bounce as the short term trend is still significantly down.
Traders looking to get long the market indexes have had zero reason to do so if they have paid any attention to the intraday charts over the last few weeks. Every test we have had of a prior pivot high has been met with heavy selling pressure and has ultimately failed.
Notice the swift drops we have had each time the market has probed the $130 area. Not only have we dropped quickly on each occasion, we made lower highs on each attempt to reach it. A closer level of resistance that should provide the first seeds of a rally is a break above the $128 level. If we are able to do so early Monday, we will have formed an inverted head and shoulders, and a measured move would put us just under $130 and right at the descending trendline connecting our previous attempts at this area. As I mentioned last week, this will be the real battle the bulls will need to win in order to regain some semblance of control over the suddenly resurgent bears.
The U.S. Dollar put extra pressure on the markets as it surged upwards throughout the week. Keep an eye on it as it approaches considerable levels of resistance in the mid $76 area.
While the inverse relationship between the dollar and equities has been somewhat spotty over the last few weeks, this is a relationship that has been the basis of our rally for two years now and is not likely to decouple this quickly based off of some fears in the Eurozone. If the dollar were to fail at these levels and reverse course, it would alleviate some of the pressure on equities as they attempt to gain traction at the current levels. However, if the dollar were to continue to rally and break above these critical levels of resistance, we would likely see a continued drop in equities at some point in the near future. Keep an eye on the dollar as it navigates this key area as it is likely to provide valuable information traders can use to guage the ultimate direction our markets will take going into the summer.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
Where is Bigfoot?
The steady selling we encountered last week in the broad markets carried over into this week as we continue to face a seemingly unending barrage of heavy distribution.
We have now formed red candles on seven out of the last eight days on SPY and finding a dip buyer has been about as likely as spotting Bigfoot. While things look bleak, we are in an oversold state and are just above some key support in not only our 200 day moving average, but also the critical lows we formed in mid-march during the tsunami/near nuclear apocalypse we had in Japan. Both of these are likely to act as magnets for price action as we are likely to retest both of them at some point in the near future.
As I have stated for several weeks now, this is not an ideal trading environment for swing traders as we continue to come to terms with the price levels we set in the beginning of the year and they would be better served by keeping positions to a minimum and taking only the highest quality setups. Traders looking for a bounce should continue to wait until they can see some healthy buying patterns emerge on the intraday time frames as they have provided a pretty clear picture of the lack of buying in the markets over the last two weeks.
Looking at a 30 minute chart of SPY, we can see that we’ve had two half-hearted attempts to hold at the $130 price level, but were unable to do so and rolled over after both attempts.
This is likely to become a key area of near term resistance, and intraday traders should keep an eye on it as it will be one of the key battlegrounds the bulls will have to recapture from the bears in order to stave off the recent pullback we have experienced. If we are unable to gain traction at these levels, we will visit the critical “Japan lows” between $126 and $125 in short order. While buyers are nowhere to be found at the moment, we are still in a longer term uptrend and are in the midst of a broad range correction. Keep trading to a minimum and keep an eye on range based trades for the near term future as they are likely to be the setups that provide the best success rate for those unable to day trade the markets. If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren’t a member, what are you waiting for?
the chop zone redux
We had another week of erratic action in the markets as we continue to chop in the broad range of consolidation we have been trapped in since late February. While the week started on a positive note on Tuesday, we finished the week in a tailspin as we plunged through several levels of support on all of the key market indexes. As I have mentioned recently, we are currently in a “chop zone”, and traders are better served keeping the action to a minimum until conditions improve, or using strategies that take advantage of the range bound action we are experiencing. One of the keys to successful trading is recognizing what the overall market structure is at a given time and adjusting to it. Right now is one of those times where swing traders will likely have a tough time while day traders can feast on the large intraday swings. Always keep an eye on the overall market structure, and make sure your trades match the current environment.
The markets erratic behavior this week is best illustrated by taking a look at a chart of the S&P 500 etf (SPY) and noting the fact that we broke out and closed above our recent channel on Tuesday only to free fall throughout the week and ultimately break down and close below it on Friday.
While this sharp turn-around was obviously very bearish, we are now at some solid support levels just above $130, and are likely due for a bounce into next week. Also note that we had a pretty volatile week, and are likely due for some range contraction as the markets try to absorb the precipitous drop we just had over the last few days. However, keep in mind that the market always punishes complacency, and traders should remain nimble and wait for action confirming that we are ready to bounce before entering any trades.
In fact, looking at this week's action on a 15 minute chart of SPY, we can see that we have yet to form any sort of substantial base from which to rebound, and continue to trade below several key declining moving averages.
Traders looking to play a bounce next week should keep an eye on the intraday time frame and watch for some sort price stabilization along with the reclamation of some of our key averages before attempting to trade against such a strong trend. This is another key concept beginning traders tend to miss. Even though most swing trades are initiated from levels on a daily chart, using intraday analysis to fine tune your entries and exits will improve your performance by adding extra confirmation signals that will keep you from entering trades too early or exiting too late even when you're analysis of the larger time frame is correct.
Looking at yet another time frame, we can see that the overall trend in SPY on the weekly chart is still up, and the negative action we've experienced over the last few weeks has not done any real technical damage to it.
While this week's candle takes us below the rising 20 period sma, we are still in the midst of building a base close to our multimonth highs, and are likely to continue to consolidate somewhere between $126 and $137 as market participants try to figure out the future direction of the markets as we head into what looks to be a Q.E.-less summer. Notice that the last broad range consolidation we experienced lasted about 5 months before we emerged from it. While it appeared that we had ended our recent consolidation in late April as we broke out of an inverted head and shoulders pattern on the daily chart, that breakout has obviously failed, and we have now been in our trading range for about 4 months and likely have a some more time to go before a new direction can emerge. Over the next few weeks, traders should watch the weekly chart in order to get a better grip of what the big picture is and to make sure they don't get overly caught up in what the shorter time frames are telling us. Don't forget, that the best trading environment is when all time frames are aligned. This is certainly not the case right now, and traders should continue to avoid the “chop zone” until all time frames can give us a clearer picture of where the market is ready to go.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
The chop zone
We had more of the same this week as the markets continue to chop around as they come to terms with the important levels that first held us back in March of this year. The action has been quite erratic over the last couple of weeks, and traders should continue to trade lightly as they wait for the current consolidation to resolve. While the action this week definitely had a bearish undertone to it, the current trend remains up and traders will likely be better served by waiting for long setups to develop as the broad markets come to terms with these price levels. Keep in mind that while the possibility for a continued push downards is very real, it will likely lead to more choppy action as we test several levels of support and moving averages. If we were able to break out of our recent consolidation however, there is not much resistance above us and we would likely have a much cleaner move upwards.
As I mentioned last week, a break below the area just under $134 on SPY would likely lead to a retest of our 50 day moving average which is exactly what happened on Tuesday.
We bounced strongly the next day but eventually reversed at our 20 day moving average and closed the week right at the neckline on the inverted head and shoulders pattern we formed throughout the last three months. This is a crucial level to watch, as a furthur drop would likely mean another couple of months of consolidation as we continue to digest the gains we have made throughout the last couple of years. In the near term, we are now in two “chop” zones (the first being the wedge we are forming over the inverted head and shoulders and the second being the area between the 20 and 50 day moving averages) and traders should expect erratic price action as long as we remain in them. As always, don't try to guess what the market will do, just wait until these patterns resolve and the market shows us what it will do.
After a couple of strong weeks, the tech sector performed much worse than its counterparts this week. Looking at a chart of QQQ, we can see that it fell quickly below the bull flag it was forming and made a strong push into the massive gap from April 19th. We bounced sharply from there, but encountered stiff resistance at the critical price level just above $84.
We are now under critical resistance as well as chopping between the 20 and 50 day moving averages, and traders should not rule out the possibility of a complete gap fill at 56.60 in the near future. We still have plenty of support below us, and all signs point to continued price swings in both directions as we continue to sort out these price levels. A break back above about 58.40 as well as being able to hold above its 20 day moving average would be bullish, but that scenario will likely need some time to develop.
The dollar continues to drive this market, and traders should monitor its performance on a continual basis as it has had a strong inverse correlation with the markets over the last few years.
Looking at a weekly chart of the U.S. Dollar Index, we can see that we have two key trendlines just above us which would likely serve as a pretty stiff test to the recent bounce we have seen. The U.S. Dollar remains in a long term downtrend, and while it may be in the process of establishing a bottom here, it still has plenty of work to do and needs to prove itself over a longer time frame before traders can assume that we have indeed bottomed out. Watch the action into next week, as a push higher into the $76 level would hint at a continued drop in the broad markets.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
The Week in Crayons
The markets didn’t do much of anything this week as they continue to chop around just above the key price levels that had held us in check for most of the year. Not much has changed from a technical perspective, and my analysis from last week still holds. While many on the twitter stream are becoming increasingly bearish as we get further along in May, the markets are still behaving in a healthy manner and show no technical signs of rolling over just yet.
Looking at a chart of the S&P 500, we can see that the “toppy” action we have seen the last couple of weeks is actually perfectly normal consolidation just above a key level of price.
The area just under $134 was a strong level of resistance earlier this year, and it is only natural that price action should gravitate back to that level as we continue to come to terms with the break of that level. We are now in the midst of forming a wedge/descending triangle just above our breakout levels, and a break above it next week will likely propel us to new highs for the year. If we fall below that price level, we are likely due for a retest of our rising 50 day moving average.
The Nasdaq composite has consolidated in a mostly sideways manner for the last two weeks and is currently forming a bull flag just above the important support at about $58.
It has strongly held two breakaway gaps it formed in April, and still looks like a strong target for capital to rotate into as it flees the sagging commodities complex. Keep an eye on your favorite tech stocks, as a break out of this pattern in QQQ will likely lead the markets higher. If we fail this pattern, two very important gaps remain as strong support just underneath these levels.
One of the reasons the markets have floundered recently is the renewed strength of the U.S. Dollar as it rebounds from key levels it had broken in April. It encountered some resistance on Friday as it reached its 50 day moving average just above the $75 level and is likely to stall out at these levels.
However, there is still room to the upside up to about $77 before it reaches strong resistance at the bottom of the multi-year wedge it has broke down from earlier this year. While commodities have felt the burden of a stronger dollar more acutely than the broader markets, its recent rise has dragged on the markets and astute traders should keep an eye on it as it continues to be reliable predictor market movement.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
Is this the Bin Laden top?
Led by the debacle in silver, the commodity complex took a massive plunge this week pulling the broad markets down with it. As I mentioned last Friday, the markets were somewhat extended going into this week and likely due for a pullback and a retest of the price levels that held us in check in late February. I've seen plenty of chatter on the twitter stream saying we formed the “Bin Laden Top” on Monday's highs, but while this week's action was not the prettiest, we still stand on firm technical ground and the trend is still pointing up. Mirroring the week's action, today's trading was somewhat lackluster as we gapped higher and trended down throughout the day before a small respite at the end of the day. However, it is important to note that all of the major indexes were able to successfully hold above their close from Thursday and are in the process of forming a pivot low at a key level of support.
Looking at a chart of the SPDR's S&P 500 etf (SPY), we can see that we are now in the process of retesting the neckline from the inverted head and shoulders we formed throughout the last three months.
Always keep in mind when you are using technical analysis, that we aren't just looking at cool designs on charts, we are trying to read the psychology of the market place. In this particular case, we are looking at a price level that derailed our rally into march, and subsequently rejected a further attempt to clear it two months later. It is only natural that price action would eventually come back to this level as the market continues to acclimate itself to these new prices. Watch the lows that we formed this week. A drop below those levels doesn't necessarily mean that we are topping out here, but it would likely mean that we are still in a corrective range and need furthur time to resume our rally. If we can hold above them, than a we will likely push to new highs despite(or perhaps because of) the sudden bearishness in the markets as the “sell in may” mantra makes its rounds through the twitter stream.
While the possibility of continued distribution at these levels cannot be ignored, looking at a chart of the Nasdaq (QQQ) we can see that several key technical levels would need to be breached before we need to truly worry about an end to this rally.
In fact, this week's pullback did not even fill our most recent gap just under $58. A more significant gap exists just below $57. With the notable sluggishness in small caps, and the disastrous action in commodities this week, keep an eye on tech names as they are likely to become the sector the “risk” money flows to if we are to continue the next leg up in our bull run.
Silver was with out a doubt the big story of the week, and one glance at the carnage on the chart of SLV shows us that this was a horrible week for the unfortunate souls that were long into this week's repeated raises on silver margins.
After stair stepping up for the most part of two month's, SLV took the elevator down for about a 25% loss in its value in five days.This chart now sports some pretty ugly technical damage, and is likely to chop around for the better part of this summer as it begins to come to terms with the price shock it just experienced. While there will be plenty of sharp moves for short term traders to take advantage of, those looking for longer term trends are likely better off waiting for the price to stabilize over the next few weeks to months before jumping in.
As I mentioned last week, the U.S. Dollar was at key historic levels, and likely due for a bounce which would likely cause commmodities to pull back. That was an understatement apparently as oil and gold followed the massive plunge of silver this week as the dollar rallied. If we look at a long term chart (monthly) of the U.S. Dollar index, we can see that although the long term picture is still pretty bleak for the greenback, it has plenty of room in the short term before it meets resistance.
The first level to watch would be $76, which marks the bottom of the wedge from which it broke down from earlier this year. A more significant level resides in the middle of that wedge at just above $80. This is a multi year bottom that was breached in late 2007, and the last two attempts to remain above it have ultimately failed. Because our rally over the last two years has been largely created by the systemic destruction of the U.S. Dollar, it is important to keep an eye on it now as any resulting rally in it is likely so stymie our markets.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
To buy or not to buy?
To buy, or not to buy? That is the question. Much like Stockguy22, I find my trading account much fatter now than it was at the beginning of the year. So what should I do with my early windfall? Should I look for a sweet ride like he did? Granted, my account is certainly not big enough to tempt me with a new Lamborghini, but check out these wheels! Decision, decisions, decisions. 
Of course I jest, as I have about as much intention of buying that monstrosity as Frank does of buying the Gallardo, but I wanted to write a post mirroring his to further illustrate the point he made about the importance of focusing on your approach to trading and not worrying about the size (or lack of) of your account. One of the biggest mistakes a trader can make is to become overly fixated on dollars instead of paying attention to the trading process and letting the results take care of themselves. This classic mistake often compounds itself by leading traders into making other common errors such as overtrading, taking subpar setups or exiting trades poorly in an effort to reach arbitrary dollar based goals. The best way to avoid this trap is to focus on the trading process instead of on gains and losses. Of course, the results of trades are important and should not be ignored, but they should not be used as a means of “taking score”. In fact, the best way to grade your trading is by judging how well you execute your trading stategy. If you do this correctly, the results will follow.
Take a look at the report card below. These are my results for the first quarter of 2011. These are the areas I focus on when taking trades. Notice that there is no grade for money made. That is the last thing I look at when judging whether I have traded well. For each trade I take, I grade myself on the four criteria that I have found are most important to my trading. Much like being back in school, I give myself a grade from four to zero which corresponds to the letter grades A,B,C,D and F. It is important to be honest with yourself when grading a trade and to not let the final result of the trade affect what grade you assess to it. For instance, just because you lost the full amount you risked on a trade does not mean that you did not earn straight A's, what is important is that you correctly determined and executed that particular trade. Conversely, just because you made a boatload of money doesn't mean that you deserve good grades on it as you could have made several mistakes such as chasing it or doubling down when it wasn't part of the original plan.
The first “subject” I grade myself on is Strategy. This is kind of a catchall for several tasks, the most important of which is choosing the correct setup for a particular trade and my ability to stick to the plan. Some of the questions I ask myself when determining my grade are: Did I choose the correct instrument for this particular setup? (should I have used common shares or options, and if options did I choose the correct structure.) Does my risk/reward structure match the probability of the trade succeeding. The most important part of this grade is my ability to stick to the plan and not modify it while I am in the middle of the play. This is important enough to warrant its own grade, but it is not typically a mistake I make, so I prefer to keep it as part of my overall strategy grade. As you can see on my report card, I graded out at 3.51, barely an A. I did a good job of sticking to the setups that work well for me, but need to develop new strategies in order to diversify my ability to attack different market scenarios.
The second “subject” I grade myself on is Sizing. This is often overlooked, but critical to trading success. Many traders take on too much size on their trades which forces them to trade nervously and freak out every time a stock corrects. On the other end of the spectrum, undersizing a trade can lead to a trader not taking profits or stopping out at the proper levels because the change in dollar amount is not big enough. My grade on sizing was 3.45, which would work out to a high B. The most common mistake I make on sizing is to take too small of a position on certain option strategies. I typically make this mistake when buying out of the money options. Because out of the money options often expire worthless, I tend to reduce my size on these plays, but I often go too far in this respect as I almost never hold to expiry and have had reasonable success in my timing.
The third “subject” I grade myself on is Entries. This grade reflects my ability to correctly time the entry of my trade using proper analysis of support/resistance levels, candlesticks and moving averages. It is also based on my ability to follow the guidelines for entry that each of my setups require. This includes properly recogizing technical patterns and incorporating multiple time frames when judging my entry. Some of the mistakes that earn poor grades are: chasing a breakout, jumping in before a candle confirms my entry on both breakouts and support plays, and taking a trade while it is in the middle of its range. While there are of course a million mistakes one can make in their entries, these are the ones I will typically make. My grade on my entries was 3.82, my highest mark for the quarter. This is typically the strongest component of my trading because I have rigorous rules I must follow for entering a trade.
The fourth and final “subject” I grade is my Exits. This in my opinion is the hardest and perhaps the most important component of trading. Afterall, you don't make or lose money when you enter a trade, that happens on your exit. This grade reflects not only my ability to honor the stops set in place when I first enter a trade but my ability to stick to my exit stategy as well. The most common and most dangerous mistake a trader can make is to allow a trade to fall below the stop loss, but a more insidious mistake often made by a trader is the early exit. This mistake is often seen as a positive because the trader is happy to be profitable in a trade, but more often than not, these early exits erode gains more consistently than losing trades do. As we can see on the report card, I earned a 3.27, my worst grade. This was due to a couple of bad trades in which I let a stock run through my stop as well as a few trades in which I scaled out before my targets were hit.
My overall grade for the first quarter was barely an A at 3.51. This is reflected in my returns as I was able to book 25% returns on my account over the first 3 months of 2011. However, there is definitely room for improvement. Had I graded higher on my exits, I likely would have booked about 40% returns in that period as I let two trades run below my stops and trailed my stop too closely on a third trade. These 3 mistakes alone held back my total returns by 10%! This is why it is important to review your performance on every trade you make. While you cannot control the success of your trades, you can control your performance, and traders should strive for behavioral consistency throughout each of their trades. Breaking your rules even once can lead to a huge drop in overall performance.
If you are looking to improve your trading(and really, who isn't?), a good place to start 
would be to implement a review process similar to the one I just positted. Honest self reflection will allow you to better understand both your weaknesses and strengths and is an important step towards improving your trade results. If you are truly interested in improving your trades I would highly recommend you join a trading group like the one we have at stockguy22.com. We have an incredible group of traders in our virtual trading floor that are practically printing money on a day to day basis. In fact, many of their gains blow away the results stockguy22 and myself have had over the last few months. As an added bonus, we are now offering four free hours of one on one mentoring to anyone that joins our site this month. If you are currently looking for ways to improve your trading, this is the perfect opportunity. Join today and help me help you!
The Week in Crayons
With Helicopter Ben indicating earlier this week that the Fed has no immediate plans to stop debasing the U.S. Dollar, traders can rest assured that the “free money rally” is not over yet and has plenty of life left in it. In fact, we had breakouts to new multiyear highs on all of the major indexes, and all signs are now pointing towards the end of our recent two month consolidation and a likely start to a new leg up in one of the greatest rallies in U.S. History. We've closed higher almost every single day now for the last two weeks and are somewhat extended so it would be a good idea to not chase price action here, but astute traders should be ready to buy the dip one we pull back and begin to retest our breakout levels.
Looking at a chart of SPY, we can see that we are now well clear of the pivot high we formed in late February just below $135 after this weeks strong breakout from the inverted head and shoulders pattern we formed throughout the last two months.
The measured move from this pattern would indicate a likely move into the low $140's, which coincides with some key price levels from late 2007 and early 2008. As most traders know, recent resistance should form support in a healthy rally and any benign retracement back to $135 should offer traders a buyable opportunity. Keep an eye on the price action in SPY, as individual setups will likely ebb and flow in sympathy to the movement of the S&P 500 and paying attention to these key levels of support and resistance should help traders with the timing of their trades in other equities.
Traders should also keep an eye on the U.S. Dollar, as its destruction has been the main impetus to our historic rally throughout the last couple of years. If we take a look at a chart of the U.S. Dollar index, it is readily apparent that the our currency has been sinking steadily for several months now and actually increased its rate of descent over the last few days as it broke down to new lows.
This downward spiral is the key factor in the nearly parabolic rise in gold and silver recently as more and more capital flows towards the precious metals and away from our ever growing supply of freshly minted currency. We are approaching the key historic lows we formed in early 2008 at about $71, and a bounce from that level should be expected. A breakdown from those levels would likely push commodities to even more absurd levels. If the dollar can bounce and bring about a pullback on commodities, watch the $80 level as that would likely be a place of strong resistance and a good spot to watch for reentry into the affected commodities.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
The Week in Crayons
Propelled by several earnings beats, the markets were able to recover from last week's drop and closed the short week right back at the top of our current range. While things are looking pretty bullish right now and its easy to get excited about the strong rip we had from the lows we printed on Monday, traders should exert some patience as we probe levels that have stood as strong resistance throughout the year. We are unlikely to just blow past these critical levels, and traders should keep an eye on the manner in which the markets assimilate this week's quick gains next week as it will be a good sign as to whether we are ready to break out of our current range or if we are merely testing it yet again. As of now, things look pretty bullish, and some benign sideways action at these levels would offer the bulls some excellent trading setups.
As I mentioned last week, a move back up to these levels would form an inverted head and shoulders pattern on the S&P 500 and looking at a chart of SPY, we can see that we closed today just below the neckline of that pattern.
A break above that line would have very bullish implications and would likely lead to a run up to $140. This level just under $134 has held the markets in check for most of this year, and is likely the critical level for us to overcome in order to resume our rally. While another failure at this level doesn't necessarily mean that we will top out, it will likely mean that we are going to need more time to consolidate and may have to retest $130 and perhaps even below that level at some point.
I mentioned the relative weakness in the Technology sector last week as one of the factors that have held up this market over the last few months, but after furiously rallying this week off of the earnings reports of several of its key names, QQQ has now breached its previous pivot highs.
In fact, QQQ was able to practically erase several weeks worth of consolidation in one big gap up and has made up much of the ground that stood between it and its stronger peers. The level under this gap up around $57.50 should now offer firm support, and if QQQ does not retrace and fill this gap ( at $56.60) it would offer us yet another clue that we are ready to break out to new highs. This year's highs at around $59 provide the next obvious level that needs to be breached in order to break higher, but astute traders are better served seeing how QQQ behaves around the $58 level.
While the small caps have rallied strongly this week as well, they have come up well short of the levels they made earlier this month. One of the tough things in analyzing the markets is to try to guage just what implications certain divergences have and to not get fooled by obvious assumptions.
For instance, we can look at a chart of IWM and assume that because the small caps performed noticeably weaker than some of its counterparts that perhaps money is flowing out of riskier equities. However, the more likely scenario is that money was actually flowing towards the less extended names in the tech sector as the markets continue to “sync” up as we consolidate. Continue to watch IWM as it chops around under its recent highs, as it is likely to lead us higher once the weaker components in our market are ready to follow it upwards.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
The Week in Crayons
Although many bulls were ready for us to blast off last week as we chopped around close to our previous highs, this week's action further solidified the fact that we still remain in a broad corrective range. While we closed the week on a somewhat positive note and appear to be establishing a higher pivot low on many of the major indexes, we are still getting some mixed signals and likely need more time in order for several of the underlying sectors to become better aligned with each other. Looking at a chart of the S&P 500 (SPX), it is clear to see that the markets have not fully come to term with higher prices after we stalled out at the 1340 area and dropped back this week.
The 1300 area served as great support and for the time being has become an important (and higher) pivot low. If we can resume our march upwards from here and rechallenge the 1340 level that halted our steep rally last week, we will have formed an inverted head and shoulders pattern. A break out above this level would likely lead to not only new highs, but a likely challenge of 1400 at some point in the near future. However, if we stall out at this level and have trouble breaching the 1325-1330 area, we are likely to retest 1300 and possibly even retest the critical lows we formed in mid-march.
On a positive note, the small caps continue to show relative strength and keep hinting that there is still quite a healthy appetite for risk in the current environment. Looking at a chart of the Russell 2000 index (RUT-X), we can see a that we found support at the steadily rising 50 day moving average and were able to close above the key 20 day moving average.
The small caps are looking healthy here, and if they are able to hold above 830 or so and avoid falling back into the range that had held them up prior to the weakness we had in march it can be seen as a positive sign that we are ready to head higher. Keep an eye on the small caps as along with commodities they have been the true leaders of our recent rallies and are likely to lead us higher if they can resume their climb higher.
In stark contrast to the small cap stocks, tech stocks have continued to be laggards and are their performance has been noticeably weaker than most of their peers. The poor reaction to Google's (GOOG) earnings as well as continued weakness in Apple (AAPL) served as reminder that even the big “leaders” have pullbacks and retracements. While the Nasdaq Composite Index (COMPQX), was able to somewhat overcome the weakness in two of its biggest components and still finish the day above two important moving averages, it remains the weakest of the big three indexes.
Watch the performance of tech names over the next few weeks, especially as earnings reports start to roll in as they will likely be a good tell on the status of our economic recovery.
As I've stated for several weeks now, expect choppy action as the market continues to consolidate and focus on range based strategies that take advantage of our current conditions.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
The Week in Crayons
A week of indecision was capped off with a day of indecision on Friday as the markets steadily sold down after a gap up prior to the open. We finished the week about where we started it, and have now consolidated in a sideways manner for the better part of two weeks after furiously rallying from the tsunami induced lows we made in mid march. While this correction in time is technically healthy and exactly what a trader should look for before a resumption in an uptrend, there are some signs that the market may need more time to “catch its breath” so to speak. Looking at this week's action on a chart of the SPDR's S&P trust series (SPY), it is quite apparent that we are still having trouble coming to terms with the price level just under $134 that had held us up earlier this year.
The fact that we had seven days of indecision followed by a day of selling that practically encompasses all of them should not be taken lightly by overly exuberant bulls. We currently remain at the upper edges of a corrective range on SPY, and a pullback to our recently breached 20 and 50 day moving averages would not be out of order. There is still a gap to fill at $131.50, and we likely have strong support a buck or two below that. However, the fact that we are at resistance is not in my opinion a reason to get overly bearish and start calling for a double top as this market remains in a healthy uptrend and traders should continue to trade it as such until it proves otherwise. A break and hold above $134 at this stage would almost assure a retest and probable break of the highs we printed earlier this year.
The small caps as seen in a chart of the iShares Russell 2000 index fund (IWM) have already broken to new highs, and are currently in the process of pulling back and retesting their previous levels of resistance.
These levels presumably should now act as support, and a bounce from here would be a signal that the broader markets are ready to follow IWM higher. The small caps have consistently outperformed their peers throughout this rally, but were noticeably weaker on Friday perhaps giving us a clue that traders are momentarily avoiding riskier stocks.
Another clue that perhaps the markets need a little more time to catch their breath is the continued weakness in the financial sector.
Looking at a chart of the SPDR's select sector financial etf (XLF) we can see that the financials made a strong move on Wednesday and appeared ready to catch up to their peers. However, XLF utterly failed to hold above its key 50 day moving average and instead reversed lower on two days of pretty steady selling. XLF remains above its 20 day moving average as well as a key level of support around $16.25, but is also outside of the steeply ascending wedge that had defined its recent price action. Look for a continued chop as XLF attempts to firm up at this level. While the financial sector is clearly not a leader in this rally at the moment, traders should keep an eye on it as it has the potential to either continue to be an anchor on the markets, or possibly be the impetus to kickstart a new leg up if they suddenly firm up.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
The finnies are so hot right now
While the broader markets have mostly stagnated this week as they continue to digest their recent gains, one area that is beginning to perk up is the financial sector. The financials have been laggards over the last several months, but today's strong action tell us that they may be ready to play catch up now. Its too early to tell if this move will be part of an overall sector rotation or just an isolated rally in a sector, but astute traders should begin eying this group for potential moves.
Looking at a chart of the SPDR's select sector financial etf (XLF), we can see that the sector has actually been steadily rising over the last month as it attempts to recover from the sharp sell off we had in early march.
Notice the long lower wicks on several of the candles during this move indicating healthy demand. With Wednesday's strong close, XLF is now above its important 50 day moving average and poised to challenge the $17 price level.
As I've mention before, incorporating multiple time frames into your analysis of an equity will give you a tremendous advantage by not only perfecting your entry, but will also improve your overall probabilities by forcing you to wait for multiple confirmation signals. Stepping back and looking at the longer term picture of XLF on the weekly chart, it becomes evident that the recent sell off could have been nothing more than healthy consolidation in the form of a bull flag.
Traders should always make it a habit to keep remain grounded and keep an eye on the bigger picture as this can help them understand and ultimately ignore the short term noise that may hamper them from recognizing a pattern in a chart. From this perspective, XLF pulled back in an orderly manner to its rising 20 day moving average, found support and is now beginning to break out from a short term descending channel.
If we take this to the other extreme, and zoom in to a 15 minute time frame, we now notice that XLF has been forming a variation of an inverted head and shoulders.
While this may not be a classic example, what is important in technical analysis is not to be a stickler for details, but to understand the underlying psychology behind a pattern. In this respect, XLF faced a clear line of resistance, made a pivot low (left shoulder), proceeded to make a new pivot low (head) and finally made a higher pivot low (right shoulder) before proceeding to move above the initial line of resistance. After that, it formed a nice bull flag for those traders that were either hesitant to buy the break at today's open or wanted to wait for additional confirmation. Traders that saw this pattern were rewarded with a nice follow through at the end of the day on several stocks in this sector. Below are a few charts to watch in the event that this move can continue over the next few days.
Citigroup (C ) had a nice move on wednesday and doesn't offer the best risk reward here, but is capable of offering a nice momentum trade if the sector catches fire tomorrow. C will also present a nice opportunity if this move stalls out and it begins to consolidate just under its 50 and 100 day moving averages.
Fifth Third Bancorp (FITB) has run into some resistance at $14, and is currently attempting to not only break through this level, but also overcome an internal trendline that has served as a persistant anchor on it throughout this year. Both of these trendlines also converge with its 100 day moving average, and a break above them will have bullish consequences.
J.P. Morgan Chase (JPM) had a strong breakout from some key resistance today as well, and is another signal that perhaps this sector is ready to assume some leadership in this market. Momo traders can take a shot on a break of today's highs while more conservative traders can wait for either a flag or a retest of its breakout area.
Suntrust Banks (STI) had a healthy breakout today as well, but still has some overhead resistance to overcome. It had a quick failure the last time it contended with its 50 day moving average around the $30 level, and is likely to have a rematch tomorrow.
US Bancorp (USB) had a broke out of its recent downtrend solidly today and was able to reclaim several key moving averages. USB provides a clear cut trade here as a loss of today's lows would also mean a reversion back under several averages and an important trendline. A move above its 50 day moving average is likely to lead to a retest of previous highs.
Wells Fargo & Company (WFC) was able to emerge from its tightly contracting range this week and closed above its 50 day moving average with a surge on wednesday afternoon. WFC appears ready to begin probing higher and ultimately retesting its previous highs.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
The Week in Crayons
The bulls continued to squeeze the bears this week, capping off an impressive two week rally by printing new highs on on two of our major indexes. While the furious charge to these levels is very impressive, we are very extended here, and are likely due for either a pullback or some sideways chop. This market continues to punish bears, and remains in my opinion a long only environment. While some traders may have had some success in selective shorts recently, in my opinion the highest probability and profitable trades this year have been made buying dips and failed bearish setups. All of the indexes showed some indecision on friday by printing narrow range doji candles, and chasing profits at this point is probably a bad idea as well.
The strength of this rally is immediately obvious when we examine a chart of the Russell 2000 small cap index.
Usually, the behavior in the small caps is a good measure of risk appetite in the markets with strength indicating a “risk on” trade and vice versa on weakness. Well, apparently risk is on as the small cap index rose almost vertically after testing support during the drop we incurred during the tsunami and resuslting nuclear disaster in Japan three weeks ago. We are now at multi-year highs on the index and while this angle of ascent is not likely to hold much longer, if we are truly out of our recent corrective range than our previous pivot high at the mid $830's should now hold as support. Keep an eye on the steep rising wedge as we are likely to break under it at some point next week as we digest this ridiculous move.
The Dow Jones Industrial average had an impressive “V” shaped recover off of the lows we printed in mid march, and impressively rallied to hit new multi-year highs on Friday as well.
While we failed to close above our previous highs, we are now well above all of our moving averages and have several weeks of price congestion below us which should now act as support. Much like the chart of the Russell 2000, the angle of ascent on this chart is extremely steep as well, and we are likely to break below this rising wedge as we consolidate our gains next week as well. Do not chase if we continue to surge higher into next week as the higher we run without consolidating, the lower the probability trades have of succeeding as we become more overbought.
While the S&P 500 has been notably weaker than the two indexes we have just discussed, it still had an impressive run and was able to eclipse most of the price action that precipitated our recent correction.
While the pattern in this chart is very similar to the previous charts as well, it is currently below its previous pivot high and its behavior at that level now becomes critical. If it cannot follow the stronger indexes and breakout to new highs, it will likely drag the others back down as we pull back and consolidate until the imbalance between buyers and seller reaches a new equilibrium. Watch the action in this important index next week as it will likely let us know if we are now free and clear of our corrective range or only testing the upper part of it.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
a big pile of charts
We had a strong day in the markets today with the small caps(IWM) breaking out to new 52 week highs. SPY and QQQ are lagging behind, but still showing good strength as well. The markets feel a bit stretched here and a few days of consolidation are likely in order. There are a lot of extended charts right now, and traders need to exert discipline and not chase profits. Below are some charts I'll be watching throughout the rest of the week.
APL has been on a tear over the last year, and is now consolidating its most recent gains in a “high and tight” bull flag on extremely low volume. Watch for a move higher in concert with a rise in volume.
ASIA has been coming to terms with its 200 day moving average throughout the last couple of months. It was recently supported by both its now rising 50 day moving average and a rising trendline and is currently testing a descending trendline that has held it in check recently.
AXL recently failed a breakout of both a descending trendline and its 20 day moving average. It fell below several key averages as a result of this failure, but is holding up relatively well. If it can reclaim the $13 area and the respective resistance clumped up in that area, it will likely run higher and ultimately retest its recent highs.
BOOM has had a nice run this year and has held up well throughout the recent bout of weakness in the markets. It looks poised to continue higher and is one to watch if the markets continue to breakout.
FORM recently broke out of a wide descending channel, and is now in the process of retesting its breakout area. Notice the decreasing volume indicative of healthy profit taking. Keep an eye on intraday action and volume to give us a clue that FORM has come to terms with its breakout and is ready to resume its breakout.
ICO has been in a very steady uptrend for several months now and is currently coming to terms with a price tag of $11. It has had very steady support at its rising 50 day moving average and is a good candidate to watch if we pull back over the next few days. An immediate break higher and out of its recent bull flag is also very possible, so keep this one on close watch.
SBGI recently had a strong breakout above $8, and is currently consolidating 50% later. While SBGI is still in the process of consolidating this move and may need more time to come to terms with this price level, it is one to keep an eye on and wait for a tradeable pattern to emerge.
Quite the opposite of most of the other charts on this watchlist, SLXP had an ugly gap down last month, and has been consolidating in a bear flag throughout march. However, it was able to break above its recent price action and may be ready to try and fill its gap. Many failed bearish patterns have led to great gains recently and SLXP has the potential to follow in their footsteps.
SRZ has been a monster since last summer, and was able to break to new highs today. Watch this one for continued strength.
STE was able to overcome a descending trendline last week, but was held in check just under the $35 price level. If it can overcome this area, a likely retest of its recent highs is probably in order.
Financials have been lagging the current markets, but may soon enter “catchup mode”. WFC has one of the cleaner and easier to identify techinical patterns in this sector. Range has steadily contracted over the last month and is now reaching its apex.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
The Week in Crayons
As I wrote a couple of weeks ago, this market continues to trap both bears and bulls as it tests the boundaries of its current range of consolidation. This week was no different as the aggressive bears expecting us to breakdown after a dead cat bounce from last week's lows were burned as the markets used them as fuel to surge past recent resistance. One of the key components of the strong move up was the continued strength in small cap names.
In fact, as we can see on a chart of the iShares Russell 2000 etf (IWM), not only did we reclaim all key moving averages, but we actually retested the upper range of the wedge that we had initially formed after our first real breakdown from the highs we had formed earlier this year. While it closed weakly on Friday, IWM showed considerable strength this week and is now firmly back in the upper region of our recent range. Keep an eye on IWM, especially as it tests our upper range as it is a good gauge of risk appettite and should provide us with a valuable tell depending on how it reacts at this level.
While the large caps couldn't keep up with the strong move up the small caps made, they had an impressive bounce of their own this week as well. Looking at the SPDRs S&P etf (SPY), we can see that the large caps were also able to reclaim all of their important moving averages and were able to reclaim some key levels of support. The next step for the bulls would be to reclaim the descending trendline that held us in check after we lost the highs earlier this year. If we retrace from here, $130 would be the first level of support although a further drop down to the mid $127's would not be out of the question. If the bulls exuberance can sustain our recent rally, than $133.50 will be a critical test for SPY.
The weak sister of the main indexes lately has been the tech heavy PowerShares QQQtrust (now QQQ). While QQQ was also able to bounce sharply this week, it was unable to reclaim its 50 day moving average and also met stiff resistance in the form of a descending trendline similar to the one that SPY now faces. While QQQ is now also above some key levels of support, it is still showing signs of relative weakness and may need more time to retest some of those levels of support before it is ready to test the upper reaches of our current range.
Looking at a 5 minute chart of Friday's action on QQQ gives us a good picture of the weakness in tech as it attempted to rally past the critical $57 area and failed. Notice the rainbow pattern created by the strong action in the morning followed by what first appeared to be healthy consolidation just under a key level but eventually turned into a roll over of price action that ended the day close to the day's opening price. While this chart is indicative of just one day's price action and may be negated as soon as Monday, it is a valuable clue telling us that perhaps we aren't ready to move past our current prices. In fact, just as the bears were visciously trapped this week by a sudden rally, overly exuberant bulls may be facing the same thing if they chase stocks here into resistance. As always, if you are playing the recent chop, continue to keep your positions light and keep rotating your plays by entering new trades as you lock up profits in others.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
The Week in Crayons
For a few weeks now, I've been pointing out the mixed signals the markets were giving us and the potential scenario that we were now in a broad trading range as the markets attempted to consolidate the massive gains we've experienced over the last several months. While its fairly easy to assume that the top of this range will be the highs we experienced in early February, the bottom of the range is another matter all together. Amid fears of a near apocalyptic disaster in Japan, the markets experienced the first real test of just where dip buyers would step up in force. Looking at a chart of SPY, we can see that bulls heavily defended the $125-$126 area earlier this week and were able to finish the week above the key low price of $127.51(barely) we made during the crisis in Egypt in late January.
Price action remains weak, and a retest of this week's lows is likely. If we cannot hold it, the next key level of support on SPY will be around the $121 level. Our near term ceiling would be just underneath the wedge we broke down from earlier this month around $130-$131.
Compared to SPY, big tech as represented by a chart of QQQQ was relatively weak as it was unable to hold above its Egypt lows this week.
It is currently flagging underneath its 100 day moving average and has been a notable laggard over the last couple of weaks. Keep an eye on QQQQ as either a continued breakdown or a reversal upwards will likely give us good clues as to where the broader markets want to go over the next month.
While the tech companies have shown relative weakness, the small caps as represented by IWM have shown relative strength by holding up well during our recent downslide.
In fact, they have yet to breach the key Egypt lows and remain well above them. The resilience in the small caps as opposed to the weakness in tech is yet another set of mixed signals the market is giving us that we are still in no man's land. One scenario to watch as we chop around further is a failed retest of the $81 level. A failure at that level would likely lead to a retest of the recent lows around $77 which would form a head and shoulders pattern. While this may or may not happen in the next few weeks, this is one scenario I am preparing for.
Forgotten amidst all the fears of nuclear fallout in Japan, the markets (and our economy) continue to face the burden of higher energy costs in the form of +$100 barrels of oil.
Using a chart of USO as a proxy for oil prices, we can see that although we dropped back into the ascending channel we've been ranging in since last summer, we actually closed just above it on Friday. Keep an eye on the developing situation in Libya this weekend, as furthur war will likely lead to exploding prices in oil and a resultant drop in our markets. On the other hand, if we can finally see some end to the civil unrest that has gripped the middle east, the ease in oil prices will likely allow the markets to lift and begin to test the our new found overhead supply.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
mixed signals
On Monday, I was discussing the state of the current markets with @jdub929 and @christianhgross, two of our resident expert traders on stockguy22.com. Specifically, we were discussing selling option premium on index futures and at which levels dip buyers would emerge and support further drops in the markets. We went a step further and created a poll asking that very question. Below are initial results as of Monday's close.
While the sample size is a little small to draw sweeping conclusions about the attitudes of the trading majority, it does match up with the anecdotal evidence offered up on a daily basis on the twitter stream. Looking at the responses to the first question, it is clear to see that the majority of polled traders still believe that buying the dip is the correct strategy to take at this time. While about half of the polled traders expect a drop to between 1200-1250 before becoming heavily involved only 10% of the traders indicated that they did not have much interest in buying the markets at this time. One third of those polled took the more aggressive stance of being willing to enter long positions if we dropped between 1250 and 1275. With Tuesday's significant gap down, these traders were tested and we found that not only were they apparently telling us the truth, but they also had plenty of company as the SPX rose steadily throughout the day and finished the day about 20 points above its lows. While the bulls were able to step in and somewhat salvage what appeared to be a disastrous day, the fact remains that they are steadily losing ground now as we probe lower and lower on heavy volume. Looking at a chart of the S&P 500, we can see that while we were able to close above the 1275 “Egypt lows”, we probed significantly lower than that before buyers stepped in.
Each of the horizontal lines on the chart correspond to one of the price levels on our poll. While the first level held today, the majority of participants actually called for lower prices before they claimed they would step in and buy support. Price action is now churning between the 50 day moving average and the 100 day moving average and is firmly underneath a 20 day moving average that is no longer rising and has in fact begun to descend. Couple this with the heavy volume we keep seeing as the markets experience more distribution and it seems that the more cautious buy the dippers will soon get a chance to prove themselves as well.
However, this leads us to the second question in our poll. The chart below shows us at what price levels participants are willing to buy momentum in the event that we can rally from here.
Two thirds of the participants were ready to buy as long as we were able to either clear the intermediate resistance we've faced at 1330 or at 1350 if we were able to forge to new highs. Contrast this with about a quarter of the participants that were not interested in buying if we were to test the recent highs. Clearly, many traders are still waiting for the recent rally to resume by next month and are ready to jump back on the pomo train as soon as it leaves the station. Keep in mind that in the last couple of months we have dealt with the beginning of a cultural revolution in the middle east, the resulting burden of $100 oil and an apocalyptic disaster in one of the largest economies in the world and yet the market remains close to where it started trading this year. The continued underlying strength and resilience of this rally, even in the face of disastrous news further supports the thesis that we are currently experiencing a bull market correction and not a reversal. One of the “tells” many traders I respect use to figure out where the market is headed is the price action in copper using Freeport Mcmoran (FCX) as a proxy.
Looking at a chart of FCX, we can see that it has been mired in a steady downtrend since mid January and has indeed hinted that the broader markets were headed for a substantial correction. However, FCX had a strong move on Tuesday on very heavy volume and looks to have found a near term bottom just above the $46 area. This doesn't necessarily mean that it is ready to begin a new uptrend as FCX still has plenty of work to do in overcoming its recent downtrend, but today's strong candle hints that perhaps it is ready to base out here as it comes to terms with a new price range.
So where do we go from here? The market has shown great resiliency in the face of horrible news, but then again, how long can it ignore it? The market is experiencing its heaviest distribution since the flash crash but buyers are willing to step in at every downturn. These and many more mixed signals continue to confound traders and are reflected in their attitudes as a substantial number of them are looking for a much larger correction over the next month while nearly just as many are waiting for us to break to new highs. This is a recipe for continued choppiness as the market sorts itself out after the epic rally it underwent over the last several months. Going back to the original point of this discussion, I expect us to trade in a broad corrective range (in which we are still defining the edges) and will begin to explore more range based trades (such as selling premium) until I see the market has either fully corrected or has indeed turned lower.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
It’s a trap
With Friday's strong action, the markets once again swung sharply in the other direction 
after sucking in traders expecting a nice follow through after Thursday's high volume selloff. Instead, the bears found themselves victims to yet another trap as Friday's gains pretty much erased Thursday's drop, While the argument can be made for either a continued bounce here or a drop back lower, the reality is that we continue to chop around wildly in no-man's land, with bulls and bears both getting trapped every other day it seems.
Looking at a chart of SPY, we can see that the market continues to send traders mixed signals as it attempts to normalize after the the huge run its had over the last several months.
The unhealthy nature of this market is evident if we look at how often it has snapped back after a strong move and reversed on traders expecting continuation. Today's action continued this pattern. While we successfully held the 50 day moving average today, we still find ourselves on the wrong side of the recent wedge that we've been consolidating in and arguments can be made for both bulls and bears.
As I keep reiterating, now is not the time to gamble and traders would be better served to reduce risk as much as possible until we see better opportunities. Keep in mind that we've had a nice trend for several months now and traders are being unrealistic if they think a couple of weeks of choppiness is enough for the markets to consolidate. Looking at a weekly chart of SPY, we can see the near vertical rise we've had since we broke out of the broad range consolidation we were mired in for most of last summer after the “flash crash”.
Looking at this longer term picture, we can see that we have really just begun to flag on the weekly chart and have plenty of room to the downside before the “healthiness” of this uptrend is truly threatened. While we may continue to consolidate in a high and tight flag
over the next few weeks, there is just as likely a chance that we continue to probe lower and test support at $128 and possibly even the last major pivot high at $123 as we enter a broader range of consolidation much like the one from last summer. Of course, keep in mind that with the Jekyll and Hyde nature of the recent market, we can just as easily rocket upwards to new highs, which illustrates why traders are better off waiting in cash or trading very lightly until the the market offers them a better edge.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
The Week in Crayons
The markets capped a wild week of trading with an ugly day of selling that was somewhat alleviated by a last minute surge. As I said on Wednesday, we are stuck in the middle of no man's land in the broad market indexes, and it seems like bulls and bears are taking turns trapping each other every other day. This is not a good time to be blindly involved in the stock market, and most traders would be better off moving to strictly cash and waiting for better opportunities.
As we can see on a chart of SPY, the market has thrashed up and down violently after being rejected around the price of $135.
We have now found support at $130, but are having trouble as we approach $134, creating a wedge pattern as we continue to come to terms with this price area. The trend remains up, but note the huge volume on down days. This is a clear warning that institutions continue to dump shares as as we approach our near term ceiling. The next levels to watch on either side of the short term wedge we are in are $135 and $128. Keep an eye on oil, as we will not be able to rally as long as price continue to surge higher.
Looking at a weekly chart of the United State Oil fund (USO) we can see that oil has clearly broken out of a multimonth channel. Notice the rare “distraught dictator candle” we formed this week on huge volume. This type of candle usually precedes a parabolic move, and I would not expect oil prices to alleviate until the turmoil in the middle east calms down.
With the markets chopping around in no man's land right now, I recommend traders either sit out, or if necessary trade lightly and very nimble until we get a clearer picture of what our new direction will be.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
No man’s land
Although we had a small bounce on Wednesday, the markets continue to reel from the onslaught of higher oil/energy costs as a result of the turmoil in the middle east. While we are still trading in the broadening wedge that has characterized the action so far this year, we are dangerously close to losing it to the downside. Looking at the S&P 500 through the etf SPY, we can see that right now we are clearly in no man's land.
Price action is having trouble holding above the 20 day moving average and is likely to start churning between it and the 50 day moving average. However, the underlying trend is still up, and there is clearly potential for a significant move either up or down. So, do we make new highs or new lows now? Your guess is as good as mine. (My guess is that we'll see $128 on SPY before we see $135) Regardless of my beliefs, I will trade what the charts show me, and at the moment they aren't showing much. The broader market isn't giving us an edge one way or the other, and I would recommend sitting in cash if you are not an experienced trader as this is the kind of environment that sucks away trader's profits.
As I mentioned in my last post though, a good trader should always be prepared for whatever the market throws at him. Below are a few charts I am looking at incase the bulls catch the bears off guard yet again and we have another stealth rally over the next few days. In the event that we lose Wednesday's lows, I will likely sit out and wait to see where we find support. I am not interested in shorting any individual equities at this time.
RealD Inc. (RLD) had nice move after its earnings report on February 4th, but has been steadily sold down since then. It recently broke down below its previous pivot low and retested a gap from its first big breakout last year, but was able to quickly recover. It now finds itself testing several levels of resistance at just under $24. If it can break through this level, It should be able to work its way back to the top of its multimonth range. This chart has UTEP Two Step written all over it, the only thing missing right now is a tighter stop out area.
Tesla Motors (TSLA) is in the process of forming a UTEP Two Step pattern very similar to RLD. In fact, it is actually a couple of days ahead of it as it has already broken above two key moving averages as well as its descending trendline. Coincidentally, it is also being held in check by $24 and is a good long if it can clear the last two day's doji candles. A close below the 20 day moving average would be a sign that perhaps TSLA isn't yet ready to resume its uptrend.
Apollo Group (APOL) has shown great relative strength comared to the broader markets over the last month or so, and is now in the process of consolidating in a bull flag. It now has a rising 20 day moving average to support it as well as the important 200 day moving average that it was able clear last week.
American Public Education (APEI), a peer of APOL's is also in the midst of a bull flag as it consolidates after a similar move to break through its key moving averages. This is another chart that has shown great relative strength over the last month, and should continue upwards if we are able to shake off the oil induced weakness of the last week.
Aetna (AET) has is yet another chart showing great relative strength as it forms a bull flag after a strong gap up on February 4th. It now has its rising 20 day moving average getting ready to converge with the recent price action and should begin to test new ground.
Wellcare Health Plans (WCG) also sports a similar pattern to its peer AET as it has been flagging after an explosive move in early February as well. Notice the huge volume as it shot up, followed by the very light volume as it has drifted slightly lower as traders take profits. Volume should be a big tell on this one.
As I stated previously, be very cautious right now as I think there is a very strong chance that we have a really ugly down day in the near future. Although I will be watching all of the above charts in the event that we can sustain upward momentum in the markets I will likely only chose one (if any at all) while limiting my risk as the first priority for all traders right now is to preserve their capital.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
The Week in Crayons
The markets experienced another bout of heavy distribution this week, this time under the guise of the unrest in Egypt Libya and the resulting spike in oil prices. While the markets were able to find support as the dip buyers stepped in on Friday, they continue to encounter heavy selling after slowly dripping to new highs. The recent pattern of forging to new highs followed by fast drops to new lows is becoming eerily reminiscent of the action we experienced last spring just before the flash crash. Although the current trend remains up and should be traded thusly, it certainly doesn’t hurt for traders to have contingency plans ready in case the markets have another precipitous drop waiting in ambush. As the philosopher George Santayana famously said, "Those who cannot remember the past are condemned to repeat it".
Below we can see two charts of the S&P 500 index. One is the period just before we had the flash crash in May of 2010, the other is of the recent action we have experienced.
Can you recognize which chart is which? As we can see, both are forming very similar broadening wedge patterns and show an uptrend marred by heavy distribution.
While a black swan event like the flash crash is usually a “one of” event, it did lead to a broad corrective range that took months to sort itself out. I suspect we will likely enter a similar situation as we move forward, but will continue to respect our current trend higher until we have a clearer picture of where the market wants to go. However, I highly recommend that traders Be Prepared™ for whatever the markets decide to throw our way.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for? Try us out free for two weeks:
The UTEP Two Step
As I have stated previously (see; Beastmode), approaching the market with a well thought out plan of attack is an important factor in becoming a profitable trader. Having a playbook with well defined strategies allows a trader to focus on very specific sets of criteria that he knows have produced results in the past instead of aimlessly wandering from chart to chart looking for an interesting pattern that catches his fancy on that given 
day. Knowing ahead of time what our actions will be for a given scenario allows us to focus on looking for that scenario instead of wasting time and effort trying to develop a trade strategy while the market is moving. Always remember, that the window of opportunity to enter or exit a trade can close in the blink of an eye and the trader that knows exactly when and where he will enter and exit a trade will avoid having it shut on his fingers while the trader that is trying to figure out it out on the fly will often end up in pain.
Today, I'd like to share with you another of my favorite trade setups. I named this strategy the UTEP Two Step. Now, our weird neighbors in the nation of Texas may think this is a type of dance, but basketball fans will recognize this as Tim Hardaway's signature double crossover move which he cooincidentally made famous while studying abroad at the University of Texas at El Paso. For those unfamiliar with this move, watch the video linked below.
When using technical analysis, traders should be aware of the fact that they aren't analyzing squiggly lines, they are analyzing crowd psychology. Therefore, when you study a pattern on a chart, think of the motivational forces behind it. The reason I name this setup after Tim Hardaway's double crossover is because I look for a stock that moves in one direction than quickly reverses in the other direction leaving the traders that entered in the wrong direction scrambling to exit their position. Having an ample supply of traders in pain helps to fuel fast moves once an equity performs this type of fakeout.
Using a trade I took last week on Crosstex Energy (XTXI), I will illustrate exactly what I look for when using this pattern.
The first thing that alerts me to a possible UTEP Two Step trade is a clearly defined intermediate-term downtrend on a stock that has recently made a strong move higher. XTXI surged higher late last year, but failed each time it tried to continue climbing over the massive candle it printed on November 10th. Once it was clear that Crosstex was not ready to approach $10, it traded down steadily as sellers outnumbered buyers each time it attempted to break above its key moving averages. It is important that the trendline defining this move is clear, as the break of it is one of our key signals that the stock is ready to reverse its movement.
The next characteristic I look for is a clearly defined area of support. In the case of XTXI, it ultimately found support just under $8.50 which was the level from which it intitially broken out from. You'll notice that combining these two trendlines forms a Descending Triangle which is a bearish continuation pattern. This is not a coincidence and is in fact 
the reason why this pattern works so well. As more and more traders pile into a short anticipating a further breakdown, they become the unfortunate fuel that propels the stock upward in the event of a price reversal.
Because we are attempting to trade against the grain, risk management and patience take on even more importance. I will typically only take this trade when it is obvious to me that it is breaking out. This means that I not only want to see a clear breakout of the descending trendline, I want it to be on a candle that breaches a price level that has recently held the stock in check. Ideally, it will clear the highs of a candle that stopped just short of closing above the descending trendline as this provides us with a clear cut entry that is very reliable. In XTXI's case, the candle on February 11th set the benchmark that needed to be cleared. It flirted with a breakout of $8.70 throughout the day, but ultimately closed just below its multi month descending trendline. On February 12th, XTXI breached this level and was off to the races.
The heavy volume on the breakout was yet another signal confirming the veracity of the move. Because I wait for several signals to be aligned before entering, my holding time on this trade is usually a few days as this type of short squeeze tends to run quickly. This is a range trade and as such, I scale out in stages and ultimately end the trade as it approaches its previous highs. Again, because this is a countertrend strategy, we must place tight stops and honor them at all costs. Also, do not forget that (like all trades) if the trade doesn't offer the proper risk/reward ratio it is not worth taking. As we can see on the chart, XTXI went straight to its recent highs with no pullbacks whatsoever and offered a quick 10-15% gain in just a few days.
This was an easy trade idea that was available to our members in the stockguy22.com chatroom the day before it broke out. If you are a trader that is not part of a community like ours where its members constantly share ideas and trades, you are not only missing out on many great profit opportunities each day, but also missing out on the chance to truly improve your trading by learning from the different ways that several great traders successfully take money out of the market every day. I highly recommend that you try out our service. Its free for two weeks, so there really is no excuse to not try us out.
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The Week in Crayons
The markets broke out firmly on Friday cementing the fact that the trend is clearly still up. While several divergences had appeared throughout the last couple of weeks showing some underlying weakness, most of the lagging indexes have played catch up all week and are now standing at new highs. Obviously, any and all dips are being bought vigorously right now and traders should continue to take shots to the long side until the dips stop being bought. One thing to note however, is that as the market continues to run up, there are less and less quality setups emerging. It is important that traders remain disciplined in the trades they choose to enter and not chase moves that have already occurred.
As we examine a chart of SPY, we can see that the trend actually accelerated as we rocketed above the broadening wedge that had defined the action prior to this week. This is a sign that many are chasing the move up, and although the markets have shown great strength over the last several months, the potential for a swift drop is very real as price chasers are usually the first to dump their shares on a pull back.
The small caps as represented by IWM have overcome the relative weakness that had developed over the last few weeks and are now well above their previous highs. IWM formed a sneaky cup and handle(ish) pattern and were able to breakout strongly on friday. Keep an eye on the small caps as they have been a good measure of risk appetite throughout the current rally.
As I said earlier, the trend is clearly up and I feel that shorting this market is an exercise in frustration right now. The plan remains to be patient, wait for long setups to develop and hit them hard and fast when you get them.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for?
More Lessons from a Fortune Cookie
“The greatest teacher you will ever have is a mirror.”
Don't you hate getting little pearls of wisdom like that in your fortune cookie? I mean cracking open a cookie and reading something like that is like getting a crappy sweater for Christmas.
Whatever happened to cool fortunes like “a pleasant surprise is in store for you” or even better “you will step on a $100 bill tomorrow at 7:14 pm”. Now thats something I would enjoy reading after some sweet and sour chicken. What is it exactly about an omen of good luck that appeals to us? We obviously know that whatever machine printed out the fortune isn't magical, yet we still perk up anytime we get a prediction of happiness or success for us all the same.
This is actually a perfectly natural reaction. Humans have visited oracles and fortune tellers for thousands of years with the hope that they would get the slightest hint that the future had something better in store for them than the present. Pyschologically speaking, one of the reasons why good omens make us feel better is because they absolve us of not only our current situation, but also of our future actions because fate will determine the outcome instead of us. In essence, this is an act of self preservation by the human psyche by temporarily relieving the pressure of having to bear the burden of every day responsibility even if only for a fleeting moment. This mechanism is the main culprit responsible for the many superstitions we cling to. Traders that succumb to their psyche's desire to avoid culpability end up doing things like trading on tips, or following the posted trades of other “experts” on twitter. Like their ancestors they trudge up the mountain (or maybe a weird kitchen) hoping that the Oracle can give them the answer they refuse to look for.
On the other side of this psychological coin is the pithy little proverbs we briefly look at when we crack open our fortune cookies and say “gee thanks, thats obvious” as we crumple them up and toss them aside. Although these are actually more helpful than vague predictions, our psyche tends to want to dismiss it because it puts the onus on us to improve our current lot in life. This is an important inner drive to recognize at work and to overcome. While honest self reflection may often feel brutal to our ego, we will benefit from it in the long run as we become self sustaining thinkers instead of blindly hoping for luck. Once we begin to see that our ego doesn't necessarily have the same priorities that we do, we learn to brush it aside and build ourselves into more complete individuals. The traders that are capable of doing this will be the ones that last because they have found what works for them while overcoming the faults that would have held them back if they hadn't seen them.
One way for a trader to study himself is to keep a daily journal documenting all of his trades. While a perfectly acceptable journal can be a simple as creating a spreadsheet that keeps track of the basics like entry, stop loss, exit, and profit/loss, a more detailed journal would also include other variables like setup used, risk/reward, time of day (especially for day traders), and most importantly, the thought processes involved in the trade. Keep in mind that the point of a journal is not only to keep track of our trades, but to also review them and reflect upon them. Traders are doing themselves a huge disservice if they don't analyze their trades. As a matter of fact, even if you don't keep a detailed journal you should still make it a habit to review each of your trades at the end of the day and if possible grade your performance. The amount of money made or lost should be irrelevant to the grade you give yourself, instead focus on whether you stuck to your rules and your decision making process. This review process allows a trader to figure out what they did well and what they can improve on.
On a personal note, one of my biggest faults as a trader is that I tend to jump the gun on both entries and exits.
Luckily, I saw this early in my trading career because of the process of documenting and reviewing my trades. Because I was able to identify this trait, I was able to develop a trading system that incorporated entry and exit rules that helped me combat this tendency. For entries, I force myself to trade two patterns as described in 3d Trading. For exits, I found that the best system for me was to scale out of trades as they reached certain criteria. Locking in profits quickly on a portion of the trade allows me to feel much more comfortable in letting the rest of the trade run longer since I'm “playing with house money”. One other benefit of scaling a portion out of my trade early is that it allows me to reload if it pulls back to support instead of exiting or riding it out if I'm holding a full position with no booked profits. Being able to look at myself honestly and critique my trading allowed me to become a much better trader and hopefully looking at the mirror will help you improve as well.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you're not a member, what are you waiting for? Try to weeks free on me.
The Week in Crayons
Another week, another rout of the bears. While we had an ugly day of distribution last Friday, it was basically erased by the bulls this week as the major indexes all rose steadily throughout the week. At this rate, we might as well start calling them cubs.
Once again though, I remain skeptical of the new highs we seem to be putting in daily on the S&P 500. While it is obvious that there is still a strong underlying bid in this market, there are still many key divergences that keep bothering me. Please realize that thanks to the modern marvel of QE2, we are currently trading in an environment that traders have never seen before. While I feel like a parrot for constantly yelling the same thing, I still feel that traders would be wise to remain cautious here and trade small while taking quick profits until the markets become better aligned.
Looking at a chart of SPY, we can see that even though we keep constantly pressing higher and higher on an almost daily basis, the fast elevators down to the bottom of the range have in fact pressed lower each time creating a broadening wedge pattern.
This is typically not what you would consider healthy consolidation and in fact is somewhat similar to the pattern we saw last year in May right before the “Flash Crash”.
Looking at the small caps as represented by IWM, we see that even though we have been able to overcome the ugly action from the last couple of weeks, IWM is presently forming a lower set of highs which is a clear divergence from the pushes higher the S&P 500 has been able to make during the same time. Also notice the spikes in volume during the days of heavy selling as opposed to the relatively ligher volume on buying days. This is yet another pimple on the market's face warning us that maybe things aren't as pretty as they appear.
Like I continue to preach, keep your trades small, your stops tight and take your profits quickly. If you do this, you will be smiling when we get hit with another day like last Friday.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren't a member, what are you waiting for? Try us out free for two weeks:
Lessons from a Fortune Cookie
With the strong surge in stocks over the last few days after the carnage we witnessed on Friday, I think its safe to say that the dips are still being bought in this market. While many signs still hint that we may be in the process of topping out, the truth is that noone knows how long this incredible rally will last. (maybe Goldman Sachs does, but they aren't returning my phone calls) As traders, it is our job to react to what the market gives us instead of trying to impose our own ideas on it. Therefore, regardless of our beliefs, if the market is trending up, we keep trading to the long side. Sounds easy, I know. While I could get lazy and just tweet that and tag it with $study, I prefer to offer advice with a little more substance.
See that guy sitting on the rock. He speaks in vague hard to quantify phrases. He must be wise.
One important point to keep in mind is that even though traders should follow the trend, we have to guard against becoming complacent when a market becomes too easy to trade. We have to hit it as hard and often as we can, but while still honoring our trading rules. During good times such as what we have experienced over the last few months, the underlying strength in the markets erases a lot of mistakes traders make. All of a sudden, chasing a stock into a higher move or ignoring your stop because you want to give the trade a little more “wiggle room” gets rewarded instead of punished. Also, traders naturally assume that their performance is all due to their skill and forget that in fact almost all stocks have trended higher during that period. This is not meant to dismiss the contributions a trader's skills make towards their profit totals, but in order for traders to look at their performance more objectively. Afterall, even though most stocks go up during strong bull markets like this crazy pomo train we've been riding, some stocks do get punished.
For instance, look at all the support levels Ford (F) has blown through during its recent slide after a poor earnings report. So far, any trader that decided to give his stop a little space has been toasted.
While I can see a knife catcher eyeballing the gap fill at $15.20, why be the bag holder hoping this happens instead of the opportunist jumping in at the right time?
Another stock that has punished those that chased it at its highs is Sketchers (SKX). While the markets have been in a nonstop rally since last summer, SKX has been busy losing 50% of its value while steadily diving through all levels of support. It has consistently offered the tease that it was bottoming out only to break down to the next level of support before pulling the same stunt over again. Any trader that ignored his stops or attempted to catch the bottom on this early has payed the price.
While we don't know when this pomo train will end, it will at some point end. Whether this happens later this week, next month or some time after that, at some point we will experience a more bearish market and charts like the two above will become much more common. In order to protect yourself from getting smoked when it happens, make sure you are trading with the proper discipline now instead of waiting to learn this lesson the hard way.
By the way, if you follow me on twitter, you will never see a tweet like this: “Do not mistake temptation for opportunity. $study”
If you want advice from a fortune cookie, order chinese for lunch.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you're not a member, what are you waiting for? Contact me at twitter if you would like to try us out free for two weeks.
The Week in Crayons
How ironic is it that I used a picture of a clogged up road in Cairo to describe the market during last Friday's episode of The Week in Crayons? While we spent most of the week roasting the bears that stepped into the market short on last week's distribution, the market used the news of civil unrest in Egypt to pull the rug out from under the overenthusiastic bulls on Friday.
So now we have a molotov cocktail of trapped bulls and trapped bears stuck in a market that is thoroughly confused as it tries to sell off in this pomo laden environment. One thing about molotov cocktails is that they are just as likely to burn the thrower as the target and as such, I highly recommend that traders sit out here if they are uncomfortable trading or don't know how to properly protect themselves in this type of environment and wait for better opportunities once the market figures out where it wants to go from here.
A chart of SPY show us just how ugly today's action was for the bulls. After breaking out of our most recent “stair step” on Wednesday and inching higher on Thursday, the bulls were punished mercilessly on Friday as oned day of selling quickly erased the climb higher that had occurred over the last six days. Looking at the heavy volume on the days that we have sold off sharply lets us know that the market is experiencing strong selling pressure at these levels and is likely to head lower until it finds enough buyers willing to step in. However, trends are not broken in one day and I would not recommend shorting now as we still remain in an uptrend in this pomo driven environment.
Examining a chart of QQQQ shows us the same ugly action as that in SPY. After making marginal new highs on Thursday, QQQQ swiftly cut through several days of positive action as it sliced through several levels of support. It now finds itself below its key 20 day moving average as well as an ascending trendline that has supported this rally for several months now. Keep in mind that QQQQ still remains above 2008 highs, and should find support as it drops down to these levels.
Demonstrating the fear that gripped market participants on Friday, gold and the dollar traded in tandem higher as the markets dropped. This typically is a sign of a flight to safety as investors flee from riskier equities and jump into the relative safety offered by the dollar and gold. Looking at a chart of GLD which tracks the performance of gold, we can see an apparent triple top just under $139 followed by a heavy selloff through multiple levels of support. It bounced strongly at $128, and should run back to test the low $130's if fear continues to run rampant in the market over the next month. Gold has moved in sympathy with the markets for over a year now as the market has been driven by inflated prices from the Fed's monetary policy, but has recently begun to diverge from this correlation. Watch to see if gold continues to trade against the market as that is a good clue that the nature of this market is changing.
With the markets now in a state of flux, I recommend traders play it safe and either get flat or trade lightly and hedged until we see better opportunities.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member.
3D Trading
While the market action this week has been very positive up to this point, I've mostly abstained from trading as I wait to see how the divergences that appeared last week develop. As of now, it appears that last week's distribution might have been the perfect bear trap to roast the few souls brave enough to short this runaway pomo train, but I still remain skeptical that the markets can keep making new highs at these levels without a more substantial consolidation. I will continue to mostly sit out like some hippie protestor railing against the system. (However, like a true hippie, i'll take pot shots at this market if the right trades present themselves.)
One of the ways that I separate the ok setups from the really good ones that seem like freebies is by making sure that the I get high probability setups on multiple time frames. Just like our eyes are able to assimilate two different pictures into one 3D image when watching a movie, being able to have two charts confirm the move on an equity is akin to trading in 3d while other traders are stuck in the 2d world.
(its science)
On Tuesday, a trade that made sense on multiple time frames presented itself as Hecla Mining (HL) attempted to find support near its 100 day moving average. While this average isn't followed as closely as some of the others, or maybe because of that, it often supports a stock that slices through the more heavily watched 20 and 50 day moving averages. While I normally will not touch a stock that has been in a free fall until it has a bullish candle formation that confirms a bottom may be forming being able to analyze multiple time frames gave me the advantage of an early entry on a possible bottom.
As we zoom in to the 5 minute chart, we see that HL spent the entire day forming an inverted head and shoulders pattern, and was able to break out of it just before the close.
Having this bullish pattern confirmed gave me the confidence to go ahead and attempt to catch the knife and take a trade on HL. (It also helped that some of the other great traders in our Stockguy22 virtual trading floor were beginning to eye a bottom on silver as well. /hat tip to Capt. Kirk)
Obviously looking at today's action, the trade has been a success so far, and sticking to my plan of taking quick profits I've already scaled out of 2/3's of the trade during today's 8% move. I will continue to scale out at higher levels, but will also keep an eye on new setups on a pullback as it looks like some of the precious metal stocks should get a decent bounce into February.
One other 3D setup I've been watching develop this week is in Morgan Stanley (MS). MS had a nice move last week off of their earnings report, but has performed poorly this so far this week along with most of the financial sector. However, it has found support just under $29, which was recently a level of resistance. MS is still clearly in an uptrend, and setups up nicely as a “pullback to the breakout level” trade on the daily time frame.
As we pan down to the 15 minute time frame, we can see that Morgan Stanley broke down from a small bull flag just under its highs around $30.20, and has been consolidating in a narrowing wedge since then. Price action has now contracted considerably and MS now faces a dilemna as the rapidly descending 50 period moving average is now approaching the recent price action. If MS can reclaim this average and break above the descending top of this wedge, It will likely head up for a date with it's previous highs.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member.
the week in crayons
Although we only had four trading days this week, they were packed with enough action to satisfy even the most degenerate action seekers. While Tuesday's action was positive across all the indexes, it was marred by the volatile day in Apple as it gapped down on news that Steve Jobs was taking a leave of absence due to his health, but rallied strongly throughout the day as the buy the dip crowd jumped in and drove the stock up sharply into earnings that afternoon, and actually made new highs after the close. However, along with the broader markets, it sold off sharply throughout the rest of the week and perfectly illustrates the growing dichotomy in the market presently as the bulls and bears each wonder who has the initiative. While APPL is technically still healthy as it is above the base it broke out of this year and its rising 50 day moving average, it would take a stretch of the imagination to view this week's candles as positive.
This divergence in the markets began to show itself last week with the relative weakness in the Russell 2000 small cap names as opposed to the less risky names in the S&P 500. The “risk off” trade continued this week as the small caps showed considerably more weakness than the more defensive large caps. We can see this clearly by examining the charts of both SPY and IWM.
While SPY was able to remain within its most recent “stair step” consolidation range despite the weakness in the markets this week, IWM continued to display classic topping action as its volatility sharply expanded while dropping through several levels of support. While many will point to the SPY chart and say it has done nothing wrong and is technically still in rally mode, the IWM chart is not healthy in my opinion which leads me to believe that the market is setting up for either a broader pullback than what we have experienced so far or a wide range consolidation similar to what we experienced last summer. The market is now at a crossroads, but to make matters a little more interesting, we're at a crossroads in one of those countries that have yet to come up with the bright idea of street lights.
The bulls find themselves wondering if they are supposed to keep going while the bears that have been shell shocked for several months now dare to dream that they may have the right of way now. So what do the bears do now? Do they step on the gas or chicken out like they have so many times throughtout the current rally? One thing I know is that I will not attempt to cross this street until I see exactly what pattern the traffic is going to take.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member.
Black Again?
The markets continued their slow drip higher last week to the confoundment of the many traders that keep calling for a near term top. Just like the roulette players I described in one of my previous entries, many of the traders I've seen on the twitter stream are starting to crowd around the “table” licking their chops at the prospects of catching the end of this streak we've been on over the last couple of months.
A chart showing the recent action in QQQQ illustrates this scenario perfectly as it has now printed a new high 8 days in a row. To exacerbate the feeling that we are now reaching a short term top, it also accelerated its uptrend by breaking out of an ascending channel. However, while this type of move typically fails, shorting the market has been a loser's game to this point while those playing “with the streak” have been amply rewarded.
Until this rally fails, my strategy will continue to be taking cautious shots to the long side while locking up profits quickly instead of letting them run. However, I will not be blindly bullish, and will have tight stops on most of my trades. In the event that we get a retracement, I will sit out and observe the action instead of trying to short this market as I feel the conditions are ripe for a nasty bear trap once we do pull back.
Below are a few charts that are setting up for a continued move higher as long as the markets cooperate.
After a strong move to new all time highs, Brigham Exploration (BEXP) entered a period of consolidation after failing to find buyers above the $28 area. It has now had sustained price action above this level for two days, and looks ready to resume its upward ascent. Because it is at all time highs, traders don't have to worry about nervous holders hoping to get back to break even as pretty much everyone holding this stock is “in the money”. Watch for a break above the highs from the last two days.
Ultra Hair Salon (ULTA) is another stock trading at near all time highs. It had a strong move on January 6th, and has been flagging in an orderly manner with its range steadily contracting. ULTA should have fairly decent short term support at around $36.50 while a break out above Friday's highs should lead to a retest of $38.
MAP Pharmaceuticals (MAPP) has been flagging just under $17 after a strong run up from $14. Its range has narrowed considerably over the last few days, and is poised to move strongly in the near future. Watch for a move above $17 on volume. Keep an eye on overhead resistance around $18.50 to $19.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member.
a big pile of charts
While the markets didn't really do much of anything on Tuesday , the small caps as represented by IWM were able to negate their bearish divergence from last week to a certain extent by closing above the descending trendline that defined the top of their recent consolidation. IWM now sits above its December highs while its 9 and 20 day moving averages curl up under it. It seems like much of the twitter stream has been getting antsy and calling for a pullback or outright top recently, but as long as the trend remains bullish, I will not fight it. However, I am playing lighter than normal and taking profits quickly as I feel that is the prudent thing to do at this time.
Looking at a chart of SPY, we again see a perfectly bullish picture with absolutely no reason to think of shorting at this time. $127.80 or so is the level to watch for a new leg up in this rally, while the area around $126 will likely serve as a good spot for the buy the dip crowd. Watch these two levels and find charts that will likely mirror the action in the broader markets.
Below are several charts I will be watching as they consolidate and which I expect will follow a breakout in SPY with a breakout of their own.
City Telecom (CTEL) broke out on heavy volume last November, and ultimately failed at the $16 level. It has been fluctuating between the mid $15's and $14, and appears close to resuming its uptrend now that it finds itself close to the apex of its multi-month consolidation.
Ezcorp (EZPW) has been on a steady rise since last fall, and has found consistent sellers at the $28 area. It consolidated in an orderly manner while it waited for its 20 day moving average to catch up to it, and now finds itself approaching a rising trendline that should give it some upward bias.
IAC/Interactive (IACI) has been trending upwardly for over a year now, and has recently found good support at $29 while it has consolidated after its most recent move up. Watch for a break of its descending trendline along with the recent highs of the last few days around $29.85 as a signal that IACI is ready to retest the top of its current range at just under $31.
Liverperson (LPSN) has experienced the same rudderless volatility as the broader markets to start the year, but still finds itself within a rising triangle as it attempts to base out after a strong breakout over the key $10 level. Before this recent runup, $11 marked the all time high price for LPSN. LPSN may not be ready for a move yet, but this is one that i'll be watching as it bases out between $10 and $11.50.
Sangamo Biosciences (SGMO) has had a great run up from $4 last year, and has recently been held in check by sellers at the $7 area. After a couple of failed tries at holding above this level, it has now closed above $7 two days in a row. It's rising 20 day moving average is swiftly approaching which may mean that SGMO will continue its upward momentum. Watch for a break of today's highs on volume to signal a resumption of its rally.
XL capital (XL) has recently run up along with other insurers, and now finds itself consolidating just below last year's highs. I will be watching this one for continued momentum if it breaks recent highs with heavy volume.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member.
Lock it up!
After breaking out on the first trading day of the new year, the markets have now spent the rest of the week wandering back and forth like confused tourists. You have the bulls saying “i know its this way” while the bears keep saying “no, no, I think we passed it, lets turn back around”.
While we've hammered out new recent highs in all the indexes, a noticeable divergence has begun to appear as the small caps as shown by the weakness in IWM (Russell 2000 index etf)as opposed to the relatively stronger charts in both SPY (SPDRs S&P 500 etf) and QQQQ (Powershares QQQ etf). Also, all the charts have shown increasingly noisy chart patterns as volatility has expanded during this weeks consolidation. While I certainly an not telling anyone to short during the current #buythedip, #qe2 environment, I would advise those that are uncomfortable with the current action to begin locking up profits and keep a tighter eye on stops as the next couple of weeks play out.
While the benefit of the doubt should go to the bulls during this current rally, I would also advise caution as the markets are in a tricky spot here at the start of the year. On the one hand, we have potential for a nice short squeeze as many traders may try to jump the gun and begin shorting extended charts prematurely, but we also have the potential for a swift pull back if we break down from here and trap any overly exuberant bulls that over bought this week.
Examining a 3 month daily chart of SPY, we can see that we have been steadily stair stepping up after a key breakout last december. Technically speaking, SPY is currently in a healthy uptrend and has not even come close to testing its 20 day moving average during this run.
During the same 3 month span, QQQQ had a much longer consolidation phase after the breakout in early december, but has shown the greatest strength of the three major indexes as it has made new highs almost every day this week. While today's hanging man candle is somewhat ominous as it shows that selling pressure is starting to build, I would wait for further confirmation such as a break of the currently ascending trendline or 20 day moving average before I would even begin to consider bearish possiblities.
While IWM has been the leader during the current rally, it has shown the most noticeable weakness this week. It actually failed its breakout level, but was able to hold its current base after dipping down below it and its key 20 day moving average twice. While this could be a sign of healthy sector rotation, it can also be a sign that money is flowing to less risky equities in a “risk off” environment.
After examining these charts, I would recommend a cautiously bullish approach until the bears can prove that they have gained control over the current markets. This means I will trade more selectively, in smaller size and when in doubt, I will “LOCK IT UP!”
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member.
Beastmode
Throughout my last three blog entries, I stressed the importance of developing and incorporating a risk management strategy into a trading system. In this entry, we will examine another important part of a trader's system, his trade setups. As traders, we are bombarded with incredible amounts of information every minute of every day. Between CNBC, twitter, stocktwits, message boards, chat rooms and even our own watchlists, we have to process hundreds of possible ideas and trades every time we sit in front of the computer. When you are overwhelmed with this many choices, much like standing in front of a vending machine with a crispy dollar bill, it helps to have a plan of attack. For instance, in my case I will first look for something in the Honeybun-Bearclaw range (yes, I like my sweets). If not, I will fall back on some sort of chocolate bar or perhaps a hard candy like Skittles, and if that fails, perhaps potato chips or I just walk away. Being prepared like this allows me to avoid panicking into a terrible decision like a bag of trail-mix. As traders, we need to have the same approach. You have your Honeybun setups which you look for first, followed by your Twix setups, followed by your Skittles setups. If you don't find any setups, you walk away and look for another machine. This doesn't mean that you ignore really tempting discretionary trades that may appear (like Twinkies) , but you don't want to be that guy paralized in front of the glass because he had no clue what he was looking for when he got there.
(Don't be this guy.)
While I don't name my setups after sweets, I do give them unusual names that are easy to remember and visualize. As a big sports fan, I name most of my setups after athletes that remind me of certain scenarios. The particular setup I'll be sharing here is called Beastmode and is named after one of my favorite players in the NFL, Marshawn Lynch (unfortunately, I'm a Buffalo Bills fan).
click here to see what Beastmode is!
This is a breakout strategy that looks for range expansion after a prolonged period of range contraction at or near recent highs. While you can give it a boring name like narrow range breakout play, I find that giving my setups colorful names lets me recall and visualize them easier. For instance, with this one I like to picture Lynch barrelling into the line of scrimmage, breaking through it, and ripping off a long run. This is exactly what I expect price to do when I enter a Beastmode trade.
A perfect example of a Beastmode trade is one I am currently involved with in Coventry Health Care Inc. (CVH).
The first thing I look for when scanning for this setup is range contracting as it bumps up against a key price level, falls towards its rising moving averages and then bounces back to resistance and begins the cycle again. This typically sets up an ascending triangle like CVH did throught November and early December. Please remember that when we study charts, we are not looking at magical lines that affect price, we are seeing visual representations of crowd psychology. A rising trendline or moving average shows us that the consensus opinion of a stock's price is steadily improving in the eyes of market participants. A horizontal trendline such as the one that held CVH in check around the $27 area is a price level that market participants see as significant for a particular issue. In this case, the consensus opinion of CVH was steadily improving as more and more buyers found it to be an appealing buy from $23 up to $27. Once it reached $27, sellers appeared showing that the consensus opinion was that CVH was too expensive over $27. These two opinions as shown by the converging trendlines would need to be reconciled soon, and led to an initial breakout above $27 on December 13th. This breakout quickly failed and price began a slow drift just below $27 as it began to tangle up with its moving averages. This long string of doji candles throughout late December showed us that the crowd was becoming increasingly confused about the value of CVH. This is the most important criteria I look for when looking for a Beastmode trade. Range has to contract in an orderly fashion that shows me that the consensus price is in limbo at the moment. Once range begins to expand, especially when it breaches a price level that has held the stock in check it signifies that market participants have finally agreed that the current price is buyable, and we have our entry. In CVH's case, this was on Monday, January 3rd. Notice how this is the first candle CVH printed in several weeks with a decent sized body. It also reclaimed its key 20 day moving average on increasing volume. Because this is a breakout trade, I prefer to set a stop at the entry day's low unless there is an obvious level of support relatively close to the breakout point because a reversal below these levels would indicate a failed breakout and thus the trade thesis would be null. In this case, I set my stop just under the recent doji lows around $26.20. My entry was at $26.80 giving me a risk of .60. I expect the stock to have a decent run on this type of trade, so I prefer a strategy of slowly scaling out at either key resistance levels , or in some cases multiples of whatever amount I risked initially. On a side note, I highly recommend that traders pay close attention to their exit stategies as they are as important if not more important than their entries. After all, you make or lose money when you exit a trade, not when you enter it.
Another chart that is in Beastmode right now is Sunrise Senior Living Inc. (SRZ).
While I missed this trade, it is a perfect example of what I am looking for when I stalk a chart for this setup. At first examination, you would think this is a different type of trade than the CVH trade since SRZ had more of a descending triangle type of consolidation, but the key component is there, which is range contraction at a key level. SRZ cleared the $5.50 area on December 16th of last year, but the trading action for the next couple of weeks showed indecision on the part of market participants as they struggled to find a price level they were comfortable with. Notice how the candles kept narrowing day after day on declining volume. While the holiday season most likely had an affect on the volume, it is also a characteristic of indecision on the part of traders as they try to figure out the percieved value of a stock. SRZ offered a beautiful entry on January 3rd when traders were forced to either let price drift under the swiftly rising 20 day moving average or break out above the descending trendline. The bulls won out on this one and pushed the stock upwards on good volume. As you can see, SRZ has followed through nicely on the breakout and offered an excellent trading opportunity.
One last example of a stock going Beastmode is the Walt Disney Company's (DIS) chart.
DIS offered a clean trade as well, never violating its trendlines until it broke out on heavy volume. Throughout November and December, DIS bounced back and forth between a rising trendline and overhead resistance at about $38. As it neared the apex of the ascending triangle, DIS put in a string of seven doji candles showing that buyers and sellers had reached a point in which neither side could gain control. The seventh candle gave us a hint that the bulls could break through on the next day as it gapped above the previous candles and had slightly heavier volume than the days preceding it. Either way, on Jan. 4th, DIS broke out decisively on heavy volume and continued it nicely the next day. Once again, this would have been an easy trade for a trader as it had an obvious entry that worked immediately.
One of the most important keys to trading this setup is to have the patience to wait for the “obvious” entry. You may miss opportunities when stocks breakout before you want them to, but it will also prevent you from waiting for stocks as they dilly-dally around if you enter early.
Below are a few charts I will be stalking over the next few days to weeks to see if they can go Beastmode on the markets.
Atlas Pipeline Partners (APL) has been coming to terms with the price area between about $24-$26 after a strong gap up on heavy volume in mid-November. I'll continue to watch it as it hopefully gets wedged between its moving averages and the apex of the converging trendlines in the near future.
Monster Worldwide Inc. (MWW) appears to have had some range expansion already after a prolonged drift of narrow range candles, but I didn't like the pattern as it didn't really have enough narrow days before the range expanded and failed on that day as well. However, it is wedged up against resistance on expanding candles, and I'll be watching to see if it breaks above Wednesday's highs on good volume. If it doesn't have enough steam to break out, I wouldn't mind seeing it drift back down and offer aa better setup.
Teekay Corp. (TK) has been oscillating back and forth between about $31 to $34 or so after a big move in October as it comes to terms with its new price level. While it has a bit of a sloppy top when trying to figure out its resistance area, it has had steadily rising support and has had a pretty orderly consolidation while it waited for its 50 day moving average to catch up with it. The last three candles have shown a failure to hold above the $33.50 area and I would love to see a string of steadily contracting candles as it come to rest on its coiling averages.
I hope seeing one of my trade setups inspires you to do the same if you don't already have a playbook and if you are a trader that already approaches the market like this I hope it inpires you to add new plays this year.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member.
Trading the Shortstack episode #3
In the past episodes of Trading the Shortstack we learned that in order to square off against Mother Market we must first put on our magical armor of risk management. With this armor, we can shrug off multiple attacks without serious injury while we wait for the proper moment to retaliate. We also learned that we should not attack until the market gives us an opening that offers a reward commensurate with the risks we are taking. Lastly, we know that we must control the engagement by waiting for the trade setup we want to appear instead of chasing missed opportunities. This is the equivalent of an army seeking higher ground in preparation for a battle. So here we are standing on top of a hill wearing our magic armor waiting for Mother Market to show her ugly face. What's next? We wait some more!
Did you know that a cheetah can accelerate faster than a sportscar by reaching 60 miles per hour in less than 3 seconds and is capable of reaching top speeds of over 70 miles per hour. Read that again! (its more fun if you do it with a smarmy sounding nature channel voice.) Thats fast enough to get a speeding ticket in most states!
Yet even with the ability to outrun anything on the planet it will patiently stalk its prey until the perfect opportunity presents itself. Only when its success is all but guaranteed will it begin the hunt. On top of that extraordinary patience, if the cheetah cannot catch its prey quickly, it will immediately break off the chase and go back to the drawing board. This is exactly the type of approach traders should emulate when they are seeking to develop a trading plan. If we can stalk a trade for days and patiently wait until the proper setup materializes, we will have forced the market to agree to our terms and significantly skew the odds in our favor. Let's examine a sample trade based on a chart that was freely available to the stockguy22 community. (If you aren't a member, I highly recommend you look into joining our site. There are an incredible amount of ideas shared by great traders every day and being a part of this type of environment will improve your trading immediately.)
On December 6th, I posted a chart of MAP Pharmaceuticals (MAPP) after noticing support at the $14 level as well as a compression in its range as it pressed up against a descending trendline and 20 day moving average. The first thing a trader should do when stalking a trade is notice the area which would signify a failed trade to stop out of.
In this case, it would be just below $14. A reasonable short term target on this trade would be the top of the range at around $16.80. This gives us a rough estimate of around 50 cents of risk versus a reward of about $2.30. Almost 5 – 1, not bad, but keep in mind that this may narrow as the chart develops as we will likely buy on strength if it breaks above its averages/trendline. Seven trading days later, the entry I was looking for finally emerged.
Notice how the stock had a string of doji as buyers and sellers fought to gain control of it between the low $14's and its 20 and 200 day moving averages. It is important to identify these battle zones, and to have the patience to stay away until they have been decided. Once MAPP was able to hold above its averages and broke the descending trendline that had held it in check throughout most of October and November a clear entry presented itself around $14.75. If a trader took this signal and decided to give it a loose stop at $13.75, MAPP still presented a 2 – 1 reward to risk ratio with its $16.80 target. A more aggressive trader could have placed his stop under the day's low just under $14.40 risking .30 to make 2.10(7 – 1 rewards to risk ratio). While this type of trade will fail more often, it will make up for it when it succeeds. While the actual targets and stops vary from trader to trader, the important thing to focus on is that a good trader will wait patiently for a trade that offers the reward to risk ratio that he is comfortable with, and will not trade until such an opportunity arises. As we can see in the next chart, a trader's patience would have been quickly rewarded by MAPP.
As a matter of fact, MAPP didn't have a red candle until after it tested the top of its range. While not every trade is resolved this quickly or easily, as long as a trader exerts the self control necessary to avoid a poor entry, they can avoid having to hold through the choppy mess that often comes before a significant move. Having clearly defined exits also keeps a trader from second guessing the position if it stalls at intermediate resistance levels or even if it fails immediately. While individual strategies such as scaling in and out or incorporating options into the trade will vary from trader to trader, the single most important act a trader can do is to develop a system like we have done over the last three episodes that allows him to plan his trade ahead of time and control his risks. After developing a detailed trading plan like this, the only thing that will stand in the way of a trader is his discipline. If he can master that, he will master the markets.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member.
Trading the Shortstack episode#2
In the last episode of Trading the Shortstack, we identified two of the most important tasks a trader must accomplish in order to be successful in his battles against the large hedge funds and investment banks that lurk behind the level II screen or in dark pools waiting to fleece him; extreme patience when selecting a trade and risk management when entering it. In this and the following episode, we will examine a risk management model that incorporates those two ideals into a system that can be adopted by any trader to suit their needs.
If you have ever walked across a casino floor, you have witnessed the siren's call of the roulette scoreboard as gamblers swarmed to it whenever they saw an improbable streak of results such as 15 blacks in a row. They crowd around the table to bet on red under the flawed assumption that it is “due”. This flawed assumption is known as the gambler's fallacy. The gambler assumes that a random event is more likely to occur because of the amount of times it has or has not occurred in the recent past. A classic example of this mistaken logic is that if a coin lands as tails four times in a row, it is more likely to land as heads on the next flip. Most people will figure that the odds of tails hitting five times in a row is so low (1 in 32) that the next flip must be a heads without fully understanding that for any set of five flips, the chances are exactly the same that four tails will be followed by a head on the last flip (also 1 in 32). So what on earth does all this talk of gamblers and math have to do with trading anyways? I'm glad you asked.
The fact that incredible streaks that defy statistical odds occur all the time should reinforce the idea that a trader must always limit the amount of money they are willing to lose in a trade in order to protect themselves from such an occurrence. After all, the odds of the ball landing on a black space on a roulette wheel are about 47%, a number that is probably very close to the success rate of an average trader and I personally have seen bizarre roulette streaks that reach the mid-twenties. A better than average trader maybe makes money on 60-70% of their trades, and they can still at any given time hit a rut and lose perhaps 10 trades in a row. Even if a trader was disciplined and always stopped out on his trades, if he risked 5% of his account per trade, he would see his account halved by such a slump. Because of this, I am of the belief that a trader should never risk more than 1-2% of their account. Risking 1% of their account on each trade, a trader would have to lose 50 trades in a row in order to lose half of his account. As a matter of fact, if a trader just focused on following this one rule, he could probably break any number of other rules and still find it nearly impossible to blow up his account.
One thing to keep in mind is that this is the amount of money he will risk on a stop out, not the amount of money he will deploy. For instance, let’s say Joe Twitter just opened up a trading account and funded it with $10,000. Knowing that protecting his capital during the infancy of his account is priority number one, he decides to risk 1% ($100) per trade. If he buys XYZ stock which is trading at $10.00 per share and feels that he should stop out if it drops below $9.50, then he would purchase 200 shares. While the total amount of money he is deploying in the trade is $2,000 which is 20% of his account, he is realistically only risking the $100 it would take to stop out barring any unforeseen circumstances in which the stock gapped below his stop out point. Managing the risk involved in these “black swan” events is a topic that will be discussed in the future.
Once a trader figures out the amount he will risk in this manner, it should become the primary focus of all potential trades he will examine. In fact, the point at which he will stop out should be the first thing a trader looks for anytime he analyzes a chart. If a trader can adopt this mindset, he will have overcome the biggest threat to blowing out his account which is the bad habit of letting losses grow well past acceptable levels. Controlling losses in this manner will automatically improve a trader’s consistency by eliminating wild swings in the loss column due to erratic sizing. Sticking to this plan also prevents a trader from attempting make up for previous losses by trading in a bigger size than would be prudent for his account. Once a trader can perfect the management of his risks, he is ready to focus on the fun part of trading, his rewards.
So now that Joe Twitter knows that he will risk $100 on each trade he takes, he must figure out the amount he hopes to make on each trade. Assuming he wins on about half of his trades, he will have to plan on making more than $100 on each of his wins, as that will get him nowhere fast once he accounts for commissions. This is where patience becomes key, as a trader should ignore all setups that do not offer at least 2 times the rewards as the amount they should risk. Many traders in fact would not enter a trade unless it offered a reward to risk ratio much higher than that but it is up to the trader to figure a multiple that works with the type of trading they do as some styles lend themselves to much higher risk/reward ratios than others. The important thing to remember is that the trader never enter a trade in which he doesn't plan on making at least twice as much as he loses as that will allow him to stay profitable as long as he can hit on one third of his trades. Survival should always be the first thing a trader thinks about. Much like a great hitter in baseball, he should focus on hitting singles not homeruns…if he takes the right approach, the homeruns will follow.
Stay tuned for the next episode in which we will examine the importance of waiting for a setup that offers the requisite rewards to justify the risk we are willing to assume in a trade and illustrate this concept with some sample trades.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member.
Trading the short stack
Imagine you are a medieval warrior…kind of like those guys from Lord of the Rings. (Hopefully you didn't picture yourself as Legolas.) You are facing your greatest foe, the villain known as Mother Market. She stands before you holding the biggest baddest sword you have ever seen, but thats ok because you are wielding the mighty…oops, never mind you only have a rusty dagger in your hand! Sounds like a bad dream, but this is the battle many traders face every day trading smaller accounts against hidden opponents with vast amounts of buying power. While all traders must overcome great odds in becoming successful at their craft, those that do so with a small account face even greater odds as they are fighting the markets without the benefit of a strong weapon (lots of cash). Luckily, small traders do have tactics they can rely on to help them overcome their bigger stronger foes. Educating traders on these strategies will be the main focus of this blog. (These stategies work for all account sizes, so don't feel this information would be useless to you if you are fortunate enough to have what you would consider a large account. Besides, against Goldman Sachs we are all small fries!)
In poker, a player with a relatively small amount of chips is considered to be playing with the short stack. Because he doesn't have a lot of chips in his corner, he has little chance of bluffing his way out of a pot and his raises are unlikely to deter opponents invested in the hand with significantly larger amounts of capital. Therefore, this player must become increasingly selective of the hands he will play and must be willing to play them aggressively hoping to take a bunch of small pots while having the odds in his favor in the event that he gets called or pushed into going all in by one of the bigger stacks. However, in trading the player has the advantage of not having to play until he gets the setup he wants and never has to go all in. In fact, he doesn't have to ante up, pay the blinds, or call raises. He even has the option of getting up, grabbing his chips and walking away from the table in the middle of the hand if he feels like it. Imagine playing poker like that! In essence, that is what trading the shortstack should be. You wait for pocket aces, you put a reasonable amount of chips in, and you see how the cards play out. If you get subpar cards, you throw them out and keep waiting for pocket aces. After all, why play anything else if it doesn't cost you to keep waiting for only the best hands? As a trader, you must do the same thing by using the chart setups that have produced strong results for you in the past instead of randomly jumping in and out of trades you see on twitter or hear about from friends. Dictating the terms of engagement is essential in any confict, and that is what you are forcing upon the market when you patiently wait for your best opportunities and ignore all subpar setups.
So now that you have forced Mother Market to face you on your terms, how exactly do you protect yourself against her? The first thing you need to do is get the best armor possible; sound risk management. If ever there was a holy grail to trading, this is it. Every successful trader I have ever heard of is an expert at managing their risk. The amazing part, is that managing risk is logically one of the simplest parts of trading. Figure out a reasonable amount of money you are willing to lose on an idea. Figure out the amount of money you would like to potentially earn if your idea works out and then implement that idea. As long as you always attempt to make more money than you are putting in you should be fine as long as your success rate approaches that of random chance. Understandably, managing risk is also one of the hardest feats for a trader to accomplish because of the interference caused by our greed/fear impulses. Overcoming these impulses and trading methodically is without a doubt the most important skill any trader can ever develop.
So how does a trader overcome the natural emotions of fear and greed while he is trading? He eliminates them by putting into place a trading system that allows him to make his trading decisions objectively by following guidelines that are predetermined by the paramaters he chooses. If this is done correctly, all possible outcomes are accounted for before a trade is made, allowing the trader to not have to make a decision in the heat of the moment when they may not be thinking objectively. In the Stockguy22 chat room, we are always talking about trading like a robot because that is the ideal mentality to have when entering and exiting positions. You should be entering,modifying and exiting positions based solely on logical decisions you have made before the trade is placed, not shooting from the hip like some crazy cowboy. Once you have a sound risk management strategy and the discipline to follow it, Mother Market’s strongest blows will barely harm you.
Stay tuned for the next installment of this series, in which we will go in depth on how to design a risk management plan that suits your needs.
if you have any questions or comments feel free to contact me on twitter @stockdarts
The Week in Crayons
Posted by stockdarts on February 13, 2012 · Leave a Comment
Much to the chagrin of bears everywhere, the markets continued their relentless march up for yet another week as the rally to open 2012 continues. While there continues to be sporadic bouts of selling intraday, there has been a strong and pervasive bid that has supported price action and has consistently thwarted all attempts at selling this market down. From a technical perspective, nothing has changed in about six weeks now as we remain perpetually oversold and extended as we slowly squeeze higher.
This is clearly evident in a chart of the e-mini futures contract for the S&P 500 which shows all of this year’s price action contained within a narrow rising channel. Almost the entirety of this move has occurred with an overbought stochastics reading as well. Also note the preponderance of longish lower wicks on many of the candles during this rally indicating that while there have been some attempts to push price down, it has inevitably been met with a strong afternoon bid.
While this traditionally is a sign of strength, it can also be a hint of future weakness when this behavior occurs after a prolonged rally. However, while it may become tempting for traders to gamble and try to pick a top when the market behaves like this, the more prudent course of action is to assume that the market will continue to behave in the same manner until it breaks out of this channel. Ironically, a breakout above the channel would result in a possibly unsustainable acceleration of the current trend leading to a higher probability short than a corresponding breakdown from the channel which would likely lead to a more benign sideways consolidation. However, while it is prudent to anticipate what the market will do, it is all conjecture until the theories either succeed or fail and astute traders must also recognize the present and profit from it…and the present remains a buy the dip environment until proven wrong.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren’t a member, what are you waiting for?
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