Range-bound

Yet another day in which the range was inside the last higher-volume/broader-range day, which was Monday, December 22. We would be happy if we could stay within this range until next Monday (not likely but would be nice). Watch to see how stocks react if SPY breaks 85.5; next time around at this zone support will most likely not hold and shorts will gain momentum. If the bulls want to end the year on a more positive note then they have to rally the troops and pull away from support towards the top of this range near 89.5.

Dinosaur Trader's Best of 2008

Check out the post for Dinosaur Trader's best of 2008. Good stuff.

Update

Believe it or not, even after all the recent volatility, we've been in the same trading range for the last two weeks. Over 90 and it we could easily go to 100 resistance. Major support at 82 meaning we break that zone and we will most likely revisit the lows. Right now the bulls have the momentum and they need to make their move. Our fantasy scenario? A few days consolidation under SPY 90 and then a significant break-out into the holidays. So far the banks have led (good) and the oils have been dragging behind (bad). Bulls need the oil stocks to firm up for this rally to survive.

Market Talk

Trading range now is 90 resistance and 75 support on the SPY. Previous support was 82, which again, was hit today. Market above 82 and bulls have a chance. Below 82 and bears become more confident. Through 75 and it's going to be a very depressing Christmas for investors.

This might be the trading range for the next little while so saddle up and stay smart.

Blog Status Update

We're thinking of firing up our blog once again but this time we'd like to make it a more community effort; we're opening up the blog to guest contributors. Possible ideas are: trades that you took on a certain day with chart and commentary; trade styles; op-ed pieces, data feed reviews, etc. The posts will of course be put under your name and it will be up to you whether to have the comment section on or off.

Base and Break: DRYS

Grasp the following, and you will comprehend the base and break, which is the primary system in which we make our living.

1) A great daily that has been in our newsletters repeatedly over the last week.

2) Today the stock gaps up with volume: probably the best combination of all is a gap-up, base and break to target.

3) base and break - failed

4) base and break to target - successful

As soon as the stock gapped up (3%) it became our focus for the day (we're only watching around 10 stocks, so it stuck out easily). It was the only stock with volume on our list. The stock set-up at 86 for a base and break. First entry was to buy the break, and as usual, stop at any reversal.

Step 1: Buy this base and break at 86.

Step 2: Get out immediately as the stock has reversed back into the base.

If you can't move fast, then our type of trading is not for you. This is not the type of system in which you put on multiple positions and go get a coffee. This system requires attention and the ability to move quickly. If you freeze the 20 cent loss could turn into a 1.4 point loss.

As long as the stock does not fill the gap, and DRYS did not, do not lose sight. The stock set-up very well again at 86 in less than 20 minutes. Note how the stock was bought up from that deep spike down. This is a very good sign and shows how much buyers want this stock.

One more time, buy the break of this base at 86 with stop on any reversal. The primary target is, as always, the daily number.

Very smooth move straight from 86 as buyers tripped over themselves buying the stock.

As usual, the stock goes to target, spikes over, and reverses. Sell partial at target, and hold the rest for possible continuation with stop at the new intraday base. The new intraday base at this point was 87.6. Therefore, buy 86, sell partial at 88, then move stop to just under 87.6 in case the stock continues upward.

This is a perfect example of buying the base, and selling the vertical line. The stock set-up 2 points under the 88 daily spot. Active day-traders who bought at 88, which was actual resistance, made the mistake of buying on top of a vertical move a stock that is far away from the base. Swing-Traders have much wider stops than we do (for example 2 points compared to 20 cents) and can be more flexible with entry points.

Good interview

Grab a beer, sit back, and listen to the interview with Upside Trader.


And one more time: subscriber, female, with initials A.P. who used the university e-mail address in Califorinia, please contact us as none of our e-mails are reaching you...

Excerpt from (what will be) today's newsletter

The market was weak today but we had two good runs: VLO from the watch-list, and DRYS from the trading-list. FSLR, unfortunately, gapped above our number.

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The DRYS trade encompasses several lessons that are constant in our system, so let's go through it in detail.

1) Volume and relative strength were excellent. Volume was around 40% of daily in the first hour and stock was near highs as market was near lows.

2) Notice how DRYS gapped up and held the gap, even though the market kept going lower into the red zone.

3) Base and break 1 point under the daily resistance at 77. This was entry: buy on break of 77 with stop on any reversal.

4) Don't forget how often our stocks set-up exactly 1 point under the spot in a base and break pattern.

5) Always buy from the break of the base (low slope) and sell into vertical rise/spike (high slope). At 77 the stock is just breaking the flat base; at 80 the stock is vertical.

When we saw DRYS gap-up with volume we started feeling confident that the stock would go today. When the market started going into deep red zone and DRYS stayed green, we grew more confident. We bought an initial position just over 77, added two times between 77.3-77.5 when it became clear to us that the stock was going to make a run for resistance. In the first spike towards 78.5 we started peeling off the position, sold more into 79, and exited on the reversal below 79.5. We contemplated buying back the position around support at 12:40 P.M. but didn't.

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Trader's Segment:

One of our readers sent in the chart of the trade today. Let's take a look:

R.S. writes: "Since the sector was strong I decided to gradually scale into DRYS. I waited until I had a nice profit on the 1st buy; then made the 2nd. As it traded through 78, I loaded up and then sold on the first red candle. I've been tempted to get back in BUT I've learned to be happy with my profit and WALK away."

This trader bought an initial position into the base and break and added as the stock went through resistance. We wrote in this weekend's newsletter how "In moves that we think are significant, for example, a sector break-out, we are often more patient in taking profits and actually add as the stock starts to run." and this is exactly what this trader did today. Instead of selling into 78 (which would often be quite logical as the stock is becoming vertical) R.S. actually bought more. Why? Because of the fantastic volume and relative strength coupled with strong sector strength. There was also no fear as there was an already comfortable margin of profit (since initial position was from 77) from the initial base and break buy.

This is the reason why we write that exit strategies are often nuanced. You need experience in the market and to know when to not push your luck, and when to have conviction that the stock will run hard. Note that this was a very aggressive trade, and one that cannot be done in less benign environments (where we would recommend to sell into the number instead of buying more). All in all, an excellent trade.

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VLOVLO knocked on our number (54) several times before breaking it and going up exactly 1 point. Recall this weekend we spoke about exit profits, and how we like to take off profits at 1 point intervals. We weren't crazy about VLO intraday as the number kept being hit, something that increases the risk of sudden reversal. Nevertheless it worked well for a nice and easy point.

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Both DRYS and VLO moved quite fast and were easy to miss if you were watching many stocks. This is the reason we always write that you should focus on the best daily spots, usually around 10-12 stocks per day. If one stock has early volume (look at volume % in QT) then stalk that stock specifically. One of the biggest mistakes of new traders is watching too many stocks. They don't do any research the night before, run scans, and watch hundreds of stocks hoping to catch the move. They end up jumping on the move too late and find the stocks reversing on them immediately.

Make every trade a good trade, be it for a loss or profit; this means that every trade you take should be from a valid set-up. If no valid set-ups appear during the trading day, then sit aside.

Absolute key to this system is to be in control of your emotions, have enough experience and knowledge to differentiate between good and bad set-ups, and then to develop the patience to wait for the valid set-up instead of trying to trade constantly.

Don't be the panicked, frazzled, anxious noob jumping from one trade to another. Be the calm, rational trader who crouches in wait, and then leaps to the occasion as the stock breaks the base. In our opinion, the system of waiting for daily spots plus defined intraday set-up of buying off the base on stocks with good volume and relative strength, is one of the most consistent methods out there for making a living in this business.

Is Tech Back?

Too soon to tell whether tech is back or not but definitely something to be on the watch for, especially after AAPL earnings this week.

We listed many charts in our newsletter today, and it was heartening to see some good old tech names along with the commodities, which have been hanging around our lists for months.

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For the new subscriber with initials A.P. and who has the e-mail address of an educational facility in California: our e-mails to you keep bouncing back. It's possible that this is not the e-mail address that you use, but it is the one PayPal supplied us with, so please get back to us with a possible alternative e-mail.

Good interview

The following interview is by a fellow trader who has a style very similar to our own:

Worth listening to:

Impatient Trader Interview

Bigger Picture

Some of the best rallies come in bear markets. They're short and they rip the throats out of the bears, especially the weak ones with little conviction. But then the bounces fade and the inevitable downturn continues. Last week was a decent little rally and we'll see how much more fuel she has...but don't forget about the big picture.

From the look of things, it's a matter of when, and not if, we touch Nasdaq 2000.

WallStrip

Say what you want about the man, but this is an entertaining interview, and he comes across as funny and honest. He seems to be missing that filter normal people have between what is thought and what is said (short WallStrip?) but that's also what makes him come across as refreshingly direct.

We find it somewhat amusing how much bad press this man receives and somehow, perversely, that motivates us, in turn, to give him some good press. Sure he's into self-promotion, but that's his gig. No reason to hate. Anyway, he won a place on our blog (and no, we don't trade nor have any interest in trading penny stocks).

The Ultimate Blow-out

One of our very own, a "plain vanilla" futures trader (except of the French variety) causes a 7 Billion loss, and very possibly was one of the determining factors in this week's world plunge. Of course this makes the Fed action somewhat hilarious (ultimately it stands to reason that the Fed cut an intrameeting 75 pts because of a 31 yr old trader's fraudulent antics) .... as they say, truth is stranger than fiction.

Our guess is that on Jan 30, the Fed will still cut 25-50 points, only if to save face.

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"Separately, the U.S. Federal Reserve remains comfortable with its decision to cut interest rates Tuesday in spite of news today that the preceding stock selloff may have been related to a rogue trader, a Fed official said. The official said the Fed didn't know of Société Générale's unwinding of positions when it cut rates. Nonetheless, the Fed remains as comfortable now with its decision as it was Monday night, when it was made, the official said."


Source: WSJ

Update

We got our break of 42 support on the Q's and the subsequent bounce, all on excellent volume. If we can get this swine of a market to close on the highs, this would be an excellent indicator for a short-term bottom.

There are very few good looking longs going into tomorrow, and we'll be looking at very minor spots (30 min also instead of daily) in order to find something for our members.

QQQQ

QQQQ has support on 42 -- which is being touched as we write this post. A failure at this level and then a reversal above on excellent volume would be bullish. However, looking at things it seems that it is just a matter of time before we hit 36 support later this year. Nothing goes straight down, however, and some kind of bottoming action most likely will be coming soon. Nostra culpa for trying to game it before we actually hit support-- be it a small bet, no excuse, it's just bad trading.

We were looking for a 20% hair-cut earlier in Jan and we're almost there in Nas 100.

And to conclude, the Fed is an idiot.

Why the Fed needs a Technical Advisor

It would have been infinitely better to let the market open down, panic sell-off, and then around 2:30PM (classic reversal time) bring out a surprise cut and get the shorts scrambling for air.

Nevertheless, the market is holding well but we've still got 90 minutes to go.... we'll see how they close this pig. Any close around this area (Dow down 150 points) would be relatively bullish. Absolute nightmare scenario for the bulls would be a close on the lows.

And yes, we bought our 3rd installment of Nasdaq calls this morning. As stated before this is not how we trade, and it's a very small bet. Our buy today is very green, but two buys from last week are very red. We'll see how it goes.... even though losing it all wouldn't be a bad thing either to teach us to stick to what we know best. Short weakness, buy Strength (unless at key support/resistance level in oversold/overbought markets).

Cautionary Note

As said previously, we've gone long some index calls. If you are also going long, please use some caution and be prepared to scale in slowly as there is one important red flag in today's "bottoming" action: the leader stocks are not participating, thus far, in the "bounce". We're bought our pilot position and are prepared to buy some more tomorrow and next week (we almost always buy in three parts to these type of swing-trades) on further weakness.

If the leader stocks get out of their misery and start showing some green, we would instead add to the position today (since it would give better confirmation of a true bottom) If the Nasdaq closes well but momentum stocks close red, then be prepared for further weakness.

As we write this every single solar and Ag stock we follow (plus AAPL GOOG BIDU RIMM) is deeply red while the Dow has gone green.

Market Talk

Well, this has been, thus far, one of the most pathetic dead-cat-bounces we have witnessed. One of the problems is that there are just too many people stuck in positions that are deeply red and are waiting for some type of salvation rally to take them to break-even territory. The trade is just too crowded. Our guess is that investors will finally cry uncle and panic sell before we can finally reach any kind of meaningful bottom. This actually is the best case scenario -- gap-down, panic vertical move down, and then finally a tradable rally.

The next scenario is more painful -- a grind down with small intraday rallies that are constantly sold for weeks on end.

Either way, stay smart and wait for a meaningful reversal before going long. Never underestimate the power of the swing of the pendulum.

Market Talk

Let's take a quick look at the tracking stock QQQQ for the last 6 months. At point 1, she broke the short-term up-trend line in November and spent two months hovering around the 50dma (point 2). At the start of 2008 she broke the new support from November lows and fell steeply yet again (point 3).

Today's rally could be the start of a tradable bottom that takes the market back to the recent support (point 3) and if lucky, back to the 50dma. Don't think about being bullish or bearish -- just look at the following chart and interpret it. What does it tell you?

For you perma-bulls, there will always be strong sectors, seek them out (for example agr-fert/gold thus far still holding) instead of trying to catch falling knives on old leaders.

Let's see how far they can bounce this cat.

Market Talk

What a brutal day -- nothing quite kills the spirit of the bulls like a rally into an oversold market which is not just sold off, but crushed, with the market closing deeply red.

We should be getting some kind of relief rally soon, but for those of you tempted to buy longer term holds.... look at the following chart and imagine this was the chart of a stock for which you had interest:

You'd say "No thanks". This is one bad-ass ugly chart. However, for shorter term bottom lovers, the sell-off has been fast and furious and some kind of rally will be coming. There will be many temporary tradable bottoms coming up (and one should come relatively soon) within what we believe will be a much larger bear trend.



Here is a weekly chart of the Nasdaq -- as you can see we'll be hitting the trend-line soon and should find some support in that zone. However, it's hard for us to believe that the trendline will hold. Gun to head, we're guessing 2008 is going to be the year of the Bears.




Do you remember back in the bear market 2001-2002 so many were waiting for the one event to help the market? "They're going to catch Osama soon," one would hear. Historically, it hasn't been too smart to wait for some event (Osama, Fed) to save the market. It's going to be a deep, painful process that will probably go on for a while. Of course, hopefully we're wrong and the market ends +20% this year instead of the -20% we're predicting.

As always, this is just fun talk. We're short-term traders and will go with the trend, not our opinion. If the charts point long, we'll go long. But most likely, they're going to point short short short for a long time coming. Having said all that, we must add that we make much more money in a bull market than we do in a bear market (our type of momentum trading works much better in a bull market) so we hope that we are completely and utterly wrong!