Comparative Analysis

Some traders like to focus on a few stocks and pile on the indicators and do micro analysis. That's great and if they can earn a decent living from that type of trading, then all the power to them. However, that's not the way we trade -- we like using very few indicators (volume, 20EMA, and pivot lines on intraday; volume, 20,50, 200 SMA on daily) and instead do comparative analysis on different stocks/futures/currencies looking for divergence (on top of of course the traditional support/resistance zones we trade off every day).

Of course spotting divergence is not too useful if you don't know what it means or how to use it. The only way divergence will mean anything to you is to constantly look for patterns in your studies and more than anything else, THINK. What commodity was leading the sell-off and what does it mean now that it has stabilized? What were the financials doing while small caps were running? Remember that rotation that was going on a few weeks ago as one sector sold off but another rallied -- it's not happening now and what does that mean? Market is trying to rally but leader stocks are lagging -- what should you do, fade the rally or hope they catch up? (hint, leader stocks are called leader stocks for a reason, never wait for them to catch up).

Comparative analysis won't just make you a better trader -- it will also force you to use your mind and stay sharp, and, at least for us, make the job infinitely more interesting.

Position Update

We took a lot off but have at least some shares left in all our positions -- posted real-time in our Twitter acct and blog.

Here is the Performance near close since the buys 2 hours ago (The % movement on symbolic 1 share each):



As we wrote yesterday and today we were looking for gold/copper to bottom before anything else -- that is exactly what happened this afternoon as SPY made a new low but gold and copper held.

Also another bullish tell was that everything was not going down the hole as tech was holding strong all day.

Looking for divergences is key to our trading and to reading price action in general.

Market Talk

Bullish things we see:

- we wrote yesterday that we were looking for gold and copper to bottom first and lead the way up for commodities and this is happening today with both commodities green.

- we like the divergence here with tech acting strong (semis especially) as everything is not being sold in a basket

Bearish things we see:

- some of the ETFs we're looking for to buy on the 200 SMA are not there yet meaning that could act as a magnet for one more woosh down.


Mixed signals for us meant to take quick profits on the bounce here but still stay long half positions in order to be involved.

New Positions

It's 2:11 Friday afternoon and we started some swing initial positions into this death grind down:

CENX 10.37, SQM 34.98, NUE 39.29, XLE 52.99, FCX 67.11, MOS 53.33, BVN 29.46, ANR 39.33, MEE 37.89, SMH 24.65, TC 11.09

We'll add into any gap down on Monday.

Update: Sold half of everything for some quick profits, swinging rest into Monday.

In 1 hr we're up 4% in CENX TC FCX over 3% in ANR MEE BVN. We're taking more profits but keeping at least a bit in each name. Our worst performing thus far is SMH which is up only 1.5%.

Ideas

The only trades we took today were short and we ended the day in cash in all accounts. However if we do get some accelerated panic we like these levels for a trade long (lines show entry points-- click to enlarge):

Copper

We've been harping about copper for a few days now in our Twitter Acct. If you want to attempt to catch a potential bounce then at least wait for copper to show some signs of reversal. As we wrote yesterday -- it was the first to sell-off and it will most likely be the first to bounce.

JJC is too thin to trade but watch that 38 level in order to time your other buys-- for a trade.

Some ideas

We have a rule that has worked well for us over the years: buy the first test of support but never the second. Last week was the first, today is the second. Our strategy this morning was to simply go over whatever we had short alerts on and start getting short before the number (on base and break down); at the number cover some and put in stop.

Here are some ideas that haven't triggered yet:

What's on our screens

On our monitors we always watch at least 10-20 stocks from each of these sectors:

Oils and Natural Gas, Coal, Precious Metals, Metals, Miners, Ag-Chem, Financials, Chinese momo, and Tech leaders. We also have small watch-lists on home builders, solars, REITS, Trannies, and semis. For charts we have 1 min, 3 min, 5 min, 15 min, 30 min, 60 min, and daily on each stock we highlight. The only indicators we use are 20,50,200 SMA on daily and 20 EMA on intraday along with P, S1 and R1.

For futures we watch the E-minis, crude, natural gas, copper, and gold and of course we always have an eye on the USD.

If you don't want to (or have the option of) watching 300 stocks then you can take a short-cut and watch the following ETFs:

DIA FCG FXI GDX GLD IYR IYT JJC KBE KOL MOO OIH QQQQ SLV SLX SMH SPY UNG USO UUP XHB XLE XLF XME

Even if you don't want to watch multiple stocks from each sector it's always good to have key stocks on your watch-list to give you an immediate feel for what the market is doing.

All our sectors are in separate portfolios but we have one small leader watch-list which includes the following key stocks:

NOV EOG OXY for energy
MOS AGU POT CF for ag-chem
BTU ANR MEE ACI for coal
GOOG AAPL AMZN VMW CREE for tech
GS JPM for financials
BUCY CAT JOYG for farm/construction machinery
GMCR ISRG for misc leaders
RGLD IAG BVN SSRI PAAS for gold and silver
AKS X MTL for steel
PCU FCX for copper

There are two basic steps that need to be taken before one trades successfully. One is doing your homework the night before and identifying key support and resistance areas. Two is being able to read the price-action (which includes breadth, volume, etc) and especially to be able to note divergences (for example relative weakness in banks).

Some key areas

If you want to initiate swing longs with the belief that the bull trend is intact then do yourself a favor and don't do it until these levels are taken out on GS IYR XLE. We had been watching these levels for days (on Twitter and in our newsletter) and all three held where they should meaning that resistance is to be respected:

GS reversed at the 160 level we've been talking about for several days. If you're a bull you want that level and then the 200 SMA taken out with force.



IYR reversed at the 50 SMA and is leading the market down -- be patient and wait for that to be remounted.



Whether one likes it or not oil stocks are a big part of the current market -- wait for XLE to re-gain the 50 SMA.

Today's trading

We've underperformed the market today but have gotten off a few good trades. We'll take it. Our focus is now resistance shorts:

This is the only stock that triggered (that is, hit our alert) from last night's newsletter, a short of MDR at 24.5




It even surprised us how well it worked which of course makes us feel more conviction in the strategy.

Our Four Strategies

We've traded these four strategies for over a decade now and will probably trade them until we retire. At the same time we have adapted with the market but the adaptations have mostly been confined to intraday strategy evolution.

Let's go over, in simple terms, examples of support and resistance strategies.

The first, and our favorite, is the simple break-out of resistance. Here is an old WYNN alert from 70 that worked very well for a day-trade (we're primarily day-traders but sometimes do hold for a day or two). At the time WYNN broke-out the market was very bullish and we anticipated the break-out by entering a day before (posted in our account real-time on that day)



Not all break-outs have to be near new highs -- here is a simple trend-line break of GS which we also entered the day before (again, posted in our account). Trend-line breaks still fit under the resistance break-out strategy.



The inverse of the break-out of resistance long is the break-down of support short. Here is a bear-flag short of QQQQ at 44.



The second type of long strategy is to buy support, be it on a major moving average, or on a previous break-out zone. HMIN 38 had been a break-out alert on our newsletter. Days later the stock offered another opportunity long, this time on a re-test of previous resistance which now was support. Again, great for a day-trade.



The inverse of support long strategy is the resistance short. RS action on Friday is a good example of this as the stock got smacked down by the 50 SMA.



It looks easy doesn't it? It's not. In order to be constantly successful you have to combine that kind of information with some decent tape reading skills and have a few intraday strategies up your sleeve. Nevertheless, studying the basics of support and resistance is an absolute must for new traders and the first step of becoming a technical trader.

Commodity talk

We went through a lot of charts this weekend and saw a nice pattern in the commodity charts. We're not quite there yet but we have very nice support coming up in all the following charts:

Note how the 200 SMA/ base are coming together. All it would take is 1-2 days more sell-off and we'll hit these spots. Until then it's a bit of no-man's land and we're staying away. Horizontal line represents buy spot.

Gold started this -- watch for them to be the first to bottom.

Drillers, Ag-Chems, Steel, Coal, and Natural Gas producers