Catching bottoms. Or not.

We found this last market bottom more frustrating than previous market bottoms.  Why?  Because it took so long -- we based over 1040 for days.  We went swing 2x near the lows anticipating a bounce.  The first time, on August 25, was the better one as we made out some decent profits on TNA FAS, but scratched other positions near even and the second time, on Aug 31,  we scratched the bulk of the swings either for small profits/losses. 

We spent an unusual  six trading sessions in a relatively small range SPY 104.3-107, just sitting on support, waiting on one economic report after another.    Finally yesterday we gapped up on the China PMI numbers and then blasted through resistance on our own ISM numbers.     We broke through the trend-line and resistance that we had posted/talked about for days.  107.

After the close yesterday we felt somewhat down on having scratched our swings the day before and missing on the gap up gains.  But after talking things through with each other we realized that we're not sure we would have made more money keeping the swings.  Why?  Because it's quite possible we wouldn't have added to the swing size while yesterday we had on full day-trade positions on the initial gap up (SSO 34.36 when SPY was sitting under 107, GS 138.63, OIH 99.61, AAPL 246.47).   Here is our note from a few days ago:

We had been prepared for a break-out  of the range for days and that helped us keep our focus on the market instead of getting lost in frustration:

And the after chart with the beautiful break of the trend-line.

The same in OIH  as we wrote, we'd buy 94 support or the break of the trend-line (over 99) but nothing in between.   We went long OIH yesterday at 99.61.

Again, break of the down-trend line. 

So even though we came into the day yesterday completely cash we were able to catch the trades that we had been talking about for days.   We had a plan and we followed it through -- even though we had made the unfortunate decision of selling the swings the day before on our fear of a gap down on the China PMI numbers it didn't stop us from making good entry trades.

Why did we even swing in the first place?   Usually we don't -- we wait for reversal before we get in (like we did yesterday) but this time we had a feeling that it was all noise and that the market would rally.  Why?  Because, as we posted last week,  copper was firm throughout the whole pullback in August, signalling that the market pullback could have all been noise.

On August 29 we wrote, "Copper saying that the whole pullback and fear in the last 2 months has just been noise".

The price-action on August 31 however, was brutal -- TLT hitting a new closing high for the year and market on pins and needles for the Chinese PMI, we lost our nerve and went flat in fear of a gap below 1040 on economic data (not to mention we were holding triples TNA FAS as swings -- next time maybe we would feel safer simply holding SPY which is what we've done in the past). 

What we have learned from the years though is that the market will almost always give you a chance to get in -- if you're fast, have a plan,  and have conviction.   So don't turn the computer off in disgust with yourself and walk away.  The opening might be small --you had 29 minutes yesterday after the open to enter your positions if you wanted to enjoy the bulk of the move -- but it was there.  

Consolidation day Strategies

It's very rare to get two trend days in a row in the market.  Often what happens after big market moves is that the next day is one of consolidation.   We wanted to go over a day-trading strategy that works very well in this type of benign environment.  Why do we say "benign"?    Very simple: we broke the mini range of SPY 104.3-107 and are holding above that while TLT is red.    As long as treasuries stay muted and we hold 107 we should be in an easier more forgiving tape.

Let's look at two triggers we had on our lists today, CTRP 42 and DNDN 40. 

Here are the daily charts:

CTRP we liked for a breakout of 42 over trend-line. 

DNDN 40 has been on our list for weeks. 

CTRP went through 42 near the open and quickly reversed.   Stock slowly faded down until it hit the 20EMA/P and bounced to make new highs.  A very common move in a consolidatory yet friendly tape. 

The second one is one of DNDN 40.  We had a very good idea that it would fail on the first attempt through 40 as the stock was already above its ATR and extended away from EMA.  We posted that we didn't want it to break 40 but would try it anyway if it based and let the EMA catch up.  It didn't wait, broke 40 and reversed instantly.  However, the same thing happened on DNDN in which it reversed back to the EMA, this time EMA/R1 combo, and then made new highs.     

The break-out fail/but buy dip on the EMA/R1 or EMA/P strategy can be very useful in consolidatory/tired yet friendly and forgiving markets.  Stops on these type of trades are very tight (a reversal back through the EMA) so it's easy to get off good risk-reward trades.   This type of strategy, however, would not have worked well in the 104.3-107 SPY range in which market was more hostile/scared.