Friday, April 22, 2011

Sector Spotlight: Business Software and Services

As we were doing scans last night one sector kept popping up, showing strong trends and very good price-action.   Business Software and Services. Go figure.

Here are the best of the bunch for some possible swing ideas.   $BCSI $ADP $CTSH $CTXS  $INFA $JKHY $SFSF $TIBX

Thursday, April 21, 2011

The elusive silver top

We stated our intention of trying to game the silver top this week in our It’s never different post.   We waited for the right opportunity and finally got involved in two short selling daytrades, on Wednesday and Thursday.   It’s safe to say that right now, it’s our obsession (even though we’ve tried to keep it out of the newsletter, which is more stock oriented and has had usual number of alerts).  We had two very good days yesterday and today by waiting for excellent set-ups and being extremely patient in our entries.   A couple of points:

1.  While we had good solid profits on these two days we would have had 10x more profits had we simply just bought the stupid metal and rode the trend.  But we simply cannot go long a chart as extended as this one, that’s not how we trade.

2. We can’t help it.   We are 97% trend-traders but once in a while we have to go for that ultimate game of trying to find the top when it’s as juicy as this one.

3.  As long as silver keeps going up WITHOUT basing we’ll be looking for short opportunities.  If it can actually base/pull-back then we’d be happy to go long.

4. It’s like picking up dimes in front of a bulldozer.  Really.     But it is a lot of fun.  And for the most part our job and the way we trade is pretty conservative.   Once in a while we need to let loose.  This is the time for us.   It’s also a very good exercise for keeping our skills sharp.  Kind of like extreme sport.  Timing has been everything, and there’s not much room for error if you want to get the trade right.   It’s not forgiving the way a break-out on a trend-day is…

5. Many traders we know are doing the exact same thing which is kind of funny. And scary.

6. On both days we didn’t cover that last contract just in case this was the one.   Our style is to move stop down aggressively and finally leave a partial position on at higher stop to give the trade some room.  On both days we were stopped out the last contract. No regrets.  Key was locking in majority of trade so that even if you’re stopped out last partial, you had a solid profit for overall trade.

7. If silver goes up on Monday, we’ll be looking for a short set-up again.  And we’ll do this every single day it goes up, covering 3/4 profits but keeping that last 1/4 just in case we hit the real “top”.  We will not swing short silver, we are only engaging in day-trades.   We’re 100% cash right now.

8.  This definitely is not for the inexperienced or faint of heart.   And it’s not even smart way to trade.    But we all have to do what we have to do.  And it’s been quite profitable the last two days and we believe will become even more profitable next week.

9.  We have a defined stop on this casino play — we’ll lose x amount and stop the game.  And it really is a game.   If you’re doing the same please treat it as such.   This is not bread and butter trading, this is not a way to last in this business and if you don’t understand good risk management it’s probably one of the fastest ways to blow up your account.  However, if you do know what you’re doing and have experience/good skill set then there are excellent opportunities.   In the other 97% of the year you’ll find HCPG to be engaging in boring and conservative trend-trading.

10.  Can’t wait for Monday. Go silver.   It’s the perfect storm as USD is in complete death spiral and silver is going for that symbolic 50 mark.   The higher it goes the more we like the trade.  A scum of 50 and reversal would be oh-so-perfect.  But then again,  many traders are looking at the  same trade which is never a good thing.

And here is the hilarious chart to look at one more time before you go for the long weekend:

Note change of angle of ascent –we’re now going vertical.   Fun times around the corner.

Daytrader Strategy: Failed Indy

Over the years we’ve contributed a few daytrader strategies to the community, the base and break, overshoot support, and one of our favorites, the Indy.    We wanted to review a variation of the Indy today: short on failed Indy.

The name comes from a description of the strategy in which the stock is basing under  R1 /2 or daily resistance and is slowly getting squeezed from below by the ascending EMA.  Indiana Jones would often find himself in similar situations and would always find a way to break out of the impending squeeze, thus the name “Indy”.   It’s a great inflection point — it’s basically do or die and you can often get off great risk-reward trades around the pattern.   We mostly trade Indy long, that is we look for Indy set-ups on existing alerts from alerts we’ve added on previous nights.

However, when we’re looking short, then we also look for failed Indy patterns.   Today there was a nice one in $SLV which we thought would be interesting to the day-traders out there:
We were looking for a short trade in silver today (again) but the $SI_F chart was a mess and we couldn’t find any edge.  So we decided to trade the SI_F  off the $SLV which in contrast was printing a nice orderly chart.
There was no daily spot on SLV to short against but there was R2 which interested us –note nice ascending 9EMA.   This is a bullish Indy pattern in that stock is basing under resistance (R2) but is being squeezed from below by the 9EMA.   SLV poked above R2, and came back to test the EMA.    A true Indy would have pushed the stock away from R2 above for continued rally but SLV started to weaken as it re-tested the EMA.  The longer it sat on EMA the flatter the EMA became — the flatter the EMA the less strength it has.    What we had here was a possible failed Indy formation — exactly what you want to see if you’re short.

Now look at the chart below:  SLV went to re-test R2, now very much sitting on the EMA.   This is the do or die moment — at this time stock has to lift up and away or it will likely fail offering good short trade.     If you see the EMA weakening (flattening) as it was here, go short, with stop on top of the high.   Trade here was short around 44.99-45.02 with stop just above high 45.07.  This is the “do or die” moment in an Indy.

And Indy fail worked well here for a short — stop was not hit and you would have had a nice risk/reward trade short as stock quickly went to 44.66,  original stop was around 7 cents so as you can see very good R trade. On the SI_F entry was around 46.13 with a dime stop,  and the low on the failure was 45.75.

At this point a trader covers majority and can sit back, relax (write blog posts) and  leave on last partial (last 1/4 in this trade) at updated stop of break-even (which now is above the EMA) in case the short has more juice.   When we have last partial at break-even stop then we try not to micro-manage the trade and try to focus elsewhere.

Note the pattern can also be applied to the daily char.  For example, stock is basing and finally ascending 20SMA catches up, stock oftten then either rips up (usually the case, following trend) or fails.  Again, good risk-reward entry.

Wednesday, April 20, 2011

The silver trade, newsletter excerpt SI_F

All our focus was on silver today. As we wrote yesterday we were expecting opportunity in silver today due to yesterday being a trend day. It is rare to get two trend days in a row (in overbought daily) without some type of pull-back short opportunity. A few of you asked us to review our trade, here it is: First trade was on extension from EMA with sells from 44.98 to 45.13 averaging 45.08. Took majority on the on re-test of EMA for profit while stopped on last on new high for a loss. At this time we had fully realized how sticky the day was going to be and decided to be a bit more careful. Even though we got out with profits, we had rushed the entry (we should have started at 45.13 instead of adding there) and we were not going to make same mistake again.

Second entry was again on extension from EMA at 45.37 plus a separate position short SLV (don’t ask why, no rational reason, just wanted another vehicle) stopped on SI_F on new high which was very close by. This time it was much less painless as the trade worked without too much chop.

Covered positions throughout the fall while moving stop down aggressively. Also booked another quick trade short on the first test of the EMA. We wanted 44 for the last cover but didn’t get it and booked the last on the move over EMA 44.87. We gave up a lot of profit by waiting for that EMA to go (instead of covering all into the spike down) but we thought we had a chance for a kill and went for it — no regrets. Also was a good place to go flat as silver rallied for rest of afternoon.

Key was being very very patient in entry — there is no trend right now “stickier” than silver. Shorting it is probably not the smartest thing to do — but it’s what we wanted to do and we had a plan, and it worked well for a decent day of profits. If you short extended from EMA on an overbought chart then usually you can get away with not much damage or profits if you’re wrong (like our first trade) or good profits if you’re right (our second trade). Also note that if you want to short against a trend, wait for the day after a trend-day as it will increase odds of success. The day after a trend day in an overbought stock almost always offers some short opportunity (unless news). As our readers know these type of trades are rare for us (we’re trend-followers) but once in a while we like to get involved in order to keep things “fresh” and our skill levels in ready state.

Sunday, April 17, 2011

Newsletter Excerpt

As we wrote in our post this weekend silver is very extended but finding a good short spot likely will take some patience.  Right now any quick extension and move up will make things easier, starting with a significant gap-up on Sunday evening and a quick run into this week.   This really isn’t our meat and potato type of trade but we’ll probably be involved at some point trying to find a short in a short-term blow-off top.   It’s extended on longer time-frames but not yet extended on intraday and that’s what we’ll be looking for before we enter.   It could come at 45, 47, or 50, we don’t know, but hopefully when it comes it’ll be a straight panic move up followed by stalling and reversal.  We’d short the reversal and be stopped on top (or give it a set room, for example, 50 cents, etc).   Of course this is easier said than done — what can happen is stock runs, extended from base, and then goes horizontal and digests the move before legging higher.   If you’re short and you see that happen you need to just accept it and take the loss.

We’re in a good position in that we  don’t “need” to do this trade and we can afford to be very patient.   This is not some breakout point that we’ve watched for weeks and which we feel psychologically we “need” to be involved in — this is very much an entertaining tangent of a trade.  We’ll wait until it’s screaming at us to get in; and if the trade doesn’t talk to us and we can’t find that “no-brainer” entry, then we’ll just sit back and watch.

Starting to leave channel and go parabolic — very important not to be early on these type of shorts as stocks can stay parabolic for much longer than one can rationally imagine.   If you don’t know what you’re doing (start early, keep adding) you can easily blow up your account.  If you’re going to get involved have a set number you can lose without doing any real damage to your account.  For example  say to yourself   “Ok, this is a bit of a crazy trade but I’m willing to give it $1500″.    You watch silver go up another $5, start stalling and reversing. You adjust your position size so that if the high is taken out you only lose $1500.   That’s the only way to go against the trend and not kill your account.

For most traders, including ourselves, it is much easier to follow the trend.  Even our support longs (which are short-term reversion to mean) are usually within longer term bullish trends (so essentially they’re also following the trend).  This is a very different type of trade.   Experienced traders only.   If you can’t trust yourself to take your pre-defined stop loss (especially if it happens quickly, the hardest stops to swallow are the ones that happen immediately) then don’t even think about taking this trade.   Basically, if in the last 2 years you’ve broken your rule/plan of adding to a losing position instead of taking a loss/ obeying a  stop then DO NOT get close to this trade.

Check Earnings

Don’t only check earnings on your holdings, but remember to know the earning dates on your stock’s competitors.
Here are the most important stocks with earnings that we follow:


It's never different

We have quite a bit of conviction that there will be a very juicy day-trade/short-term short trade coming up in silver $SI_F.  But to be perfectly honest,  we’re not sure we’ll be able to get off a good risk/reward trade.    There were many smart traders who were completely right in their thinking that the Nasdsaq was in a bubble back in 2000 but lost it all anyway as the top kept getting toppier. Knowing it and Trading it profitably are two different things.  What will help the trade is further extension, the faster we go up, the better.  A gap up on Sunday night and into Monday would certainly be good.   For us to get short (we’d do it via SI_F) we’d need an extension away from the 5 min/ 9 and 20 EMA (daily/weekly are already extended and since we are daytraders we’ll be focusing on the intraday time-frame).
To make a point clear right away — we’re not calling an absolute top in silver.  We have no interest going in that direction.  We’re all about the short-term.  If we short 45 and it goes to 43 and we cover we call that a victory.  If it goes to 47 the next day that’s fine, we got our two points.
We look at the divergence between silver miners (stalling, under highs) and silver commodity (screaming higher, completely parabolic) and we can’t help to think reversion to mean on the commodity.    Take a look at the following charts:
This is an overlay of silver miners via $SIL and the commodity via $SI_F.  We love these type of divergences because they usually foreshadow good trading opportunities.

Here is a silver weekly– textbook parabolic as buyers are hysterical.  Got to get me some silver!   The divergence to us demonstrates speculative fever versus supply and demand.
Unbelievably extended from the base, and outside its Bollinger Bands on every major time-frame.     Not exactly a good risk-reward entry long, even if you are a bull.

We posted this chart a while back — we’d be buyers of SIL on a pull-back to the trendline, currently at 26.

If you are interested in silver, you follow $SLW.   Here’s a recent quote that caught our eye:  ” Smallwood (CEO) pointed out the only drawback right now is that with silver prices rising so fast, miners are reluctant to do deals with Silver Wheaton. They know that if prices run up to $50 US in the near future, they can get a much higher upfront payment for their silver. He is convinced those deals will come once prices stabilize”
Miners holding back and not signing deals?  Again, this type of information often comes near a blow off short term top.   ZeroHedge this weekend posted this article about University of Texas taking physical delivery of  1 BB in gold.   They see it as a “tipping point” in which U of T is the first of what eventually will be many to leave the “fiat” system.   They see the current gold rise as a “dress rehearsal” of what really will come once other funds join in the fun.   Again, this type of fear-mongering for us is closer to a time when you want to be short, than long.
Precious metal bulls have very good arguments on why silver/gold will go higher.  And who knows, maybe it will go up much higher.  But it’s never different.  And new paradigms are much more rare than people think.     Historically speaking it’s rarely a good idea to initiate a position in a trading vehicle that has gone up vertically out of base as much as silver has and is outside of its Bollinger Bands.   We’ll see if this time indeed is any different.