Saturday, May 21, 2011

Resolution Coming

As we’ve been writing in the last little while we are in a range-bound market.  This is to be expected:  we’ve lost commodities as leaders, financials can’t find a bid, and star stock AAPL has lost its mojo.   When defense stocks lead, then (for traders like ourselves) it’s a time to retreat and go into hit and run mode.   The market thus far has refused to break-down but it’s in no mood for new highs either.   This means for the most part range bound strategies are ruling as breakouts are sold and breakdowns are bought.   However, this could change soon as we are seeing some “do or die” inflection points coming up.    Let’s take a look at a few examples to illustrate our point:
Coal stocks bounced on support last week but then paused on resistance on Thursday/Friday.   We have our floor and our ceiling — and should get guidance coming up very soon.  Bullish would be a break through resistance as the Thursday high is taken out,  and bearish of course would be break-down through Monday support.    Don’t make any aggressive bets until we leave the range.

FCX which had long been a great tell  is now firmly stuck in congestion.   The 200SMA finally cratered and stock went straight to next level of support and held.  However the rally so far has been tame.    For momentum to return FCX has to take out 50 convincingly and for bears to really get confident 46 has to break.

MCP offers another clear example — bounced on 100SMA but didn’t have the juice to go through 50SMA and stalled.     Bounce from support to resistance is typical in range-bound markets.    This week will be important tell to see if the stock will either break-out of resistance or finally break-down.

AAPL is always on our screen as a major market tell.    Two weeks ago it based on top of the 50SMA and under trend-line.   The “do or die” moment came in which it had to decide whether to break-out of trend-line or crater through the 50SMA.   It picked the latter and promptly sold off into next level of support.  Again, we got a bounce and again resistance (50SMA in this case) stalled the momentum and stock returned down.    We’ve reached the “now what?” point and will be watching with interest (but no position).   Will AAPL get its momentum back and break through the trend-line or will sellers hit it over the head and take it through it’s recent low?
Until we get answers for our questions our strategy will belong to the range-bound toolbox.  As we wrote last week, we will be shorting any move to resistance post trend-day up, and buying any move to support post trend day down.    If stocks can break through the indicated ranges then we will change accordingly back to continuation strategies (buy breakouts, short breakdowns).  But until then, it’s scalp city.
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Thursday, May 19, 2011

The trade we probably would have taken and a few thoughts LNKD

We’re not sure how realistic it is to “imagine”  how we actually would have responded to the trade but we’re pretty consistent in how we trade so this is probably a good version of what would have happened.    At first we were very grateful for not having short shares available  (108-122 would have been very painful for at least a few trades) but then on reversal post 122 we were cursing not having shares available to short.   Would the profits from the post-reversal pay for the losses of the 108-122 run?  No idea.  This is just a fun exercise.
The run from 108-122 was incredible considering that it was not a short squeeze.   Lesson here: never underestimate people’s greed nor stupidity.

Click to see notes 1-4:

Glad the market closed and we don’t have to imagine pain/pleasure in it anymore (for today at least).  And for those young bulls who think that old-schoolers don’t understand the new paradigm of social media…. you’re wrong.  Earnings are still earnings.   We learned that lesson the hard way (via fiber optic stocks) back in the last tech bubble and now you’ll learn your lesson in the new social media bubble.     There will always be a few standouts (Amazon a great example) but our feeling is that this isn’t one of them.   Either way, short term, whoever bought the open won big time.  Kudos.

Further Reading:  nice short rational piece on LNDK run today by Paul Kedrosky here

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Prepare Accordingly

We think that the USD bottom is here to stay for a while and this is a game-changer for the market.  The commodities, and silver specifically, had been market leaders — they will not be able to regain this role with a strong USD.    We’ve gone from a trending market to a range-bound market.    This isn’t necessarily a bad thing (for traders anyway) but it is necessary to change one’s strategy accordingly.

This means we’ll be less focused on trend strategies ( break-outs/break-downs) and more biased towards reversion to mean strategies (shorting resistance and buying support).    Of course there still will be break-outs here and there (we already have a few tech spots we love) but it will be more of a stock-pickers market going forward.  We also believe it will be a less forgiving market going forward.

Our general strategy in range-bound markets is to buy support the day after a trend-day down, and to short the pop into resistance the day after a trend-day up.     As always with any bias/strategy, we’ll do it until it doesn’t work, and then re-assess.    As an extra bonus this is occurring with the coming of summer which means when we see no edge, we will shut off the computers and take off to enjoy the sun.

As we tweeted yesterday:
Yesterday was trend day to resistance which means today you short the pop and cover into the dip.    Look not for home-runs, but base runs.
SPY over 134.7 resistance overshot into 135, and then right back down to 134 support.

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Tuesday, May 17, 2011

The Last Stand

We hit multiple support levels today in the market — and all that happened was that bleeding was stalled and we closed flat.    To put it clearly, we hit the 50SMA on the SPY, the 100SMA on the IWM QQQ and the mighty 200SMA on SIL USO.   Usually when multiple support levels hit we are salivating over buying support.   Today we felt no such excitement; we scalped long AAPL SLV OXY and went out by the close.

What is somewhat strange about today is that when we have multiple support lines hit on the ETFs we usually have a ton of stocks hitting support — we had very few for today.  We’re not sure what’s going on but we don’t feel hungry for stocks right now.   It all feels dead catish — as if bounces now will only set up shorts.    We hope we’re wrong, we prefer strong trending bull markets than ones stuck in ranges.     Either way, we will obey whatever the market does — if market rallies we should see some longs set-up.   If market falters, a few shorts we already have on radar will trigger.    But for now, we’re in the undecided camp, leaning biased long for possible few day dead-cat bounce but taking things easy, as we always do when we’re lacking in conviction.
As we tweeted this morning — this is the first test of the 100SMA since last September.     It needs to hold for market for dip buyers to remain confident.
QQQ couldn’t hold the 50SMA yesterday but held on the 100SMA.  MoMo leaders here act awful and need to turn around for bull momo to stay afloat.

Higher low on silver today and SIL held the 200SMA.   If any continuation tomorrow, this will be our focus tomorrow for daytrades long.

SPY held the 50SMA and could bounce to 134.   However, right now there are just not enough bullish set-ups to convince us that this would be anything but a dead cat bounce.   Again though, we’d love to be proven wrong.

USO held the 200SMA — but our feeling is that the USD bottom is in short-term and it’s going to be sluggish for commodities going forward.

Please note that everything we write about has a short time-frame.  We are primarily day-traders but sometimes hold for 2-3 days.  Always keep that in context when reading our posts.

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Monday, May 16, 2011

A market in need of inspiration

Our interest in trading this market has dropped off a cliff in the last week.  There’s no more silver tops nor Osama tops to short, nor falling silver miners to catch.     The hard edges are gone and what we have now is a range stuck in congestion.     Here are a few levels that would inspire us to trade actively (we still do trade every day, just a lot less and with less size) again:

ES_F has two areas which would shake things up — through new highs or first trend-line test near 1300.    We’d be buyers of FIRST test of trend-line.

The second more major trend-line is near 1230.  We hope it doesn’t get there but technically market is still in an uptrend as long as the major trend-line holds.
OIH is one of our favorite ETFs to trade — and it’s a complete mess right now.    We’ll probably have some shorts set-up in this sector soon and nothing long until 136 area.

AAPL also is one of our favorite tells –   two big levels are the trend-line break which is fast fading, and 316 support.   Nothing in the middle interests us too much.  Special kudos to @gtotoy for his post earnings short in the stock.

SLV is a complete muddy mess — again no interest here until at least first test of 30 (and then 28).

And here’s the game-changer, the USD.      Extended market, very oversold dollar — prepare for a trading range stuck in congestion.

One of the keys to survival as a trader is  hitting it hard when you have an edge and then retreating to a more passive state when you don’t.    As always we’ll take scalps here and there but we would need to break out of the recent range for us to take on any trades with substantial size.

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