Friday, September 30, 2011

No Balls to the wall here

We’re trading shy thanks to the amount of confusing information that we are seeing.  The most confusing of all is why the hell are we still above August 05 lows?   Commodities/China started this sell-off and normally we’d want them to bottom first yet US markets are holding firm while they keep grinding lower.   We’d prefer to see the opposite:  US markets make new lows, get panicky, while commodities firm up and show strength — that would get us interested in long trades.
There’s obviously two issues at hands, Europe and China, and they are making the lines somewhat hazy.    On one hand it looks like the S&P is pricing in Europe, while commodities are pricing in China.

We were waiting this week to short the 50SMA — we didn’t even make it there as the 20SMA on the $SPY  served as enough resistance.   The range is now tightening short term.
Copper ($HG_F)  still above the crazy Sunday commodity night but threatening it every day it seems
$CLF used to be one of our favorite trading stocks.  Now it trades like a dead internet stock from the bubble days.  Amazing.
$WLT was another super-star, one of our most loved trading stocks.  Again, trades dead.  Bid-less.    We want these to come back to the realm of living again before we start feeling the urge to go long.
We’ve noted our frustration this week on our stream.  Every night we send out our plan for the next day to our subscribers.  The plan has worked well (early in the week buy commodity to gap fills which all filled, later in week, short to support targets, which again worked) — basic range-bound reversion to mean strategy.  But our execution has been anything but stellar.  The gap between the plan and the execution is the hardest part of trading — when trading is bad the gap is wide. When you are in the Zone, then there is no gap.  Right now we’re in the gap area.  Why?  Because of all the mixed signals we can’t feel conviction about anything, thus we trade nervously.   We’re going for singles.  But maybe that’s not a bad thing.
Remember this chart we posted a few weeks ago under the title “How not to trade” — well update it at your own pleasure.  We’re still stuck to the range.    Peter L Brandt has an excellent post out today which covers this (lesson #3).   Don’t miss it.
Tough tape and people are getting impatient to see the range resolve.  It might happen next week or it might not happen for months.    If there ever was a time to be zen-like in your approach to the market and accept whatever the market brings, it’s now.

Tuesday, September 27, 2011

Dead cat bounce or the real thing?

he Euro-tarp rumor came out on Saturday and commodities were thrashed Sunday night before they bottomed.  We don’t think the rally has anything to do with a Euro Tarp rumor (since the real selling in for example copper came a day after)  but a simple squeeze continuation from yesterday’s commodity bottom.      Tech, which has held better than any other sector we follow, is not surprisingly underperforming today as it stands aside and let’s the commodity squeeze take place.     Take note that $AAPL is only up 1%, and for example $CMG $AMZN are both red.    This has all the makings of a vicious dead cat bounce, something we wrote about yesterday.
So how can one tell the difference from a dead cat bounce and the real thing?  Well we can’t.  They both start the same but the latter bases and then keeps making higher lows while the former gives it all back.   If you feel like the leaders should lead the bounce, well, it’s not that simple either since “leadership” is dynamic in the market.   It’s too soon to tell what this market wants to do (the reaction against the 50SMA should yield some information) but we do respect the fact that commodities, which started this whole sell-off, have now short-term  bottomed.
Charts are in a world of chaos and there’s not much to do today for new positions if you trade off patterns.  Don’t fall into the other side of the fear of loss which is the fear of missing:   if this rally is for real then there will be many excellent risk/reward set-ups in the near future.

Monday, September 26, 2011

A feeling of safety

The market has held the August lows admirably, while  commodities all broke down through August lows, and today hammered from incredible overnight sell-offs.    This to us is a very positive first step — but continuation will be key.   What will be necessary is a “feeling of safety” as traders who have had their limbs blown off by the sell-off start to come back into the market for “fear of missing the rally”.    Once that happens we could get a monster squeeze.

Right now tech is a lightweight — as noted this weekend we wanted $AAPL to be hit before we saw signs of a bottom.  We saw that today.   The real soldiers in the trenches right now are the four horsemen of commodities,  crude ($CL_F) , copper ($HG_F),  silver ($SI_F) and gold ($GC_F).     We’re keying off these for the immediate future.

The hammers in the four horsemen today are exceptional — but as we all know one day hammers don’t have much significance — it will be all about continuation.  We think this week will be the most important week since this sell-off started this summer.    The market held the range, the commodities bottomed — now if traders feel the fear of missing a rally and step up we could have a vicious bear market rally.    If today was a one day wonder and market pulls back tomorrow then fear of losses will outweigh fear of missing profits and we will go lower.   As said, this week is pivotal.     Bring your A game to the table.

Some positives

It's hard to get an edge on this market as computers trade to each other from one rumor to another but there are a few positives we'd like to point out today. The most obvious of course are the reversals on silver ($SI_F), gold ($GC_F) and copper ($HG_F) from their overnight lows. We also like the action on the refiners (which have been good tells lately) with $HFC $TSO $WNR holding gains.

As we noted this morning we think the rally could take us to the first target of gap fill near 116.5 on the $SPY -- that first test will likely be faded. The reaction to the fade will give out short-term direction information.

We noted a gap fill trade on $OIH in our newsletter this weekend and we have the first positive step towards that target today. We expect the first test of the fill to be faded.

Visibility is low and traders are flying pretty blind -- taking it one day at a time and trusting only moves short-term is our motto right now.