Trend-line breaks versus Channel Breaks

As much as we love the trend-line break trade, the best and least messy moves are straight up channel breaks.

Out of all our triggers (around 12 and counting) from last night the two strongest moves were WLT CMI channel breaks and not trend-line breaks.

Why is that? Because while you don't want a trade to be too crowded, you do want it to be on enough traders' screens for it to get momentum; trend-line breaks are just harder to spot for most traders. It's a fine balancing act between obvious but not crowded.

WLT 73 long alert



CMI 53 long alert

Another Example

AAPL great move today through trend-line but heavy resistance and congestion ahead.

Market Talk

Trend-line breaks worked well today but if you're looking for continuation you will have to be patient.

PCX found support on the 100 SMA, broke trend-line today for a nice move. But look at what's ahead in terms of resistance: 50 SMA, 20 SMA and lots of daily congestion. Nevertheless still bullish -- if you're a swing trader this is a hold with stop on today's lows.

Last Night's Triggers

Alerts that have triggered thus far into the trading day.


Arrow is entry point alert from last night's newsletter:

Position Update

We went long a few shares AAPL at 196.21 swing as it keeps bumping up on the trend-line. In retrospect we should have waited for trend-line to actually break rather than anticipate it due to bearishness of the market.

On the upside we like 198 and 200 targets for partial exits and on the downside around 194 (2 day low) and we'll probably eat the 2 points loss.




Update: Sold AAPL for 1 point loss this morning. Will try again long on trend-link break.

Position Update -End of swings

We don't often blog/tweet all our real-time trades but if we lead people in, we will lead people out. And since we posted our entries, here are the exits.

As posted in the account today we sold into this gap-up with best profits being (from Friday buys) CENX FCX TC 7-8% profit to lowest being SMH NUE XLE 2.5-3% profit.

Our focus for rest of day will be day-trades.

Position Update

We were expecting a consolidation day but the market gave back a bit too much for our comfort. Nevertheless the big levels are still holding but the range is tightening and we should get some real direction soon.

Here's what's left of our swings (at 3:50 PM):



As we tweeted today we sold ANR for 3.4% profit from Friday swing (earnings tomorrow) and sold SQM for 1% loss and MOS for 3.6% gain in front of AGU earnings tomorrow.

We gave back a chunk of the remainder of the positions from Friday but at least having these swings kept us from trading in today's chop-fest.

DT misses the bottom!

Guest Post by amigo Dinosaur Trader:




For Those Who Missed The Bottom

I’m not sure how Friday went for you but for me, it sucked. No, I didn’t lose money, it wasn’t that bad, but I missed the bottom in a big way. While HCPG and a bunch of other people I know were stacking money faster than you can say “comparative analysis” I was at a friend’s house, drinking some coffee and musing over what a shitty year 2009 was.

I thought I was being smart because I had made good money on Friday morning and then had dribbled it all away picking “the bottom” too soon. At around noon, I made my last losing trade of the day, in PCU. I decided when it started to pull back yet again that “the bottom” just wasn’t going to happen on a Friday afternoon. I congratulated myself with having the restraint to walk away instead of churning myself negative on the day and I head over to my friend’s house.

On the way I stopped off at the local hardware store to pick up some paint. I asked the guy mixing the stuff, a surly old man named “Kenneth” to use the “low VOC” stuff. He rested his hand on a nearby gallon of paint, looked down at his shoes, took a deep breath and looked at me, shaking his head ever so slightly.
“You’re not going to die of paint fumes, son” he said.

“Yeah, I know, it’s just that I have a small kid…”

Kenneth interrupted. “Your kid’s not going to die of paint fumes either. Look, let me tell you a story.” He drew in a hoarse breath. “You know how Mickey Mantle died? His father had some disease, Hodgkin’s disease, or Huntington’s disease, one of those.” He waved his hand in the air as if swatting away some imaginary mosquito. “Anyway, Mickey Mantle thought his entire life that he was bound to die of the same disease his father had, and so he used this as a rationale to go out and party. He figured, who cares if I have a few drinks, I might as well enjoy myself before I die of this awful disease.” He looked at me with a flash of impatience as he could tell I had yet to make any connection between his story and the “low VOC” paint. “Well, you want to know what he died of?” Here, Kenneth paused for effect and then he practically yelled, “He drank himself to death!”

“Okay, fine,” I said. “Give me the regular stuff.”

As I shuffled away with my toxic paint, he left me with one final bit of advice. “Just eat whole wheat bread and drink plenty of water and you’ll do fine.”
The story had shaken me up a bit. Perhaps Kenneth’s lesson was that I was too focused on certain details, and missing the bigger picture in life. I congratulated myself again on having the perspective to walk away from a crappy day in the market. “Maybe I’m beginning to see more of the big picture,” I told myself. I smiled.

The talk at my friends house over coffee was of perspective and how, as parents, aging parents, we had gained a lot of it in only the past few years. I left feeling good. It was 3:30 and I wanted to get home to see the last few minutes of trade.

I clicked on my monitors and sat down. My Tweetdeck was full of new messages including a direct one from HCPG, “You missed our epic bottom buys, all in real time. Dick!” “What assholes,“ I thought. I scanned through charts… everything I was looking at only a few hours earlier had ripped, simply ripped. All of that perspective I thought I had just gained went right out the fucking window. I was disgusted.

I clicked off the monitors and went downstairs to psychologically abuse my cat.
Over the weekend I did all kinds of research, calculating pivot points, drawing trendlines, etc. I told myself that I would get back in the saddle today and make up for missing the bottom. Instead, the market is fucking around, displaying less direction than Clay Aiken surrounded by a circle of men. I’m down a little bit and pissy. I told my daughter to steer clear of me, “Daddy is in a bad mood,” I warned. She looked up at me unafraid and said, “You better steer clear of ME Daddy, I’m in a bad mood too, my doll is sick.”

“You have a lot to learn about perspective kid,” I mumbled, wondering if the paint fumes had sickened her doll.

Anyway, if you missed the bottom, don’t go “drinking yourself to death” today. Go get some nice whole wheat bread, drink some water, and bide your time waiting for a better opportunity. What’s done is done. Don’t prematurely “off” yourself by letting anger and frustration rule your trading.

Consolidatory Action

Very good digestive action by the market (as long as we stay in this range) and we haven't made any trades. We're still long and strong CENX TC FCX ANR MOS MEE BVN NUE XLE SMH SQM.

Why do we like this action? Take a look at the following charts and see how today we're basing right under resistance. Sharp moves up would be sold but a base and stair-step higher would be much more effective in trapping the bears.

Thoughts

We would say that 80-85% of the time writing the HCPG newsletter is relatively easy and a pleasure. A few break-out candidates stick out to us on the daily charts, we highlight them, and then review the trades the next day. Right now we're in the other 15-20% of the time where writing this newsletter is a struggle. Why? Because nothing is clear and even the first factor, usually a given: what strategy are you focusing on?-- is tough to answer. We're primarily break-out traders but there are no break-out candidates. Charts are broken.

However if Friday's low indeed is a near-term bottom then we need to find longs. The best we can do is find target longs to resistance. These don't have the same success rate as break-out longs and tend to be more messy/choppy so adjust accordingly. To add to the complexity we have to be aware of the fact that the trend is broken and therefore need to be cognizant of resistance shorts on any rally. Of course "not easy" doesn't equate to "not profitable" as there are many opportunities in the market thanks to the increased volatility. You just have to climb higher up the tree to get the fruits.

Refusal to Die

What's interesting to us about all the following charts? Their refusal to die in the market plunge last week -- all of them held last Friday's low (Jan 29) while their respective sectors (tech, gold, financials, oil, Ags, etc) all went lower. If market bottom is for real (no matter what the time frame) then watch these stocks to lead. Also if you feel that Friday afternoon was a head-fake then watch for new week lows on these stocks. This is the kind of analysis we constantly do to find new "tells" that will give us edge in predicting market movement.

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.