How to catch a knife, properly

Dedicated to @daytrend who motivated us to write a post on how we buy support


We do two types of knife catching, one is in long-term account, and one is in our more active day-trade/swing account. The long-term account is mostly inactive and probably used only a few times a year with the monies in safe but low interest money markets.  In the long-term account absolute key is to not even start the first buys until it's chaos-panic out there.  For example today was the first buys we made in this account -- sitting out already a move down from 122 to 108 SPY.   We put on our first 20% positions today.  We only enter 20% max in one day and only on next areas of support (next buy comes at SPY 105 or lower which would take us only to 40% invested).   Almost always these buys are in commodity stocks we believe in long term and never in fad stocks (TASR CROX two good examples).   There is no time-frame for this account and we never use margin -- these are long term holds for the future on the belief that commodities like oil are finite, the world population is growing, and that eventually demand will re-appear.   The stocks we started buying today were SU JRCC USO RINO ATPG MOS TC MON AA CAGC VALE AKS.  All broken charts, horrible looking, but also very oversold and good candidates for long-term holds.

The other, and probably more interesting to most of you, type of knife catching is what we do quite often in our day-trade account.   It's not really knife-catching since we wait for buyers to show up near support (or on overshoot strategy if no set-up on support), buy after stock has started to reverse with stop under.  Risk is always defined because you have your stop before you even enter (as opposed to what we do in our long-term account) and it often works well.  In fact our best days often come not from break-out days but from buying the panic. It's our specialty (and we pray to the market gods not to curse us after that last sentence).   We've done numerous trades like this in real-time just in the last 5 months since we joined Twitter.

So what do we look for?

1. Divergences, what we've called "comparative analysis" over the last few years.  We always look for "tells" to start diverging.  If crude has been leading market down we look for it to first stabilize.  Financials are another sector that often serves as a great tell.  If market is going to hell but financials are making higher lows then that's often a good tell for a market bottom (and remember these are day-trades, we're not looking for a 3 month bottom, but sometimes just a quick 1 hr bounce).



2. Absolute key is to wait for the reversal before you enter and put the stop under.  Sometimes it's very volatile and if we wait for a 5 minute candle to close we have to place a stop over a point away, something we don't want to do.  This means that often we go in on what we perceive is the bottom but before the candle actually closes.  When we're wrong on these trades we get stopped out literally in seconds.  If you don't trust yourself to take a stop instantly, and sometimes it means losing $1000-$2000 in 30 seconds, then don't try it because that realtively small 1-2G loss could snowball and  blow out your account 30 minutes later while you're still frozen in shock.  If you're the type that freezes, then forget about support buying and just stick with trend-trading.

3.  We don't start entering until the stock is extended from the 20EMA/5 minute but near daily support.  This is key -- we enter when daily and intraday are both extended.  Daily alert will already have been chosen from the night before as oversold stock heads into daily support.  Intraday we look for stock to move away from 20EMA/5min in a panic slope down.  Then and only then do we enter when reversal has already started with a stop on the low.  Our first target to take a partial position off is the EMA itself.  We're also very quick to move stop up to break-even after taking off the first load.

4. Intuition.   We've made a science of it and have numerous posts on the subject but in the end you need the screen time. It's much harder than it looks and you need experience to make it work.  We've traded for over 13 years through some brutal markets and have earned our stripes the hard way.  We can offer insight into our experiences and show you how we do things, but in the end, you have to do the grunt work and earn your badges.

This is a very quick summary and might seem confusing if you have not followed our strategies over the years but the following posts go into detail of everything we just mentioned. Many of them include screen shots of our real-time calls plus charts to illustrate these strategies.


Overshoot Strategy
Buy first test, short the second
EMA strategy for buying support
How to Daytrade Support
USO support Trade
Buying Support
Overshoot Strategy, real-time

USO trade

We wrote several times over the last few days (including our last post) that we were interested in buying USO in the 32 zone (or crude around 67-68).  We got our trade today -- not as profitable as we had hoped but this market is having a hard time bouncing.

We first bought USO on the inventory reversal, sold only a 1/4 for 1%, sold a bit more for meagre profits and got stopped break-even on the move back down  Meh.   The second set of trades though was much better. We wanted USO closer to 32 but decided to go in on the reversal (32.77 entry with 32.67 stop) as SPY bounced on the 200SMA.   We got off some very good exits, the bulk of it for over 2.2% profit  (decent size/trade since stop was only a dime on  a liquid stock).     

All posted real-time on StockTwits

USO/Crude

We like this 32 area for potential reversal into panic selling (around 4% away).   If you're watching crude then watch the 66 - 67 area for signs of reversal.  As always remember how we trade support: we wait for signs of reversal, we get in with stop under.  No catching knives, no being a hero. 

Daytrader Talk

As far as trades go today $SPY offered two good entries.  Support at 115 and resistance short at the 50SMA.  

Let's go through it with more detail:

We talked about 115 support several times yesterday/this morning and were very impressed how well it was supported at the open.   The market held its ground and rallied straight from support (115) to resistance (50SMA).   The best resistance shorts often come when market travels from support to resistance in one trip -- this often exhausts the usual range for rallies and makes shorting resistance successful endeavor. 

This is the chart we posted yesterday pointing out how the 50SMA on the SPY looks like a "great short spot".

We posted this updated daily chart after we initiated the short. 

 

    

The intraday chart will probably be more of interest to the daytraders in the crowd (which we guess is at least half our audience).   Note the slight high base at 117, and then a break away from the EMA right into resistance (50SMA daily).  Remember when you short resistance you want the stock to be extended -- this was textbook set-up.  We always wait for reversal first before shorting with stop at high of day.  We were a bit slow off the bat today and did not get in until  117.24 at 1:51:46.  Stop at that point was a penny above the high117.37, 13 cent stop.   We took first profits at the EMA -- when we initiate resistance short away from the EMA we always cover some on the reversal back to the EMA (20EMA/5 min).  Second and final cover was in front of the 2 day 116.4 -116.5.  In retrospect we should have left on a portion as it went lower, but we'll take it.

We noted this morning that crude was strong at the open.  Having crude roll over while SPY was making new highs (arrow on chart indicates time when SPY at high of day) was a great confidence booster to go short as we felt crude was leading the market.   Why?  Crude was firm at the open but market was weak -- crude rallied and market reversed and rallied.  So when crude started to roll and SPY was at high of day and at the 50SMA resistance, then chances of a short trade working were high.

This is typical trade around support/resistance.  As you can not a homerun, but a single.  This is what we try to do day in and day out. 

What to do, What to do

It's going to take a few days but we should get some kind of set-ups soon as we base under the 50SMA on the SPY -- we'll either get longs over mini-bases at that range or shorts against resistance, too early to tell.    Until then there simply is nothing to do for our type of trading.   Frustrating?  Of course. Especially with the current volatility in the market, but as a trader it's part of the game one has to accept -- the sidelines.

Until then, get some exercise, read a book, go kiss your spouse, and wait.  

Market Talk

After yesterday's monster range traders like ourselves who key off daily charts will find it difficult to find new alerts.  We need to break out of yesterday's range or build mini-range in stocks over the next few days.  For today, we do nothing.

For us to cash out on the Wed support buys that we initially wanted to hold as swings on was obviously a good move.  Our time-frame is very short now and we can't imagine putting anything into the swing account for a while.  

We broke through the 200SMA yesterday on may of the stocks we follow (including SPY) which means that support buying for us will be on hold.  Buying breakouts doesn't look likely either which leaves shorts.  Shorting at resistance and shorting breakdowns will probably be the game plan going forward.

For now though we're happy to do nothing today and try to chill into the weekend.   We'll go through charts on Sunday and if anything sticks out we'll post it here.

Have a good weekend.

Buying support

Update:  we took it all off, and flat in all accounts.   Might regret it as our original plan was to swing but there's just too much news going around (yes, excuses excuses!)

As our readers know we came into the day looking to buy the 200SMA/dip.  We got rewarded well for buying the fear. We wrote in our newsletter last night, "If many of these hit simultaneously there's a good chance we'll get a reversal at the spots."  and that's exactly what happened.

We sold all of our CENX OIH ANR FCX JOYG POT into the bounce but are still holding a few  TCK AA SWN VALE ATPG  with stops now above entries.

We posted this at 9:54AM -- we were in before that but didn't have time to post.  Since we posted at that time however, we have used it to show entries with the arrow.  



It was one of our best days this year in terms of PnL in which a lot came together -- extremely oversold sectors hitting support simultaneously.

Market Talk

Update:  as we tweeted this morning "buying into massacre" we added CENX TCK FCX AA VALE ANR SWN ATPG JOYG POT and have already sold a lot into the bounce.  We'll hold a portion swing of all though if they can close well.




Commodity slaughter continues on the rise of the USD.     We entered the day with our swing account  100% cash but did make two purchases today.  OIH and CENX on the 200SMA test.    We initially had decided to put a stop of 119.1 on OIH (couple cents below today's low) but instead have sold half the swing position this afternoon and are holding very small size with no immediate stop.   We think the commodities should find some support soon as the XME SLX KOL are all close to the 200SMAs.    We will buy all of these, swing size, on those spots -- if we get there tomorrow.


Here are the charts:

One more sell-off like today and we should hit the 200SMAs on the following (arrow indicates our desired entry spots):

Basic Material Disaster Screen

Here's a list of basic material stocks down 10-20% for the week.   We think the sell-off is getting short-term overdone and will be looking for support bounces in stocks not directly associated to the oil spill (so no BP RIG APC CAM HAL, etc) but which are suffering from collateral damage.   Also some steel and coal stocks could be ripe for a bounce.   To be clear -- we never buy the low and average down.  We put alerts on places we think a stock will bounce, wait for buyers to show up, wait for reversal, and enter on the bounce with stop below.

A failed support long trade

One of the rule of thumb rules of support buying is you want heavy volume when trading breakdown/breakout but light volume when you buy support or short resistance. Why? Because if stock has heavy volume it can go straight through the price. This is what happened with our CAM trade today -- we missed a great trade in it by seconds. It happens, and we're not particularly upset (especially since we've had a very good day trading other stocks from our list) but it's always a good reminder of how easily panic selling can go through support. The traders who go after these type of trades often take a lot of pain -- sometimes it works, and sometimes it doesn't. That's not our style -- not knocking that type of trading, but it's just not what we do.

This is the chart we were looking at -- we have 200SMA initial support and then secondary/tertiary overshoot strategy at 36 and 35.5







A few notes -- CAM was a buy on that first test at 42 near open, and as we always write (included in early morning blog post), a short on the second test (of 42) Now that would have been the best trade of the day!

We always write to wait for reversal before buying -- when it's slow you can wait for the candle to hammer up and buy the next candle. On a move like this it's impossible unless you want 2 point stop (we don't). So price actually did reverse when we bought and we had stops below on both -- buy you can't see it on the candle as it went too fast.

All in all we lost combined 64 cents combining all three trades (one win, two losses). A 3 point gain would have been, of course, much sweeter, but you can't get them all every time.

Retrospective musing? With that much panic chances that it would simply stop and reverse at our support levels was not likely. We should have either not gotten involved, or waited for a more clear sign of reversal with smaller size and wider stop.

Overshoot Strategy, Again

We've discussed the overshoot strategy in previous posts but it's always good to review it with real-time examles:

So here's what we were initially looking at -- APC we had alert at 100SMA but stock wasn't pausing. We wrote next support is 65.65 -- this is secondary support, so stock goes through first support and then overshoots to secondary support.





Fortunately it worked as stock found footing there and bounced:



We actually tried the first small reversal at 100SMA, quickly took our 25 cent loss, and then tried again on the hammer on the secondary overshoot support, which ended up working well (2 points with 30 cent risk).




(add 3 hrs to time stamp -- west coast time printed and start from bottom)

Daytrader Talk - Buy first test, short second

Very good examples today illustrating something we've talked about for years: first test of support is a buy (in a bull market), second test is a short or a pass, but never a buy (unless it prints a higher low -- not always easy to catch).

We had an 88 short alert in our newsletter last night on WLT (and posted in StockTwits)this morning before it triggered.

We had WLT as a long on the initial test of the 50SMA a few days ago. It worked well but now stock was returning back to test the support. On daily if a support is tested again in a short time-frame then we pass from trying to buy it long on support to looking to short the breakdown.



We missed a great entry on the rally to 20EMA/5 min -- short on the reversal with stop above.



But thankfully WLT based at 88 and gave a an entry short right at the number.



Very quick 2.5 points



Our other trigger was from Wed newsletter -- support long CAM 42. Again, perfect example, this time intraday, of how to buy the first support, but either short or pass on second. So daytrader would have caught the first move up long but passed on the second (or gone short).

Triggers for today

So far we have had a small day-trade in a short, one break-out starting to work, and three bounce support trades work well. As we wrote in our newsletter last night -- for now these are all day-trades except for our GLD swing from yesterday.

VALE alert was 29.75 for a support bounce -- worked well.



SSRI we had 20 breakout long alert and working thus far.



IOC was a short at 67.3 which worked for a quick scalp down.



FST we had 28 alert for a reversal trade long-- came within a dime and bounced nicely.



DECK came within a dime of our long support alert and bounced 3 points:

New position

Our only position long, posted today at 2:40PM (average 113.88) in anticipation of the 114.2 break-out. Love the chart, will add on pull-backs (gold notorious for pulling back and basing and filling).

Daytrader Talk

For as long as it works we will buy support in pull-backs. Couple points in buying pull-backs:

1) stock should be oversold when it hits support.

2) ideally the whole sector to which the stock belongs hits support around the same time (at least in same zone).

3) our best support trades are when the stock is deeply oversold on daily and also deeply oversold on intraday meaning it hits the support alert extended away from the 20EMA/5 min, creates a hammer candle and rallies. If everything sets well we often jump the entry when we see reversal in price and don't actually wait for the 5 min candle to close. Stop is on the low.

Here's an example today of WLT as it hit the 50SMA and bounced:

This was only a day-trade for us (no swing) as we feel there's more downside in the market.

Note how stock leaves the base, moves away from the EMA extended into support, reverses with very good volume. The hardest support buys for us the stair-step grind down moves and the easiest, ironically, are the panic vaccuum moves extended away from base/EMA into support. This of course is exactly the inverse of buying strength in which it is best to buy the stair-step up and always avoid buying on top of a big spike up extended away from the base/EMA.

New Positions

Update: out of all positions April 27


Our day-trade account time-frame is pretty short these days since we're seeing failures in extended set-ups. But we're starting to fill up our swing account with starter positions in commodity stocks (still under 25% invested).

Here is what we bought today (posted real-time on our Twitter acct:

We think AEM will break 62 soon and want to be long in front of that (61.34):



SWN is flattening the 50SMA and we think it will break through soon (41.88):
(Update: as posted, sold partial SWN 42.85 in front of the 200SMA and the rest at 43 at the 200SMA -- we didn't expect the stock to move this fast today)







APA might take a while but like this base forming under 109 and we bought today in anticipation (107.28):




As posted, sold a few APA 109.05 into the run today -- we were hoping it would wait but instead it broke out with light volume and we wanted to take partials off.


POT held on the 200SMA and now is basing under trend-line. We started a position today in anticipation of a break-out (108.43):





We're also looking to leg into some VALE ATPG next week if we get any type of pull-back. These are intial entries into longer-term positions which we plan to hold for a while -- very differnt from what we've been doing in our day-trade account lately which average time spent in a stock has averaged to be less than 2 hrs.

Triggers

Incredible tape/strength in the market today -- we had three triggers, all break-out, and all worked nicely.


ICE we had alert 115, but noted to watch for base and break 114.




FST 28 minor spot, worked.




SHLD 111.5 big spot, worked well.

Back to a stock pickers market

It seems that the era of the "easy tape" is over for now and we're back to a stock-pickers market. This means that traders will actually have to do some homework and work at it a bit more to be able to make the income.

We had two shorts, one long support, and one long break-out trigger today from the newsletter -- having shorts and longs trigger is also another clear sign that going forward one has to pay attention to levels with more scrutiny. They all worked -- a good sign that market acting as it should technically.

We knew there would be some trade around VALE 32 -- nice short base on it today and thus far working for day-trade.



UTX break-out 75 on our newsletter last night.



LULU short 41.66 worked well for a trade.



RGLD was listed as a buy at 46.5 -- very nice quick bounce there as it hit our alert