Catching bottoms. Or not.

We found this last market bottom more frustrating than previous market bottoms.  Why?  Because it took so long -- we based over 1040 for days.  We went swing 2x near the lows anticipating a bounce.  The first time, on August 25, was the better one as we made out some decent profits on TNA FAS, but scratched other positions near even and the second time, on Aug 31,  we scratched the bulk of the swings either for small profits/losses. 

We spent an unusual  six trading sessions in a relatively small range SPY 104.3-107, just sitting on support, waiting on one economic report after another.    Finally yesterday we gapped up on the China PMI numbers and then blasted through resistance on our own ISM numbers.     We broke through the trend-line and resistance that we had posted/talked about for days.  107.

After the close yesterday we felt somewhat down on having scratched our swings the day before and missing on the gap up gains.  But after talking things through with each other we realized that we're not sure we would have made more money keeping the swings.  Why?  Because it's quite possible we wouldn't have added to the swing size while yesterday we had on full day-trade positions on the initial gap up (SSO 34.36 when SPY was sitting under 107, GS 138.63, OIH 99.61, AAPL 246.47).   Here is our note from a few days ago:

We had been prepared for a break-out  of the range for days and that helped us keep our focus on the market instead of getting lost in frustration:

And the after chart with the beautiful break of the trend-line.

The same in OIH  as we wrote, we'd buy 94 support or the break of the trend-line (over 99) but nothing in between.   We went long OIH yesterday at 99.61.

Again, break of the down-trend line. 

So even though we came into the day yesterday completely cash we were able to catch the trades that we had been talking about for days.   We had a plan and we followed it through -- even though we had made the unfortunate decision of selling the swings the day before on our fear of a gap down on the China PMI numbers it didn't stop us from making good entry trades.

Why did we even swing in the first place?   Usually we don't -- we wait for reversal before we get in (like we did yesterday) but this time we had a feeling that it was all noise and that the market would rally.  Why?  Because, as we posted last week,  copper was firm throughout the whole pullback in August, signalling that the market pullback could have all been noise.

On August 29 we wrote, "Copper saying that the whole pullback and fear in the last 2 months has just been noise".

The price-action on August 31 however, was brutal -- TLT hitting a new closing high for the year and market on pins and needles for the Chinese PMI, we lost our nerve and went flat in fear of a gap below 1040 on economic data (not to mention we were holding triples TNA FAS as swings -- next time maybe we would feel safer simply holding SPY which is what we've done in the past). 

What we have learned from the years though is that the market will almost always give you a chance to get in -- if you're fast, have a plan,  and have conviction.   So don't turn the computer off in disgust with yourself and walk away.  The opening might be small --you had 29 minutes yesterday after the open to enter your positions if you wanted to enjoy the bulk of the move -- but it was there.  

Consolidation day Strategies

It's very rare to get two trend days in a row in the market.  Often what happens after big market moves is that the next day is one of consolidation.   We wanted to go over a day-trading strategy that works very well in this type of benign environment.  Why do we say "benign"?    Very simple: we broke the mini range of SPY 104.3-107 and are holding above that while TLT is red.    As long as treasuries stay muted and we hold 107 we should be in an easier more forgiving tape.

Let's look at two triggers we had on our lists today, CTRP 42 and DNDN 40. 

Here are the daily charts:

CTRP we liked for a breakout of 42 over trend-line. 

DNDN 40 has been on our list for weeks. 

CTRP went through 42 near the open and quickly reversed.   Stock slowly faded down until it hit the 20EMA/P and bounced to make new highs.  A very common move in a consolidatory yet friendly tape. 

The second one is one of DNDN 40.  We had a very good idea that it would fail on the first attempt through 40 as the stock was already above its ATR and extended away from EMA.  We posted that we didn't want it to break 40 but would try it anyway if it based and let the EMA catch up.  It didn't wait, broke 40 and reversed instantly.  However, the same thing happened on DNDN in which it reversed back to the EMA, this time EMA/R1 combo, and then made new highs.     

The break-out fail/but buy dip on the EMA/R1 or EMA/P strategy can be very useful in consolidatory/tired yet friendly and forgiving markets.  Stops on these type of trades are very tight (a reversal back through the EMA) so it's easy to get off good risk-reward trades.   This type of strategy, however, would not have worked well in the 104.3-107 SPY range in which market was more hostile/scared.

Why you should always keep an eye on commodities

Look at SPY versus our favorite commodity ETFs in the two time frames we've pointed out in the charts.   See any pattern? 

The commodity ETFs all bottomed before the market and made higher lows both in the March 2009 bottom and in the recent bottom.   Commodities are fantastic "canaries in the mine" tells for the markets.   We've always believed that commodity traders are one step ahead of equity traders -- keep up with what they're dong and always keep an eye on the major commodity sectors. 

The Dynamic Relationship Between Global Equity Markets and Japanese Yen

Guest post by  Vincenzo Deroches

During the late 1980’s and early 1990’s, Japan experienced a severe slowdown in economic growth.  Although there were many factors at work causing the financial meltdown, a major cause was an asset bubble that had burst in Japan.  Japanese equity and real estate markets were growing at unprecedented rates throughout the 1980’s until the bubble burst.  And when it burst, it burst!  A period of financial distress began to develop in Japan that has become known in the financial world as “The Lost Decade.”  Although the exact details of the Crisis are beyond the scope of this article, the one important fact is that, in hopes of revitalizing an anemic economy, the Bank of Japan eventually lowered interest rates significantly, and they have held interest rates at close to 0% since then.  This single fact, that the Bank of Japan has set its short-term interest rate target at 0% for many years, has caused a fascinating correlation to develop between the Japanese Yen and global equity markets.

The primary goal of every fund manager in the world is to produce a positive return for the year.  In order to do this, traders and investors must find yield.  This is where the Japanese Yen comes into play.  Does the Japanese Yen offer much yield?  Of course not.  Interest rates are near 0%.  If you invest in something and earn 0%, you aren’t making much money, right?  Thus, investors are not interested in investing in the Japanese Yen necessarily.  However, they are interested in taking out loans in Japanese Yen, and then investing that capital in higher yielding assets, such as global equity markets, venture capital opportunities, real estate markets, etc.  Since they are paying virtually no interest on their loan, they can then take that money and put it to work in other markets.  Consequently, the standard relationship between the equity markets and the Japanese Yen is—when equity markets are rising, and investors are willing to take risk, the Yen tends to fall significantly in forex market trading as investors are selling it.  Let’s take a look at a chart

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This chart depicts the massive weakening of the Yen from 1999-2007, as investors sought higher yield.  But the Yen doesn’t weaken forever!  When equity markets begin to fall, and global economic concerns grip the market, the Yen tends to outperform every currency because all the investors that borrowed Yen at 0% interest rates in order to invest in higher yielding, risky investments, are now repatriating their investments back into the Yen, so that they can pay back those loans, and get their cash into safe investments.  Let’s take a look at another chart.

This is what happens in times of economic uncertainty.  The Japanese Yen gets extremely strong.  This is problematic for the Japanese economy because they are an export-based economy, and a strong currency makes their exports much less attractive to foreign nations.  The next time the global economy threatens to unwind, consider positioning yourself for profit by buying the Japanese Yen.

New positions

Update:  We just aren't feeling it -- took it all off for basically breakeven (posted real-time).

There's still a trade here short -- going to come fresh tomorrow AM and re-assess

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Four major ETFs that we follow hit resistance today, SPY IWM IYR XLF.   We started swing shorts on all 4 (posted entries real-time IYR 49.85 short, IWM 63.8 short, XLF 14.88 short, and SPY 109.77 short).

Breadth is good today and the financials are leading, meaning we know that we could be in for some pain in these starter positions.   As to where to add or where to place stop -- too early to tell, we'll see what the market dictates.   If we start taking on some pain in the swings we'll probably hedge it with some long ETFs in other sectors. On the whole we feel more uncomfortable adding to shorts in pain than we do to longs.   Let's see what the next few days brings. 

Market Talk

As we posted this afternoon on our StockTwits acct the market reversed in front of resistance.  That's the new range  that now has to be broken.   The two following lines on the SPY chart are the short-term support and resistance that needs to be on your screens.  We're not doing much with stocks these days -- mostly trading ETFs until we feel there's a better edge in the market. 

It's summer.  Get out there, enjoy yourself, take some time off.   If you want/have to be in front of your screens, then stay smart.  Don't chase market up or down -- this is typical range-bound market where resistance is shorted and support is bought.    Stay cool and loose. 

Trading Talk

Similar to our copper tell for market bottom  fertilizer stocks have also proved to be great tells for us in the past.    We posted the first chart last week on chart.ly just as POT was breaking the trend-line:

Look how the stock successfully tested the trend-line/20 SMA before going higher.  Text book.  Next target 50SMA.

This brings us back to the super-focus theme of trading.  We focus on two patterns (bases, and trend-lines) only, no cup and handle, no head and shoulders, nothing else.  We only use a few indicators (moving average on daily and intraday, Pivot lines, volume).   We only have a few intraday set-ups we use and all our trades can be contained within the strategy of buying breakouts/shorting breakdowns and buying support/shorting resistance.   We have followed the same bulk of stocks now for over a decade.  We've traded together for over a decade without any additions/subtractions.

Everything we do is contained in a small trading universe.  But we know every nuance of our world.    We don't spread ourselves thin and we are experts in what we do.    You've heard it a thousand times -- find something you're good at and then get better. But nothing could be more true in trading.  Biggest mistake of new traders is going into a chat room and following different trades by different traders using different strategies.    Find your voice and then learn to sing.

Market Talk

A lot of shorts got suckered into yesterday's fade.   Before the close we posted:

As we wrote in the newsletter this weekend, we would short the first test of the 200 SMA but buy the second.  Yesterday was the first test of the 200 SMA which offered great opportunities short at SPY 111 and today was the break-out.    As we wrote yesterday and today, we like the market long but we do want stuff to set-up, something that is not happening due to the quick nature of this rally.  The best thing that could happen now is if we stay above but close to SPY 111 for a day or two and set-up some nice longs.

Everyhing these days happens in fast motion:  we go down quickly, we go up quickly.   This market is making daytraders out of all of us (well, we are mostly daytraders to begin with but for the rest of you!).

Resistance short triggers

Here are the daytrade alerts that triggered short today from last night's newsletter (short alert on rally to resistance).

ATHR 32.8 short on trend line:

SU short at 33.4 alert from last night's newsletter:

SCCO short at 31.5 alert in last night's newsletter:




CHK we liked long over 25.5 if it could base, if not we wrote to watch for resistance short 25.2-25.5

And SPY short 111

Super-Focus

One of our favorite tells in the market is copper.    Here are our two posts in the last week on copper (via JJC etf) on StockTwits

We traded intraday long all last week on the bottoming pattern:

And today we traded intraday short against resistance on the above pattern (including SCCO 31.5 short alert from last night) as copper hit the top of the trend-line.

One of the best advice we can give to young traders is don't spread yourself thin.   Find a niche and focus on that instead of trying to stay on top of every facet of the market.  We like following commodities -- it's our guideline  for how we trade.    Everything in this market is inter-connected, you don't have to watch everything to understand market movement.  Focus on one important sector, be it commodities, financials,currency, bonds, etc and get to know every wrinkle and crease on the map.

Trading Talk

NFLX 114.7-115 was an old alert on our newsletter -- the type that we write does not expire (base versus for example a  trend-line move that has to be adjusted every day).   We posted the chart again, writing that we were looking for a breakout, near the open on stocktwits

As you can see it's a very clear trade from 114.7 to 119.5 (but as always take some day trade profits in the way, we're already out half and always moving stop up).

Why did we like the stock today for a break-out?  Great relative strength and volume.   As an added bonus, the set-up was excellent:

Stock opened up near the break-out zone and based.  Next came the dip to R1/20EMA -- one of our favorite combinations, before bouncing back for a great base and break right at the number for a very nice break-out (thus far already 3 points).   Entry was either on the reversal on 20EMA/R1 or on the break-out itself as volume poured in at 114.7 break.   Stop for the 20EMA reversal would have been a move back through the EMA, and if you bought the break-out then stop would have been a move back through the base (probably 114, so 70cents to 1 point risk).

  As we already posted you'd want to take some off on the move to 118 and move stop up above break-even but ultimate target is 119.5

Whether you're a day-trader or swing-trader do yourself a favor and plant the 20EMA on your 5 min charts.

Update:  we got stopped on the remainder on the move back through our entry point.   Back to cash, yet again!

Market Thoughts

We haven't updated the blog for a couple of weeks because, well, we haven't had anything to talk about.  We've closed the day in cash every day now for weeks as we feel there is no edge currently in swing trading.    Even for day-trades we're finding slim pickings and are spending most of our time on the side-lines.  Boring, but part of the game.  We'll trade whenever we see a good risk-reward trade, be it once every two days or ten times a day.   As simple as that.

Here are some thoughts on the market:

Coal, steel, metals and miners, Ag-Chem all look horrible.  Drillers are broken but the action is better than before as the group is trying to stabilize. The strongest sectors within the commodities are natural gas stocks and gold.

Financials, transportation, and farming/diversified machinery look awful.    Basically "world growth" stocks are saying "no growth".

GS action is similar to the driller action -- chart is broken but one gets the feeling that whoever wanted to sell has already sold.  Stock is not rallying but isn't going down either.   We'll have our eye on the stock next week to see if this changes.

The only stocks that are still holding are the darling momentum group, the AAPLs and VMWs of the world.   They are the last pillar standing -- when this group starts bleeding we'll know that traders are finally feeling some real panic.    We're so used to the cowboy commodity stocks go down 8% in a clip -- that doesn't even make us blink anymore.  But we're still not there for the MoMo group.  Before we dip our toes into the bloody waters of panic we'd like to see traders finally give up their AAPL shares.

If market rallies and we switch to buying strength then our favorite set-up is AAPL.  Stock is setting up a very nice base near 265-266 -- it could be 2 days from now or 2 months but eventually we will get a nice break-out through that area.    Two conditions that have to be met before we buy the breakout:  relative strength (stock has to be leading the market up) and volume.


Crude closed over 71 -- watch that symbolic 6 handle and then 65-67 level for tells of panic.

Copper closed near that important 280 mark.  It's been leading the way down, at least partially on the prospect of China slowing down.  Copper will not act alone -- if the fears prove to be true look for many other sectors to follow copper down.   Our number one reason, technically, why we remain on the bear camp is the price-action of copper.

New positions

Gap down and rally today -- best tells to trade on the long side were GS and metals (especially AKS).  As we posted this morning:

  We were flat in the early afternoon as GS had broken the 20 EMA/5 min chart  and usually when that happens market just hugs the EMA all day making for choppy, range-bound action.  Then suddenly GS picked itself up and broke away from the EMA -- that woke us up and we quickly looked through our lists to look for trades.  Steels and miners stuck out and we bought both SLX XME (posted real-time on stocktwits)    At the time we felt like we were chasing both but at the same time we didn't feel like we had much choice considering the action in the metal/miners.    When the trade started to work in our direction (both closed over 2% green from our entries and XME now up 3% from entry in AH action) we took off a point in each and moved up stops.

Strange sandwich pattern on SLX daily and volume not too impressive but we liked the intraday action.  Let's see if we can get some follow-through.  We're long SLX 53.15 swing with stops to around break-even.  

XME we're long from 48.2 swing and will probably take off another partial at the 200SMA near 50.3.  Again, volume nothing to write home about but intraday price action on miners was very impressive.  Stops at this point are also around break-even


Update from May 26,  sold partials into today for around 5-6% profit (tweeted exits).   Flat. 

Update on our commodity basket

As we posted real-time  last week we bought a basket of 12 stocks (CAGC VALE RINO MOS SU TC ATPG AKS MON JRCC USO AA) on Thurs (20%) and averaged down on Friday open (another 20%) leaving us 40% invested in the account.  Today we sold out of all of CAGC for 16% profit, and sold partials on everything else leaving us under 10% invested in the Long-Term account.

We will exit the rest if portfolio drops under 1.5% profit (currently at 2.6% profit) or if on the upside in front of the 200SMA  on SPY.

If you bought with us into the Thurs/Friday panic then take some off with us today.

Update:  port at 1.58%,  close enough to stop, we sold last 10% and back in cash in all accounts. 

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.