Update on steel positions

Update on Update:   whenever our short and long go green at same time we think "it's a good time to flatten out".   Out QLD for a few pennies, and rest of NUE X ATI for just under 2%.     Back to cash in all accounts. 


Update on our steel positions:

All are through trend-line and because of that we have moved stop to break-even in all three positions.   We're only up around 2% in each so not much cushion but hopefully good enough to stand the chop until we get continuation.     Long NUE 37.67, X 43.55, ATI 45.51.     We're hedged with QLD short from 66.80.  We most likely will take a loss in the QLD position if steels break-out further but want to have it on the book in case of gap down.

Watch the steels

We think this sector is ready to wake up from its long slumber:

Here are 4 we are watching (we're already in X looking to swing).

Click on charts to see our trend-line alerts.

Intermediate swing ideas

If this rally continues then most likely the laggard commodity sectors will be playing catch up.  Here are some frew ideas for the swing traders out there:

ECA looks great on the break up through the down trend-line.  

If WHR can wait a few days resistance will meet the trend-line  -- entry would be long through there.

The next two trades would be bounce on trend-line swings rather than breaks of trend-line.  This type of trade offers good risk-reward if you can get in close to the trend-line as the stop will be close-by, right under the trend-line. 

BHI bounced on the trend-line but still close enough for good risk-reward.  Entry would be here with stop under trend-line.

X has suffered  horrible price-action but interesting low risk spot here on the bounce on the trend-line.  If this rally is for real it most likely will push even these type of performers up.    Entry would be here, stop would be below trend-line.  

Rotation Plan in Play Update

Further Update:  Closed rest QLD short for 10 cents, closed TNA short for 25 cents,  Sold more OIH for 1.7 points.   Sold more XME over 53.  Starting to close the swing.   Have left small XLF,  1/3 OIH, 1/3 XME.
10:30AM update.  Flattened out rest of positions.  Swing closed.  Back to day-trading!  



As we wrote yesterday we didn't know whether XME 53 breakout would work or not but we did have conviction it would at least be touched.  As per plan we took off 1/3 of the position from 51.68 into 53 and now stop has been moved up to above break-even.   We won't let this go to a loss (unless gap down of course).   Next target is 54.

We also took off half of our QLD short for a 12 cent loss.

We also  sold 1/3 our OIH swing this morning for 2 points (entry 107.89) and also would be stopped now on any move below breakeven.

We have left the TNA short position which is small and we have not added to and will probably just sit on for a while (unless IWM 68, would probably add there).

We also have our initial XLF position which we added early yesterday and which we will not add to either until we get some type of pull-back.   The XLF TNA positions were a fraction of the XME position which was our largest hold in a long time.

Rotation

On Sunday we wrote on StockTwits that we were looking for a rotation into areas which were not extended and instead basing: 

Tech got more extended and we went short yesterday. Step One.  Now we're looking for Step Two and that's a rotation into XME (we're also long OIH sub 108 and a small XLF long we probably won't add to unless market pulls back 2-3%).    Today was a good start as XME closed well off its lows while QQQQ closed on its lows. Let's see if we can get some follow-through tomorrow.

This is the type of trading around the core swing we do on a daily basis:

As posted at 1:55 PM EST we added to XME

Day-trade around the swing:  add on the pull-back, sell it on the strength, keep the core.  Posted at 2:44 PM EST:

As long as we have conviction that XME will touch 53 (which we do), we can constantly trade around the core.  We will take off at least 1/3 on 53 itself.

 

Note divergence of XME/QQQQ price-action post FOMC.

Why do we like the rotation idea?  As we wrote last week in our blog we do believe we will go higher and if this is the case the market cannot just be led by REITS and momo tech; other sectors such as financials and commodities will most likley catch up.


QQQQ to our eyes is running on fumes -- however we wouldn't short it without being hedged.  Why?  Because we often engage in momentum trading ourselves and know very well how irrational the moves can be and how extreme the pendulum can swing.

Great hedged short.  We're short QLD 65.26

65.26

This chart on the other hand represents to us a very nice base getting ready for break-out.   That being said we are also aware of the lagging status of the XME, thus the adds only on pull-back and the exit on strength.

New Positions

All updates will be edited on page on daily basis.



We opened up a hedged swing today -- here are our positions:

We know all about the power of momentum -- resistance is futile in front of a real melt-up.  However we do think that this is a great place to initiate an initital position short hedged with other longs. Decent size QLD short position 65.26 after adding short in front of QQQQ 48.8.  which we will add to slowly if Nasdaq keeps running this week.

We have a small  token TNA short position from 44.75 that we have not added to since we think IWM has room to run.   Not adding to this - just letting this one sit.

We posted this chart a few times last week/weekend for our subscribers and in StockTwits with a trend-line and 108 alert.  We started long on the trend-line and added at 108 for a good position size at 107.89.

We added more to this late in the day in order to even out the hedge and are long average 52.17 for a good size position. Edit: added to XME on this pull-back today, average now 51.68

Our timeframe is potentially longer than usual in order to wait for the plan to unfold.

Edit: added initial XLF position at 14.90 to the swing book, will re-assess post Fed for any additional adds.
Edit:  added to XME on the pull-back

Market Talk

We're short term traders but sometimes we like to indulge in thoughts about the intermediate time-frame.   Warning: this is what we think will happen but we always defer to what we see, not what we think.   This means that if we're wrong we are not the type to press our bets.  We take our losses, and re-assess.


The first test against major resistance in overbought market is most often a great daytrading opportunity short.  We short the first test of resistance (in overbought markets) and buy the first test of support (in oversold markets) but that's it -- second test we don't touch.   Double tops/double bottoms are not worth the risk for our type of trading.

Our guess is that SPY will test 113.2, pull-back and then move higher into a new range.  However, we do intend to catch that pullback short before we go long on any swings into the new range.  We're fast, and that type of trading is what we're all about. 

Why do we think that SPY will enter a new range higher?  Because our belief is that bonds will finally break this trend-line lower and end their long rally.

Another piece of the puzzle is that copper refused to sell-off even in the dire dark months of the August pull-back.  As we wrote a few weeks ago, copper basically told everyone that the pull-back was a farce. 

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

.




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

---------------------------------------------------------------------


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