Overshoot Strategy, Post 5 Daytrader Talk

We'd like to review one of our more difficult strategies that we use -- the overshoot into secondary support.   We've written about it many times in the newsletter :  
Overshoot Strategy Again
Overshoot Strategy
Overshoot Strategy Example
How to catch a knife properly
   

When a stock is nearing support (in this case the 20SMA) but it's not showing signs of reversing, look for an overshoot of primary support and into secondary support.    On entry on reversal on secondary support the first target is a move back to primary support.

In this case CMI had 20SMA near 91.4 and secondary support near 90.68-90.83 level.

At 91.4/20SMA zone there was a small reversal, we got in with stop on the low and quickly lost 12 cents as stock reversed down to make new low.   Once this happens you have to sit back and wait for secondary support to hit.   The set-up for the secondary support overshoot was actually much better -- a panic move away from the EMA with a big volume spike.   We were ready to buy support anywhere from 90.6-90.9.    Target exit is a move back to primary support which was 91.4/ 20SMA, anything after that is a bonus.   In this example reward target was 50 cents and stop was only 10-15 cents (fills from 90.85-90.9 were easy)    Very good risk-reward.


If your trade is working well and you want to stay past the major exit point of primary support then sell majority of position into the target, and hold remaining position with either original stop or stop at break-even.  

It's one of the more difficult strategies we have in our toolbox but it can be very satisfying.  A couple of conditions before trying it:  1) You have to be fast and be able to take a quick loss without blinking.  2) You have to be patient and wait for the secondary support to be hit before entering and most important 3) You can only enter this strategy if secondary support is hit very extended from the EMA/base.   If it's close to the EMA/base then chances are it's just going to grind lower.   Never buy the grind lower on these type trades, always wait for the panic spike.

New positions

Update, added DO to swing book.   3 longs, 2 shorts, net long.  With today's price action we are going to play it safe.
Update II:  sold a few GS, SWN, DO into the ramp this afternoon to lock in profits and go back to net neutral.
Update III: Sold GS swing flat, stopped out just over breakeven.   Sold DO for 1.8% profit, Sold SWN for 1.5% profit. Covered IWM/SPY short basically even (20 cents profit in one, 20 cents loss in another).

Flat.  Back to daytrading.




As scary as it is here we've initiated a few market shorts against the resistance points we wrote about a few days ago, so far  all small and swing size.   Definitely going against the trend here so no leveraged products and no real size.

Our average now   is short SPY 117.85 and IWM 70.36.   We're also long GS (in from yesterday under 153, pulled swing stop this AM when we added shorts in order to stay hedged) and SWN swing size.  Two shorts, two longs.  No leverage.

Why so hesitant?  Breadth very good today, strength all around, and we think now SPY could run to the intermediate resistance 120.   However, we had planned a short into this area for a while and want to at least follow it, albeit small and hedged.    Breadth is too good for any kind of reversal today so this is not an immediate satisfaction trade.    As we find long swing set-ups we will add those to the book going forward.

Next Focus

As we wrote in our newsletter tonight our focus for tomorrow is the very juicy short setting up SPY 117.6-117.8 and IWM  70.5

We're not too pleased with futures down .7% tonight -- always preferable for us to short the pop rather than chase price down in a market that has been as strong as this one.    Let's see if we can get a post FOMC rally into our resistance areas tomorrow.  

If the market stays weak all day then we'll have to re-assess to come up with an alternative plan.  We already listed one short on break of support in the newsletter and will look for opportunities in that direction if market shows signs of weakness.

As we wrote this morning in our StockTwits account "Traders we know who would never touch micro-caps are now all over them. Entering fume/giddy stage -- be nimble."   We feel that if the giddiness can continue into our short spots (SPY resistance less than 1% away from today's close) then a quick reversal will be coming.  If we go down tomorrow and base around these spots then the consolidation will take away from the set-up: we like shorting resistance into extended runs into resistance -- if market consolidates under then it becomes more of a long breakout than a short resistance trade. 

If you plan to take any action on our thoughts first think about what kind of trader you are and what kind of time frame you have.  We're very active traders who look for the best risk-reward opportunities that we can spot.  Even though we are looking short for our next big trade we had 8 long alerts trigger today (and we were long all day long but went into cash into the close).  Our next focus is the big short coming up but we will always defer to our set-ups (we also have multiple long alerts for tomorrow that we would take if they set).  We have our opinions and thoughts but we always defer to the set-up.  

If you're a swing trader it's quite possible we'll get our reversal, cover,  and pat ourselves on the back, and you won't have noticed too much action in your portfolio.    Know your time-frame!


We look for spots that we feel have edge to trade against:  this could be a target trade, a break-out trade, a support long trade, a resistance short trade, a short break-down trade -- whatever spot catches our eye as having good risk-reward.    We usually hit it hard and get out at least a portion relatively fast (reason we like liquid stocks).

Earnings season has begun, major resistance is around the corner, bulls pushing the limit with third-rate micro stock runs, and the USD is getting close to support.  All this means lots of trading opportunities for active traders.  Buckle Up!

Buy the first test of support, never the second

Our veteran subscribers have read this line literally a hundred times in the last four years, "Buy the first test of support, pass or short the second test".     We love buying support if it's the first time it's been tested in a long time (for example over 2 months).  However if support is tested again within a short time-frame (less than two weeks) then it automatically becomes a short alert.

As we wrote about VMW this morning before the break of the 50SMA -- it's not good risk-reward to buy the second test of support (or major moving average) when it comes so close to the previous one.

All the examples here are similar pattern.   Monday tested 50SMA and bounced.  Wednesday tested 50 SMA again and broke down.

Target Trades

Most of our trades fit in the following categories:

1)  breakout of resistance long
2) breakdown of support short
3) resistance short
4) support long

but we also have one more strategy we like to use called a "target trade".   If you've followed this blog for the last four years you've seen us make this trade countless times -- most recently on XME 53 and GS 148.5.

Basically a target trade means you take a position well under the actual alert with the conviction that the alert will at least trigger.    You don't know whether the break-out will fail or be successful but you do have conviction that it will at least trigger.

To make this strategy work well you have to make sure several  conditions are met:

1) the alert spot is very clear and has many eyes looking at it.

2) done in a benign trending market

3) you're buying in a range-bound base that is not extended and has support near-by (so you have a natural stop relatively close by on a swing basis). 



To look at specific examples look through the XME GS links above but to sum it up -- here's an example:

Stock HCPG is basing very nicely under 50 -- it's come close to touching that number several times and you have had an alert there for weeks.   The market acts well and the sector to which HCPG belongs has been acting strong.  The stock is not extended.    You have a good feeling that 50 will trigger -- however it's becoming a crowded trade and you know there's a chance of break-out failure.  You have conviction that 50 will trigger but you are not sure whether the break-out will work or not. What shall you do?   Get in before.  So you buy a swing position at 47.89 within the range of 46-50 with a stop under 46.    If you are a new trader we recommend just having a pre-defined stop.  If you've been doing this for a while then we recommend the same as what we ourselves do, and that is to trade around the position in order to be able to withstand pain and not get chopped out.  If the market weakens, put on short index hedges. 

The next day market gaps up and stock HCPG makes a fast run for 50 on the opening bar.    If the set-up is excellent and the volume is significantly above average, and it's a sector move, then if you wish you can add to the position and move stop up to above break-even.    However most of the time all ducks do not line up and what we prefer to do is to take some off into the number to lock in profits.  Why?  Because our conviction was about the stock actually hitting the alert, not what came after it.   This is what we did on XME 53 (which worked well since the breakout actually failed) and this is what we've done on GS 148.5 ( a move we've telegraphed for our readers for the last 6 days on the trend-line break).    Remember that once the alert actually triggers your primary goal has been met -- therefore after a trigger, NEVER let the trade become a losing position.   

Remember -- spots which are technically very clear serve as magnets -- in our experience they almost always trigger.   What happens after they trigger however is much less clear.   

It's a strategy that works very well if you're patient enough to use it only when the conditions of the trade are met.

Daytrader tip: In extremely benign trend days with excellent breadth what we also often do is to simply go through our alert list and buy whatever is close to triggering.  Why?  Because alerts (based on support and resistance), act as magnets.   Hop on the steel ball rolling towards the magnet, take some off when magnet meets ball.

The Mighty Goldman Sachs

Update:   we are selling some of the swing position into this BoJ market ramp and taking a more conservative position.   Moved stop up to today's lows to protect profits (146) and are going to try to sit on the rest of the position until at least 153/200 SMA.  Sold more 149.8, moved stop up to 148.5 break.


We posted this chart last Wed -- writing that we would go long on any trend-line break.  
We are swing long GS and have traded GS long every day since the trend-line break (usually pair trade long GS/short BIDU or long GS/short TNA). 

Nice move from trend-line and now basing under 50SMA/148.5 resistance which has been tested three times.   This is a defined range with very good risk-reward.    We have a good entry and are comfortable sitting in anticipation of the break-out.   What if it weakens?  We would reduce size on a move down through the 100 SMA and 142.5.  Why wouldn't we bail completely?  Because if GS weakens we would add TNA short hedge.

      GS important stock for the market -- keep these levels on your screen going forward this week.

The strategy of adding a hedge is an excellent tool for keeping you in a trade that you like, but that is causing you short-term pain.  For example we came into today long GS, seeing the weakness on good breadth we daytraded short QLD TNA in order to stay long GS and follow our plan.  We covered the shorts but left the long GS position intact.  If we go through 113.2 tomorrow we will do the same -- but probably with enough size this time to make us net short.   Why?  Simple -- the more times support is tested, the weaker it becomes as the buying pressure wanes with each test.

If you love a plan and don't want to be head-faked out then do short-term hedges around your position in order to stay in the trade.   

Market Talk

Updated chart. Copper stalled at resistance, looking for pullback to at least first trend-line (yellow).   We'd only be buyers of a pull-back to the trend-line at this point and would not engage in any potential breakout trades.

On Friday we wrote "Note the change in the angle of descent -- usually a sign that a short-term bottom is near."  Watch for this to unfold this week and to repeat what we said on Friday, if you're heavy long in commodities, not a bad idea to take some off the table.

If we do get a bounce in the USD then of course it will be a good test of our favorite commodities.  As we noted in our newsletter this weekend there are a lot of names in the sector that are setting up but many are extended -- any pullback and base here would make them much stronger.

We haven't had a sell-off across all sectors for a while -- the pattern has been one of rotation.   We'll see if today will be any different and whether any money rotates back into tech.  We will also be watching less dollar sensitive sectors such as financials (we're long GS swing which we would take off in any strong breadth selloff).   The bulls aren't going to feel any fear until we get a broad sell-off across the board with no rotation.

The following two charts exemplify the rotation that we saw coming in September.

The Nasdaq hasn't done anything in 10 trading sessions.   Will money rotate back into it now as the USD finds its footing?   Our guess is no -- tech is dead in the water until at least earnings season.

Meanwhile look at the move in the drillers in the last 10 trading sessions.   Text book rotation. 

 



We have no interest in tech names at these levels as we still find them much too extended for good risk-reward.   However if there is a sell-off in tech we would be looking at some support spots in the near future, for a trade.

We plan to go in more defensive mode this week and wait for earnings season to make any aggressive longer-term bets. 

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.