Good Vid

Love these vids

Awesome.

Lots of support spots setting up

We'll be looking through our universe for support longs for next week but here are a few that we've been eyeing all week:


GDX through 59 should bring 58 -- we will buy reversal off 58

OIH 122 we love as support long. 

We will buy any reversal off SLV 24.5

Some of our best days this year have been buying panic hitting support -- bring it on bears! 

Update

Update:  Sold OXY swing for 3 points.   Sold XLF for 6 cents. Sold TZOO av 40 cent loss. 
We're short SPY 121.26 daytrade and have covered a portion but will swing if market pulls back.  Stops at breakeven.  
Out of everything -- think best action is done for the day and we'll be heading out into the weekend 100% cash.



We are long 3 partial positions into tomorrow (XLF OXY TZOO) with stops over breakeven -- we expect all of them to get hit tomorrow AM.

Last night CSCO stank up the after hours session, NQ ES were down significantly but copper, oil, gold and silver were all up (copper 2.7%!).  Copper is our number one tell and we couldn't feel too scared with it ripping overnight.  Tonight very different scenario as index futures are down but this time commodities are down even more, many opening limit down with China's open. Last night China was rallying hard on the CPI number.  Tonight it's selling off even harder.
. 

As we've been saying for a while, the US market at this time has been irrelevant.  The bottoms and tops this year have been in the overnight sessions led by China.  CSCO?  irrelevant as market shrugged it off today with ease.   But a commodity sell-off would be much more of a red flag.

Last night we weren't too worried but going into tomorrow with copper down limit, gold, silver, crude hit hard, and Asian markets red across the board, we feel different and  much more cautious.   So what does this mean?  It means we will be more careful about buying dips in case we get a trend-day down. We'll still put out feelers and if support buyers show up, fantastic.   However, for the first time in a while we believe in the possibility that support buyers won't show up as readily.    We also won't be putting bids out at areas we like -- we're going to be more conservative and wait for reversals before entering support with stop under.   Again, switching to more conservative stance.   Hopefully we'll be wrong and dip buyers will show up with the same enthusiasm as they have in this rally.


The first line in sand is SPY 120 -- gap fill and 20SMA.   How easily the market bounces or fails there will be the best tell for rest of the day.   We'll go long ON reversal in that zone with stop under.


There are some support places we think will be hit in the intermediate future SLW 30, SLV 24.5, GDX 58, OIH 122.   We would try all of these long on reversals.

Copper has been our main tell this year.   We're not going to stop ignoring it now!

Transcript

Full transcript of the Grantham interview:  
http://www.cnbc.com/id/40131748/


What I worry about most is the Fed's activity and — QE2 is just the latest demonstration of this. The Fed has spent most of the last 15, 20 years— manipulating the stock market whenever they feel the economy needs a bit of a kick. I think they know very well that what they do has no direct effect on the economy.

The only weapon they have is the so-called wealth effect. If you can drive the market up 50 percent, people feel richer. They feel a little more confident, and the academics reckon they spent about three percent of that. So, the market went up 80 percent last year. They should be spending 2.4 percent extra of— of the entire value of the stock market, which is about two percent of GDP. And that's a real kicker.

You don't see it because of the enormous counterdrag from the housing market— and— and its complete bust. But, it would have been worse with— without this. The problem is, they know very well how to stimulate the market. But, for whatever reason, they step away as the market gathers steam, and— and resign any responsibility for moderating— a bull market that may get out of control as we saw in '98 and '99 with Alan Greenspan, as we saw in the housing market.

And— I fear that the market will continue to rise. It will be continuously speculative. After all, when you can borrow at a rate that is negative after adjustment for inflation, it's not surprising that you would borrow a lot.

BARTIROMO: So, what are the implications of— of this constant easing and stimulation? You know, it— it seems the numbers are so mind boggling: $600 billion here.

GRANTHAM: They— they (CHUCKLE) are mind-boggling.

BARTIROMO: You know? (CHUCKLE) But, give us the—

GRANTHAM: The consequences are you get boom and bust. You— stimulate in '91. You let it get out of control. You have this colossal tech bubble in '99. Sixty-five times earnings for the— for the growth stocks. Then you have an epic bust. Then, of course, they're panic struck. They race back into battle with immense stimulus with negative real rates for three years.

And you get another— rise of risk taking and everything risky— prospered in '03, '04, '05, '06, '07 until we had what I called the first truly global bubble. It was pretty well everywhere in everything. It was in real estate. Almost everywhere. It was in stocks absolutely everywhere. And— and it was in the bond market to some considerable degree.

And that, of course, broke. They all break. That's the one thing they can't control. You can drive a market higher and eventually — of its sheer overpricing, it will eventually pop. And, typically, it seems to pop at the most inconvenient time. So, we're going to drive this one up, and this time there isn't much ammunition. In 2000, the Fed had a good balance sheet. The government had a good balance sheet.

In '08, it was still semi respectable, and— and now it's not. It's not very respectable at all. So, what are they going to use as ammunition if they cause another bubble and it breaks, let's say, in a couple of years? Then we might have some real Japanese-type experiences.

I think the Fed is not designed— to have effective tools to deal with the economy. It should settle for just controlling the money supply. And— if it insists, it can worry about inflation. The way you address a weak economy, particularly very substantial excess unemployment is through fiscal policy. You must either bribe man— manufacturers, corporations to hire people who have been unemployed, which they did in Germany. A lot of economists think that's perfectly effective.


Or you must go in there and hire people yourself as a government. Now, I— I believe in crowding out. So, I— I would never do it unless there was clearly quite a few million extra unemployed. I wouldn't go after too many skilled labor because there's never— enough of them to go around. And that does cause crowding out. I would go after the— what I called lightly-skilled workers.

The kind of people who were building the extra million-dollar— sorry— extra million houses in— in '05, '06 and '07. And find— and find jobs for them. We have an infrastructure that is decades behind schedule.

We could insulate every house in the Northeast. These are high-return projects, great— for society in general. And to— to allow people to sit there unemployed. Their skills are deteriorating. Their family morale goes to hell. And— it's a deadweight on society. And you have to remember when— when the government hires someone, he doesn't pay the full price like a corporation does.

He pays about half price because he pays a lot. He, the government— it, the government, pays a lot for someone sitting down unemployed. All the— all the many ways— that unemployed get— get helped plus— the government carries the atrophying of the skills. Society loses that, the longer they're unemployed.

BARTIROMO: So, what should the federal government be doing then? I mean, the housing industry, for example, missing in action. What is it going to take to get housing moving again? What is it gonna take to get businesses hiring again? If it's not the job of the Federal Reserve, what policy should we be seeing coming out of the government?

GRANTHAM: I think the Federal Reserve has— is in a very strong position to move against bubbles. Bubbles are the most dangerous thing— asset-class bubbles that come along. They're the most dangerous to investors. They're also the most dangerous to the economies of— as we have seen in Japan and in 1929 and now here. You've got to stop them.

The Fed has enormous power to move markets. And it— not necessarily immediately, but give them a year and they could bury a bull market. They could have headed off the great tech bubble. They could have headed off the housing bubble. They have other responsibilities— powers. They— they could have interfered with the quantity and quality of the sub-prime event. They chose not to.

In fact, Greenspan led the charge to deregulate this, deregulate that, deregulate everything, which was most— ill advised, and for which we have paid an enormous price. So, they can— they can stop bubbles, and— and they should. It's easy. It's a huge service. What you do now is— is— I like to say it's a bit like the Irish problem.

I wouldn't start the journey from here if I were you when you ask— the way. You— you really shouldn't allow the— situation to get into this shape. You should not have allowed the bubbles to form and to break. Digging out from a great bubble that has broken is so much harder than preventing it in the first place.

Japan has paid 20 years for the price of the greatest land— bubble and the greatest stock bubble in history. Far worse, in my opinion, than the South Sea bubble or the tulip bubble in many ways. The land under the Emperor's Palace really was worth the whole state of California, which is quite remarkable. But, we spent quite a few hours checking it, and it seemed to be true. And the price they paid— to dig out of that has, of course, been legendary.

And we better hope that we don't pay anything like that price. But, that is a risk. It's not— it's not certain that we will escape— without several years of— sub-average growth and— and stress to the system.

BARTIROMO: So, are there policies that the administration could be implementing?

GRANTHAM: It's really Congress. If Congress is bound and determined to— interfere with any proposed stimulus, then— we’re going to have a nice experiment and that is to see how the natural, recuperative powers of the economy stand up to this stress. I think it will probably muddle through. But, it won't be pretty. I— I don't think it will necessarily go backwards. But, it will go forward at a very sub-average rate. And I think that's the course that— would have to be recommended now is— it would be much better if Congress would shape up and— and do some sensible— stimulus program from here.

And it would be sensible if the Fed recognized it doesn't have that— that power, and— and get out of the way. Cranking out the printing press irritates all the foreign countries. Why wouldn't it? It's manipulating the dollar downwards. It's causing inflationary fears.

It's causing— commodities to go through the roof. Not led by gold by the way. Gold has gone up almost exactly the same in the last year as all the other metals. Everything is up. The commodity index in a year is up 35 percent. A weighted average of everything. And that isn't oil because oil is slightly less than that.

But, it is— a very dangerous situation. And it risks currency wars. If we're seen to be pushing down the dollar, when on technical terms— and fundamental terms, I should say, the dollar looks already pretty cheap, and we're clearly driving it down by aiming to increase inflation and— and swamping the system with money, why wouldn't— emerging countries take defensive action? And all of them are.

So, we're already in— in a— in a currency war in a way. It's a mild one, and I hope it stays that way. But, a currency manipulation is exactly the same as tariffs. It's a bit easier to change, a bit easier to back off. But, it has the same effect on global economy if we get into a currency war as if we got into a tariff war, which characterized the period after 1930 when the Smoot-Hawley Tariff Bill was passed. And— and— and they're talking about that even as we speak in— in— in Congress.

BARTIROMO: So, while so many people are talking about the Chinese as far as manipulating their currency, you say the Fed is manipulating these markets?

GRANTHAM: They are. And— and— and China is, of course, manipulating its currency. And it would make life easier for everybody if they would allow the currency to rise a— a little faster. But, it— it certainly weakens our hand enormously to go there and— and shout at them angrily when we're clearly doing the same thing. And this is what the— the German Finance Minister— the point he made two days ago.

BARTIROMO: Yeah. Let me ask you about emerging markets. You recommended an overweight position in emerging markets back in 2000 when not many people were talking about it. And, obviously, it was dead on, the right call as we've seen a huge move in the emerging markets. Do you think there's still room to run in the emerging markets? Or is that becoming a bubble?

GRANTHAM: Incidentally, the emerging market since— 2000 is 3.3 times the S&P. So, every $100 you have in the S&P, you would have had $330 starting from the same point in emerging. And after that incredible discrepancy, which by the way says the main event in investing should be getting the big picture right. It's nice to pick stocks. But, how many good stocks do you have to pick in a whole portfolio to equal that incredible move between the biggest asset class in the world, U.S. equities, and the third or fourth biggest asset class emerging markets?

It— it's these movements between the great asset classes that make you money. And I'm happy to say that that's the group that, GMO, I work with— asset allocation where we are students of bubbles. And— and— and, basically, financial history. It's a very entertaining job, I might say, which has made me forget the question.

BARTIROMO: The question is do you think that is now becoming overvalued? Is there still room to make money in emerging markets?

GRANTHAM: I'm pleased to say two and a half years ago, I did a quarterly letter called the Emerging Emerging Bubble, and I argued that in the following five years, the case for emerging would be seen as so crystal clear— that it could not possibly help but outperform and go to a premium PE. Now, up until then, they had always sold at a discount. Sometimes a substantial discount.

But, I — the case is this, they are growing at about six percent real. Six percent plus inflation. We are growing in the developed world at about two. Before '95, there was no difference. Before 1995. And now it's three to one. My argument two and a half years ago is what a simple bull case? You want to grow? Buy emerging.

You want to be conservative? Buy utility companies or the blue chips of— of— of the developed world. If you're going to grow at six, you're— you're— it is very appealing that you would outperform a world growing at two percent. And the developed world is slowing down. I— I say it has an incurable case of middle-aged spread.

It's just been there, done that. It's a little old. It's a little pastured. Doesn't have the population profile. Emerging does. And they have the attitude, and they have good finances. And— and they're really showing— a— a clean pair of heels to the developed world.

Now, it turns out that you— it's a bit more complicated. You don't actually find a strong correlation between— top-line GDP growth and making money in the market. It— it seems like you should. The fastest-growing countries should give you the highest return. They simply don't. But, there's only four of us— that— that believe that story. Everyone else in the world believes that if you grow fast like China, you'll outperform in the stock market.

And so, I'm reasoning two and a half years ago, everybody will think this way pretty soon. And surely— emerging countries will go to a big premium on— every dollar of earnings that they make. And they're beginning to. But, I think they've got at least a few years left. The bad news for us, because we're fairly purest value managers for mainly institutional clients, is we don't like to play games with overpriced assets.

And that's the world that we're in now. The Fed is driving the S&P, which is overpriced— the Standard & Poor's 500— a broad measure of the U.S. market, is driving it from already substantially overpriced into what I would call dangerously overpriced.

This is about the boundary line. We expect on a seven-year horizon one percent only plus inflation from the U.S. market. And now, as you push it up another 20 percent perhaps in the next year, it becomes dangerously overpriced. A bubble territory and ready to inflate to considerable pain. That's what we have to worry about.

So, you're caught between, if you want to become conservative, you've got to start taking— counteraction now. If— if you want to go with the flow, don't fight the Fed as they say— you should be prepared to speculate on very nimble feet. It's not our style as a firm. But, I think it's— probably a game that you could play with a pretty good chance of winning for— for a few more quarters.

BARTIROMO: A few more quarters. But, at some point— or is it today— would you be recommending selling into the rally?

GRANTHAM: Our institutional clients— sell very gracefully into this rally. We've already started to sell. We're not even— averagely weighted. We're modestly underweighted. And you must remember bonds are even worse than stocks on a seven-year forecast. So, you get caught in this paradox. It's very tempting— and this is what the Fed wants by the way.

It wants us to go out there and buy stocks, which are overpriced because bonds they have manipulated into being even less attractive. So, we’re being forced to choose between two overpriced assets. That is not always a terrific choice to make because there is a third choice, and that is don't play the game and hold money in cash.

And cash has a— a virtue that people don't appreciate fully. And that is its— its optionality. In other words, if anything crashes and burns in value— say the U.S. stock market, if you have no resources, it doesn't help you. If the bond market crashes, and you have no resources, it doesn't help you. And what cash is is an available resource. It buys you the right to buy the U.S. market if the S&P drops from 1,220 today to 900, which is what we think is fair value.

You then have some resources if you have some cash. There's another complexity and that is that we believe that the old-fashioned, super blue-chip franchise companies like Coca-Cola [KO  62.80    0.25  (+0.4%)   ] are also much cheaper than the rest of the market. So, if someone put a gun to my head and s— said, "I've got to buy stocks. What should I buy?" I'd say, "Buy two units of the Coca-Colas. They're the cheapest group in— in the equity world. Buttress it with a fairly large dose of emerging markets. They're a little overpriced. But, they've got potential. And— a lot more cash than normal for opportunities should the bubble blow up."

BARTIROMO: What about commodities? I mean, clearly, the story of China and the demand coming out of China has boosted all sorts of commodities. Is that bull run still in place?

GRANTHAM: I have an eccentric view on commodities not necessarily shared by my colleagues or by— almost anybody. And that is we're running out of everything. I think it will become devastatingly clear to everybody. I— I think we went through a great paradigm shift about five years ago and— we'd spent a 100 years with almost all commodities declining. Perhaps oil was about flat in real terms, adjusted for inflation.

But, everything else was declining: copper, corn, and so on. And, now, you look back five years later, you can't see that clearly at all. A lot of them seem like they've been going up for 50 years, a 100 years: copper— iron ore— tin. But— and— and— and oil. Oil has clearly broken out. It spent a 100 years at $16 in— in our currency until 1974. And then it doubled when OPEC started and it's been 20 years trading around 35, plus or minus a lot.

And then I think it doubled it again, and I think the trend line is probably about 75. So, the world has changed. We're entering a period where we're running out of everything. The growth rate of China and India is simply— can't be borne by declining quality of— of resources. And— and I think we're in a period that I call a chain-linked— crisis in commodities.

So, it'll be a crisis in rice. It will triple and it'll come down. But, then— then it'll be followed by one in corn and— and barley and so on. And— and copper will go up a lot, and then that will come down. But, oil will be in crisis mode. From now on, we just better get used to it. So, if you're afraid of inflation, I think— and if you can bring yourself to have a long horizon— and when I say long, I mean ten to 20 years, not the usual ten to 20 weeks— that locking up resources in the ground is a terrific idea.

Or locking up— timber, agricultural land will do just fine. A great inflation hedge. You will win, in my opinion. Very high probability over a long horizon. Now, have these things gotten ahead of themselves in the short term? Quite possibly yes. And that— that's what makes investing so tricky. If they were to break for whatever reason at all in the next year, I— I would suggest that is a great buying opportunity.

BARTIROMO: And—

GRANTHAM: To— to buy here is to trade off the long-term high prospects of winning with quite a reasonable chance of— of— of buying at a— a— a short-term peak.

BARTIROMO: So, is there value in some of the commodities producers? The equities?

GRANTHAM: If they have stuff in the ground. If they're just processors, forget them. Shoot them, in fact. Because they're the people who will pay the price of constantly having to raise their prices paying more for their raw materials. But— if they've got stuff in the ground. The oil industry since 2000 has doubled against the stock market. They didn't double because they got brilliant.

They doubled because oil in the ground became worth four times what it was. And that is a wonderful thing for an oil company with good reserves. But, the same if you had mineral reserve. That— that's the play, I think, on commodities.

BARTIROMO: It's extraordinary that people are putting so much money into such low-yielding, fixed income— products. And— ignoring dividend payers, which of course in equities are— are even more competitive than— than the yields that you're seeing. You're seeing no yield in— in fixed income. Is that a bubble?

GRANTHAM: I— I don't call it a bubble because it's not— it's not driven by huge animal stir— spirits. They're not doing it to sell it at a huge profit. They're doing it because they were severely frightened— in the great crunch. It was a devastating event. And it could have c— turned out much worse than it did. It— it should have frightened people. It did frighten people and they'll still frightened for quite a while.

And what the Fed is trying to do is to make cash so ugly that it will force you to take it out and basically speculate. And in that, it's very successful, of course, with the hedge funds. They're out there speculating. Finally, the ordinary individuals are beginning to get so fed up with having no return on their cash that they're beginning to do a little bit more purchasing of equities. And that's what the Fed wants.

It wants to have the stocks go up, to make you feel a bit richer so that you'll spend a little more and give a short-term kick to the economy. But, it— it's a pretty circular argument. For every dollar of wealth effect you get here, as stocks go from overpriced to worse, you will give back in a year or two. And you'll give it back like it— like it happened in— in '08 at the very worse time.

All of the kicker that Greenspan had engineered for the '02, '03, '04 recovery and so on was all given back with interest. The market overcorrected through fair value. The housing market that was a huge driver of economic strength and a— actually masked structural unemployment with all those extra, unnecessary houses being built. All of that was given back similarly at the same time. It couldn't have been worse.

BARTIROMO: What are you expecting from the economy in 2011?

GRANTHAM: (Sigh.) I'm expecting 2011, 2012 to— and— and 20 as far as I can see to be less handsome than it used to be. I think we— we're on a trend lying growth of about two percent. And— I think we'll muddle through— quite well. The problem is in the not too distant future, stocks will be too expensive and they'll crack again. Risky, fixed-income will be too expensive and that will crack again.

And unless we're lucky, we will have yet another crisis without being able to lower the rates 'cause they'll still be low, without being able to issue too much moral hazard promises from the Fed because people will begin to find it pretty hollow. Cycle after cycle, the Fed is making basically— is flagging the same intention. Don't worry, guys. Speculate. We'll help you if something goes wrong. And each time something does go wrong and it gets more and more painful.

And, eventually, even— even— fairly unintelligent investors might get the point that this is not a good game to play indefinitely. I am impressed, however, how eager we have been to return to the game. We got a— a practically mortal blow, and, yet, everyone was back in there swinging last year. It wasn't just that the S&P went up 80, which I did call by the way. I said it would race up to 1,100. And— but, it was speculative so the— the junky part of the market went up 120 percent. This is a formidable— recognition of what the Fed can do when it wants to.

BARTIROMO: What about the dollar? Where do you see it?

GRANTHAM: The dollar is on fundamental purchasing power— it's a— a fairly cheap currency. And— as long as there's QE three, four, five and six, you'd have to bet that it's more probable that it will go down. Now, if it stirs up— a currency war, all bets are off. We haven't had one since the 1930s. We— who knows how that will play out? That's one thing that can completely change the game, and— and— very hard for me or anyone to guess what that would do.

But, if we avoid that, I think you have to count on the dollar being at least irregularly weaker until we finish the Q game, which is ma— basically just running a printing press and using it to push down artificially— the bond rate. And let me point out that the Fed's actions are taking money away from retirees.

They're the guys, and near retirees, who want to part their money on something safe as they near retirement. And they're offered minus after-inflation adjustment. There's no return at all. And where does that money go? It goes to relate the banks so that they're well capitalized again. Even though they were the people who exacerbated our problems.

And, hopefully, the redeeming feature in that infamous trade is that your corporations go out there, borrow money, build factories, hire people, which they're not doing because consumption is weak and because they were also terrified by the crunch. I— I think, therefore, under these conditions, low rates is actually hurting the economy. It's taking more money away from people who would have spent it —retirees — than are being spent by passing it on to financial enterprises and being distributed as bonuses to people who are rich and, therefore, save more.

So, I think it's a— a— bad idea at any time and a particularly bad idea now.

BARTIROMO: So, final question here. What are you recommending to institutional clients today? How— how should they be investing?

GRANTHAM: We recommend a very heavy overweight in— in the great franchise companies: the Coca-Cola’s [KO  62.80    0.25  (+0.4%)   ] , Johnson and Johnson's [JNJ  63.92    -0.03  (-0.05%)   ]. I'm not recommending those two names. They're just examples. We're recommending a modest overweight in emerging, an underweight— in everything else. Extra cash reserves and— patience. But, I think if you're willing to speculate, you might find that this is an interesting one more year to speculate.

BARTIROMO: And—

GRANTHAM: But, be aware the ice is thin. It's overpriced. It's a dangerous game. Don't believe that it's somehow justified. It is not justified by anything except the crazy behavior of the Fed.

BARTIROMO: You said, "The ice is thin." In terms of these cracks, how significant a crack would you expect when, in fact, we do see a crack?

GRANTHAM: The trouble with bubbles is when they go, it's very hard to know how painful it will be. But, typically, they go racing back to fair value. So, if this market goes to 1,500 in a couple of years, by then, fair value might be at 950— 950 is painfully below 1,500. And by the time it gets there, the mysteries of momentum in— in the market— everyone likes to go in the same direction, and they shout, "Fire."

It— it's— usually the case that it doesn't stop at fair value— 950. So, it might go to 700. And— and you're talking another market that halves. It halved in 2000, and we thought it would by the way. We predicted a 50 percent decline. It halved this time in— in '08, '09. And I think it might very well halve again if it gets back to 1500.

Fantastic interview with Jeremy Grantham

Grab a cup of tea (no milk) and spend 30 mins watching this vid

Position update

As we posted yesterday we are long TZOO in anticipation for 37 breakout.  We took some off into the rally today but keeping most of the position.

OXY was a target trade to 86 from last night's newsletter (and we posted the chart this AM on StockTwits) and it delivered well as it set up Indy a point under that and then went 2 points over.  We're long swing for new 89 target. 

XLF was a newsletter support long from a few days ago.  We bought XLF yesterday on the test of daily support (partial still left from 15.08 buy).   We're swinging the position again into tomorrow.

We fortunately have cushion in all 3 positions -- stops are above breakeven for all three.

Market Talk

Tomorrow should be interesting as CSCO stunk up the AH session with uber-lame earnings.  We'll be watching the leader techs to see if they can hold up (NFLX AAPL AMZN BIDU -- even a flat session would be a win).

CSCO 20 has some serious support -- we'll be buyers of FIRST test on that level.

SMH 29 retest would get us long.

GDX held that 59 support today but we think it's a matter of time before it tests 58 --we're buyers of first test of that level. 

Love SLV 24.5 zone -- we're buyers of first test of that level. 

 We're buyers of first test of OIH 122.

IYR reversed somewhat on trend-line as it held yesterday.  Next visit on the trendline though and we think it will go give the 50SMA a kiss. 

We wrote that we'd be buyers of the 15 re-test in our newsletter last night and posted this morning that we were long on the re-test.  We took off some of the position in the afternoon but are still swing long XLF.

Day Trader talk

We've talked about "comparative analysis" before in our posts.   Divergence between SLV GDX today was a fantastic example of this, coupled with parabolic chart and massive historical high volume.

SLV running like mad up over 5% at 1:10 PM away from base/EMA.

Meanwhile what was GDX doing?   Basing on EMA/R1 (where we covered the morning short on first touch of support) with no reaction whatsoever on SLV hysterical move.   At the time we believed GDX told the real tale.    This is information you need to jump on as an active trader. 

I trade Size. 

A vid every active trader can relate to

Great home-made vid from Zero Hedge

I trade Size

A few ideas

We simply have too many financial alerts (six in this weekend's newsletter) to think this XLF breakout will not continue.   However, XLF has already had a large move from the breakout zone and some consolidation is needed and welcome.    We'll be buying dips in the XLF.

DRYS setting up under 5 but needs time as the move from the bottom has been vertical.  Basing under the 200SMA would be healthy.

Add that 46 alert so when AIG is ready, so are you.   

Two triggers from this weekend's newsletter (CREE 55 and DO 70).  We like them both for swing if we can keep a nice cushion on them until the close.

We posted CREE 55 trendline alert on StockTwits on Friday.   Very nice break today with intraday Indy setting up as added bonus.

We like the NFLX 165 short spot but have been worried about the 20SMA.  Today the 20SMA was tested (successfully) which means that the 165 short spot just became even stronger.   

UPS 70 has been on our newsletter for weeks --  finally looks like it is setting up.

Benign tape continues with dips being bought aggressively.     This won't last forever;  milk it until its dry.

Potash saga

Excellent article on the details of what occurred in BHP's hostile takeover attempt of POT.  

Potash: the deal that didn't have to die 

Market Talk

SPY has blasted through the 200SMA weekly and doesn't look like it wants to stop anytime soon.  We believe at some point the weekly will be tested again -- the SMA is too important to be taken out so easily in an extended market, but our time-frame as traders is to short for that type of trade.  Also-- even though we see the trade and believe it will work, it's just not our cup of tea.  We're more trend traders than reversion to mean traders.  Even when we buy support its done within a longer term uptrend. 

 As we wrote yesterday our focus today was on the XLF -- its the only sector that was not extended and one we hoped to see continuation from today    We also wrote in our newsletter yesterday that we were looking for further rotation out of technology and into financials -- something which also occurred today.

We have a running alert on QQQQ 55 so we know how far away it is at all times (currently 2.36%).   The 55 number is one of the fundamental reasons we have not shorted swing tech.  Why? 

 Because as we wrote weeks ago -- 55 will serve as magnet.  Why short within a trend that is being drawn to a magnet? 

Weekly on XME looks fantastic -- definitely helped by its gold holdings. 

XME top holdings:

OIH could easily move to the 200 SMA. 

The weakness in tech did not spread to the market as rotation played out and the market ended green.  We'll be looking at this carefully next week to see if tech weakness simply rotates into other sectors or whether contagion will occur.

Very benign tape -- and traders are buying dips ferociously as the "Fed put" and funny money gives confidence to all.   Interesting times indeed.      

Fins, finally.

SPX is extended at year high resistance, dollar in death spiral, techs notable underperformance today but into the close comes the massive financial breakout out of multi month base.    As always, continuation will be needed for confirmation but we'll be looking at stocks in the sector extensively tonight for our watch-list.  XLF is one of the only sectors that is not extended and a rotation into financials now would seem likely if we can get continuation in the next few days (i.e. to rule out today being a head fake).

The Indy: Day trader Strategy

We've been trading a lot lately a strategy we came up with 2 years ago -- we finally got around to giving it a name.  Welcome to "the Indy"; a strategy that HCPG subs are well acquainted with and trade often.  

This is the second day-trade strategy we have come up with over the years.  The first, and any reader of this blog over the last 4 years will know it well, is the base and break. 

The name comes from a description of the strategy in which the stock is being held from above by R1/daily resistance and is slowly getting squeezed from below by the ascending EMA. Indiana Jones would often find himself in similar situations and would always find a way to break out of the impending squeeze, thus "the Indy". 

 

This is a daytrade entry set-up on alerts we have on newsletter from the night before -- meaning we are looking for a breakout on daily.  It is easy for us to catch these type of trades because we are already looking at the stock to break-out.  We usually only look at 5-10 stocks a day for trades -- all the homework is done the night before and mailed to subscribers.   Here are a few examples from the last few weeks.

First you have the stock rally almost to the alert/ R1(or R2) zone and then pull-back. The stock's range is wide as it bobs between the alert and the ascending EMA. As time passes the price pattern tightens up as it waits for EMA to catch up with R1. Once the EMA catches up the the stock is free to break-out. Stop is under EMA/R1 (usually very tight stop which gives you great risk-reward).

Indy can be held from above by R1/R2 or our alert price which is daily resistance.

Very clean example on NFLX:

The risk-reward for this set-up is simply outstanding. 

Nice clean example from today on our alert from GS in last night's newsletter.  Note again the Indy set up against our alert price (but R1 close by and giving support to the EMA).  The important condition is that the stock is being held from above by some form of resistance, be it R1/R2 near alert (alert is always daily resistance) or by daily resistance itself, in the case of GS.

Nice Indy set-up here as stock bases under our alert price (daily resistance) and waits for ascending EMA to catch up -- once it does it's do or die time and usually with set-ups like this, it's Do.   Risk-reward is excellent as stop is always near by (move under the ascending EMA or EMA/R1 if close together).   As stock moves up the EMA moves up also, perfect trailing stop.  We always take profits on spikes up away from the EMA.Entry would either be a break of the base (here 164 break) or on dips to the EMA with stop under EMA.

Position Update

Update: not waiting for stop, closed the shorts.  Why?  USD significant move up, X bad news, and market holding flat while momentum flying.  Why? The increasing possibility of a sideways basing under the weekly 200SMA and break through instead of a pullback.   All flat in all accounts.

As we wrote in our blog last night we came into today short TNA SSO SPY.   Usually we would have covered the shorts into today's gap  down but since we wanted to go long near the open (newsletter long alerts MOS NFLX) we decided to keep them on as hedge, especially since it is only a 1/4 position left and we have cushion in all three.  We are now out of our day-trade longs MOS NFLX and have placed stops on all of the shorts on a move through SPY 119.1

Market Talk

Active traders like ourselves can't really be bears or bulls.  Traders like us just trade whatever sets.  However, we can have a bias, and that bias simply makes us look for more opportunities in a certain direction.   Our bias is now short due to the market going against major resistance on multiple sectors.

However, with the QE2/POMO anomalies we're also very aware we can overshoot resistance.  However any move above the 200SMA weekly on the SPX for the next little while will be treated as overshoot short for us meaning that we would short any intraday extended move with target a move back to the 200SMA.  

Our best days in trading almost always come when we're against a major level of support or resistance.   This is a time when we are aggressive as we have conviction.

We covered a large part of the daytrade but are short swing TNA SSO SPY and will trade around the position accordingly.

Market Talk

We've posted this chart a number of  times over the  last little while at StockTwits-- it shows the importance of the 200SMA weekly on the SPY.    Expect at least a pull-back after the first time we kiss the MA (currently just under 120).  A pull-back and consolidation under the weekly 200SMA should be considered healthy as we consolidate in time and price under this very important zone.    If we do go through without pause then we believe the chance of a breakout failure would increase exponentially and we would adjust our positions accordingly.

What would be an ideal pull-back scenario?  A 50% pullback from the MA and the trend-line which would approximately be 5 points, which would land the SPY at 115, which of course in itself is major support.

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.