Two "G" ideas for next week

The best two ideas we have for next week are swing long $GS and $GDXJ.  Both these names have been recently on our radar, as posted on change of character tweet as it lifted off the 200SMA on Tuesday and $GDXJ trend-line break that we have been patiently waiting for all week.
Here are the updated charts:

The 200SMA held and this financial king is starting to act better — we like the recent action and think it’s a good swing candidate on the break of trend-line/50 SMA which are almost aligned near 162.

We always have an eye on this gold miners juniors ETF as it is, in our opinion, the best technical ETF out there.  We were hoping to get in near 37.2 for entry and hold for reversal back up to the trend-line but it never pulled back to that area.  We like the recent basing  and like this as swing long on break of trend-line.

Oil and Gas

Our readers know that oil and gas has been our favorite sector to trade for a while. Most of the charts in the sector though have rallied significantly in the last little while and are quite extended. Here are a few that are on our screen:
Let’s start with a driller that actually is under-performing:
We like RIG 74-75 on support, or on breakout of trend-line on strength. Anything in the middle we’ll leave alone:

The next six charts all belong to refiners/marketing sub-sector.
HOC is our favorite (and we got long on anticipation of trend-line break on Friday and are holding). Next resistance is 60 and 62. Great chart.

VLO beautiful bounce from 50SMA. Nothing wrong with this chart but a bit of basing under recent highs would make it look even better (and give us an entry!).

FTO similar chart but more extended from 50SMA. Very strong, and looks like it wants to get out of this recent range asap. Too extended for us to swing but active traders will probably be interested in 29 for a quick one.

WNR a bit more messy and no clear spot yet but a few days under 17.5 would set it up.

TSO made our newsletter after Japan for a target trade to 26 which worked great. It’s now regained that area and looks to be grinding higher. Too extended for us to get involved.

SUN the strongest of all and has already broken out. Very impressive but too late here for our style.

The next charts belong to the sub-sector of independent oil and gas:
Nice basing here under 78 for NFX– this could be a nice one if it can sit for a few more days.

Similar chart here for DNR to a lot of the refiners, again, too Vish for us, needs to base.

OXY trying to lift off from 50SMA. Not a bad swing right here with stop under 50SMA.

Nice action PXD as it lifted from 50SMA, again decent entry right here with stop under Thursday low.

Chop Chop

Many sectors stalled or reversed at resistance on Friday.  Expect some choppiness ahead as market decides its direction (bull option: digest the move and plow ahead; bear option: bounce over, back down to lows).  Considering recent resilience of the market bias is firmly with the bulls until proven otherwise.

 SPY reversed at trend-line

QQQ reversed at 50SMA and trend-line

We posted this chart a few times last week expecting a move and pause into this area.   Basing under would be healthy in order to set up a new move up.

DBA big move from 100SMA into 50SMA and now pause.

The BEST technical ETF we follow -- GDXJ bounced again perfectly on the 200SMA right into trend-line and now basing on 100SMA.    It could retrace 50% of the move and still be bullish.  Beautiful chart.

SLX we had charted last week as a move from trend-line to 50SMA -- here it is and now pause.  Again, any basing here would be healthy. 

Our favorite sector right now is Oil and Gas -- note how it's basing under trend-line.  We're expecting a breakout soon from this area. 

KOL has also been hot -- we're basing near recent highs.  Any digestion here would be very healthy for the upside. 

Bottom or dead cat? Too early to tell but enjoy the move.

What do these all have in common? They broke through their 50SMA, found support on the 100SMA and now are lifting up to go visit the 50SMA. None are technically healthy, yet anyway, but all look like they want higher. If the tech move is for real, we should get some nice clean spots in the near future. If it’s not for real, then the 50SMA should prove to be resistance. Considering the resilience of the market advantage goes to the bulls. $NVLS $QCOM $SPRD $RVBD $SWKS

All look like they want at least to 50SMA and all look like good daytrade shorts on first test of 50SMA

Support/Sector

Without a doubt our most profitable support long trades have been when a whole sector hits support simultaneously —
Networking related stocks are on our radar for a group bounce — points of interest are horizontal line on charts:
$CIEN $JDSU $FFIV $JNPR

Rationality #Fail

Odds of a nuclear core meltdown are estimated by scientists to be 1 in every 10,000 years. That’s very interesting especially in light of the fact that we have had 3 at least partial core meltdowns in just the last 50 years. This is the kind of statistic that makes us shake our head at such mathematical estimates based on a purely rational approach. Of course anyone in our profession will instantly see the parallel between the utter failure of the scientific estimate regarding potential nuclear disasters and the utter failure of the estimated risk of financial meltdown in 2007. Statistically both were nearly impossible and incredibly unlikely. And both are occuring in a very regular time-line. What becomes very clear is that complex systems defy rational mathematical estimates of risk.

We were pondering these thoughts last week when our intelligent friend Alex recommended reading Richard Bookstaber’s A Demon of our Own Design. Fantastic book — here are a few quotes:


“I believe the markets can better conquer their endogenous risks if we do not include every financial instrument that can be dreamed up, and take the time to gain experience with the standard instruments we already have. Just because you can turn some cash flow into a tradable asset doesn’t mean you should; just because you can create a swap or forward contract to trade on some state variable doesn’t mean it makes sense to do so. Well, in the efficient market paradigm it does. . .But in the world of normal accidents and primal risk, limitless trading possiblities might cause more harm than good. Each innovation adds layers of increasing complexity and tight coupling. And these cannot be easily disarmed through oversight or regulation. If anything, attempts at regulating a complex system just makes matters worse….Rather than adding complexity and then trying to manage its consequences with regulation, we should rein in the sources of complexity at the outset.


Simpler financial instruments and less leverage make up a painfully obvious prescription for fixing the design of our markets. These modifications will lead to a financial marketplace that will be apparently less finely tuned and less responsive to investor needs. But, like the coarse response mechanism of the cockroach, when faced with the inevitable march of events that we cannot even contemplate, simpler financial instruments and less leverage will create a market that is more robust and survivable”

Daytraders: Hang with your own kind

We read an interesting article a while back by Kid Dynamite about the benefits of seeing opposing viewpoints. The article was well written and made sense for his trading style as a swing trader. However, all we could think about is how the exact opposite is true for daytrading. Once again, time frame changes everything.
At our stage of the game all the technical matters are automatic. We know our setups, we know exactly what to do in terms of risk management, it’s become second nature. What’s left is all psychological. The quality of our set-ups is consistent, our risk management is stable, so what’s left is all mental.
As a daytrader you have to make instant decisions within seconds and when you are putting that much money on the line in a split second decision you will rarely have 100% conviction. The money at risk for a swing trader’s typical 8% stop can easily be equivalent to 50 cents for a typical daytrade. It’s notoriously easy to get talked out of a daytrade position. Daytrading is much more instinctual than swing trading, and the less rational thought that goes into it, the more psychological it becomes.
This is one of the biggest drawbacks of a chat room that has traders who use different trading strategies: you mix in every color and in the end you’ll get an ugly brown. This is the reason that the traders we follow on stocktwits all have similar trading styles, we want the confirmation, we do not want dissent. If we’re in a trade it’s because it fulfilled the required conditions (set-up, risk/reward) and the last thing we want is to question the trade.

Trading Strategies

We have four different strategies based on daily charts that we commonly use:
1. The first is the one most familiar to traders and that’s the “break-out”. This is a trend-following strategy. It works well in trending bull markets.
2. The second is the “break-down” and it is also a trend-following strategy. It works well in trending bear markets.
2. The third is buying support, a reversion to mean strategy. This works well in markets that are correcting but still in longer term bull trend.
3. The fourth is shorting resistance and is also a reversion to mean strategy. This works well in rallies within longer term bear trends. This strategy can however also work well in range bound markets or nervous markets.
In addition to these strategies (all based on daily charts) we have three intraday strategies that we have created over the years that work in conjuction with the daily strategies: the base and break, the Indy, and the overshoot support. The first two are used in the trend following strategy, while the third is used in reversion to mean buying support strategy.
Here is an example of a typical break-out: BHI breaks out of congestion over 72.

Here is an example of a typical break-down: JDSU will probably hit some stops through this support base of 20. This strategy hasn’t work well for a while as buyers have repeatedly bought the dip; where stocks should typically die, they instead reverse. We are not interested in breakdowns at this point.

Here is an example of the third strategy, buying support within established longer term bull trends: CLF near 80 would be supported by the ascending 100SMA and daily support and would get us involved long:

Here is an example of the fourth strategy, selling resistance within established bear trends, OR in nervous markets. QCOM short 55 would most likely be good for a daytrade short as there is strong resistance at that level. Note that we always buy the first test of support and short the first test of resistance. After that we don’t get involved. This means we would expect the first touch of 55 to work well as a resistance short, but the second test to quite possibly be a successful breakout.

Of course there are also many nuances that come from the intraday set-up (for example we don’t buy support if it is basing on it instead of a vertical panic move towards it, etc) and many smaller points one has to keep in mind when trading these strategies. However, this is the skeleton of how we have traded over the last 14 years, and will most likely trade until we retire.

Late night thoughts

$ES_F is bobbing up and down with the Nikkei as news reports have become more optimistic in the last 4-5 hours. The first big reaction of this market is going to be completely correlated with the headlines and Japanese market reaction. If they can bring the power online and gain hold of the situation, market will bounce. If they fail to do so in time and situation deteriorates we will see more selling. Pretty simple stuff. However what will come after that initial reaction will be much more complex, not headline driven, and much more difficult to game.
We’re in for some turbulent times. Stay smart, don’t chase and whatever you do, don’t panic to the downside or the upside. And if you feel like you don’t have an edge then just stay out. There are worse things that can happen than staying in cash in once in a decade type catastrophic event.

Market Talk

We wrote in our newsletter last night,

“Today could very well be a short-term bottom but we’d be surprised if it were “the” bottom. Why? Japan, the 3rd largest economy in the world, is effectively paralyzed and the risks of contagion to an already fragile world economy, in our opinion, are not priced into the current market prices, off just over 1% from pre-Japan crisis. Nevertheless we’re not going to overthink this and as always, trade the charts. But it is something in the back of our head making us more conservative towards anticipatory breakouts and swings.”

And indeed, today two daytrade breakouts triggered and both worked for daytrades but would have failed as swings. Until the flow of news slows down this will be a daytrader market. As our readers know we love buying panic — but when we do it’s rarely when the market is reacting to real-time geopolitical events/natural disasters (and most panic moves down aren’t — usually it’s a follow up of an event that already happened, a cascading of fear versus a real-time reaction). And on the rare occasions when we do get involved on reaction to real-time news, (we were buying the panic on the BP disaster), it’s when the event is more finite and contained. Macondo could have gotten worse but it never was on the same level as what is happening now in Japan. We don’t know how the situation will develop and what the fallout will be, but we won’t be involved until the possiblity of a full blown core meltdown is off the table or at least we see a real crash (down 2% not good enough for us to put on the risk, $ES_F 1224 would probably tempt us though as that would be flash crashy). In sum, for us it has been more profitable to buy panic when the news is already in and we’re only dealing with investor psychology than when the market is fluctuating based on real-time news.

Our layout -- E signal

We often talk about the tools of the trade in our newsletters.  We've gone through a big change in the last week and wanted to update our readers.   We've been trading with QT/IQfeed for many years as Esignal did not have a simple column that we needed for our type of trading, the volume percent.  The volume percent shows what percentage of the average volume a stock is printing at any given time.  For example if by 10AM EST your stock volume percent panel is showing 40% this means your stock has very heavy volume as it has already printed 40% of its average volume (we usually use 30 day average).

A recent turn of events:  it was decided by its owners (AMTD) to let QT die a natural death.  It will not be maintained any longer and when IQ feed comes out with their new update, QT will most likely not be able to function properly.  We needed an alternative before this happened.  Last week we downloaded and played around with multiple different software platforms (Investor RT, Sierra, Ninja, TradeStation, ToS and E-Signal) and found E-signal to come closest to what we were looking for (plus we had been with E-Signal many years ago so it was still familiar).   Fortunately at this time E-Signal was also rolling out their new updated platform, E-Signal 11.   Guess what -- E-Signal 11 has the capability of adding volume percent as a study, which then can be added as a column indicator.   We added this function today and have everything we want.

E-Signal is faster than QT, has a cleaner more intuitive feel, the charts look nicer, it's not as buggy, and now has the volume percent!

Note the 6th tab is the one we custom added (we sent out the code to our subscribers in today's newsletter to cut and paste into their platforms). 

Our conversion is complete.

On one monitor we have different watch lists split into sectors:

Momentum (think LULU BIDU CMG OPEN), Tech, Ags, Coals, Financials, Oil and Gas, metals, ETFs, etc
On another monitor we have linked 3 min, 5 min, 15 min, 60 min and Daily charts to all our watch lists. 

Typically, the Esignal policy is a "30 day money back guarantee" in which you pay on day 1 but if you cancel within the first 30 days, your credit card will be refunded.  However they offered to waive the fee completely in the first 30-days ($129) as long as you are a new customer (or someone who has not used eSignal within the past 12 months).  Exchange fees will apply however (you will need NYSE Nasdaq at the minimum for $10 a month) and mention HCPG to our contact rep.  

If you would like to try eSignal, please contact Andrew Mui at 1-800-322-1510 or andrew.mui@interactivedata.com and mention you were referred from "Highchartpatterns.com" or "HCPG".  Through a special arrangement with eSignal and HCPG, he will give you a FREE month of eSignal (Exchange fees will apply. Other restrictions may apply) without any payment upfront.  This offer is NOT available through the website nor from any of the other representatives at eSignal.  


Many thanks to Ken who wrote the code : (EFS script for volume percent ).  Here's the exact instructions on how to get it set up on Esignal 11

Oil and the Market

We're coming up to a point of inflection in the market as the USD is getting hammered on a daily basis, crude is over 105 and Brent over 116.   Something has to give soon.  The only way, we believe, the market can regain its upside momentum is if oil lets up.  With oil above three digits expect what we have been experiencing in the last 2 weeks, as illustrated very well by the following chart, nervous chop.  Nevertheless considering how much the market has run from the March 2009 bottom,  it's a testimony to its strength and the stickiness of its trend that it hasn't given back more with the significant sudden rise in crude.    A fragile economy just starting to recouperate and $100+ oil is not a good combination.   The economy can handle a crisis induced temporary rise but can it handle these prices (and the coming food price hikes) on a longer term basis? 

When we trade the ES these days we do it alongside CL_F.  The inverse correlation has been very strong the last few weeks and until this subsides, active traders need to have crude front and center of their screens. 

Trannies

Real panic in the trannies today as the oil rally finally caused some real selling in the sector.  In fact we can't remember the last time we saw so much blood in this sector.    Support at 89 finally stemmed the bleeding.

This chart belongs front and center of your screens -- 89 now is big, symbolic level.  Don't underestimate the importance of the trannies for market health.

Support Trades still working

We have been wanting these alerts since last week when Ags started selling off and they have been in our newsletter for days.    Big reversals on ALL our support trades that triggered today.   We were involved in all of these and tweeted the Ag buys (and CMI which we included in the basket) right at the bottom today in stocktwits.   We sold all of them for profit but not as much as we would have liked, but we did get a bit of revenge with XME as we got back in after the SPX headfake lower (while Trannies held -- as we tweeted real-time, that was bullish).

These are all the triggered alerts from the HCPG newsletter last night.  Arrows represent alerts. Epic reversal in the Ags.

A few were overshoots (we have a whole strategy around support trades and when they only grind instead of panic move down, we go to overshoot mode).  If you don't know what we're talking about read about it here:  Overshoot strategy

Don't confuse buying support with buying a falling knife.  Our best trades over the years have come not from breakouts, not from shorting breakdowns, but from buying support.  

All of today's lows in the following now represent "line in sand" areas, also keep eye on today's low on XLF (50SMA) and IYT (89 support).  


AGU our alert was 86.5-87 -- perfect.

CF 127.2-128 overshot as panic completely took over -- incredible reversal.  The most consistent strategy we have in our arsenal is to buy when others are panicking (not news nor earnings though!) as a whole oversold sector hits support. 

MOS we liked 77.5-78, overshot to trend-line.

POT 164.7-165 was our area to watch.

Wrote in newsletter last night to look for reversal on CMI in the 98 zone on gap fill.

Trend line bounce.  69 was 50SMA but we wrote in newsletter last night that we liked 68 more for overshoot.

Tells and EMA talk

These wide range days are often very good for forming "line in sand" lows and highs on key stocks.   Let's take a look at two on our screen:

FCX held 50 today -- keep this important stock on screen as tell to see if it can hold 50 in the next few days.   Next support 48.

AAPL sliced right through trend-line but bounced on the 50SMA.   First touch since September/2010.  If the 50SMA fails, next support is 325.

 Daytrader Talk:  very classic move here as SPY gapped down, bounced hard until it hit the 20EMA.    Market lost momentum and down it was again -- very good risk/ reward short strategy on descending EMA (and for longs of course ascending EMA)  if stock has travelled a good distance to hit it (and as such is extended).   Entry would be against EMA with stop on high above.   If you want to go long then wait until EMA flattens out and stock overtakes EMA but never buy against descending EMA. 

All eyes

All eyes are on silver futures right now (spot trading up 5%) and tomorrow all eyes will be on silver stocks.   Insane move up and continuation on the breakout over 31.  If you're not already involved: at these levels in our opinion there is no good risk/reward trade anymore.   If you want in long, wait for consolidation/base/pullback.  If you want to short....wait for what you perceive to be a blow off top reversal, then get in with stop above.  We have no interest on the short side -  there are easier trades out there than to short this panicked freight train. 

Crude futures up 6%.  Notice how the previous geo-politcal ramp (Egypt) was given back all back (on WTI, not Brent).   However, we think this one will have more sticking power aas Libya is one of the top ten exporters of crude in the world.   Imagine what will happen if this middle east storm spreads to the big leagues, i.e. Saudi Arabia.