Commodities, you're dead to us

We’ve been commodity/tech based for what feels like years and for the first time in a while we had zero commodity alerts in the newsletter.   Every set-up we like right now is outside of this space.   We’re not calling for further death but what we are seeing are a lot of charts that have no edge.  We just have no interest in commodities right now which for us is pretty amazing.     We’ll regain interest if a) there is much deeper death and we go to next levels of support or b) they regain strength and set-up long

We wrote yesterday that if you bought silver major target was coming up on both SLV and SI_F 50SMA.   Silver went through the 50SMA average by 40 cents last night and reversed sharply today, currently down 5%.   We have no interest in silver unless a) it bases around 39.5 and forms a long on daily or b) goes crashing down to 30.   Everything in between is no man’s land.

We’ve shown this chart of copper quite a few times — looks horrible, nothing for us to do here.

These wide moves up and down usually are indicative of tops.   No interest in crude.

Overshoot of 100 SMA on the OIH,  bounce back to 100 SMA and down again we go.  Again, no interest here until a) much further death, possibly to 200SMA or b) it regains strength and sets up long.   Right now no man’s land.

We’re always buyers of first test of support, and this happened on FCX last week.  Now it’s second test,  we’re not touching it.

So the million dollar question is does the commodity complex drag down the whole market or do we find rotation?   Right now the answer is leaning towards rotation as tech, and especially semis, look very strong.

Semis are looking healthier than they have been in a long time.

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Rail MoMo

Rails have already broken out or are setting up — sector is leading and looking hot.   Here are four that are on our radar:

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When knife catching is not knife catching

 We’ve tweaked this strategy as the years have passed and here is quick outline of the main points of sector support buying:
1. For the most part we prefer to get involved with ETFs over stocks, or at least put the size on the ETFs and smaller size for the stocks.    This type of trade boils down to confidence, and for us it’s much easier being confident in an ETF than a stock.

2.  This one is very important — it can’t just be one stock hitting support, it has to be the whole sector.  The more stocks hit support at the same time, the closer you are to a bounce.

3.  Best time to add is the day after a trend-day down.  The sweet spot for buying support is in the morning sell-off after a trend-day down.  That’s when the best bounces come.  However sometimes market ends at the lows (this is what happened to miners on Thursday) and then gaps up on Friday.  This is the reason we partial in on different days, because it’s very difficult to time the exact bottom.

4.   Best support buys are when it’s not on fundamental news.  For example we wouldn’t buy support on cloud stocks after bad earnings. Period.  We stayed away from buying the dip after Japan nuclear crisis because we couldn’t “game”  the situation (too bad, bounced great).   But buying “margin pukes” is probably the BEST time to buy support as there is no change in the fundamental scenario.

5.  You don’t anticipate this type of trade, patience is key.  You have to wait until there’s blood and then partial in — and never all in on one day.    It’s all about buying power and allocation — you have to give yourself concrete levels for adding.  As long as the rubber band stretches past support, you can add.  Once you’re in overshoot territory your adds will lower your cost basis and eventually your target will be your first entry at initial support.    The first target of overshoot is always the first support.  For example let’s say you want to get into an ETF called OO.  The sector is deeply oversold and many stocks in the sector are hitting support at the same time, similar to what happened here.   You start your first partial at 50  which is long term support, and add near the close at 48.   You’re now in overshoot territory.   Next day it opens at 46, and you add more.  Sector starts bouncing.   Since you’re in overshoot the  primary exit for first partial now is the support that you first started buying, 50, but your cost average is now 48.   However, it can also happen in which we are not “feeling” it and do not wait until target and take the profit earlier.   Either way, once you get the bounce, your stop automatically becomes the low, no matter what.

6. The exit plan if things go badly:   if the stocks start basing over the next few days, then you need to start lightening up and taking losses as any basing diminishes the rubber band snap back effect.   As said, once the bounce comes that low becomes the stop.   If the bounce is not enough for you to get out of your positions profitably and you go back to the lows then you will have to take the loss, which can be quite significant.   We hate to jinx ourselves but, to date, after 14 yrs of trading, this has never occurred in which we bail on the entire position without a bounce for significant losses.   There is always a bounce in ETFs.    However, what can  occur (and has happened to us in which we have scratched the trade or gotten out with some damage) is that you get out on the initial bounce but with losses  when sector  bounces weakly and you feel like it’s your best chance to exit before your position goes back through the lows.

7. One last thing:  for 90% of our trading we will not go into a trade unless we feel that our risk reward is around 3:1.   This means if we risk 1 point we expect to make 3 points.  This is very common for traders and is a very sound strategy.   This means that even if you’re wrong 50% of the time, you still are profitable due to the 3:1 ratio.     However, for this particular strategy this is not the case.   Sometimes  our profits are less than how much our unrealized losses were but we still consider it a good trade.  For example, let’s say we start buying on support and add on overshoot.  At the lows we are down 40K unrealized.   Sector bounces and we get our first target and start partialling out, bounce stalls and we exit everything for 20K profit.   Now most traders will tell you this is not good trading as you were down/risked 2x more than your profits.   However, it’s the way it is in the strategy and we haven’t been able to change it — what makes us override this red flag is the extreme consistency of wins the strategy yields.    The only time we can endorse a strategy in which the risk is more than the reward (for example 2x) is when the strategy has an incredible win rate.    Again, this could be a turn off for many of you, and that’s understandable.  This strategy is definitely not for everyone.

8.  There are three places where traders often make errors:

a) Getting in too early.   They put on a small position early and then see it become quite red and start adding.  Don’t even start that original position until there’s blood in the street.  Disasters start slowly and this is a prime example of it.  They use up all their buying power and cannot lower their cost average.  When the bounce occurs it’s not strong enough for them to go green and they exit with losses.  This is THE most common error a support trader can make.

A  2% pullback on a strong momentum stock could be a nice entry, but only if you get in on reversal with stop under — we would never use the described strategy for stocks near their highs.   It has to be a fast (the faster the better) deep pull-back, often when stocks are hitting the 200SMA or at least 100SMA.    Even the 50SMA often is not enough for us to enter this strategy (but yes on individual support buys which are very different than what we’re describing here — for those we wait for reversal, buy, and put stop on that low.  We never add and we always have a defined stop).

Additional naunce: we don’t wait always wait for the ETF to hit major support (even though it has to be very close) but the leading stocks in the sector.

b) Buying a broken stock instead of  buying oversold into support on longer-term bull trend.     We would never get into a broken stock just because it’s “cheap”.  In our business nothing gets cheaper faster than an already cheap stock.    When we say we’re buying on “support”,  it automatically means that the long-term bull trend is intact.    If it’s a broken chart, by definition, there is no support.

c) Not waiting for whole sector to hit support.  Probably the main reason we’ve had such consistent success with this strategy is that we simply wait for whole sector to hit support simultaneously.  If you want a recent example look at the charts from last week’s post here.

The ETFs that we use most frequently for this strategy are OIH XLE KOL JJC XME GDX GDXJ SIL SMH QQQQ, and when it’s with the Ags then POT CF MOS AGU as basket.

We’re primarily break-out traders but there is no strategy that has rewarded us more consistently over the years than buying baskets of deeply oversold ETFs hitting simultaneous support while in longer term bull trends .  We hope these detailed notes explain how what some perceive to be “knife catching” is not knife catching at all, but just a good trading opportunity.
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Easy bounce is done, now what?

When we buy support in an oversold chart our first target is always the next level of resistance.   We’re there now in silver and many silver charts.  The “easy” bounce is finished and now it will  become harder to game.   Let’s take two examples (EXK and AG, our favorite two  miners) we highlighted last week from The Plan.

AG shows it most clearly — very oversold move right into the loving hands of support and 100SMA.   Two day bounce into first big target of the 50SMA.   This is where many active traders start peeling off positions.   Now you enter, at least for us, a more difficult  part of the trade.   The only way we’d enter now is if stock consolidated and set-up new long.

Similar action in EXK.   Bounce on support from very oversold levels into first major resistance.   Easy part is over, now comes the grind.

The miners were more “clean” in holding support and bouncing.   The silver futures were much more wild:   overshoot of 34, and then rally back through 34 and to 38, again first major resistance.  That was the clear bounce and probably where a lot of traders took profits.    Now comes the hard part for silver longs, building new bases and new set-ups at these higher levels.

As we wrote yesterday for us the “edge” is gone because the big levels have been hit — if we get involved again it’s for scalps here and there, but nothing that we will obsess over during the nights.  Think of it as a major  car accident.   The persons involved are rushed to the hospital, the most serious injuries are taken care of and the patients are stablized.  But the next step is the hardest,  the long, slow road back to recovery.

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Week Ahead

After last week’s excitement we plan to take it easy tomorrow as we didn’t find too many great spots to trade against for tomorrow.  If market rallies and distances itself from 134 support then we should get long set-ups for later this week.  If we break through the 50SMA we’ll probably be fishing for short and support long set-ups.  As we write this futures are up 7 so it looks like market leaning towards rally.

Note rotation into tech as commodities got spanked last week.  We wrote last week and repeat today — this is one of the sectors where we’ll be fishing for break-out longs.

Trannies holding well and another sector currently showing relative strength.

We’re not big fans of trading retail stocks (for the most part they lend themselves more to swing trading than daytrading) but this is an undeniably strong chart.

As long as silver was making extreme moves (50 top or last Thursday’s plunge ) it had our interest.  However the rubber band has now snapped back and the commodity is rallying (albeit in a very mute manner).   Except for possible intraday scalps (likely long) we’re much less interested now in this metal.  What would change that?  Further weakness into 30.5 area which doesn’t look likely in the immediate future.   We expect at least a bounce here back to 38 support (now resistance) but most likely will not be involved as we don’t feel the same “edge” as we did before.    For the most part if we don’t have a concrete edge/spot to trade against we lose interest.

It’s somewhat curious how few people are talking about copper.   When copper was bullish it was the “tell”.  Now that it’s acting like dead money it’s getting much less attention.  As a rule, tells should work in both directions.   Copper doesn’t seem to want to yield it’s 200 SMA and a bounce here would not surprise us, especially considering how oversold it has become.

If you trade commodities you always watch the USD.    This is the dog that will wag the tail — and right now it’s barking.   We’ve seen the USD try to rally and fail countless times — will be interesting to see if it will be any different this time.  Logical first target is the 50SMA.

As you can note, we don’t particularly feel any edge in any direction right now.   We need a bit more guidance (even a one day rally could change the scenario) from the market and the USD to see how the trend will develop.  Take it easy out there and if you see what we see, then trade accordingly and don’t force trades!

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Trading Thoughts

Wisdom doesn’t necessarily come with old age; it comes through experience, learning, and above all, self-analysis.    The same is true in most professions, sometimes a bad doctor/teacher/plumber stays  a bad doctor/teacher/plumber until he retires.   Two exceptions are sports — if you’re a bad athlete you’ll be cut and that’s that, and trading — if you’re a bad trader you will blow out.    However, the analogy still holds true for everything in the middle ground.  There are traders who are good enough to pay the bills year over year but their PnL never reaches the “comfort” zone.   In our experience there are a few things that can be done to help advance the improvement curve.
1.  You have to analyze your actions.   Trading, like life, is all about patterns.  The newer you are the more analysis you need to do: profit analysis, risk analysis, trading journal.   We did this for years and still keep a PnL Excel graph on a daily basis.  When an anomaly occurs, we write a paragraph beside it to describe what we were doing to cause the anomaly, good or bad.    Writing the HCPG newsletter  for 5 days a week for 5 years is now a form of journal writing for us — it forces us to make concrete what is potentially abstract.   The act of writing lends clarity to one’s thoughts and enables the next stage of understanding.  Starting a blog, even if it’s private, and writing out your trading plan is an excellent method of trade introspection.

2.  You have to be hungry to become better.   Is there any more humbling career than that of a trader?  As the years go by the learning curve flattens but it should never stop.   There is always room for improvment, always.
3.  Having a trading buddy/mentor/community to bounce ideas off  is a fantastic catalyst for advancement.   Many moments of enlightenment for us have come through the discussion with traders of strategies, building upon each other’s thoughts until you reach a new level of understanding.
4. You can’t be afraid to lose.   We read years ago a trader who said: “Trying to avoid losses in trading is like trying to avoid breathing in life.”  Losing money is part of the job, it cannot be avoided.   You cannot trade well if you are in constant fear of losing.    That’s what risk management is for, that is what stops do, they take away the fear and help a trader stand back and let the trade unfold.

5. Once you get the basics of strategy and risk management down it all becomes mental.    For active traders at this stage of  our career it’s all about conviction.  We touched upon this issue in a post a few months ago –  if we start to second-guess ourselves, it’s game over.   Traders know this, and that’s why in a tight trading group it’s a faux pas for any one trader to talk negatively about another’s live position.   It’s the reason we never ask anyone’s opinion about a trade.   If we have to ask then it automatically means it’s not good enough to take in the first place because the idea doesn’t jump out on one — it’s not a no-brainer, a lay-up.   If we had to point to one reason why we’re still around after all these years it’s because we wait for the trades that jump out — if nothing is good enough to trade step back and become a spectator until the next set-up emerges.  Don’t worry,  there’s always a bus that finally comes around the curve.
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Our favorite post of the year (so far)

….goes to Peter Brandt’s  “Cop’s raid the brothel” — part 2

If you haven’t read the post, go read it.  If you’re read it already, go read it again.   Here’s our favorite part:

“first heard this phrase at the CBOT in early 1980 in direct reference to the Silver market collapse…  you will note that Silver topped at 5056, dropped quickly to 3025, recovered to 3970, then was destroyed to 1080 and eventually 4 (that is $4 per oz.) for a total decline exceeding 90 percent.

The reported reason for the decline was the failed attempt to corner the physical market by the Hunt brothers of Texas. Today’s equivilant would be a combination of JP Morgan and the small speculators through the ETFs. The CFTC stepped in January 1980 and hiked the margin requirements. The rest was history.  The real reason for the decline was that Silver had no business being at $50, that Silver is a COMMODITY, and that commodities have boom and bust cycles.

Many, many investors got wiped out by the drop. During a meeting at the CBOT, a member made the statement, “Isn’t it too bad that not only the Hunts got wiped out, but little investors who had nothing to do with the manipulation also lost the family farm.”   To this comment, and old-time trader made the statement…”Well, you must remember, when the cops raid the brothel, everyone gets arrested, even the piano player.” I will never forget the phrase or the meaning of the phrase.”

Love that.  Enough to go download his book tonight for a weekend read.  You can get it here The only thing we’d like to add is that we don’t think the “little investors” were so innocent after all, they were greedy and trying to cash in on the speculative fever.   In the same vein,  the piano player upstairs knows exactly what’s going on downstairs in the brothel.

It's never different, part II

We wrote back on April 16 our post on “It’s never different” which basically stated our case for the coming top in silver.  We added thoughts to the argument in our “Elusive Silver Top“  post on April 21.    Forward ahead a few weeks and we’re 30% down from the highs.
As we tweeted yesterday we started buying GDX SIL GDXJ and stated exactly what we were going to do yesterday in “The Plan“.    We argued the other side this time, that in our experience when multiple supports hit at the same time:

“often two things happen:  1) it bounces or 2) panic overshoots and then bottom forms and stocks run back into primary support. We can’t remember the last time we saw so many stocks hit support at the same time — we think a bounce is coming soon and are positioning ourselves to take advantage of it.”

As evidence for our case we posted 9 charts, the main charts we follow in the sector, and demonstrated how each and every one had hit support.  Today the rally.  We would have been fine to add into overshoots (and had braced each other for significant pain) and had a very detailed plan on where to add and what levels, etc, versus our buying power.  We even had “emergency plans”.

Thankfully it didn’t come to that.  We have already locked in 3/4 of the swing for very nice profits and are holding the last 1/4 possible swing if we can get enough of a cushion (up 2% -3.5% now on last positions).   Our stops now are firmly above our entry.  (update, took the last 1/4 as 20EMA on 5 min failed just before noon, all cash).

Short-term tops are rarely different, but also short-term bottoms are also rarely different.   Both sides work just as well.  We’ve already locked in our best week of 2011 (and put on a lot of real-time trades out there this week, 2 basket daytrades on Wed and Thursday and now this swing).
Trust your experience, but also always have a back-up plan.
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We tweeted our last 1/4 position exit at 11:53 PM once we noticed the 20EMA/5 min failing on our stocks.  If you’re a short-term trader use the EMA.  Blue rectangle is our last 1/4 partial exit and as you can see selling picked up after that.   Might go higher later on but as short-term traders we would have been already been stopped at lower prices.   If you’re a longer term trader then of course it’s not relevant.

The Plan

We tweeted our day but in case you were not following:   we bought the basket GDX GDXJ SIL SLV in the morning and sold everything save SLV (scratched) for nice gains.  We wrote that there could be a head fake and thus the aggressive selling.   We then went flat and wrote several times that we were staying away from SI_F /SLV as the USD rip was too much of a weight on the commodities.  We wanted to get involved in the miners, but not the underlying commodities.   Later in the afternoon we started a small swing position in the miners making clear size was small and it was for a swing and not bottom catching.   We’re currently underwater in all three:  GDX 56.48, GDXJ 36.52, and SIL 24.50.    We’ve being very careful with adds as we think we could easily see another round of sell-off.

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Basically this is the plan: buy the overshoot for a target back into primary support.   It might take a few hours or a few days or more but we like the trade.   We’re again staying away from SI_F/SLV (even at 34 support which had interested us before) and focusing on the miners.  We believe the miners will bottom before the commodity.

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We had a trend day down which is good– as our readers know, the sell-off after a trend-day down in an oversold sector is usually the sweet spot for buying the bounce.   This is our plan going forward:  add on overshoot, take partials on bounce back to support.   Absolute key to executing such a plan is scaling in slowly at different prices.   You add too fast and you will not be able to execute the trade properly.  Don’t worry about catching the exact bottom, this is not what the trade is about (unlike previous daytrades where that actually was our intention).

There are two scenarios that we like and would make most likely make the trade work:   1)  of course the easy one is  we gap up and we go green, that would be nice but not counting on it.   2) on the anniversary of the flash crash, things get, well flash-crashy, and the rubber band stretches even more.   We would be buyers of the next level of support (for example SLW 32.8).  The last scenario is the one that would make us take losses.  No rubber band stretching, small bounce, and then we just base at the lows.   We would probably the loss on this scenario.

GDX 57 we traded yesterday for a great daytrade but went flat before the close.  We’re again in the ETF but lower price (56.50) and much smaller size.   Our plan is to add on overshoot and sell at least partial back into 57.

IVN at 200SMA, again watch for overshoot and then rally back to 200SMA.

PAAS at 200SMA, same plan.

We bought and sold SLW near the close for a quick gain — we like the stock again on overshoot to 200SMA with target back to trend-line.

GDXJ we’re already in — will add on 200SMA.

Already in SIL,  will add on 200 SMA.

AG held 100 SMA into the close, again watch for overshoot and bounce.

SLV to 100 SMA,  again, overshoot and trade back to 100SMA.    As we noted, more volume today in SLV (all time high volume) than in SPY.    30 level big support.

EXK held on 100 SMA, again overshoot and bounce back.

What do all the following charts have in common?  They’re all at or over support.   When a whole sector hits support like this often two things happen:  1) it bounces or 2) panic overshoots and then bottom forms and stocks run back into primary support.
We can’t remember the last time we saw so many stocks hit support at the same time — we think a bounce is coming soon and are positioning ourselves to take advantage of it.   If you’re following us in please be careful with your adds.   Many times traders get the idea right but are not able to enjoy the fruits of the trade due to using too much of their buying power too early.

Review and the Note

Our newsletter consists of 2 parts:  the first is a review of ALL trades that trigger the alerts from the previous newsletter, win or lose.  The second is a fresh list of new alerts for the next day.   We wanted to share with you the first part of the newsletter that just went out to our subscribers:

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We wrote last night that “Our focus tomorrow are the gold and silver miners” and we wish we had remembered that this morning when we kept getting chopped around in everything else. Note we didn’t list SI_F or SLV last night in the support list– the edge we think is now with the miners and not the commodity.   In the afternoon though the miners set-up and we got off a decent trade but everything else was tough.   Let’s review everything that triggered:

CLF we wrote would be “cute” to break 90 and quickly scum to 89.3.  It actually worked very well if a) you caught it and b) you took the quick trade.  After that it grinded down all day.    One thing that came up repeatedly today was our rule of  “buy the first test but never the second”.    First test 89.3 worked fast and well, second test was a complete avoid or short.

UA didn’t come close enough to our 62.5 alert for us to get involved but we wanted to include it to show what a nice support long-set up looks like — see how it’s choppy without an stair step down movement?  That’s exactly what you want.  The stair step down moves following descending EMAs are the most difficult support longs to catch.    Stock spiked down away from EMA into S2 and bounced.

DE we bought on first square and it worked well until it hit 9 EMA, after that it re-tested and stopped us out (second square) and wasn’t enough of a bounce to take partials.    Scratch trade.

WLL bounced on 64 near the open (64.02 bounced 37 cents) but second test was failed.   If you wanted it long after that then the place to do was after the EMAs flattened out (blue rectangle).   It doesn’t always work but if you want a support long trade and missed the bottom, then that’s the place.

We got in near on reversal at noon  near our alert on MOS but took an early scalp exit in it as by that time all we wanted to do was un-do the damage and go green.  We nailed the 200 SMA bounce alert though and know some of you banked coin in this- nicely done.

Here’s the reason we went red in the morning — AGU 83 we tried catching 2x and lost on both.  Finally got it again when it stabilized but just like MOS, by that time all we wanted to do was to go back green and made a hasty exit and  missed the big run.   AGU had earnings out this morning, and had a lot of volume and was just stair stepping down.  We should have left it alone or gone in with smaller size and wider stop.

Up until we hit the miners we kept churning our account, barely green.      Here’s what went down in the afternoon (we put out real-time tweets of entry and exits so hopefully that helped).

GDX SIL hit our supports and even though we didn’t have much confidence left after our morning we thought it would be worth to go small and put some feelers out there.  We bought the basket GDX SIL GDXJ.   As we wrote last night GDX 57 was pretty huge number, with 2 trend-lines and 200 SMA all converging (reason we wrote that miners would be our focus for today).

We bought small near 37 and SLV bounced on 50SMA, so far so good.  Then we noticed that SI_F GC_F was starting to weaken but miners were not.  We thought about our divergence post that started our whole silver short obsession http://highchartpatterns.net/its-never-different/

What got us interested in shorting silver was the fact that the miners were pulling back while the commodity went ballistic.  Today we saw the miners hold their ground while silver made a new low — miners sold off first, they will likely bottom first.   As we tweeted at this time we added to the basket (4x add on position size) as the divergence gave us more confidence.    Trade worked great and we hope many of you caught it.

GDXJ didn’t come to alert but we added it in basket anyway.

Very nice bounce at 37

SIL 25 alert worked perfectly

And GDX 57 even more perfect.

We wrote in the newsletter last night “Our focus tomorrow are the gold and silver miners” and on top of that the last thing we did last night before going to sleep was to write this note (to re-affirm focus) and leave it on the keyboard:

GDX 57  GDXJ 36.5 SIL 25

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Conjecture?

Last Sunday night we were glued to the screen.  Silver had suddenly been shot in the head diving down 13% (!!) while ES_F stayed green, up 4 points.   We couldn’t figure out what was happening but were amazed ES would stay green while silver was being shot dead.    Then the news came that Osama had been killed — we had quite a bit of conviction that the good news (in a very extended market) would be sold.   We quickly put up our Osama Top post when futures were up 12 at 1372 (now down 24 points from that call) and warned in our tweets that we believed that the rally would be faded.
We’ve been on twitter for over a year and  have put out a newsletter 5 times a week now for 5 years.    We respect a lot of pros on our stream  @dinosaurtrader @gtotoy @zortrades @szaman @peterlbrandt  (just a few names among many that pop out — all our 36 follows rock) and for the most part we’ve earned the respect of our followers.     And then once in a while we get tweets like this — which came our right after our Osama top post:


Of course it’s conjecture.  What else would it be?   The best any trader can do is to made an educated guess based on their strategy and experience.    Man….

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Ag support

Back to stocks:
We like to buy support when a whole sector hits it simultaneously (in our experience it increases the odds of success exponentially) –  several of our favorite Ag stocks (POT CF AGU MOS) are looking like they want to test their respective 200SMAs.    Let’s take a look:

MOS is the closest one — we’ll probably try a day-trade there but don’t really expect it to hold for too long.


We like CF near 120 — 200 SMA  and daily support.

AGU is on trend-line now — again, we think this will break and eventually could test the 83 zone.

POT we like 51 for a trade: