Oh the suspense -- the XME test

Note the test and success first of the 50SMA in Jan 2011, then the test and success of the 100SMA in March 2011, and now the test of the 200SMA in June 2011.

Note the first test of ascending SMA has a much better chance of success than the next tests (if tested in short period of time).   The third test of the 50SMA failed and the second test of the 100SMA failed.   We like first tests on ascending SMAs, but not so much the subsequent ones (unless considerable time has elapsed).

Click to enlarge:

We have no position currently in XME — possible overshoot if SPX goes for 1240-1250.

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Our plan for next week

We took a mid-sized position near the close prices on QQQ IWM SPY but with the understanding (and lots of room in buying power) that market could gap down/sell-off a few percent into 125 SPY on Monday.     So why did we buy?  Because there’s a chance market doesn’t gap down and we wanted to be involved, and we liked the XLF hammer.  So why didn’t we go in with bigger size?  Because the evidence is quite mixed and major trend-lines and support levels often serve as magnets — basically, it’s too risky to bet anything big right now.  Even if we gap up we would have zero regret for not taking on larger size.   Note also we didn’t put on any leveraged product (no TNA, SSO, no futures) as we want to stay on the conservative side.
We wrote on Monday night “we think ultimately this market will at least go test the trend-line which currently is lining up with the 200SMA around 125″ and it’s coming even sooner than expected.     Note how trend-line is slightly below the 200SMA.  We’d love a) bounce before 200SMA to leave out all the dip buyers who didn’t get in today and were waiting for the 200SMA or b) a move through the 200SMA to freak out everyone and then bounce on overshoot to trend-line just under it.

And what if trend-line can’t stop this falling elevator?  Well, next support is near 122 — but unlikely we will get there without experiencing some bounce, even if it is a dead-cat intraday or 2 day bounce.

The QQQ very similar — trend-line support, and then major support right above 50.7
QQQ close to 200SMA — however, note the awful action in AAPL — good possibility that the 200SMA will not hold.

One of the brighter notes — XLF off the lows on Friday.   Good start.

Copper technically broke down but then rallied back to close near 405 support again.

GDXJ another bright spot as it held firm during the market downturn.

We’ve been asked for long-term predictions from some of you — we don’t have any.   We don’t believe in long term technical analysis.   The charts can look one way but then the market has two days contra-trend and the whole picture changes.  Right now it looks like we will test the trend-line, bounce, and then go through and test the major horizontal support (122 SPY, 50.7 QQQ) but again a  rally  could change that picture drastically.    The price-action is bearish but it’s too oversold for us to put on break-down shorts — however we will be active in resistance shorts on any bounce.    We think this coming week will bring a lot of fire-works — absolute key between those that make a fortune and lose a fortune is buying power.   If you start slow and add only at major levels (no margin, no leveraged products) you can often catch very nice reversals.  If you start too soon, add too soon, most of the time you will blow out before the reversal comes.
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The only chart that counts

This is the big kahuna — ideally we’d like a slight overshoot of the very watched 200SMA into the loving hands of the trend-line from March 2009.   Nothing goes straight down but that trend-line test seems like a given.  In our experience the first test of the trend-line is often a great risk-reward long.  The second test, not so much.

Click to enlarge

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Respect the Lights

Modern civilization demands abstraction, and money is the ultimate signifier.    Most of our interactions are removed from reality.     This distancing effect is a common part of our life.  We buy an iPhone and all we think about is the dollar price, we don’t think beyond  the money — about the life of the person who actually helped construct the phone at Foxconn.


We buy our meat from companies that do everything they can to distance you from the idea that what you are eating was actually a live animal that was butchered.  It’s not even called “Cow part”, it’s called a Rib-Eye, another distancing effect.
The distancing effect is even more exxagerated for traders.  Money is already an abstraction, for traders it’s taken to a different level where money becomes an electronic number, green and red, bobbing up and down like in a pin-ball game.    Compare this to a carpenter who works for an afternoon, makes $100, and goes home with the money knowing what bills the money will pay. Every hour that passes he knows that he has pocketed another $25.     The connection is tangible.
Back in the bubble days (tech bubble, 1999) I was in a car with a buddy prop trader, going out for dinner, driving too fast down the highway.   We got clicked by a ghost cop car halfway down the route and my buddy was stopped an issued a ticket.  He was pretty flippant and I’m sure the cop was happy to give him the $250 ticket.  We drove off and he laughed, “Ha, I made that much in the first two minutes of the day”.   He didn’t care about the ticket , he had no connection to money, and incidentally enough, to risk.He blew out in 2002 and we lost touch.
The lack of respect for what you gain and can lose is directly related to how quickly traders blow out their accounts.   What is essential for new traders, especially prop/daytraders, is to make a physical connection between those flashing red and green lights and income.  Basically, what is needed is to try to overcome the distancing effect — to realize that those flashing lights represent hard-earned money and thus do everything in your power to follow the strategy/plan/discipline.    In this business to lose money is unbelievably simple.  On the other hand, to become a professional trader who can pull money consistently out of the market is quite difficult.  The first step in this quest is to respect those flashing lights.

Our tells and Mixed Market

We’re done nothing more than scalping today, looking for dimes here and there as the action is too mixed for us to bet in any one direction.  On the negative side we hate the action in the silver miners, CMI, and semis.   On the positive side AAPL showing a bid and OIH doing well (thanks to OPEC).
Zortrades showed a snapshot last week of a quick way to look at stocks on his screen — we liked it and borrowed the idea — doing the same but with our own favorite tells:

Quick look at this and it tell us to either stay flat, or go for scalps, and not push our luck in any direction — at least until we get better breadth.

What many are looking for is a trend-day up bounce — that’s not going to come until we get better breadth and a upside revesal on some of the “momentum” stocks (like it or not, silver miners are an excellent tell for hot money).

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A special "Never Give Up" Motivational Poster for Finance Types

Motivational Poster of a come-back kid for finance types:

Incredible power of healing with Time (note– only when combined with sick innovative products led by a genius — usually does not apply to Scam Chinese Reverse Merger stocks )

AAPL circa Fall 2000 after if lost 80% of its value within months:

AAPL 2011

Just a lighthearted post from your friendly HCPG crew who are currently playing around with Esignal’s new Go To Date feature.  

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Looking for a short-term trade bounce on the SPY using the Bollinger Bands as a guide

Many traders look for complex algorithms to tell them when the market is ready to bounce but in reality, all you need is a Bollinger Band.   We usually like to buy support when we have the whole sector hit support at the same time.   In fact, these have been our most profitable trades over the course of our trading career.   However, in some situations, like the one we’re in now, sectors are below support and we cannot rely on that strategy for assessing support buys.   When this occurs we look to Bollinger Bands on SPY for quick trades into the blood.

We closed Friday under the Bollinger Band, the first time since March 16.   As you can see from the last time it occurred it offered a nice opportunity long for traders.

Bollinger Bands are great general tools for ETFs

Let’s zoom out and look for other instances SPY has closed below the Bollinger Band.  Time and time again this simple tool has given great general reference points for bounces.

Ideally we sell off into next support, which is at 129.5 zone, and then enjoy a dead cat bounce.  As you know we believe this is a range-bound market meaning we also do not expect a straight trend down.   However, the emphasis lately seems to have shifted from “buy the dip” to “sell the rip”.

Our range now is between 131.4 resistance (which was the old support gap fill) and 129.5 support.

Please view everything we write in the context of our time-frame as short-term traders.

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Why all traders should watch copper

How many times have we heard about Dr. Copper as a great “tell” for the economy?   It’s on the radar for most longer-term traders but it should also be on the radar for short-term traders.    We’ve said it a hundred times to our subscribers over the years that copper is THE tell on our market screen.   It often leads the market up and down.   Today was a fantastic example as it bottomed at 11:30 bar while the SPX kept falling for another 18 minutes until it bottomed.

Take a look at this overlay of SPY over HG_F

And in real-time, only on StockTwits  (not on WSJ, not on CNBC!)  the call from our esteemed friend Dinosaur Trader.

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Market Damage SPY

We took out 3 major moving averages today, 20SMA, 50SMA, and  tagging the 100 SMA which  finally stalled the bleeding.    From a technical point of view we’re working with damaged goods now.   We’ll spare you the “stock picker’s market, be cautious, raise cash” cliches, but we think we’re in for a range bound grind of a summer going forward.   Oh yes, and this will be  a stock picker’s market, please be cautious and raise some cash. 

Four slow steps up, and one very dirty fast move down.

Daytrader Toolbox: when to short the gap up

We had a lot of spots in our newsletter last night that we liked if they could have waited a few days.  We had nothing that was ready.   A number of them gapped above and proceeded to sell off for the morning.   Reader M.D. wrote to us last night:

“I understand your preference on the market action.  On many setups you write ‘needs a day’ or a few.  What if the market does not play ball, and the alerts trigger tomorrow?  Do you pass on them?  Or if not, how would you play?”

We answered back:

“Then we usually look for shorts on breakout failures, shorts on ES, or just sit it out.”

———-

If the market has run a lot for support to resistance, and there are no alerts that are ready, then shorting a gap up is usually a very good risk-reward trade.   This is very similar to our strategy of  buying the gap down on a market that closes oversold on support.    It has a very consistent win rate and something we recommend you add to your tool-box if you are a daytrader.

Big run from support to resistance — silly gap up on an extended market means good risk-reward short.

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Name of the game is commodity trend-line break

We’re seeing a ton of patterns like the following.   It’s a great pattern for commodities coming off the bottom.  You don’t get the exact bottom but often a nice meaty move.      Here are a few that have already triggered (and have been in our newsletter — strategy was swing long into the break) and a few that have not broken yet for your trading pleasure:
Happy to have the commodities back for a trade  (also note the Ag theme –we like Potash and Mosaic $POT $MOS)

Now or Never (short term)

Things were looking dicey last night with futures down 10.   Market recovered somewhat overnight and the beacon of light was copper which held strong. Even though we’re not exactly experiencing a rip roaring rally it’s a nice move off the lows.   This is a short term “now or never” day — we bounced off 131.4 SPY gap fill and have bounced back through the 100SMA.   All we want at this stage is for a close off the lows — if we can hold the lows then we should get some bullish set-ups in the next few days.

Copper poking its head over the multi-week range — through there and would be bullish.

Very similar pattern on crude — poking its head over the range.   Not enough distance to call it safe but it’s a good start.

SPY filled gap and bounced — if the lows hold we should get some nice bullish set-ups soon.

These are the types of patterns we’re looking for — MOS we posted yesterday on our stream (and was in our newsletter).

Similar pattern on WLT coming up through 120.

Inflection point indeed.   Bears and bulls, press your bets.    Bulls would need to get some distance from these areas in order for buyers to find conviction to bid prices up and bears would need to go through today’s lows.  Once we break the range we expect trades with more “edge” to enter the picture.  Follow us on StockTwits and Twitter.

Resistance points

We had some initial juice in the market with the USD weak and commodities catching a bid on the Goldman upgrade.    However, not too many charts will set-up long until bulls take it up a notch and get it over the following resistance areas:

SPY reversed again on the 50SMA.    A close over would be bullish short-term.   If bulls can’t get it going most likely bears will press their bets.   Inflection point.

Semis barely holding onto 100 SMA — they were holding well until recently and need to pick-up on support in order to keep the bull thesis alive.

XLF rejected again at the 200SMA today — horrible action here but at least would look like temporary bottom on a close above.

QQQ can’t get above 100SMA — again note how traders sold the 100SMA test.

IWM reversed again at 82 resistance.     We should get a distancing from this area soon as bulls/bears press their positions.

As you can see from the above charts we’re at a very important point in the market (short-term).  Both bulls and bears will try hard to press their bets at these inflection points.   We have very few set-ups either way — however we expect that to change quickly once the victor emerges.
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Resolution Coming

As we’ve been writing in the last little while we are in a range-bound market.  This is to be expected:  we’ve lost commodities as leaders, financials can’t find a bid, and star stock AAPL has lost its mojo.   When defense stocks lead, then (for traders like ourselves) it’s a time to retreat and go into hit and run mode.   The market thus far has refused to break-down but it’s in no mood for new highs either.   This means for the most part range bound strategies are ruling as breakouts are sold and breakdowns are bought.   However, this could change soon as we are seeing some “do or die” inflection points coming up.    Let’s take a look at a few examples to illustrate our point:

Coal stocks bounced on support last week but then paused on resistance on Thursday/Friday.   We have our floor and our ceiling — and should get guidance coming up very soon.  Bullish would be a break through resistance as the Thursday high is taken out,  and bearish of course would be break-down through Monday support.    Don’t make any aggressive bets until we leave the range.

FCX which had long been a great tell  is now firmly stuck in congestion.   The 200SMA finally cratered and stock went straight to next level of support and held.  However the rally so far has been tame.    For momentum to return FCX has to take out 50 convincingly and for bears to really get confident 46 has to break.

MCP offers another clear example — bounced on 100SMA but didn’t have the juice to go through 50SMA and stalled.     Bounce from support to resistance is typical in range-bound markets.    This week will be important tell to see if the stock will either break-out of resistance or finally break-down.

AAPL is always on our screen as a major market tell.    Two weeks ago it based on top of the 50SMA and under trend-line.   The “do or die” moment came in which it had to decide whether to break-out of trend-line or crater through the 50SMA.   It picked the latter and promptly sold off into next level of support.  Again, we got a bounce and again resistance (50SMA in this case) stalled the momentum and stock returned down.    We’ve reached the “now what?” point and will be watching with interest (but no position).   Will AAPL get its momentum back and break through the trend-line or will sellers hit it over the head and take it through it’s recent low?

Until we get answers for our questions our strategy will belong to the range-bound toolbox.  As we wrote last week, we will be shorting any move to resistance post trend-day up, and buying any move to support post trend day down.    If stocks can break through the indicated ranges then we will change accordingly back to continuation strategies (buy breakouts, short breakdowns).  But until then, it’s scalp city.

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The trade we probably would have taken and a few thoughts LNKD

We’re not sure how realistic it is to “imagine”  how we actually would have responded to the trade but we’re pretty consistent in how we trade so this is probably a good version of what would have happened.    At first we were very grateful for not having short shares available  (108-122 would have been very painful for at least a few trades) but then on reversal post 122 we were cursing not having shares available to short.   Would the profits from the post-reversal pay for the losses of the 108-122 run?  No idea.  This is just a fun exercise.
The run from 108-122 was incredible considering that it was not a short squeeze.   Lesson here: never underestimate people’s greed nor stupidity.

Click to see notes 1-4:



Glad the market closed and we don’t have to imagine pain/pleasure in it anymore (for today at least).  And for those young bulls who think that old-schoolers don’t understand the new paradigm of social media…. you’re wrong.  Earnings are still earnings.   We learned that lesson the hard way (via fiber optic stocks) back in the last tech bubble and now you’ll learn your lesson in the new social media bubble.     There will always be a few standouts (Amazon a great example) but our feeling is that this isn’t one of them.   Either way, short term, whoever bought the open won big time.  Kudos.

Further Reading:  nice short rational piece on LNDK run today by Paul Kedrosky here

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Prepare Accordingly

We think that the USD bottom is here to stay for a while and this is a game-changer for the market.  The commodities, and silver specifically, had been market leaders — they will not be able to regain this role with a strong USD.    We’ve gone from a trending market to a range-bound market.    This isn’t necessarily a bad thing (for traders anyway) but it is necessary to change one’s strategy accordingly.


This means we’ll be less focused on trend strategies ( break-outs/break-downs) and more biased towards reversion to mean strategies (shorting resistance and buying support).    Of course there still will be break-outs here and there (we already have a few tech spots we love) but it will be more of a stock-pickers market going forward.  We also believe it will be a less forgiving market going forward.


Our general strategy in range-bound markets is to buy support the day after a trend-day down, and to short the pop into resistance the day after a trend-day up.     As always with any bias/strategy, we’ll do it until it doesn’t work, and then re-assess.    As an extra bonus this is occurring with the coming of summer which means when we see no edge, we will shut off the computers and take off to enjoy the sun.

As we tweeted yesterday:

Yesterday was trend day to resistance which means today you short the pop and cover into the dip.    Look not for home-runs, but base runs.

SPY over 134.7 resistance overshot into 135, and then right back down to 134 support.

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The Last Stand

We hit multiple support levels today in the market — and all that happened was that bleeding was stalled and we closed flat.    To put it clearly, we hit the 50SMA on the SPY, the 100SMA on the IWM QQQ and the mighty 200SMA on SIL USO.   Usually when multiple support levels hit we are salivating over buying support.   Today we felt no such excitement; we scalped long AAPL SLV OXY and went out by the close.

What is somewhat strange about today is that when we have multiple support lines hit on the ETFs we usually have a ton of stocks hitting support — we had very few for today.  We’re not sure what’s going on but we don’t feel hungry for stocks right now.   It all feels dead catish — as if bounces now will only set up shorts.    We hope we’re wrong, we prefer strong trending bull markets than ones stuck in ranges.     Either way, we will obey whatever the market does — if market rallies we should see some longs set-up.   If market falters, a few shorts we already have on radar will trigger.    But for now, we’re in the undecided camp, leaning biased long for possible few day dead-cat bounce but taking things easy, as we always do when we’re lacking in conviction.

As we tweeted this morning — this is the first test of the 100SMA since last September.     It needs to hold for market for dip buyers to remain confident.

QQQ couldn’t hold the 50SMA yesterday but held on the 100SMA.  MoMo leaders here act awful and need to turn around for bull momo to stay afloat.

Higher low on silver today and SIL held the 200SMA.   If any continuation tomorrow, this will be our focus tomorrow for daytrades long.

SPY held the 50SMA and could bounce to 134.   However, right now there are just not enough bullish set-ups to convince us that this would be anything but a dead cat bounce.   Again though, we’d love to be proven wrong.

USO held the 200SMA — but our feeling is that the USD bottom is in short-term and it’s going to be sluggish for commodities going forward.

Please note that everything we write about has a short time-frame.  We are primarily day-traders but sometimes hold for 2-3 days.  Always keep that in context when reading our posts.

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A market in need of inspiration

Our interest in trading this market has dropped off a cliff in the last week.  There’s no more silver tops nor Osama tops to short, nor falling silver miners to catch.     The hard edges are gone and what we have now is a range stuck in congestion.     Here are a few levels that would inspire us to trade actively (we still do trade every day, just a lot less and with less size) again:

ES_F has two areas which would shake things up — through new highs or first trend-line test near 1300.    We’d be buyers of FIRST test of trend-line.

The second more major trend-line is near 1230.  We hope it doesn’t get there but technically market is still in an uptrend as long as the major trend-line holds.

OIH is one of our favorite ETFs to trade — and it’s a complete mess right now.    We’ll probably have some shorts set-up in this sector soon and nothing long until 136 area.

AAPL also is one of our favorite tells –   two big levels are the trend-line break which is fast fading, and 316 support.   Nothing in the middle interests us too much.  Special kudos to @gtotoy for his post earnings short in the stock.

SLV is a complete muddy mess — again no interest here until at least first test of 30 (and then 28).

And here’s the game-changer, the USD.      Extended market, very oversold dollar — prepare for a trading range stuck in congestion.

One of the keys to survival as a trader is  hitting it hard when you have an edge and then retreating to a more passive state when you don’t.    As always we’ll take scalps here and there but we would need to break out of the recent range for us to take on any trades with substantial size.

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