Scum and Reversal

 Three charts we’re watching closely for bullish confirmations are $GDXJ $MOS $GS.  What do they all have in common?  Possible break-down failures which would be bullish.  Scum and reversal (go through the breakdown zone and then reverse higher) trap the bears and inspire the bulls.    We need the closing price to make any kind of price-action judgement but keep these 3 on radar:

We wrote earlier today that $MOS was offering decent risk reward on 55 break-down reversal (was around 55.4 at the time) with stop at 55.     A close near 56 would be bullish.

$GS 98 we posted last night we would be short but that a scum/reversal would make us bullish.   The short worked for a point and now it’s hovering under 98.   A close over 98 today or tomorrow could help bottom this financial.    It trades heavy today (too heavy for us to go long) but keep on radar.

We posted this last night as action spot — look how it scummed the lower trend-line and then reversed to stall at higher trend-line.    A move through the upper trend-line could get $GDXJ going and would be nice win for the bulls.

To inspire the bulls you need the closing price to have some distance away from the break-down zone.  A close near the break-down point would not really yield any information/edge.  Two hours to go until the close –  keep these 3 on your radar when doing research tonight.

Not good enough risk/reward

We sent this off to our subscribers (in the newsletter) after the close today:

Usually we’d be in anticipation swing mode right now — that is, putting on positions that we think will hit tomorrow.   We held off as we didn’t like the risk/reward as we found good arguments for both sides.

 

For the bears: 

 

1. We don’t have enough set-ups we love — it really is still slim pickings.  However, once we break through the range this will change fast.

 

2.  The volume is atrocious.  Note how the Euro  ($6E_F) is doing nothing (i.e. not confirming today’s rally) — and currency traders (also bond and commodity) tend to be more “right” than equity traders.     Equity traders running up the market on no volume for a Thanksgiving rally.

 

3.  One of our favorite “tells” , the Ags ($POT $MOS $AGU) , are doing nothing and look terrible.  

 

4. The “solution” to the Euro mess will likely involve money printing so why are gold/silver stalling?

 

For the bulls:

 

1.  The resilience of this market is astounding.   No matter how bad the news, and yields surging in France this morning was pretty dismal, the bulls buy the dips.     This is a huge point.

 

You take all these arguments together and what happens is it puts us on the side-lines.    The risk of a break-out head-fake we believe is too high for us to anticipate anything right now.    There will be easier markets to trade and this certainly isn’t one of them.

Bulls need to prove it this week

This week should be pivotal — we’re right against resistance in many sectors and it’s up to the bulls to take the ball.
$XLF through this down-trend could cause a squeeze (that being said the first attempt on it could be a nice opportunity day-trade short –all about time-frame) .

$SPY going back to the top of the handle — needs to get rocking if it wants to get the juices going for a year-end rally.  Thus far every attempt has been squashed –  again, up to the bulls to prove different.

$XME lagging — still under the range.

Copper $HG_F  still the weak link even though no one seems to care about it anymore.  Needs to get going above that trend-line and 50SMA to get the bulls excited.

Best looking in the commodity region is the $OIH — right at resistance, looks like it wants to be the first to break-out.

Should be week full of opportunities, be it failed break-outs (resistance shorts) or finally some continued bull follow-through.   Buckle-Up.

Fat pig to slaughterhouse or breakout of range?

We’re basing and filling in the handle — the more we test it the greater the chance of a break-out.   That being said everytime the bulls have been excited for a break-out they’ve been smashed over the head, but seasonality is bullish and patterns are looking better.      $SPY 127.4 zone/top of channel/200sma will be the test for the bulls.

Support Long example GDXJ

Excerpt from our newsletter tonight:

We had on a few ideas yesterday for support long ($OIH 120, $GLD 168, $SPY 120, $GDXJ 30.5-30.8 trend-line) and the only one to hit was GDXJ 30.5-30.8 trend-line bounce.

  

GDXJ trend-line bounce on 30.5-30.8 –  sometimes when we have these zones instead of exact numbers it’s difficult to find one hammer to go off of and instead we start partialling into the zone with a pre-set stop (say 30-40 cents).   This is what we did today with GDXJ buys starting at 30.87 and adds at 30.8, 30.6 and 30.57.    Once it hammered at 30.53 and bounced we had an exact stop (30.47)  but before that we were looking at a “bail point” of     around 30.4-30.3.

Of course you use smaller size when you are partialling into a zone because your stop is often wider (we rarely have a 50 cent + stop on a $30 stock).      We use these “partial in the zone” type entries also more often with ETFs which tend to chop around more than stocks and also when market is more nervous as panic often means overshoot.   

S1 (dotted blue line) was 30.8 and we were looking for overshoot into trend-line 30.5 (daily trendline on last night’s chart), hence the zone.  Start at S1, add all the way to trend-line, and if that didn’t hold, cut the loss on the whole position at a pre-defined number.  

You need a pre-defined number before you enter the trade so you don’t freeze and talk yourself out of taking the stop.  

To repeat: adding lower within a pre-defined zone is fine as long as you have a pre-defined stop.   When we started at 30.87 we were hoping very much it would go down to the bottom of our buy zone of 30.50 (but not any further than that .   

Extended from EMA right into S1 intraday support/ and trend-line support from daily.    This is what you want in a support long.   Note that GDX was also hitting 50sma at the same time — the more stocks hit support from same sector at same time, the better the chances of success.

This bounce on trend-line is what we were looking at and happily, other traders noticed it too which is why it worked – you want spots to be obvious enough to be on other trader’s watch-lists but not so obvious to be a crowded trade.  Fine balance.

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Nice bounce but we won’t get long on any other moves back to this trend-line as next time will probably go through.

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New Normal in Currency Movements Charted

Note how previous resistance of ATR (Average True Range) of Euro Futures ($6E_F)  has now become support –  wild moves really are the “new normal”.

EURUSD rip/death

Picture says it all — click to enlargen  $6E_F Euro Futures

This is how we trade reversals

We’re all about looking for a tradable spot for reversion to mean trades, and then waiting for it to hit.    Sometimes it hits, sometimes it doesn’t, but it’s how we trade.
An hour ago we wrote: 
What do we mean buy “buy on reversal, stop under”?   This means that you wait until the stock/future hits your support level and reverses — you buy your number with stop at the low.  In this case the buy was the reversal back to 1710 with stop just under 1707.7
Our first target usually is the 9EMA (in this case 1718 as we posted).    8 point target trade for just over 2 point stop.  Good risk/reward.
That’s exactly how we trade support long/resistance short  reversion to mean trades.  The up-side is that it gives you a defined stop and good odds at a win.  The down-side is sometimes the stock doesn’t hit your level and you miss the trade.

What started as boring night

Yen intervention causing lots of fun and games in the overnight session — here are some levels we have on our radar:


Let’s start with gold ($GC_F):     first support to come is around the 1710 zone.

Next support comes up on daily on trend-line near 1640

Euro Futures ($6E_F) has lots of stickiness in this 1.40 zone.

And last but not least the “widow-maker” as @stockjockey refers to it, $SI_F has minor support — blue line near 33.15 zone.

And on daily more substantial trend-line support — blue arrow near 31.5 zone.

 

The most common pattern

Looking through charts this weekend really brought home the new “correlation 1″ meme constantly written about these days in the finacial blogosphere.    Patterns look very similar across the board.    Here is the most common one we can find:

V type moves like #1  often retrace and have high failure rates.   Moves from more based/rounded bottoms like #2 have much higher break-out success rates.     $XME right now (#3) is very V-sh/extended, stalled near 60 resistance.   Any basing (handle for the V at least) would be bullish and set this up long.    However that being said the momentum is so strong right now that nothing would surprise us but at these levels we’d rather buy the pull-back than new strength.

We’ve entered a very forgiving bullish tape — Euro bailout rumors were everwhere for the October rally and yet when news came out on Thursday, it was bought.   $AAPL missed.  $AMZN missed.  $GMCR and $NFLX massacred.  Yet no one cares. Bulls are in control and it’s their game to lose.

We’re extended and for us the most bullish scenario would be just to hold the line/or even pull-back but not any further rippage, at least early in the week.  And in the unlikely event the bears really start to push then the big gap to fill of course is  $SPY 124.5  as the first signiciant support on daily.

Gold and Silver: Helloooo I'm Back!

Silver ($SI_F) looking like it wants higher as it’s poking out of its range — has room to the 200SMA.

Gold ($GC_F) reversed at 1705 resistance — but looks like it has room until 50SMA.

We wanted $SPY at 126.2 for short and went to 126 in pre-market before reversing.   As for support it’s all about gap fills — 122 and 117.5.

We had $IWM as a short on our newsletter at 74 for days (and tweeted several times)– today it hit the level pre-market and reversed hard.   We see that happening a lot lately — hitting resistance overnight futures/pre-market and not in regular session.   Note that was first test — next test will likely break-out of the range.

Copper ($HG_F) failed break-down last night through 3.50 but through there and has room to 50SMA and daily resistance near 3.65.    Copper has been wild lately and we’ve been staying away — massive death days followed by rip days.   Lots of things going on in the background there and too volatile for us to get involved.

Huge move in crude ($CL_F) that stalled at the 200SMA today.   Lots of congestion ahead — further upside should be tough as lots of stickiness around 95.

MoMo getting murdered left and right ($GMCR $NFLX $AMZN), market extended into resistance:  we’re happy to hone those intraday trading strategies.

Updated Game Plan

Our resistance short spot was taken out in the overnight session. Our $SPY 123.5 short roughly corresponded to ES_F 1230-1233 zone which we wanted to short last night :

The most frustrating part about futures is that some of the best spots are triggered in the middle of the night. Perfect reversal at our 1230-1233 resistance short zone — we loved that spot and contemplated putting in offers at 1230/1233 with stop at 1235 in case it triggered during the night but alas didn’t, and were left with a gorgeous chart that justified our call but no trade.

Note that ES_F fulfilled the SPY trade we were looking for — 100SMA/daily resistance test and roll. This makes the SPY resistance short more complicated and we’ve lost interest in the trade due to it being a second test– but let’s cross that bridge later.

Trend-day down today — and bulls got lots of little cuts trying to buy the dip. Our rule of not going contra-trend on first day of sell-off has saved us countless dollars over the years. The first day of a sell-off often is a trend-day — and going mean-reversion on a trend-day is often a frustrating and losing experience. Stick to the direction of the EMA on trend-days, which meant today shorting the rallies back to the descending EMA.

Bulls were shot down on every touch to the EMA except for the last one, which in turn reversed against underside of S2/15 min-20EMA. Typical trend-day action which kills reversion to mean traders.
We have a lot of decent longs now that are getting ready if/when market regains strength; and $SPY 117-117.5 will possibly offer decent opportunity as a day-trade long.   In between those two scenarios, howeve, we will be mostly chilling.

Game Time

Very bullish close for the market as it easily closed over 122 resistance on the $SPY.   Next up is 123.5 which also coincides with 100SMA, daily resistance and as a bonus, $TLT will likely hit support at same time.  Game time!

Thus far from the October 04 bottom there have been two good day-trade short opportunities; the first was the jobs data pop last Friday, and the second was Wednesday’s 122 reversal.    Will the third be 123.5?     We’ll definitely try it short  (we usually wait for 10 -20 cent reversal before we enter and then  stop on high — and it often takes 2-3 tries to get it right but we always have stop on high –no hero trading).

As for longs we’ll be focusing in the basic material sectors for new opportunities even though the close of the $OIH extended into 50SMA makes us think we’re not going to find too many good set-ups without some further basing.   Melt-up market indeed.

Have a good weekend everyone.

Our time frame is short

We’re realizing, through comments left on our previous post, that there are readers of our posts who do not know our time-frame.   We are primarily day-traders.    If we short a stock at 100 and it goes to 98 we call victory.   If it reverses and then goes to 200, great.  Hopefully we caught some of that too.   Our job is to trade against  levels which we believe will offer good risk/reward, be it short or long.   If we have a 20 cent stop on the $SPY and we bank 1 point then that’s the same to us as traders who have 2 point stop and bank 10 points.
Day-traders who shorted against 122 resistance on $SPY, a level we’ve written about for days, did very well — (after-hours sitting at 120.5).    Number one rule for financial blogs/social media — know the time-frame of the writer.
We have no idea which scenario plays out (hoping for the late year rally one –  but will trade accordingly to whatever happens).     As we posted before the most bullish scenario would be a pull-back/base under 122 and then rip higher.

Watch who you fade

We can’t remember a time where levels worked so well –  anecdotally speaking — it seems to us that market just keeps getting more technical.   Praise HFTs?   Since this rally started we have had only 2 fade spots on our newsletter (and both were posted also on stream) .  The first was to fade the jobs number pop last Friday, and today was 122 $SPY resistance.

Pretty amazing how these “obvious” spots are working.   Also a note of caution for those who we have heard  like to use the stream as a contrarian indicator — we were pleasantly surprised to see the short bias today.    Watch who you fade!


First gap fill is near $SPY 120 and second support is near 50SMA (and second gap fill near 117.25).   Let’s see how much the bears can push.       The most bullish scenario for us would be a fade to around 117.5 to put some fear into the bulls and then a reversal higher out of this range.

 

Hysterical Market Needs to Chill

V type markets can be tough as they don’t let the “wrong side” traders out to breathe — when we went down the poor longs couldn’t get out on any bounce, and now the  shorts didn’t have a chance to cover as we ripped through the 50SMA.     These can be vicious markets for contra-type traders.

Perfect V in $SPY — looking for mini Ws to come next.

However, that being said we had 8 out of 9 alerts (all long) trigger today from our newsletter– often when that happens and we run out of alerts it also coincides with a consolidation period in the market.    V type moves never last — the healthiest thing for the market would be to enter a consolidation period near the 50SMA.    Any such basing would set up many new longs, while continued running would create a higher probablity of a sharp move down.

The easy trade, the fade, and now what

We always regret not calling ourselves “Base Trading Group — BTG” instead of HCPG.   Everything in our strategy circles around how we trade around the base.     Friday was as text-book bread and butter HCPG trade as they come — short the first touch of the descending 50SMA after extended run.  We’ve written about this for years and we imagine most of our subscribers were involved somehow in this trade.
We wrote on Thursday on our stream to “fade the job’s number pop” and we wrote emphatically in our newsletter to short 118.     The jobs number came at 8:30 –   short the 50SMA on the $ES_F at 1174, or short the pop to 118 on the $SPY pre-market.    For our way of trading–this was as “easy a trade” as they come — what comes after is a bit more complicated.    Is the rally over or are we just basing for higher run?   We have some decent set-ups long that just need a bit of time (3-4 days would make them look fantastic) so we’d be in the camp that would argue that the rally is not over yet — but we wouldn’t put any swing money on that either, we’re still in daytrade mode.

Perfect ES_F touch and fade from the 50SMA.   Very extended run straight into first touch of the descending 50SMA.   This is as essential HCPG type trade as they come and hopefully a lot of our readers/subscribers nailed this trade.

Here is the 5 min chart — note how extended it was from the 20EMA — again, lay up as it follows everything we teach — extended from base on every time-frame we follow.

And $SPY in pre-market short against 118, text-book.   These are the types of opportunities that don’t come often — when they do they deserve much more aggressive type of size positioning.

For weeks we wrote in the newsletter that we were looking for a bounce scenario in which the August $SPY lows would be broken and the 1077 $ES_F overnight lows would be tested, hold, and bounce.   That’s exactly what we got with a 10% bounce that was sold into the 50SMA.   Both these trades, in one week,  were easier to predict (because of their extreme oversold/overbought nature) than the range we have experienced for the last two months and we imagine what will come in the next several months.      What we are looking for now is a flattening of the 50SMA — a multi-day base under the 50SMA would be ideal– and then a rip higher (and we have multiple long set-ups already setting up giving some credence to this scenario) out of the range.   Note the taking of the 50SMA would be quite important technically as 1) it has not been overtaken since the correction started and 2) it is steep slope descending, making it quite strong.
(If you want to learn more about fading first touch of 50SMA, and waiting for flattening of the SMA –again, critical to how we trade—- google “flattening”  or “first touch” in the search box of our old blog at www.highchartpatterns.blogspot.com )
New lows of course are always a possibility — and the action in the banks are probably the biggest argument for this scenario.    Long term visibility is low meaning conviction for longer time-frames is low — we’ll be sticking to day-trading until we return to a trending market.

Miscellaneous thoughts including market talk, strategies, and a defense of dip buyers who didn't get their heads bashed in

We're short-term traders and probably a good 50-60% of the people we follow in our stream also share the same time-frame.      It's our nature to always want to yearn for resolution of ranges even though our rational side tells us that we could be in this trading environment for a good while longer.   Take a look at the following chart -- we left on the 50SMA (the black line) and simply drew arrows with every big move up and down.    The range was basically established between two trading sessions: Friday, August 05 (rumors of US downgrade) and Monday, August 08 (first trading day of confirmed US debt downgrade).
We have not trended the last 2 months, we've been completely range-bound.  On Friday even with the incredibly bearish close we still are above where we were on August 08.
If someone presented us with this chart we would say:   Wow, ugly chart.  Steep, descending 50SMA that hasn't even been tested once since the sell-off began.   Usually what happens in these situations is that the stock remains in range until the descending 50SMA starts to catch up and then price is pushed down, thus transforming from a  range-bound price-action to a down-trending one.

Just as buying the dip worked well for a long time (ceased to work as well once we broke 2009 trend-line) the motto is short every rip until it stops working.    Shorting break-downs in broken charts also work (witness $NFLX through 125 support this week) but it's not our preferred strategy (shorting resistance is our prime strategy for this type of market).  One day it will stop working -- but likely not until we break the range and/or 50SMA.

When the market was above the 2009 trend-line and traders were buying dips (successfully) many would say "one day buying the dip won't work and they'll get their heads bashed in".  We never understood that thinking.  The idea of buying dips is to do it on shorter-time frame within a larger trend.    That is,  buy pull-backs if longer time-frame trend is intact.   We were known as consummate support buyers and over last two years made many live calls buying support.  However, on August 02 in "Time to Re-assess" we wrote that:

"We have written for months that we would buy the dip until we broke the 2009 trend-line.   Well, today we broke the 2009 trend-line."
In our outline of "How to catch a falling knife" written in May we wrote about the three errors traders often make in "catching falling knives".   Error number two we wrote in this post was:
" 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."
Once the March 2009 trend-line broke then the game for buying support was essentially over.   The 2009 trend-line for us was "the big kahuna" and we wrote a dozen posts before the break referring to it as the big level that would change everything.  Traders like ourselves, and many that we respect on the stream, did not get their heads bashed in -- they realized the trend was broken and they shifted strategies.
Of course we speak about ourselves and about other professional traders like us -- it's likely many retail investors who did buy the dip for the last two years and kept on doing it in the last two months in fact did get hurt.    However, the accusations about dip buyers were often made against traders making support calls on the stream, not the average Joe buying dips from his E-trade account.
Now we're on the other side and in a bear trend meaning that the modus operandi is to short resistance until it's proven otherwise (break of range/break of 50SMA).      In our experience this has been the best combination we have found -- trend-trade, and employ counter-trend strategies (reversion to mean), but always in the direction of the longer time-frame trend.     Not always easy to execute, but that's the foundation of how we trade.

No Balls to the wall here

We’re trading shy thanks to the amount of confusing information that we are seeing.  The most confusing of all is why the hell are we still above August 05 lows?   Commodities/China started this sell-off and normally we’d want them to bottom first yet US markets are holding firm while they keep grinding lower.   We’d prefer to see the opposite:  US markets make new lows, get panicky, while commodities firm up and show strength — that would get us interested in long trades.
There’s obviously two issues at hands, Europe and China, and they are making the lines somewhat hazy.    On one hand it looks like the S&P is pricing in Europe, while commodities are pricing in China.

We were waiting this week to short the 50SMA — we didn’t even make it there as the 20SMA on the $SPY  served as enough resistance.   The range is now tightening short term.

Copper ($HG_F)  still above the crazy Sunday commodity night but threatening it every day it seems

$CLF used to be one of our favorite trading stocks.  Now it trades like a dead internet stock from the bubble days.  Amazing.

$WLT was another super-star, one of our most loved trading stocks.  Again, trades dead.  Bid-less.    We want these to come back to the realm of living again before we start feeling the urge to go long.

We’ve noted our frustration this week on our stream.  Every night we send out our plan for the next day to our subscribers.  The plan has worked well (early in the week buy commodity to gap fills which all filled, later in week, short to support targets, which again worked) — basic range-bound reversion to mean strategy.  But our execution has been anything but stellar.  The gap between the plan and the execution is the hardest part of trading — when trading is bad the gap is wide. When you are in the Zone, then there is no gap.  Right now we’re in the gap area.  Why?  Because of all the mixed signals we can’t feel conviction about anything, thus we trade nervously.   We’re going for singles.  But maybe that’s not a bad thing.

Remember this chart we posted a few weeks ago under the title “How not to trade” — well update it at your own pleasure.  We’re still stuck to the range.    Peter L Brandt has an excellent post out today which covers this (lesson #3).   Don’t miss it.

Tough tape and people are getting impatient to see the range resolve.  It might happen next week or it might not happen for months.    If there ever was a time to be zen-like in your approach to the market and accept whatever the market brings, it’s now.

Dead cat bounce or the real thing?

he Euro-tarp rumor came out on Saturday and commodities were thrashed Sunday night before they bottomed.  We don’t think the rally has anything to do with a Euro Tarp rumor (since the real selling in for example copper came a day after)  but a simple squeeze continuation from yesterday’s commodity bottom.      Tech, which has held better than any other sector we follow, is not surprisingly underperforming today as it stands aside and let’s the commodity squeeze take place.     Take note that $AAPL is only up 1%, and for example $CMG $AMZN are both red.    This has all the makings of a vicious dead cat bounce, something we wrote about yesterday.
So how can one tell the difference from a dead cat bounce and the real thing?  Well we can’t.  They both start the same but the latter bases and then keeps making higher lows while the former gives it all back.   If you feel like the leaders should lead the bounce, well, it’s not that simple either since “leadership” is dynamic in the market.   It’s too soon to tell what this market wants to do (the reaction against the 50SMA should yield some information) but we do respect the fact that commodities, which started this whole sell-off, have now short-term  bottomed.
Charts are in a world of chaos and there’s not much to do today for new positions if you trade off patterns.  Don’t fall into the other side of the fear of loss which is the fear of missing:   if this rally is for real then there will be many excellent risk/reward set-ups in the near future.

A feeling of safety

The market has held the August lows admirably, while  commodities all broke down through August lows, and today hammered from incredible overnight sell-offs.    This to us is a very positive first step — but continuation will be key.   What will be necessary is a “feeling of safety” as traders who have had their limbs blown off by the sell-off start to come back into the market for “fear of missing the rally”.    Once that happens we could get a monster squeeze.

Right now tech is a lightweight — as noted this weekend we wanted $AAPL to be hit before we saw signs of a bottom.  We saw that today.   The real soldiers in the trenches right now are the four horsemen of commodities,  crude ($CL_F) , copper ($HG_F),  silver ($SI_F) and gold ($GC_F).     We’re keying off these for the immediate future.

The hammers in the four horsemen today are exceptional — but as we all know one day hammers don’t have much significance — it will be all about continuation.  We think this week will be the most important week since this sell-off started this summer.    The market held the range, the commodities bottomed — now if traders feel the fear of missing a rally and step up we could have a vicious bear market rally.    If today was a one day wonder and market pulls back tomorrow then fear of losses will outweigh fear of missing profits and we will go lower.   As said, this week is pivotal.     Bring your A game to the table.

Some positives

It's hard to get an edge on this market as computers trade to each other from one rumor to another but there are a few positives we'd like to point out today. The most obvious of course are the reversals on silver ($SI_F), gold ($GC_F) and copper ($HG_F) from their overnight lows. We also like the action on the refiners (which have been good tells lately) with $HFC $TSO $WNR holding gains.



As we noted this morning we think the rally could take us to the first target of gap fill near 116.5 on the $SPY -- that first test will likely be faded. The reaction to the fade will give out short-term direction information.

We noted a gap fill trade on $OIH in our newsletter this weekend and we have the first positive step towards that target today. We expect the first test of the fill to be faded.

Visibility is low and traders are flying pretty blind -- taking it one day at a time and trusting only moves short-term is our motto right now.