Remember that 2009 trendline

We wrote about the $SPY 2009 trend-line on this blog at least a dozen times earlier this year  — it was for us the only chart that counted.     Take a step back and take a look at what the market has done since we broke it– churn.   Like a dumb old fish bobbing its head up and down in the water.    A bunch of nothing.

Market looks like it’s establishing a new trend-line range:

Taking that into account with what we wrote about yesterday, it looks like we’re in for some interesting times.

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Bonds and the case against a market bottom

A quick look at the March 2009 bottom versus our current position at the end of 2011.      Note how the inverse correlation between bonds and equities started to crumble in the three months before the S&P 500 market bottom.    $TLT topped 3 months before equities (just one more piece of evidence that equities are the last to know after bonds, currencies, and futures).      If history is to repeat in this 2011 Euro crisis then we’d expect the inverse correlation bond/equity to also start to falter, something that hasn’t occurred  yet.    Something to keep on radar.

Metals trying to hold support

Gold ($GLD), silver ($SLV), and our favorite junior miner ETF ($GDXJ)  all are attempting to find footing (bouncing intraday before the market) today as they hit major levels of support.     If these levels crater then it would be a major blow for reversion-to-mean strategies that have worked well so far this year.

Major weekly level on GDXJ

SLV bounce near 100 SMA on weekly

GLD first touch of 50SMA on weekly since 2009

Even if you aren’t interested in trading these keep an eye on them as a greater market tell.

For relevant commodity quotes check out  Jet Fuel Prices,   Coal Spot Price,  Crude Oil Price, and Electric Power Maps.

Houston: We have our base

We’ve talked about the 200SMA wall for months — every time the $SPY got close to this major resistance in it did so from an exhausted V-type move.   But not this time.     We hit it again this week and just like always, retraced, but on Friday the market came right back up to base under it — we’re at the cusp of breaking through this coming week.    It hasn’t paid to anticipate now for 5 months and we held off from doing so but we’re on break-out watch mode and have a list of decent candidates as our go-to stocks.

Furthering the bull case is the bar down below the 50SMA for $TLT

On the worry side we’d like miners to act better– but we’d defer to the actual metals ($SI_F and $GC_F) and if they break-out that’s good enough for the bull case.

Copper has broken out of the range and now is basing nicely.  $HG_F

Euro on the other hand is just following the trend-line down — Note however that one good day would break it out of the pattern.

The same can be said for this risk-on metal — silver right now has a bearish pattern but one good day would take it above the trend-line.    Many charts to us look the same — we’re not anticipating but we do understand that they could be on the cusp of a break-out and it’s good to have that possibility  in your trading plan come Monday.

So to recap — we’ve seen this scenario before where things are lining up, bulls are excited and bang bears pull the rug out.   So yes we approach break-out possibility with cynicism but at the same time we do see that this is the first time $SPY has approached the 200 SMA from a decent base which increases the possibility that yes, this time will be different.

200 SMA wall

We posted this chart yesterday showing the few times we’ve been above the 200sma on the $SPY since the August sell-off.   To be exact we were above it for 2 days on Oct 27-28 before reversing, then one day above on Nov 8 before again reversing,  and yesterday we closed above the 200SMA for the fourth time since the summer sell-off.   If the bulls can manage additional closes above it in the near term ( we’re a point below it  right now) then it likely will shift the sentiment away from  the current “sell-strength” environment.

The most bullish scenario for us is for the market to flat-line and base near the 200SMA and then break through which is exactly what has been missing from previous break-out levels is the base — we’ve approached it every time from exhausted V -moves.     Churn baby churn, indeed.

On the bearish side of the argument,  the 200sma is a wall until it isn’t, the Euro ($6E_F ) acts like death, and silver/gold can’t find any traction.

The recent randomness of news/rumors has diminished the edge for our type of trading strategy and  as we’ve posted on the stream — we’ve pulled back  from being active in this tape.     We’re ok with giving back on trades that simply did not work, but we’re not ok with getting chopped up in a tape that offers no good set-ups for our strategy.        All that being said, things can change in a heartbeat and it’s still important to stay involved and watch price-action, looking for hints of change.

Gap fill magnet?

It’s not really our job to be bearish or bullish, our time-frame is too short. Our job is to go through charts the night before and come up with actionable alerts for the next day.  This has been very difficult lately due to the (more so than usual) randomness of the market via gaps.   However, we think it will get easier soon for our type of trading based on the charts we see (as @todaytrader says, fingers crossed).     Let’s take a look ahead:

Huge gap — will it act as magnet?   We’d love to see a fill on this gap and our style would dictate a buy on the 50SMA.     We’re not betting on it but it’s definitely a possibility for which we want to be  prepared.

The junior gold miner ETF ($GDXJ) is one of our favorite trading vehicles — and it illustrates some tough slogging ahead for the bulls.  We posted this chart numberous times in November — we had bought a test of the trend-line on November 10 but had warned that another test of the trend-line would probably cater through.  Technically this is still a bearish chart and for our time-frame the first test of the 50SMA (blue line)  is a short.

Note that bonds are still not rolling over yet — $TLT bounced on 50SMA today.  Keep today’s low on radar for rest of week.

A win for the bulls here as copper ($HG_F) loved the China lowering reserve requirement news — through trend-line with a blast,  bullish.

It’s hard not to get excited over today’s action but stay cool — bulls still need to prove their mettle going forward.   There are a lot of potential new spots we found today on daily but all of them need a bit of basing ($CAM 54, $GD 66.5 to give two examples).  All we care about are opportunities, long and short, and it looks like we should get many of them in the coming days.

 

Weave your way

The only sense we’ve made out of this market is to go reversion to mean.    At the bottom of the range today we had many support longs trigger — and they worked.   Last week bulls excited for break-out got killed on the reversal.    Range trading at its best.
For tomorrow we have a nice mix of resistance shorts and support longs –  traders are confused, investors are confused, politicians are confused, everyone is confused.   And when everyone is confused they become weak holders, thus reversion to mean reigns.     One day we’ll leave this large multi-month range but until then either stay in cash or shorten your time-frame.

$SPY broke the range lower only to reverse into the afternoon and close over trend-line.   Ball is still however in the bears camp until the bulls distance price away from bottom trend-line.

Bear Trap?

Usually if $SPY is trending down our support alerts don’t do well.  Today there has been an astounding divergence as our support alerts have ROCKED while SPY has done nothing but trend down.

These are the support long alerts that triggered from our weekend newsletter (QCOM COP gapped below):

$XOM 76.3
$USO 36.8
$VMW 91.2
$APC 74.25-74.6
$CLR 64.6 — if base,  64 were instructions
$ALGN 26.8
$ULTA 64.4-64.5
(and two shorts $EOG 96 and $WLT 70)    Take a look at how well they worked for bounces.

It’s ridiculous how well they worked (and so is the divergence from our PnL and the opportunities in our own alerts as we didn’t have the faith considering SPY action).
We can’t even remember the last time we saw such divergence.   Not sure it’s enough evidence to call it a bear trap but it sure is one point for the bulls to see dip buyers under the surface buying with such conviction.

Slaughterhouse Won

Last Friday as the market was heading back to the top of the range we wrote about how it was do or die time — we would either break-out of the range or fat pigs were going to the slaughterhouse.   On Tuesday we really didn’t see an edge for swing longs and wrote Not Good Enough Risk Reward which indeed was true since the market proceeded to dump later that week.
Our tells of Euro ($6E_F) lagging, combined with lack of good set-ups,  and Ags ($POT $MOS $AGU $CF)  underperforming helped us and our subscribers stay away from swing longs BEFORE the down move.
For the last 4 months the golden rule has been — the more the bulls get excited, the more you go to cash.   We broke the mini triangle down but we’re still in the bigger channel which has support around 119-119.5 on the $SPY.   Note that the trend-line moves every day and target needs to be adjusted.

Our favorite “tell” sectors are completely broken.    However, SPY will probably offer a decent short-term trade on the bottom of this channel.   We like the idea of an overshoot of the 50SMA (120.8) to bring in some panic, and then a bounce around 119 zone on bottom blue line.

If the bottom line of channel breaks (currently around SPY 119-119.5) then it’s going to get a lot dicier to navigate.   However, we’ll worry about that if/when it happens.   Have a good week.

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.

.

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.