Market Talk

SPY has blasted through the 200SMA weekly and doesn't look like it wants to stop anytime soon.  We believe at some point the weekly will be tested again -- the SMA is too important to be taken out so easily in an extended market, but our time-frame as traders is to short for that type of trade.  Also-- even though we see the trade and believe it will work, it's just not our cup of tea.  We're more trend traders than reversion to mean traders.  Even when we buy support its done within a longer term uptrend. 

 As we wrote yesterday our focus today was on the XLF -- its the only sector that was not extended and one we hoped to see continuation from today    We also wrote in our newsletter yesterday that we were looking for further rotation out of technology and into financials -- something which also occurred today.

We have a running alert on QQQQ 55 so we know how far away it is at all times (currently 2.36%).   The 55 number is one of the fundamental reasons we have not shorted swing tech.  Why? 

 Because as we wrote weeks ago -- 55 will serve as magnet.  Why short within a trend that is being drawn to a magnet? 

Weekly on XME looks fantastic -- definitely helped by its gold holdings. 

XME top holdings:

OIH could easily move to the 200 SMA. 

The weakness in tech did not spread to the market as rotation played out and the market ended green.  We'll be looking at this carefully next week to see if tech weakness simply rotates into other sectors or whether contagion will occur.

Very benign tape -- and traders are buying dips ferociously as the "Fed put" and funny money gives confidence to all.   Interesting times indeed.      

Fins, finally.

SPX is extended at year high resistance, dollar in death spiral, techs notable underperformance today but into the close comes the massive financial breakout out of multi month base.    As always, continuation will be needed for confirmation but we'll be looking at stocks in the sector extensively tonight for our watch-list.  XLF is one of the only sectors that is not extended and a rotation into financials now would seem likely if we can get continuation in the next few days (i.e. to rule out today being a head fake).

The Indy: Day trader Strategy

We've been trading a lot lately a strategy we came up with 2 years ago -- we finally got around to giving it a name.  Welcome to "the Indy"; a strategy that HCPG subs are well acquainted with and trade often.  

This is the second day-trade strategy we have come up with over the years.  The first, and any reader of this blog over the last 4 years will know it well, is the base and break. 

The name comes from a description of the strategy in which the stock is being held from above by R1/daily resistance and is slowly getting squeezed from below by the ascending EMA. Indiana Jones would often find himself in similar situations and would always find a way to break out of the impending squeeze, thus "the Indy". 

 

This is a daytrade entry set-up on alerts we have on newsletter from the night before -- meaning we are looking for a breakout on daily.  It is easy for us to catch these type of trades because we are already looking at the stock to break-out.  We usually only look at 5-10 stocks a day for trades -- all the homework is done the night before and mailed to subscribers.   Here are a few examples from the last few weeks.

First you have the stock rally almost to the alert/ R1(or R2) zone and then pull-back. The stock's range is wide as it bobs between the alert and the ascending EMA. As time passes the price pattern tightens up as it waits for EMA to catch up with R1. Once the EMA catches up the the stock is free to break-out. Stop is under EMA/R1 (usually very tight stop which gives you great risk-reward).

Indy can be held from above by R1/R2 or our alert price which is daily resistance.

Very clean example on NFLX:

The risk-reward for this set-up is simply outstanding. 

Nice clean example from today on our alert from GS in last night's newsletter.  Note again the Indy set up against our alert price (but R1 close by and giving support to the EMA).  The important condition is that the stock is being held from above by some form of resistance, be it R1/R2 near alert (alert is always daily resistance) or by daily resistance itself, in the case of GS.

Nice Indy set-up here as stock bases under our alert price (daily resistance) and waits for ascending EMA to catch up -- once it does it's do or die time and usually with set-ups like this, it's Do.   Risk-reward is excellent as stop is always near by (move under the ascending EMA or EMA/R1 if close together).   As stock moves up the EMA moves up also, perfect trailing stop.  We always take profits on spikes up away from the EMA.Entry would either be a break of the base (here 164 break) or on dips to the EMA with stop under EMA.

Position Update

Update: not waiting for stop, closed the shorts.  Why?  USD significant move up, X bad news, and market holding flat while momentum flying.  Why? The increasing possibility of a sideways basing under the weekly 200SMA and break through instead of a pullback.   All flat in all accounts.

As we wrote in our blog last night we came into today short TNA SSO SPY.   Usually we would have covered the shorts into today's gap  down but since we wanted to go long near the open (newsletter long alerts MOS NFLX) we decided to keep them on as hedge, especially since it is only a 1/4 position left and we have cushion in all three.  We are now out of our day-trade longs MOS NFLX and have placed stops on all of the shorts on a move through SPY 119.1

Market Talk

Active traders like ourselves can't really be bears or bulls.  Traders like us just trade whatever sets.  However, we can have a bias, and that bias simply makes us look for more opportunities in a certain direction.   Our bias is now short due to the market going against major resistance on multiple sectors.

However, with the QE2/POMO anomalies we're also very aware we can overshoot resistance.  However any move above the 200SMA weekly on the SPX for the next little while will be treated as overshoot short for us meaning that we would short any intraday extended move with target a move back to the 200SMA.  

Our best days in trading almost always come when we're against a major level of support or resistance.   This is a time when we are aggressive as we have conviction.

We covered a large part of the daytrade but are short swing TNA SSO SPY and will trade around the position accordingly.

Market Talk

We've posted this chart a number of  times over the  last little while at StockTwits-- it shows the importance of the 200SMA weekly on the SPY.    Expect at least a pull-back after the first time we kiss the MA (currently just under 120).  A pull-back and consolidation under the weekly 200SMA should be considered healthy as we consolidate in time and price under this very important zone.    If we do go through without pause then we believe the chance of a breakout failure would increase exponentially and we would adjust our positions accordingly.

What would be an ideal pull-back scenario?  A 50% pullback from the MA and the trend-line which would approximately be 5 points, which would land the SPY at 115, which of course in itself is major support.

Overshoot Strategy, Post 5 Daytrader Talk

We'd like to review one of our more difficult strategies that we use -- the overshoot into secondary support.   We've written about it many times in the newsletter :  
Overshoot Strategy Again
Overshoot Strategy
Overshoot Strategy Example
How to catch a knife properly
   

When a stock is nearing support (in this case the 20SMA) but it's not showing signs of reversing, look for an overshoot of primary support and into secondary support.    On entry on reversal on secondary support the first target is a move back to primary support.

In this case CMI had 20SMA near 91.4 and secondary support near 90.68-90.83 level.

At 91.4/20SMA zone there was a small reversal, we got in with stop on the low and quickly lost 12 cents as stock reversed down to make new low.   Once this happens you have to sit back and wait for secondary support to hit.   The set-up for the secondary support overshoot was actually much better -- a panic move away from the EMA with a big volume spike.   We were ready to buy support anywhere from 90.6-90.9.    Target exit is a move back to primary support which was 91.4/ 20SMA, anything after that is a bonus.   In this example reward target was 50 cents and stop was only 10-15 cents (fills from 90.85-90.9 were easy)    Very good risk-reward.


If your trade is working well and you want to stay past the major exit point of primary support then sell majority of position into the target, and hold remaining position with either original stop or stop at break-even.  

It's one of the more difficult strategies we have in our toolbox but it can be very satisfying.  A couple of conditions before trying it:  1) You have to be fast and be able to take a quick loss without blinking.  2) You have to be patient and wait for the secondary support to be hit before entering and most important 3) You can only enter this strategy if secondary support is hit very extended from the EMA/base.   If it's close to the EMA/base then chances are it's just going to grind lower.   Never buy the grind lower on these type trades, always wait for the panic spike.

New positions

Update, added DO to swing book.   3 longs, 2 shorts, net long.  With today's price action we are going to play it safe.
Update II:  sold a few GS, SWN, DO into the ramp this afternoon to lock in profits and go back to net neutral.
Update III: Sold GS swing flat, stopped out just over breakeven.   Sold DO for 1.8% profit, Sold SWN for 1.5% profit. Covered IWM/SPY short basically even (20 cents profit in one, 20 cents loss in another).

Flat.  Back to daytrading.




As scary as it is here we've initiated a few market shorts against the resistance points we wrote about a few days ago, so far  all small and swing size.   Definitely going against the trend here so no leveraged products and no real size.

Our average now   is short SPY 117.85 and IWM 70.36.   We're also long GS (in from yesterday under 153, pulled swing stop this AM when we added shorts in order to stay hedged) and SWN swing size.  Two shorts, two longs.  No leverage.

Why so hesitant?  Breadth very good today, strength all around, and we think now SPY could run to the intermediate resistance 120.   However, we had planned a short into this area for a while and want to at least follow it, albeit small and hedged.    Breadth is too good for any kind of reversal today so this is not an immediate satisfaction trade.    As we find long swing set-ups we will add those to the book going forward.

Next Focus

As we wrote in our newsletter tonight our focus for tomorrow is the very juicy short setting up SPY 117.6-117.8 and IWM  70.5

We're not too pleased with futures down .7% tonight -- always preferable for us to short the pop rather than chase price down in a market that has been as strong as this one.    Let's see if we can get a post FOMC rally into our resistance areas tomorrow.  

If the market stays weak all day then we'll have to re-assess to come up with an alternative plan.  We already listed one short on break of support in the newsletter and will look for opportunities in that direction if market shows signs of weakness.

As we wrote this morning in our StockTwits account "Traders we know who would never touch micro-caps are now all over them. Entering fume/giddy stage -- be nimble."   We feel that if the giddiness can continue into our short spots (SPY resistance less than 1% away from today's close) then a quick reversal will be coming.  If we go down tomorrow and base around these spots then the consolidation will take away from the set-up: we like shorting resistance into extended runs into resistance -- if market consolidates under then it becomes more of a long breakout than a short resistance trade. 

If you plan to take any action on our thoughts first think about what kind of trader you are and what kind of time frame you have.  We're very active traders who look for the best risk-reward opportunities that we can spot.  Even though we are looking short for our next big trade we had 8 long alerts trigger today (and we were long all day long but went into cash into the close).  Our next focus is the big short coming up but we will always defer to our set-ups (we also have multiple long alerts for tomorrow that we would take if they set).  We have our opinions and thoughts but we always defer to the set-up.  

If you're a swing trader it's quite possible we'll get our reversal, cover,  and pat ourselves on the back, and you won't have noticed too much action in your portfolio.    Know your time-frame!


We look for spots that we feel have edge to trade against:  this could be a target trade, a break-out trade, a support long trade, a resistance short trade, a short break-down trade -- whatever spot catches our eye as having good risk-reward.    We usually hit it hard and get out at least a portion relatively fast (reason we like liquid stocks).

Earnings season has begun, major resistance is around the corner, bulls pushing the limit with third-rate micro stock runs, and the USD is getting close to support.  All this means lots of trading opportunities for active traders.  Buckle Up!

Buy the first test of support, never the second

Our veteran subscribers have read this line literally a hundred times in the last four years, "Buy the first test of support, pass or short the second test".     We love buying support if it's the first time it's been tested in a long time (for example over 2 months).  However if support is tested again within a short time-frame (less than two weeks) then it automatically becomes a short alert.

As we wrote about VMW this morning before the break of the 50SMA -- it's not good risk-reward to buy the second test of support (or major moving average) when it comes so close to the previous one.

All the examples here are similar pattern.   Monday tested 50SMA and bounced.  Wednesday tested 50 SMA again and broke down.

Target Trades

Most of our trades fit in the following categories:

1)  breakout of resistance long
2) breakdown of support short
3) resistance short
4) support long

but we also have one more strategy we like to use called a "target trade".   If you've followed this blog for the last four years you've seen us make this trade countless times -- most recently on XME 53 and GS 148.5.

Basically a target trade means you take a position well under the actual alert with the conviction that the alert will at least trigger.    You don't know whether the break-out will fail or be successful but you do have conviction that it will at least trigger.

To make this strategy work well you have to make sure several  conditions are met:

1) the alert spot is very clear and has many eyes looking at it.

2) done in a benign trending market

3) you're buying in a range-bound base that is not extended and has support near-by (so you have a natural stop relatively close by on a swing basis). 



To look at specific examples look through the XME GS links above but to sum it up -- here's an example:

Stock HCPG is basing very nicely under 50 -- it's come close to touching that number several times and you have had an alert there for weeks.   The market acts well and the sector to which HCPG belongs has been acting strong.  The stock is not extended.    You have a good feeling that 50 will trigger -- however it's becoming a crowded trade and you know there's a chance of break-out failure.  You have conviction that 50 will trigger but you are not sure whether the break-out will work or not. What shall you do?   Get in before.  So you buy a swing position at 47.89 within the range of 46-50 with a stop under 46.    If you are a new trader we recommend just having a pre-defined stop.  If you've been doing this for a while then we recommend the same as what we ourselves do, and that is to trade around the position in order to be able to withstand pain and not get chopped out.  If the market weakens, put on short index hedges. 

The next day market gaps up and stock HCPG makes a fast run for 50 on the opening bar.    If the set-up is excellent and the volume is significantly above average, and it's a sector move, then if you wish you can add to the position and move stop up to above break-even.    However most of the time all ducks do not line up and what we prefer to do is to take some off into the number to lock in profits.  Why?  Because our conviction was about the stock actually hitting the alert, not what came after it.   This is what we did on XME 53 (which worked well since the breakout actually failed) and this is what we've done on GS 148.5 ( a move we've telegraphed for our readers for the last 6 days on the trend-line break).    Remember that once the alert actually triggers your primary goal has been met -- therefore after a trigger, NEVER let the trade become a losing position.   

Remember -- spots which are technically very clear serve as magnets -- in our experience they almost always trigger.   What happens after they trigger however is much less clear.   

It's a strategy that works very well if you're patient enough to use it only when the conditions of the trade are met.

Daytrader tip: In extremely benign trend days with excellent breadth what we also often do is to simply go through our alert list and buy whatever is close to triggering.  Why?  Because alerts (based on support and resistance), act as magnets.   Hop on the steel ball rolling towards the magnet, take some off when magnet meets ball.

The Mighty Goldman Sachs

Update:   we are selling some of the swing position into this BoJ market ramp and taking a more conservative position.   Moved stop up to today's lows to protect profits (146) and are going to try to sit on the rest of the position until at least 153/200 SMA.  Sold more 149.8, moved stop up to 148.5 break.


We posted this chart last Wed -- writing that we would go long on any trend-line break.  
We are swing long GS and have traded GS long every day since the trend-line break (usually pair trade long GS/short BIDU or long GS/short TNA). 

Nice move from trend-line and now basing under 50SMA/148.5 resistance which has been tested three times.   This is a defined range with very good risk-reward.    We have a good entry and are comfortable sitting in anticipation of the break-out.   What if it weakens?  We would reduce size on a move down through the 100 SMA and 142.5.  Why wouldn't we bail completely?  Because if GS weakens we would add TNA short hedge.

      GS important stock for the market -- keep these levels on your screen going forward this week.

The strategy of adding a hedge is an excellent tool for keeping you in a trade that you like, but that is causing you short-term pain.  For example we came into today long GS, seeing the weakness on good breadth we daytraded short QLD TNA in order to stay long GS and follow our plan.  We covered the shorts but left the long GS position intact.  If we go through 113.2 tomorrow we will do the same -- but probably with enough size this time to make us net short.   Why?  Simple -- the more times support is tested, the weaker it becomes as the buying pressure wanes with each test.

If you love a plan and don't want to be head-faked out then do short-term hedges around your position in order to stay in the trade.   

Market Talk

Updated chart. Copper stalled at resistance, looking for pullback to at least first trend-line (yellow).   We'd only be buyers of a pull-back to the trend-line at this point and would not engage in any potential breakout trades.

On Friday we wrote "Note the change in the angle of descent -- usually a sign that a short-term bottom is near."  Watch for this to unfold this week and to repeat what we said on Friday, if you're heavy long in commodities, not a bad idea to take some off the table.

If we do get a bounce in the USD then of course it will be a good test of our favorite commodities.  As we noted in our newsletter this weekend there are a lot of names in the sector that are setting up but many are extended -- any pullback and base here would make them much stronger.

We haven't had a sell-off across all sectors for a while -- the pattern has been one of rotation.   We'll see if today will be any different and whether any money rotates back into tech.  We will also be watching less dollar sensitive sectors such as financials (we're long GS swing which we would take off in any strong breadth selloff).   The bulls aren't going to feel any fear until we get a broad sell-off across the board with no rotation.

The following two charts exemplify the rotation that we saw coming in September.

The Nasdaq hasn't done anything in 10 trading sessions.   Will money rotate back into it now as the USD finds its footing?   Our guess is no -- tech is dead in the water until at least earnings season.

Meanwhile look at the move in the drillers in the last 10 trading sessions.   Text book rotation. 

 



We have no interest in tech names at these levels as we still find them much too extended for good risk-reward.   However if there is a sell-off in tech we would be looking at some support spots in the near future, for a trade.

We plan to go in more defensive mode this week and wait for earnings season to make any aggressive longer-term bets. 

Update on steel positions

Update on Update:   whenever our short and long go green at same time we think "it's a good time to flatten out".   Out QLD for a few pennies, and rest of NUE X ATI for just under 2%.     Back to cash in all accounts. 


Update on our steel positions:

All are through trend-line and because of that we have moved stop to break-even in all three positions.   We're only up around 2% in each so not much cushion but hopefully good enough to stand the chop until we get continuation.     Long NUE 37.67, X 43.55, ATI 45.51.     We're hedged with QLD short from 66.80.  We most likely will take a loss in the QLD position if steels break-out further but want to have it on the book in case of gap down.

Watch the steels

We think this sector is ready to wake up from its long slumber:

Here are 4 we are watching (we're already in X looking to swing).

Click on charts to see our trend-line alerts.

Intermediate swing ideas

If this rally continues then most likely the laggard commodity sectors will be playing catch up.  Here are some frew ideas for the swing traders out there:

ECA looks great on the break up through the down trend-line.  

If WHR can wait a few days resistance will meet the trend-line  -- entry would be long through there.

The next two trades would be bounce on trend-line swings rather than breaks of trend-line.  This type of trade offers good risk-reward if you can get in close to the trend-line as the stop will be close-by, right under the trend-line. 

BHI bounced on the trend-line but still close enough for good risk-reward.  Entry would be here with stop under trend-line.

X has suffered  horrible price-action but interesting low risk spot here on the bounce on the trend-line.  If this rally is for real it most likely will push even these type of performers up.    Entry would be here, stop would be below trend-line.  

Rotation Plan in Play Update

Further Update:  Closed rest QLD short for 10 cents, closed TNA short for 25 cents,  Sold more OIH for 1.7 points.   Sold more XME over 53.  Starting to close the swing.   Have left small XLF,  1/3 OIH, 1/3 XME.
10:30AM update.  Flattened out rest of positions.  Swing closed.  Back to day-trading!  



As we wrote yesterday we didn't know whether XME 53 breakout would work or not but we did have conviction it would at least be touched.  As per plan we took off 1/3 of the position from 51.68 into 53 and now stop has been moved up to above break-even.   We won't let this go to a loss (unless gap down of course).   Next target is 54.

We also took off half of our QLD short for a 12 cent loss.

We also  sold 1/3 our OIH swing this morning for 2 points (entry 107.89) and also would be stopped now on any move below breakeven.

We have left the TNA short position which is small and we have not added to and will probably just sit on for a while (unless IWM 68, would probably add there).

We also have our initial XLF position which we added early yesterday and which we will not add to either until we get some type of pull-back.   The XLF TNA positions were a fraction of the XME position which was our largest hold in a long time.

Rotation

On Sunday we wrote on StockTwits that we were looking for a rotation into areas which were not extended and instead basing: 

Tech got more extended and we went short yesterday. Step One.  Now we're looking for Step Two and that's a rotation into XME (we're also long OIH sub 108 and a small XLF long we probably won't add to unless market pulls back 2-3%).    Today was a good start as XME closed well off its lows while QQQQ closed on its lows. Let's see if we can get some follow-through tomorrow.

This is the type of trading around the core swing we do on a daily basis:

As posted at 1:55 PM EST we added to XME

Day-trade around the swing:  add on the pull-back, sell it on the strength, keep the core.  Posted at 2:44 PM EST:

As long as we have conviction that XME will touch 53 (which we do), we can constantly trade around the core.  We will take off at least 1/3 on 53 itself.

 

Note divergence of XME/QQQQ price-action post FOMC.

Why do we like the rotation idea?  As we wrote last week in our blog we do believe we will go higher and if this is the case the market cannot just be led by REITS and momo tech; other sectors such as financials and commodities will most likley catch up.


QQQQ to our eyes is running on fumes -- however we wouldn't short it without being hedged.  Why?  Because we often engage in momentum trading ourselves and know very well how irrational the moves can be and how extreme the pendulum can swing.

Great hedged short.  We're short QLD 65.26

65.26

This chart on the other hand represents to us a very nice base getting ready for break-out.   That being said we are also aware of the lagging status of the XME, thus the adds only on pull-back and the exit on strength.

New Positions

All updates will be edited on page on daily basis.



We opened up a hedged swing today -- here are our positions:

We know all about the power of momentum -- resistance is futile in front of a real melt-up.  However we do think that this is a great place to initiate an initital position short hedged with other longs. Decent size QLD short position 65.26 after adding short in front of QQQQ 48.8.  which we will add to slowly if Nasdaq keeps running this week.

We have a small  token TNA short position from 44.75 that we have not added to since we think IWM has room to run.   Not adding to this - just letting this one sit.

We posted this chart a few times last week/weekend for our subscribers and in StockTwits with a trend-line and 108 alert.  We started long on the trend-line and added at 108 for a good position size at 107.89.

We added more to this late in the day in order to even out the hedge and are long average 52.17 for a good size position. Edit: added to XME on this pull-back today, average now 51.68

Our timeframe is potentially longer than usual in order to wait for the plan to unfold.

Edit: added initial XLF position at 14.90 to the swing book, will re-assess post Fed for any additional adds.
Edit:  added to XME on the pull-back

Market Talk

We're short term traders but sometimes we like to indulge in thoughts about the intermediate time-frame.   Warning: this is what we think will happen but we always defer to what we see, not what we think.   This means that if we're wrong we are not the type to press our bets.  We take our losses, and re-assess.


The first test against major resistance in overbought market is most often a great daytrading opportunity short.  We short the first test of resistance (in overbought markets) and buy the first test of support (in oversold markets) but that's it -- second test we don't touch.   Double tops/double bottoms are not worth the risk for our type of trading.

Our guess is that SPY will test 113.2, pull-back and then move higher into a new range.  However, we do intend to catch that pullback short before we go long on any swings into the new range.  We're fast, and that type of trading is what we're all about. 

Why do we think that SPY will enter a new range higher?  Because our belief is that bonds will finally break this trend-line lower and end their long rally.

Another piece of the puzzle is that copper refused to sell-off even in the dire dark months of the August pull-back.  As we wrote a few weeks ago, copper basically told everyone that the pull-back was a farce.