Make peace with not catching every move

• Posted by hcpg
 
• on April 7th, 2013

We had two conversations about a particular  trading topic on Friday — one was with a long time sub we like very much, and the second was with an internet Troll we blocked after a few minutes.   The gist of it is this:     The one thing traders have to accept in order to have any type of peace with their job is that they will not be able to catch every move, every turn in the market.   That’s not what short-term trading is about.

Trading is about coming up with strategies that yield good risk/reward returns.  Now for us often this is waiting for a support long at a certain point — we sometimes try to catch it short before it hits that point, but often we’re not successful and instead just wait for our spot.     Let’s say stock HCPG is hovering at 52 and we see multiple support converging at 46.    We have a good idea that at 46 we will be able to catch a very good risk/reward trade.    Over the next two days it does go from 52 to 46, a 6 point move down, but we’re not able to catch it short, that is it does not set up in any strategy that we know that offers good risk/reward for the move.    At 46 though we buy with 50 cent stop.  Over the next two days it rallies to our target of 48 and we sell it all.  For us that is a solid trade, our meat and potato trade, catching 2 points on 50 cent stop.

The internet troll comes along and says, ha ha, while you were looking for a measly 2 points I caught the 6 point short.    That’s where the internet troll shows his real colors, that of the infamous noob.  We are patient; we wait for everything to line up, and then pounce.  A stock could move 10% before we make our move looking for 2%, and that might sound crazy to a non-trader, but that’s the way it works.  Just because a stock moves 10% doesn’t mean it’s easy to catch.  We only trade what falls in our strategies, nothing else.   We miss moves ALL THE TIME.   Every trader does.  That’s not what trading is about.  The other obvious point is risk/reward, 4x your risk is the same if you risk 50 cents and make 2 points, than when you risk 5 points and make 20 points.

Unless you make your living off OPM,  comparing yourself against market benchmarks is counter-productive.   If market goes down 20% for two years and your fund goes down “only” 8% you are a rock star fund manager.  However, if that happens to us, we’d have to shut down.   Short-term traders like ourselves are all about consistency, being able to pull consistent profits from the market, no matter the condition.   Our PnL does not correlate to market %.   In fact some of our biggest profits are made in flat markets while we tend to under-perform in slow grind-up markets.   As traders know, the more volatility, the better.  The goal of trading for us is not to beat a certain benchmark %, or to be in the top 10% of any list, but to be able to make a good living year in, year out.  Every month we want to be able to pull money out to pay the bills that sustain our lifestyle for our families, and save whatever is extra — which basically is what every worker wants.  That’s about it.

As for future internet trolls– we’ve been trading for 16 years.   We’re good at what we do and we’ve proved that on the stream with real-time calls over and over again now for over four years, and in our newsletter for seven years.   If you want to follow us, great, be quiet and learn.  Don’t criticize, don’t offer advice, and if you don’t like what you see, simply hit that Unfollow button.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Trader’s edge: Overcoming the Distancing effect

• Posted by hcpg
 
• on June 9th, 2011

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.

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When knife catching is not knife catching

Originally published May 10, 2011

We’ve tweaked this strategy as the years have passed and here is quick outline of the main points of sector support buying:

1. For the most part we prefer to get involved with ETFs over stocks, or at least put the size on the ETFs and smaller size for the stocks.    This type of trade boils down to confidence, and for us it’s much easier being confident in an ETF than a stock.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Trading Thoughts

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

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

5. Once you get the basics of strategy and risk management down it all becomes mental.    For active traders at this stage of  our career it’s all about conviction.  We touched upon this issue in a post a few months ago —  if we start to second-guess ourselves, it’s game over.   Traders know this, and that’s why in a tight trading group it’s a faux pas for any one trader to talk negatively about another’s live position.   It’s the reason we never ask anyone’s opinion about a trade.   If we have to ask then it automatically means it’s not good enough to take in the first place because the idea doesn’t jump out on one — it’s not a no-brainer, a lay-up.   If we had to point to one reason why we’re still around after all these years it’s because we wait for the trades that jump out — if nothing is good enough to trade step back and become a spectator until the next set-up emerges.  Don’t worry,  there’s always a bus that finally comes around the curve.
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Originally published May 07, 2011

How to run a straight-up business: newsletter case study

We have been running the HCPG newsletter now since 2006.   We are very happy with what we have created over the years and believe that many of the lessons we have learned in running HCPG also can apply to other businesses.   So here’s our case study.
1. Don’t claim anything.    The quality of your product is the only thing that matters.     We could be three punks trading from a double wide in some trailer park,  or we could be three very well-off successful traders.  We’ve never claimed one or the other.  Does it matter?   No, not at all.   All that matters is whether the information we provide can make you more profit than you would have without the newsletter.  Stay with what is relevant.   We stay under the HCPG moniker without providing personal information because frankly, our personal life is no one’s business.   All we do is provide potential set-ups for any one who pays $44.76/month.   You’ll find out very soon (including a 10 day free trial) whether it’s all nonsense or whether it can add to your bottom line.
2. Unless you intend to provide an audited PnL record that you will provide to your subscribers every week never talk about dollars or brag about how much money you’re minting.   You will never hear us talk about money, be it on stocktwits, twitter, or in the newsletter.   You will never hear us say Big Kaching!!   If we’re happy with a trade we’ll say it was a good trade; whether we had 100 shares or 100,000 shares should have no effect on your trading.  Keep your ego out of your business.
3. Be nice and always look at the big picture.  If you’re in it for the long-term as we are (HCPG 5 year anniversary in a few months) then try to build solid relationships with your readers.  Don’t nickel and dime people.  If a subscriber forgets to cancel a trial and gets billed on the 10th day  and emails us that they don’t want to stay on, we refund the money.    We believe that readers should consider us a lucky find — rather than trying to trap people for an extra month because they forgot to cancel in time.   We want readers to stay with us because they want to stay with us.   This is also the reason we do monthly payments.  No contracts, no specials.
4.  Be the best in what you do.    Easier said than done but what will propel you on this path is to specialize.   Find your niche and then be the best.     We only trade high-beta very liquid US equities, mostly in the commodity and tech space.  We’re not interested in trading small-caps, Chinese time-bombs, biotech-time bombs, and while we like to watch currencies and hear about options, they’re not our specialization and you won’t find them in our newsletter.  We want to only talk about things we know very well and frankly, options and forex do not fit into that category.
5.  Teach people.   Subscribers who have been with us  for a good chunk of time  know our strategies as well as we do.   Create a community and  build bonds and you will see the benefits of organic growth.
6.  Keep your cool.   When you are writing the newsletter or posting on twitter/stocktwits you are representing your company.  Don’t get emotional, or get into cat fights with other traders.    If you are dying to rant then open up a personal twitter account and go nuts.   But everything that comes under your company name should reflect professionalism and integrity.   Don’t get us wrong, we love to joke around, and believe that’s an important part of relieving stress in a very stressful job.   But you won’t find HCPG losing it in a temper tantrum.
7.  Don’t fret about the competition.     We often retweet posts from our competitors, and consider many of them as online friends.   Don’t be afraid.   There’s always room for a quality product in the market.


(originally published April 09, 2011)

Easier to stay long with financials at our backs

Having conviction on the long side (which is essential when it comes to buying pull-backs) is a lot less stressful when financials act this well.   We’re above all major moving averages now on the $XLF on daily and weekly.   Note this 15 area on the XLF has been a critical area for years.    Digestion here is normal and healthy.     Our guess is that once 15 is gnawed at a bit more, we’ll lift off from that level to the next resistance level at 17.     And if we pull-back in the digestion phase, first major support comes in at 14.

The Other Side

When $IWM broke 81 we wrote a post saying it was the big news of the day and that if bears wanted to push, this was the time.   Now it’s the other side — first test of the 50sma this year and if bulls want to hold, this is the time.

Divergence food for thought

Not sure how to interpret this chart (lack of belief in China growth?) but the divergence between $QQQ and the metal miners $XME hasn’t been this significant since 2008.    Our time-frame is too short to trade off such a chart but interesting nevertheless.   Even if you take out $AAPL out of equation the divergence is very significant as a $SPY/$XME chart shows  similar divergence.   Any thoughts?

Refiners coming into important zones

Refiners had a hard reversal on Friday and look like they want to test their respective 20SMA averages on daily.   Let’s take a look at our three favorites,  $HFC $WNR $TSO and their respective initial support zones.
WNR 17.6 range is the first initial support.   Note that this would be the first test of the 20sma this year.

TSO first support near 26.75

And HFC first support near 32.8

If they aren’t clearly trending down (following 20ema on 5 min intraday chart) we’ll try all three for support long buys, either a) waiting for reversal before entry with stop on low or b) bidding the aforementioned spots with around 0.5% stop.

To put it simply  bullish would be a bounce on the zones given in this post, and bearish would be no reaction on these levels as buyers shy away from initial support.

Refiners can sometimes act as decent market tells and with crude approaching $110 and $SPY at resistance we’re on the look-out for the possibility of at least a pause in the music.   Keep your eye on that empty chair.

Market hasn't gone anywhere but look at the move on these stocks

We have referred to this market as “benign” as a while now and one of the features of a kind bull market is even when the market sits and digests,  break-outs work.   Take a look at the last four freebies we gave out on the stream  $SLW, $IBM, $WLL, and $CLR.    Big moves in individual stocks while $SPY has done very little.
CLR was an alert in our newsletter but also a freebie on the stream for 84 break-out.

IBM has been on our list for weeks, and we mentioned many times on stream:

Just before we left for vacation we gave out this idea for SLW,  long on close with stop on lows of day.  Awesome continuation.

WLL 54 also given out on stream — and again, big move.

Market sits and does very little while individual set-ups work very well.   Definition of a benign market.

This is how we trade

We keep things very simple for our trading.   Every day after the close we manually scan through our universe of stocks looking for patterns to trade.   This is our homework and anyone can buy it for $44.76 a month.    We send our alerts out to our subscribers.   The next day we review everything that triggered, win or lose, whether we traded it or not, etc.
During the slow parts of the day we start writing the newsletter.   Right now we have taken day-trade profits in $AMZN $KLAC $ALTR long,  $WYNN short, and have small swing size positions on with hard stops that we’ll take into tomorrow if we don’t get stopped in the next 3 hours.
Our Sunday morning newsletter included all the alerts that we review today:
KLAC support was 49 or 48.5 overshoot. At 49 stock was trending lower without any pause, but finally green bar reversal on 48.5. Decent move back to the 20ema at 49 (overshoot often rallies back to primary support – that’s the first day-trade target).

ALTR 39.26 alert—found it’s footing just under and decent bounce back to S1 (day-trade first target).

We liked our chances with KLAC ALTR also because of SMH coming within pennies of our 33.8 support. The more support that hits at same time, the greater the chance of recovery.

WYNN short 112 at open we found impossible as it went on opening bar, bounced on S2, but gave good entry on bounce back to the 20ema and back to new lows.

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AMZN was the star of the day – but you needed some conviction on this one to buy the new high near the open. For those who hesitated stock gave second entry on pull-back to R1 at 188 and then great action to 190 which was first day-trade profits.  (Trend-line break was on our newsletter for Friday, and 188 was sent out Sunday morning — AMZN is one of the best trading stocks right now in the market).

Swing long as long as 188 holds.

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Every day after the close we manually go through our master list of 300 stocks to look for patterns. Sometimes on weekends we look for new names and do scans – FTI was a product of a scan. We often regret adding them after as we realize “there’s a reason the stock isn’t on our master list”. We wrote yesterday that FTI was not a good trading stock but 55 was big number. Decent swing candidate to keep an eye on on a close over 55, but crappy day-trade action at extended run and scum of 55.

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We don’t like surprises.  We like trading our pre-determined list every day and nothing else.

All charts are from E-Signal– our subscribers get a substantial discount on their service. If you’re interested please email us at info AT highchartpatterns DOT com

All about this chart

We are basing at the very important 135 $SPY area while trending higher on the 20ema on the 60 min chart.  However note that we have tested it three times already in three days — the more we test it the weaker it becomes.   If we revisit again any time soon good chance it will crack.

Sticky Level

The bulls couldn’t ask for better price-action thus far as the market is refusing to pull-back and instead is constantly digesting thru time and then making a leg higher.    We are at a sticky level– one we posted last week — the $SPY 134.8-135

Extended into a major resistance area but handling it well so far– the more we base near 135 the better the potential break-out will look.   We’ve mentioned for a while that our favorite sector right now is the $XLE — good bases in this sector and not extended (compared to market).     That’s the place we have been and will be focusing for near future.

Map going forward

Slight sell-off today making today’s candle completely below the Standard Deviation 1 on the Bollinger Band, first time since Jan 03.    However, we’ll err to the bullish side (buying dips/break-0uts) as long as we stay on top of this trend-line.   If we break it, then it would be time to re-assess but until then ball in bull court.

Quite possible that the “easy money” has been made as we have broken the Standard Deviation 1-2 trend but as said — as long as we are on top of the trend-line the bulls have the advantage $SPY

The re-test market

This last month has been one of the best markets for break-out traders we’ve seen in a long time.   Everything works:  not only the first break-out, but also the re-test, which is a sign of how generous the tape has been this month.      What do we mean by successful re-test?  Take a look at these examples:
We gave the first trend-line alert on $AMZN a while back as a freebie on the stream– first buy was trend-line break.    Stock ran,  then was faded back to trend-line and then ran again up to our next alert (this one was for HCPG subs only) at 185.   Again fantastic run, and again re-test and a break-out of our third pivot which was trend-line break.     Great trading stock.

$POT 44 was another freebie for the stream — nice break-out on original break and look how it came back to test the number and bounce this week.

$X 29 was HCPG newsletter alert for weeks — it finally went,  re-tested the number and bounced yet again.    Usually each of our alerts is good for one trade.  We’re now finding that the alert is giving us multiple trades — a sign of an extremely good tape for traders.

One last example in $SLW — 32 was our buy spot in the newsletter.   Worked great first time through, but look how it came back to re-test 32,  find support on the number and bounce like a rocket.

All traders with similar strategies to ours want this tape to stay like this for as long as possible.   Of course it never lasts for too long but as traders we have to milk it for what it’s worth.  We’ve written a few times this week in the newsletter not to overthink the market.   Yes we’ve come straight up, yes we’re overbought, but in this tape you have to put that aside and focus on the individual set-up.    If it’s good, take it, if it’s not, pass.   Today a good example as $SPY was flat yet there were break-outs galore left and right in momentum stocks.

Our strategy going forward is the same — we’re not going to hyper analyze strategies –  whatever sets up on our list we’ll take a shot ($NUS $LNKD were the two HCPG break-outs for today — fantastic moves in a flat market), and if nothing sets up then it’s usually the sign that market wants to pull-back.   One step at a time.

The chosen ones

Our readers know that we like to find big spots on our favorite stocks and then focus on them until they break-out.   The longer they’re on the newsletter often the better the trade.  Why?  Because we have watched the stocks for sometimes weeks and know their behavior very well.  When the break-out day comes and we see the action/volume fall into place our conviction is strong.  And once you get the basics down (strategy, risk management, etc) what’s left, at least for our type of trading, is all about conviction.
Two recent examples from 2012.    We saw $POT  44 in early January and wanted that break-out.   It was highlighted in our newsletter on Jan 4, 5, 7, 9, 11  until it finally broke out on the 13th.

 The same happened finally with $AMZN today which had been highlighted as 185 breakout in newsletters sent out on Jan  7, 9, 11, 15, 17 with a 5 point break-out today.

Every trading style is different but for us it pays to watch the big spots like hounds, learn the stock’s behavior, and then hit it hard when the big day arrives.      The disadvantage to this method is that there are fewer opportunities compared to strategies that constantly scan for volume, moves, etc, but the advantage is that the win rate (which in turn helps one’s confidence) is relatively high compared to other strategies.

It’s common wisdom that a trader’s strategy should synch with his personality — we’d rather trade less (relative to day-traders that is) and be right most of the time than trade more and be wrong most of the time, even if the PnL is equal.  Why?   Over the years it’s what has evolved naturally for our type of trading due to our desired levels of confidence, stress-level, and quality of life.

It's not the charts, it's what mood the market is in

Almost every break-out we had in our newsletter last week worked, from copper stocks, fertilizer, biotech, oil, tech, no wonder what sector, it ran.  They were the same patterns we had in second half of 2011 which often didn’t work.  Same charts, very different success rates.   Why?   Sentiment of course.  We wrote a few times in the last few weeks how this has been one of the most “benign” markets we’ve traded in for a long time (since earlier parts of 2011).    Even the gap-ups would offer opportunities, as stocks would be faded to alert numbers, and then spring like a rabbit up for fantastic moves.   Dips are shallow, buyers are aggressive, and everyone is a genius.       Indices go to resistance, stall, digest and then go higher the next day.  Enjoy it while it lasts because it never lasts for too long.
We’ve never been interested in mechanical strategies exactly because of this — in some markets the exact same chart pattern fails 80% of the time, while in other markets the same pattern works spectacularly for 80% of the time.    Figuring out how benign/generous a market condition is for us is integral to our way of trading.     In easy markets like this mistakes are forgiven, as long as they’re on the long side.   You chased up?  No worries, after a shallow dip stock goes right back to the highs.   What is essential for us now is to look for signs of when this mood starts to shift — the first will be a dip that is not bought, i.e. a trend-day down.   That could start shifting the psychology.
We watch our favorite tells all the time,  the Euro ($6E_F),  silver ($si_f),  bonds, copper, etc, but in the end, all decisions defer to price-action.  How does a stock act at support and resistance is ultimately the most important piece of information for our type of trading.
On a different note some of you have noticed that we’re not “tweeting” that much during session hours — this was part of our 2012 resolution, to keep our focus on trading during trading hours and make appearances more during after-hours.    If things get less busy we’ll probably tweet more but trading will always be priority number one.    We’re grateful to be part of such a wonderful community but after the honeymoon stage of social media is over, the next pivotal stage to conquer is finding a work/life balance.

Don't get frustrated by the gaps

Our readers know that if a stock gaps above our alert we either a) let it go b) wait for an intraday set-up to form  or preferably c) wait for a fade back to our alert to enter.     Happily,  the fade is happening a lot.   If you see a gap above the alert, don’t delete it and walk away with frustration.   Keep watching — what we’ve found in recent days is that the stocks are fading back to the important break-out zones, testing it, and then rallying again.   This of course happens frequently in the market, but we’re finding it happening more often than usual this week.    Let’s take a look at the examples just from the last 2 days:
We’ve had $OXY 98 in our newsletter for days — and it finally broke out yesterday morning with a gap above our number.   And then two perfect fades/trades for those who waited patiently for the entry with 20 cent stops and 1 point rewards:

$SLW 31 interested us long — again, gap up, but fade to number with excellent risk/reward day-trade entry.

$CLF 68 break-out from this weekend’s newsletter — same thing, gap up,and then fade back to our spot, and rally.

$FCX 40 from this weekend’s newsletter — yesterday it gapped above and wasn’t faded back to our spot, but look at today’s action.   Great pull-back to 40 and rip higher.

And lastly $DECK 87 from last night’s newsletter — again a gap above, and then quick fade to our spot for excellent risk/reward entry.

We’re currently experiencing a very benign market — don’t worry about the gaps,  just watch your spots and wait for the pitch.   Almost every single alert we had this week that gapped above gave an excellent entry later in the day at the original alert.

Place your bet

We’ve posted these charts on the stream in the last 2 days but wanted to bring them in together to show what is at stake:

We’ve spent all week digesting, but not filling, Tuesday’s gap on the $SPY.  This is bullish digestion above the 200sma on daily.

$XME is boxed in by major moving averages– it bounced on the 20sma yesterday but is having trouble with the 50/100 from above.  Make or break time coming up next week.

$SLV repelled by the 20sma today — note trending slope down.    Very clear line in sand.

$GLD repelled by the 200sma — we had this as a short resistance spot all week but alas  took it off radar yesterday.  Again, clear line in sand.

Nice tight bars under 200sma on the $XLE and has refused to fill the gap — again, roll down or break-out coming soon.

As we wrote yesterday divergence between Euro ($6E_F) and market is deepening — one of them will give in soon and there will be some reversion to mean.   Place your bets on which horse will fall first.

Stay Cynical

After a few days off from the market we came back refreshed and energized and happy to see the Santa rally.   But then we looked through our charts and one thing really stood out — silver action, or in this case, non action.

$SI_F chart — dead in the water.    Silver is a “risk-on” metal, what’s happening here?

Here’s a chart of the gold/silver ratio overlaid with $SPY.   As you can see they usually have an inverse relationship but have recently begun to  trend higher together  (meaning that market is moving up while gold outperforms silver).   It’s too short a time-frame to draw firm conclusions but it’s something to keep in the back of your head.

SPY chart near resistance zone from V move from 120 support — needs to digest this move.    We’re in short-the-rally mode until the V formation is worked through.  In bullish markets this means pops are faded intraday but support buyers show up before the close- – and this happens until the move is digested.  In bear markets it means complete reversals.

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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.