Sunday, January 25, 2009

Wk4: Market Recap

2009 has had a rough start to say the least. With the S&P and DOW down 8% and the NASDAQ down 6%, the actions over the next few weeks by President Obama should be a major market mover. The Energy Sector (XLE) was the only S&P sector ETF to be up on the week, the other 7 being (XLB, XLF, XLI, XLK, XLP, XLU, XLV, and XLY). The volatility index (VIX) jumped 10 points on Tuesday, but formed another inverted hammer on the weekly chart.

As shown above in the internals box, Friday’s choppy action is clearly displayed with a positive Breadth Ratio and negative A/D Line, something that is very uncommon, but indicative of sideways action.
Looking at the Banking Sector (BKX) we saw a huge push lower on Tuesday with an extremely bearish candle with virtually no shadow. While it seems to be forming a bear flag, the government is pumping in fiscal stimulus in the billions of dollars to help these banks from collapsing.

On an even more interesting note looking at the XLF FEB 10 Calls, 272k contracts were traded on Friday. To put that in perspective of how large that is, the next highest are the FEB 11 Calls at 46k. A very big hitter is buying an enormous amount of call options in anticipation of a move higher. While we cannot know for sure which way the market is going to move, we can analyze the facts and historical trends to make highly probable speculations.

Wk5: Market Forecast

In the week ahead, we are waiting for President Obama to release his Economic Stimulus Plan. We still have a lot of earnings, but key economic data will be…
· FOMC Meeting Weds 2:15ET

· Durable Goods Orders Thurs 8:30ET
· GDP Fri 8:30 ET

Oil Services and Gold are looking strong here. Stocks like RIG and SLB performed very well on Friday and Gold is making another run at $1000 an ounce, however watch GLD on a yearly chart as it is approaching its down trend line resistance. Barron’s released an article saying “big oil is a buy.” Whether it’s true or not if the big boys are beginning to buy, it usually pays to jump on the band wagon in that case.

Again we are in a bottoming process that will probably last for many months. We continue to be range bound between the $800 and $850 level on the S&P so tread cautiously until one of these levels is broken to establish a short term direction.

Wk5: Stocks to Watch

To recap we are still long MYGN, GILD and short HUBG. ASEI and AXP hit our profit targets with nice gains. BMRN could be actionable long over the high of the low day, which at this point is Thursday’s high. With stocks like SIVB, RL and SINA that gap on the open you need to look at your risk to reward and see if the stock is still at a low risk entry point.

Wait for the first 15 minute bar to close before placing a trade.

This is a vital rule for our trading strategy because it allows for somewhat of a market direction to be established off the open. For now stay cautious with small manageable position sizes.

Wait for pullbacks to go long in AEM ($50 level), ABX, and TNH.

RTN (long)
Ascending Triangle
Entry: Above high of low day, $51.47
Stop: Below last swing low, $49.82
Target: $54
Option Play: Feb 50 Calls
Comments: This ascending triangle has touched its “ceiling” twice. If we see resistance a third time it may pullback to make another higher low before breaking out. Also notice how the volume is increasing as the stock moves higher.
SGR (long)
Ascending Tri/Bull Flag, depending on how you look at it
Entry: $28.07
Stop: $24.55
Target: $31
Option Play: Feb 25/30 Calls
Comments: SAFM has developed a nice base at the $25 level. Any breakout above $28 and the stock should push higher.
AU (long)
Break of Resistance
Entry: $28.28
Stop: $24.40
Target: $30, or until it stops going higher
Option Play: Feb 25/30 Calls
Comments: We placed a wider stop on AU. Once the stock breaks out we will move the stop under the low of the breakout day.
IFF (short)
Break of Support
Entry: $27.45, or anywhere at the $27-$28 area
Stop: $29.27
Target: $25, or until the bulls begin to show buying pressure
Option Play: Feb 30 Calls, very low volume, shorting stock may be a better option here.
Comments: We like this stock on a break of support. While support is a subjective area, we can watch for relative strength or weakness to confirm our entry. If the stock is holding at these levels and the market is falling we will pass on the trade.

Thursday, January 22, 2009

Wk4: Watchlist Update 2

Here are a few more stocks to wrap up the week...MYGN (long)
Ascending Triangle
Entry: Anticipatory trade at $72.60 or a breakout trade at $74.01
Stop: Under swing low
Target: $75
Option Play: FEB 75 Calls
Comments: MYGN has performed strong in this market climate and is about to breakout to a new 52-Wk high.SIVB (short)
Pull Back to Resistance
Entry: $21.24
Stop: Over swing high
Target: $20
Option Play: FEB 22.50 Calls
Comments: SIVB has been in a downtrend and continues to push lower. The stock just released earnings so if it continues to breakdown it remains a great put candidate.
HUBG (short)
Bear Flag
Entry: $18.19

Stop: $20.05
Target: $16.50
Option Play: None, Stock is not available to borrow.

Comments: HUBG has formed a nice bear flag and is looking to consolidate before making its next push lower.

Wednesday, January 21, 2009

Wk4: Watchlist Update

All our picks for the week are doing quite well. BMRN has pulled back nicely and is setting up for an entry. GILD broke out today and closed above its 200 day moving average. SINA and RL gapped lower Tuesday, but continued to breakdown to are target before rallying and AXP broken down from it's descending triangle which will now act as resistance. Here is another stock to add to the long pile.
ASEI (long)
Ascending Triangle
Entry: $80.00
Stop: Under Wednesday's low
Target: 82.75
Option Play: FEB 80 calls
Comments: ASEI is looking to breakout of its Ascending Triangle once again. Look to buy over the hammer with a stop under the low

Monday, January 19, 2009


Wk3: Market Recap

Week three was full of emotion. The major indices broke down below their moving averages with the financial sector performing the worst. The market will often times move in the path of least resistance so these trend lines should now act as resistance points if a rally should occur. Monday’s bearish A/D Line and Breadth Ratio along with a 3 point rise in the Volatility Index (VIX) was the first sign that fear was resuming into the markets. Thursday’s bottom was marked intraday by a hammer on the 15-min chart followed by a steep rally with increasing volume.

Many of the top performing names we’ve been watching broke down on stronger volume this week which makes us believe that a rotation in the leading industry groups is taking place. One thing to note is that the large inverted hammer produced by the VIX on the weekly chart. This could mean confidence among investors is growing, however it is more likely that investors are laying low until president elect Obama’s inauguration is over.

The three day weekend can provide an upside bias because it gives investors time to regroup and refresh their minds. Nonetheless, the formation of a bottom is a complex process and it is usually unclear when one is reached. Using the A/D Line and Breadth Ratio’s we are able to gauge what is happening with the markets “internally,” helping us filter out false moves and better define our entries and exits.

Wk4: Market Forecast

In the week ahead, we should see somewhat of a range bound market. While a stochastic oscillator reads oversold, the moving averages will act as resistance if there is an attempt to move higher. We are entering a 5 week option expiry cycle kicked off with president elect Obama’s inauguration on Tuesday. This should produce a light trading day, however earnings season is heating up and big names like Johnson and Johnson, TD Ameritrade, CSX and IBM all report on Tuesday. Housing Starts are released Thursday at 8:30ET and should act as a market mover as well.

On a longer term outlook, the markets will be paying close attention to the actions president Obama and his new administration take to restore confidence in the economy and US financial system. It is important to keep in mind that the markets will react based on the emotions of greed and fear by the consumer. We will wait for a break of the S/P 880 level before we take on a cautiously bullish stance and a breakdown of the 817 area to become increasingly bearish.

Wk4: Stocks to Watch

A sideways market creates an environment less likely to produce breakouts or breakdowns in individual stocks so keep that in mind for the coming week. Keep these tickers on your radar, wait for price pattern confirmation and keep an eye on the volume for each.

BMRN (long)
Ascending Triangle
Entry: Waiting for pullback, buy above the high of the low day
Stop: Place stop under the pullbacks low
Target: $23
Option Play: FEB 20 calls
Comments: BMRN recently broke out of resistance on pretty good volume, if we see a pullback in this stock we will likely enter. It has shown relative strength to the market over the past few days along with increasing volume.

Gild (long)
Ascending Triangle
Entry: $48.75

Stop: 46.70
Target: $52

Option Play: FEB 47.5 or 50 calls
Comments: GILD is resting on its main moving averages (10, 20, 50 and 200-Day). If we see prices begin to move higher, this should be a very easy to manage trade. Keep in mind the $50 psychological resistance level and watch for hesitation by bulls or bears to step in at that point.
SINA (short)
Bounce off Resistance
Entry: $21.14, a move below Friday’s low
Stop: $22.59
Target: $19, watch to see if we get a bounce or breakdown at the $20 level
Option Play: FEB 22.5 puts, this stocks option volume and open interest are quite low.
AXP (short)
Descending Triangle
Entry: $17.50 area Stop: $20-21, or previous high
Target: $15, $10, this is a very wide triangle over a two month period so we may see a break lower, then a small rally before the final target is reached.
Option Play: FEB 17.50 puts, tight spread and high open interest.
Comments: We have been watching AXP for the last few trading sessions and it has performed very poorly on higher volume, if we see a small rally back to the down trendline one last time, the bears should step in and the stock should break lower making for a great entry point!

RL (short)
Bounce off Resistance
Entry: $41-$42 area Stop: Last swing high before moving lower
Target: $38.50
Option Play: FEB 45 or 40 puts, the 45's will have more intrinsic value, but look to the volume and spreads upon entry.
Comments: RL finally broke down below its $42 support level last week which will now act as new resistance allowing for an easily managed trade.

Friday, January 16, 2009

Price Patterns

Here at TJMactrading we follow a technical swing trading strategy which analyses key support and resistant levels for entry and exit of our trades. The Japanese Candlestick charting technique is one of the most useful tools for spotting these price patterns and trends.

Support and Resistance: Many of the trades that we take will almost always have an entry off support or resistance. Support and resistance are like the floor and ceiling of a room. Support being the floor, resistance the ceiling. Entering as close to these levels as possible allows for the least amount of risk to be taken on during the trade. These are both psychological and technical price levels that will help you get the most out of every trade! Price patterns are created using support and resistance levels and help give us a clearer understanding of what’s going on in the stock.

Before defining the patterns, we must discuss what it means to be in a trend. While quite subjective to interpretation, an uptrend is a series of higher highs and higher lows and a downtrend is a series of lower highs and lower lows. We will discuss the most common price patterns below.

When looking at price patterns, there are two categories they are divided into, continuation patterns and reversal patterns. The price patterns discussed here can be used across any timeframe, although historically the longer the timeframe the more accurate. Here are a few of the most common price patterns.

Continuation Patterns:

Ascending Triangle
Descending Triangle
Bull Flag
Bear Flag
Reversal Patterns:
Head and Shoulders
Inverse Head and Shoulders

Ascending Triangle: The ascending triangle is identified by its relatively flat upper resistance boundary and rising lower boundary. The upper boundary should be touched 2-3 times in order for it to be an actionable triangle. This pattern is a bullish continuation where the bulls are showing strength and the bears are finding it hard to drive prices lower. A target price is gauged using the different in price from the flat ceiling and low point of the triangle. With a ceiling of $31 and low of $24, a 6 point price target can be estimated from the break of the resistance level.

Descending Triangle: The descending triangle is a bearish continuation pattern with a chart mirroring the ascending triangle to the downside. While triangles are classified as continuation patterns, they can be reversal patterns if occurring in the context of the opposite trend. (ie: descending triangle in an uptrend, or ascending triangle in a downtrend.)

Bull Flag: The bull flag formation is a bullish continuation pattern which usually follows a breakout and is now consolidating before making its next move higher. During this consolidation, prices should not retrace more than 50% of the flag “pole.” A Fibonacci Retracement can be used to accurately measure these levels. Typically the consolidation period will consist of lower volume, once volume increases that is usually a sign of the next breakout.

Bear Flag: The bear flag formation is a bearish continuation pattern where the underlying experiences a sharp drop in price then consolidates or chops sideways before its next move lower.

Head and Shoulders: The head and shoulders formation is comprised of a small rally, large rally, and another small rally, usually occurring at the top of an uptrend. This forms two shoulders and a head. The neckline is the support level at which the stock rallies and pulls back to. When a rally sells off before making a new high, it is a sign that a head and shoulders pattern is forming. The target price can be estimated by taking the different of the high and low of the pattern and projecting it down from the neckline.

Inverse Head and Shoulders: The inverted head and shoulders pattern is the opposite of the head and shoulders pattern, it is a bullish reversal pattern. The head in this case usually acts as the bottom of a downtrend and is often times in the form of an inverted hammer. Once the neckline is broken with increasing volume a move to the upside should follow.

Monday, January 12, 2009

A/D Line and Market Breadth

Advance Decline Line: The a/d line is a number composed of the net sum of advancing stocks minus the number of declining stocks (ie: a day with 500 advancing stock and 2000 declining stocks would yield an a/d line of -2000). This number is calculated separately for the NYSE and the NASDAQ.

An a/d reading of greater than 1500 or -1500 is usually indicative of a trending day. Therefore if the a/d line opened the day at +1600 and remained at this level or better, any pullback would be buyable because internally the same number of stocks are still advancing. This scenario is flipped for shorts, with an a/d line of say, -1900 any bounce would be shortable.

Breadth Ratio: This is a figure composed of the ratio of volume flowing into up stocks compared to the amount of volume flowing into down stocks. A breadth ratio relative to 1 is generated (ie: a day with 10M shares of advancing volume and 5M shares of declining volume results in a breadth of 2:1 Positive, 2x as many shares are rising than falling).

Generally, the Breadth is more important than the advance decline line because it takes into account the volume of advancing to declining shares. A breadth number is calculated separately for the NYSE and the NASDAQ.