Sunday, February 28, 2010

Wk09: Market Forecast

News announcements for the week.

We have spent the last week chopping around between the 50% and 61.8% Fib levels. With the large hammer on the dailys as well as the bull flag consolidation this seems bullish, but we are looking for an S&P close above $1113 to confirm this or a close below $1093 to confirm bearishness.

Wednesday, February 24, 2010

Monday, February 22, 2010

Thinkorswim Flexible Grid Chart

Here's how to setup the flexible grid chart on thinkorswim.

Market Data Sources

Here's where we get some of our data that we use in our analysis.

Sunday, February 21, 2010

Wk07: Market Recap

Last week’s write-up pretty much sums up this past week’s action. We broke above the 61.8% on the prior retracement so if we were to reverse lower it should happen on Monday or Tuesday. If we move higher this week we would be looking for move to prior highs over the next few weeks.

Wk08: Market Forecast

In the week ahead look for these news announcements to act as potential market movers

A mix of news is on this week’s calendar including GDP and Existing Home Sales Friday.

Looking at the market breadth for the prior week we do see a divergence. As the market went higher, the Up volume to down volume was decreasing. Typically the Monday after options expiry is down and with less volume on the prior rally a reversal could be in store.

You’ll notice that we always have two plans for the week, one bullish one bearish (or one of the two could be neutral). While no one can predict the market, it is our jobs to react to it, therefore whatever happens we must be ready.

Thursday, February 18, 2010

The Hanging Man

The Hanging Man Reversal is a common candlestick pattern we see near the end of a rally. The psychology behind the pattern is simply, retail traders or "late to the party charlies" want to get a piece of the action, but the majority of the move has already happened.

If the following day closes below the hanging man's close, all the bulls who went long on the hanging man's close are now underwater in their positions and selling occurs. In order for this pattern to confirm a reversal we need a close the following day below the hanging man's close.

Wednesday, February 17, 2010

Options Expiry

Options expiry (third Friday of every month), is this coming Friday. Here are some things to keep in mind.
  • About 2-3 days prior to expiration, time decay drastically decreases (for options you've bought), and works in your favor (for options you've sold).
  • The week of options expiry tends to be an up week followed by a down Monday.
  • If you've sold a naked put and the stock is In-the-Money (ITM), you will be required to purchase those shares come expiry.

Monday, February 15, 2010

Wk06: Market Recap

Looking at the markets in terms of supply and demand is one of the most common and simplified ways of analysis. Identifying where the market is “valued” describes balance. Looking at the weekly chart of the S&P500 we notice two very important things.

1. The prior week’s candle is a doji bar or spinning top as talked about in Japanese Candlestick Charting Techniques by Steve Nison. This is a potential reversal bar, with confirmation, in this case, a close above the high of that bar.

2. We also notice that the current weekly candle’s body engulfs the prior week’s body, bullish engulfment. Volume on the SPY during this decline has increased, giving weight to the bears.

We will watch for a break above or below week 6’s candle to confirm that the market is moving into a new area of value. This value concept can been further explained using The Auction Market Process aka. Market Profile.

Wk07: Market Forecast

In the week ahead look for these news announcements to act as potential market movers

On a daily chart of the SPY we can clearly see the down channel that we are in. The hammer break below the channel could be classified as the final flag lower signaling a reversal pattern, and as talked about in the market recap, there is potential for a breakout as we sit at this downtrend line.

The horizontal overhead resistance is strong and not far off. If a breakout does occur it would make sense that it would be a swift large body candle, however a higher lower to follow would allow for reentry if the anticipatory breakout trade is not your style. For those thinking short, a safe stop would be above the prior swing high above that horizontal resistance.

Remember to keep things simple, ask yourself 2 questions when at an inflection point and deciding which way to play a trade…
1. When will the bears know they’re wrong if I go short?
2. When will the bull know they’re wrong if I go long?

Wk07: Stocks to Watch

These names we are looking at this week.


Reenter on pullback:


We don’t normally talk about long-term plays; however we couldn’t help but notice UNG. A potential double bottom pullback (reversal pattern) has formed. A break above $11.00 could send this stock upwards.

Tuesday, February 9, 2010

Trading like a Cheetah

Often traders feel that they MUST be trading all the time. This couldn’t be farther from the truth. A successful trader will act much as a cheetah does hunting its prey in the African Safari, striking less often, but with vengeance.

A Cheetah will track a herd of gazelle and wait low in the outlying grass, carefully identifying his prey of choice, the weakest, the one with the highest risk/reward. It is only then that the cheetah attacks with full force capturing its prey, returning to feast on its catch, then resting until tomorrow, a new day.

Saturday, February 6, 2010

Wk05: Market Recap

In last week’s market forecast we talked about a target for the S&P of $1030. We came down to the $1045 level and while Friday’s price action resulted in a large bottoming tail hammer, we feel that after a small bounce we should continue lower. We also saw the Vix spike above the prior swing highs, which we talked about last week as well.

Wk06: Market Forecast

In the week ahead look for these news announcements to act as potential market movers
A few crucial economic news announcements noted above. We are looking for more downside action with a short term S&P target of $1030. After hours, it is interesting to go back and print out daily and weekly charts from years past, including 1929 and 1987 and look for similarities in these charts to today’s price action. For those who follow Elliot Waves principles, this is a valuable tool.

Wk06: Stocks to Watch

We continue to play the major top line figures rather than pick individual stocks. For those trading the E-mini’s intraday and feels that the increased volatility has been whipping them around, look to trade the SPY, DIA, QQQQ or IWM.

500 SPY shares are equal to one E-mini S&P contract. Playing with one or two-hundred SPY shares allows you to scale out your position where one or two E-mini contracts does not. On big days you must be trading. It’s these day that can make your week or even your month, especially for those day trading.

Paul Tudor Jones

Here's a really great documentary video about one of the most successful traders ever, Paul Tudor Jones. Jones is a multi-billion dollar hedge fund manager for Tudor Investment Corporation.

Friday, February 5, 2010

Thursday, February 4, 2010

Trend or Range Day?

How did we know that today was going to be a trending day, and for that matter, an extremely profitable day? We look at three things on the open.

1. Prior day’s close
Looking at the prior day’s close, we established (after Globex overnight trading) that today would be a gap down. Statistics show that approx. 80% of gaps fill, but the larger the gap, the less likely the gap is to fill and the more likely it is to begin a trend day.
2. Market breadth
Once the market opens the first thing we look to is the market breadth, that is, what percentages of stocks are advancing versus declining. We see that today the market opened extremely bearish (only 9% of the stocks we’re bullish).
3. Candle formation at the open
Once we have confirmation of the first two we look to the candle formation to signal our entry. We see that on a 15-min chart the first candle was a large body bearish candle. Looking at a 5-min chart we see that the market attempted to move higher to close the gap, but was immediately rejected initiating the selloff.
After looking at these three aspects, we have a confirmed short entry and, as the day progresses we continue monitoring the breadth and as long as it remains as bearish as our entry we continue to stay short resulting in a very profitable trade.