February 9th 2014: A kinder, gentler way to play earnings.....

Here's a post-earnings set-up that I'm seeing play out successfully lately.

And here's the best part:  you don't need to gamble into earnings or face premium crush after the news is out.

Step 1.  Wait for earnings to come out.  Don't gamble into earnings.
Step 2.  Wait for a flag to appear
Step 3.  Wait for flag to break
Step 4.  Buy the break or minor pullback
Step 5.  Manage trade to reduce risk

Here's some recent chart set-ups:

For more charts and to read a disclaimer, check out my public chart list on stockcharts:

http://stockcharts.com/public/1109955

February 1st 2014: I do not like red bars, Sam-I-am. I do not like them, Sam, you see.

With apologies to Dr. Seuss, here's a chart which nicely summarizes my trade history:

I'm mainly a long trader, but I will occasionally take the right set-up in some of the triple short index ETFs.  However, that's still "long" a short fund.  It's just what seems to work for me right now.  2013 was really tough for shorts (at least for me vs. the indexes).  You had to be very quick in recognizing the turn, scale some profits, raise your stop and make sure you didn't give it all back when the indexes gapped up on Tuesday or Friday.  As the "Bill the Cat" cartoon likes to say, "ACk!".  I was lucky to scrape out a few pennies on more than one occasion last year.

Here's a short set-up that I'm watching in SCO:

Given my preference to trade on the long side, I tend to make most of money when the $SPX has green weekly elder bars and is trending up.  The trend might last 2 weeks or 10 weeks or more.  Sometimes I can squeeze another week of decent profits out at the top by focusing on relative strength in individual stocks while we trend sideways in the $SPX.  I need to get better at pressing harder during these periods - in any case, this is where I make my money.

On the flip side, when the $SPX is slipping down with blue or red elder bars - it's a struggle for me to trade on the long side.  Most of my long trades see no follow-through at all.  Therefore, I trade small or not at all.  For example, this week I saw some relative strength divergences in ETFs like:  IWO, IWC, IJH, MDY, XLF, FAS, TAN, and IBB - all of which failed to make a lower low on Wednesday and bounced sharply on Thursday.  You had to be quick in identifying that trade, taking profits, and raising stops or you gave back some profits on Friday.  My trades here are mainly short-term rentals which need lots of attention and quick fingers.  Another option is to take long set-ups in the double and triple short ETFs if I see low risk entries (like SCO above).

So, here's the question that I'm thinking about right now:  Is it worth it?

The way I see it, there's 4 options while the market is sliding downwards:

1.  Sit in cash and watch from the sidelines.  Kind of boring, but also a good time to reflect + spend more family time (which is also very valuable).

2.  Try to catch small bounces on the long side.  Reminds me of jumping in front of a bus to pick up a penny.

3.  Short a market that's basically crushed shorts since summer of 2011.  One of these times it's going to work, but that same logic can cause drawdowns.

4.  Some hybrid of the above.

Right now, I'm feeling like doing some hybrid of the 3 options.  I don't want to lose touch with the markets, but I also have no interest in losing the money that I make during uptrends.

So, that's my plan:  trade small, keep lots of cash, hang out with my daughter, and wait for the eventual turn and for green bars to come back!

For more charts (and less words), see my public chart list on stockcharts.com:

http://stockcharts.com/public/1109955

January 26th 2014: Stock market bottoms are like pornography...

....I'll know it when I see them.  Probably.

Everyone wants to know where the bottom is in the stock market indexes because we dropped a few percent off of all time highs.  Right off the bat, I'll say that I have no idea where or when the market will form a bottom.  Some of it depends on your time frame, but for this post - let's define a trade-able bottom as being on the daily bar chart time frame that retraces at least 25% of the eventual loss from $SPX 1850.

Again, I have no idea where on when the market will form a bottom, BUT I do know what to look for.

Bottoms can come in all shapes and sizes - especially the stock market variety.

Here's what they usually don't look like:

Here's what that chart looks like to me (a falling knife):

Secondary indicators like big black bars showing up on a heikin-ashi $SPXA50R at oversold lows or $VIX>20 can be very helpful:

But in the end, I always defer to a price chart.  Here are some recent examples of what a bottom in the $SPX looks like to me:

Will the eventual bottom look like one of these 3 patterns?  Possibly.  We could also have a "tweezer type" bottom (which I personally dislike to trade). We could do something completely different and I'd probably miss the bottom in the indexes and just trade individual stocks (which is fine with me).   The important part is that I'll be looking for some reversal or exhaustion type pattern which I can trade with defined risk + better than random probability.

One final thought:

Good luck out there next week.

For lots more charts (and less commentary), check out my public chart list on stockcharts.com.

http://stockcharts.com/public/1109955

December 27th 2013: So, what's in store for the market next year??

Answer:  How the heck would I know; I don't have a crystal ball.

Here's something that I wish someone had told me when I was younger:  most predictions for next year will be wrong.  Here's another one:  humans suffer horribly from bias.  They're biased by where they get their paycheck, they're biased by the need to predict the future, they're biased by recent history, etc., etc.  As an example, if Year 1 was up 25%, your friend the stock broker from big bank brokerage A will jump on TV and predict Year 2 will be up 10-15% based on X,Y, Z logical and usually fundamental arguments.  Similarly, the guy from the bear shop will say stocks are going to crash.  Every year, he'll say the same foolish thing and he'll be right 1 or 2 years out of 10.  The guy from the bond shop will say to buy bonds for the long-term to reduce volatility in your portfolio.  You can watch them on mute and fill in the words yourself because on average they'll all say the same thing depending on their individual biases, employers, and current portfolio position.

Anyway, my main point was not to rip on talking heads on TV....

I think it's much more valuable to talk about possibilities for 2014.  There's an important distinction between possibilities and predictions.  Possibilities offer a potential road map.  Predictions are an imperfect attempt at defining the future.  The key distinction for me is that the charts will tell me if I'm on the wrong potential path and I can get the heck out of the way.

Here's some possibilities for 2014 (and a brief rationale):
- $SPX:$USB ratio tags its 1999-2000 high of ~16.  (Trend is in place and can hit top of prior range - especially if money flows out of bonds and into stocks).
- $COPPER gets a bid after 3 years of neglect and runs up to the top of its range @ $4.50 per pound.  (Some nice bullish divergences showing on the monthly RSI(2) chart.)
- $XJY (japanese yen) continues to slide against major currencies until it finds support in the low 80's.  (Breaking down below $96 and trend is in place).
- $GOLD (& $SILVER) experience a vicious short-covering rally.  ($SILVER is finally outperforming $GOLD and historically, that's been a clue that prices can rip higher.)
- $TYX (30-year bond yield) hits 4.5%.  (Trend is in place and can hit top of prior range).
- $WTIC continues sideways between $115 and $75.  (Competing RSI(2) monthly chart divergences suggest range bound trade for now).
- $NATGAS surprises to the upside despite reports of large supply.  (Cup and handle target is close to old resistance at $6.11).
- Industrials, XLI, (led by shippers: SEA) outperform the $SPX in 2014.  (Trend is already in place for XLI, shippers could add more fuel.)
- Metals (XME, SLX) are surprise leaders for 2014 and play catch up to the rest of the materials sector.  (Monthly charts look bullish for the first time in 3 years).
- $VIX remains trapped in the 10-20 range.  Brief forays above 20 will be buying opportunities for equities.  (Monthly $VIX chart looks bearish to flat.)

So those are some of things that I'll be watching for in 2014.  IF the right set-up comes along, I'll be jumping on a few of these.  Good luck to all!

December 7th 2013: What's up with energy stocks?

Once again this week, there's too much for me to cover in a single blog post....

In no particular order:
- The relative out-performance of industrials &  health-care vs. almost every other market sector
- The relative out-performance of large caps on Friday (vs. small & mid caps)
- The relative out-performance of low-vol vs. high-beta on Friday (SPLV vs. SPHB)
- The accumulation day on Friday and what that means for the market (short version:  as long as Friday's lows hold, I expect a grind upward into year-end.  Accumulation/Distribution days act as anchor points.)
- Gold & Silver & related miners
- Bonds & Yields
- Trends in Natgas, Crude, and the Gasoline:Crude spread

The most surprising thing to me that happened this week was the action in energy stocks.  Forget IOC blowing up; check out the action in the former energy leaders.  For example, on Friday, the INDU's are up 200 pts and many of the former leaders in energy, including:  OAS, PXD, EOG, not to mention solar names, were getting hammered.  That's the epitome of poor relative strength in the face of rising oil prices and buoyant stock market - a big, giant red flag.  The large caps energy names (XOM, CVX) and refiners were holding up the whole sector so the headline prices of the energy index were well-contained, but the action under the surface was ugly.  It won't take much for the energy sector to completely rollover.  Technical indicators for the broader market suggest to me that the probabilities are for higher prices, but if we do rollover watch for energy to lead on the downside.  They also have the potential as a hedge while playing other sectors (like industrials).

Here's a chart:

Here's what I see:

- Poor RSI

- Nested box formation

- Small box is a tight range consolidation

- The bottom of the large box is the target on a break of the small box

For more charts and to read a disclaimer, please visit my public chart list on stockcharts.com....

http://stockcharts.com/public/1109955

November 24th 2013: The Kirk Report for $100, Alex?

For the not-so-princely sum of $100 per YEAR (not per month), you can have access to the trading brain of Charles Kirk via his namesake, The Kirk Report.

Charles brings with him an extreme work ethic that helped him turn a tiny $2K porfolio into a relatively huge $7M account.  I haven't done the math to figure out the average yearly compounding, but we can say for sure that he's done well at trading.  At this stage, he can afford a more balanced life, but that doesn't seem to diminish from the virtual fire hose of information that he shares daily via email updates (pre and post market updates), weekend updates (flipboard magazine and week-in-review video), as well as a real-time, twitter-like, link-fest called the "Notebook".

In general, some of my favorite posts are the in-depth interviews with other traders who have reached that elite multi-million (or higher) status.  It's Jack Schwager's Stock Market Wizards in real-time.  Where else are going to find this stuff?  One of my all-time favorite posts of his was a 2012 "self interview" titled simply, "How I made 54K last week".

Perhaps his greatest talent is the ability to see and map out price patterns and possibilities in the S&P500 chart on multiple time frames (from weekly to 1 min charts).  He identifies the patterns (mainly cup & handle and variants like head & shoulders) that seemingly everyone (including the HFT algo's) are watching.  Even if you don't trade patterns, it's useful to be aware that he's trading them, other pattern traders are trading them, and the algo's are trading them.  The completion or failure of these bullish or bearish patterns also gives a sense of the strength of the underlying trend.  For example, if the bearish pattern currently in play fails, a bullish one will often form and succeed.

Where else might you spend $100 on trading this year?
- 5 round trip trades?
- A tight stop?

Consider joining the Kirk Report for 2014 and earning a multiple of your $100 back.

In full disclosure, Charles is offering a "End of Year Drawing" with prizes for positive reviews.  My personal win-rate with random events like drawings is close to zero, so don't let the drawing color your interpretation of my review.

November 11th 2013: The importance of staying solvent...

"Markets can remain irrational a lot longer than you and I can remain solvent".
- John Maynard Keynes

ref.:http://en.wikiquote.org/wiki/John_Maynard_Keynes


On Thursday, the Dow busted its highs and then quickly reversed with volume on the downside.  The weak bounce into 12N had little volume, so I went short the Dow (and the S&P500 for good measure) right around 12N.  Nice entry.  Superior risk/reward over some other plays that I considered (including financials) and the market went my way the rest of the day and it was a nice easy ride down.  Don't you love it when a plan comes together?  I mean it was picture perfect distribution day with bearish engulfing candle that swallowed the last week's worth of price action and destroyed some bullish price patterns in the process.  And I was feeling rather pleased with myself.

Then, the payroll numbers hit @ 8:30A on Friday.  Bizarrely strong considering the fiasco in Washington, but I don't pay too much attention to fundamentals.  Bond market tanks immediately.  Dollar is flying, but fades intraday.  Equities dip slightly then recover fast and level out until 3:30P.  Financials absolutely ripped higher.

Perhaps I should have covered immediately.  Perhaps I should have gotten long something...anything really.  Instead, I just watched my gains evaporate and come just shy of my stop (Thursday's highs).  And while I was watching the market (equities, bonds, currencies), my thought was "are we really doing this?  really?"  Are we really going to have an accumulation day up here after we just ripped almost non-stop from the October lows?  Yup.

I stopped myself out today (Monday) and flipped long (small) in regional banks and solar.  My losses were small (because I had a good entry).  And it stings giving back those nice profits - especially since the odds of getting an accumulation day after a distribution up here were extremely low.  But it would be far worse to stubbornly hold onto my position when the market is doing the opposite of my expectations.

Repeat after me:
"The market can remain irrational a lot longer that you and I can remain solvent".

For more charts and to read a disclaimer, please visit my public chart list on stockcharts.com...
http://stockcharts.com/public/1109955