This Market is Tough To Buy

Since the "flash crash" on May 6, the market has had a difficult time gaining any traction. Its first rebound from that fall was a fairly obvious dead cat bounce, which I shorted as it approached the 50 day moving average. Sure enough, it fell after that and I covered pretty quickly.

My mind-set has been fairly negative since. I just haven't been able to accept that the market can climb back into the saddle and head for new highs after that terrible down day May 6. I continue to keep this mentality until the market shows otherwise - that's trading.

Consequently, I bought the market (options in SPY are my favorite vehicles of late) on June 8 after an upside reversal. While the market finished down the next day, it continued higher after that, and I promptly sold my positions. When the market is having a difficult time, it moves fast in both directions, so taking reasonable gains fairly quickly is prudent.

My strategy has been to let the market rally back up to the 50 day moving average or resistance level close to that area and then turnaround and short again. Because I was trading the SPY, I never kissed the 50 day. If I had traded NASDAQ or DOW vehicles I might have had a chance to get in.

I really thought the market might have rallied more than it did recently and didn't expect to truck to new recent lows quite like it has. Sticking to the plan and not just diving in wrecklessly is the best way to grow and preserve cash.

I wish I was in this week's downtrend as I have not felt the market is ready for a full blown rally at this point, but because I let it play out (i.e., look for rally to resistance level that never happened), I stayed out and made some money along the way.
What now? If you don't have a position in the market itself, the indexes, it's a good idea to not get in to one until we have some clarity on a short term direction. The market seems to be saying it will play at these lows or go lower, but it isn't offering a reasonably entry, from my perspective, at this point. A rally to certain levels would, and I'll revisit this in the near future (maybe I'll do some posts while on vacation in Laughlin/Lake Havasu nexxt week).

As far as IBD style break out stocks go, hold your fire. If you have any positions that are not currently profitable, get out. If you have profit in any stock, only hang on if you feel very strongly that it will hang tough and stay profitable as the market works out a new near term bottom. However, I'd be inclined to be out of all break out positions right now and just let the market do its thing.

There will be some good swing trades in the near term that aren't IBD style break outs that I'll look at. Gold seems to be hanging on and wanting to go higher. I still have positions in that as well as silver. One could argue that silver is etching out a cup with handle while gold is already in a steady uptrend after breaking out from a cup with handle.  I'm keeping a watchful eye on both, especially since I felt silver had cleared resistance recently (see one of the posts below) and was ready to go higher, only to see it revisit this resistance level.

One quick thought - if you are good at short selling, it's possible we start seeing some IBD style shorts set up. These are tricky, and I confess I haven't mastered the art of shorting stocks using Bill O'Niel's approach, as laid out in "How to Make Money Selling Stocks Short". It's a good read, but finding short candidates is challenging that meet O'Niel's critearia.

Essentially, stocks he likes to short in the book set up in head and shoulder patterns. The shorting opportunities come when the stock rallies back above the 50 day moving average on try 2 or later and then falls back down through teh 50 day, preferably on volume (after creating the left shoulder and head and rebounding from a fall from the head, and carving out the right shoulder). There are a lot of details to this approach, but if we are in for a sustained downtrend, start looking for shorts.

Have You Developed a Watch List?

If you have a watch list, it may be wisest to keep it as that: a watch list to draw from if this market shows more strength. So far so good, however. Just remember the market is beholden to news and is coming off the bottom of a nasty down move. We could simply be in what turns out to be another little rally in a bigger bear market. We haven't hit bear market levels, but it isn't that far away.

As a stock trader, despite the mixed signals of this market, it is always worth taking a shot at a trade which is setting up if you think there is a chance of a rally working out.

The way to play it is to test the market with a pilot position and see how it works out. If this market rally is for real, there will be plenty of time to find solid stocks readying for a break out.

My watch list so far includes the following stocks:

AVGO - Already broke out, but within buy range
LULU - Broke out but pulled back today in heightened volume. Great story to this one.
ULTA - Broke out of odd, choppy boxy base, but I think Nicolas Darvus would like this one...
CSTR - Intruiging one, watch for rebound off 50 day moving average (only 9% ROE)
ROST - Cup with handle (lowish sales)
URBN - Cup with handle
WYNN - Cup (sales 23% most recent quarter, would like to see more)
CLR - High handle forming?
SKX - Broke out of cup, but only heightened volume - high handle forming?
LZ - Cup forming
TPX - Cup forming. One of my favorites so far despite choppy pattern.
ALTR - Cup forming
NFX - Cup forming, but prior uptrend a little soft
MFB - Cup forming, good group, could use some volume for a vote of confidence
VLTR - Cup forming, hot group
VRX - Cup forming, been a hot stock in a currently cold group

This watch list is just a starting point. I will be vetting each stock and waiting to see which ones break out on solid volume. It's possible I move in on LULU or AVGO as my pilot position. I will let the market develop some more as I dip a toe in.

Update on Swing Positions

I felt it necessary to follow up with my earlier postings Monday about my positions.

SPY: sold all positions at the end of Tuesday's move, not because I think this rally is over, but mostly because my options were June options. I may pick up some more SPY July options Wednesday if the market pulls back some.

SLV: sold all positions today for essentially no gain and no loss. I actually didn't mind SLV's move today and might have held if I had July options. But again, I had June options and decided it was wise to take a scratch trade with only two days left to pull the trigger. If SLV breaks above $18.35 (not the actual price of silver), I may pick up some July calls with a stop below the $17.86 or so price level. This $18.35 level (green arrow pointing at it on the image below) offers some resistance and could be a decent little break out play (no, not quite like IBD, but similar and only for a little move higher) with a good probability of working out.

GLD: sold some positions, again because they were June options. I do have some July options that I'm holding. Made decent percentage gains on the June options. I still have a couple June options in the GLD that I may unload tomorrow and perhaps buy some more GLD July options soon.

I'm not a gold bug, I don't store gold bars in a secret hole in the ground in my backyard, and no I don't think a Book of Eli style apocolypse is coming or that a depression is on the way like some gold fanatics think. Yet it is difficult to argue with the uptrend in gold when you look at its chart. It is currently trading above its December 2009 highs after digging out a large six month cup base.  I have posted the GLD chart again here and you can see for yourself. You can see the upward posture with a quick glance even if you are brand new to investing. So how do you play uptrends? Don't chase, but rather buy when it makes sense, like a pullback to the trend channel or off a bounce to a short term moving average like the 8 EMA or 21 EMA. IT's possible we get a pullback to the 50 day moving average and still be in an uptrend. Or you could even play a break out to new highs, but don't expect gold to act quite like a stock would when breaking out. Keep a close eye on it and stick with reasonable stops. I will risk 50% on an option (I generally buy in the money options with deltas of 70, something I learned from another trader) with the idea that I'm aiming for at least 100% gain or more. But that 50% stop can come fast, and a disciplined investor will stick with those stops no matter what. On the chart I've posted for GLD, the yellow line is the 8 EMA, the blue is the 21 EMA and the red is the 50 day moving average. The white is the 200 day. This is generally the same color scheme for all charts I post from http://www.freestockcharts.com/ a great resource.

USO: still holding my options. USO looks like it wants to go higher. USO, or oil really, is following along with the stock market, so my game plan is to hang on for  a bit.

New positions: none yet, but I am looking for IBD style break out stocks, as these offer the most powerful moves. Will update soon.

A Real Rally This Time?

No one knows the answer to the title. However, the market has logged positive behavior and is in a rally. It's difficult to say how long or strong it will be, so just let it unfold as we go. If you see top rated stocks breaking out in higher volume, this will be an excellent sign.

If nothing else, it would be prudent to expect at least a brief, even spirited rally back up to key resistance and trend lines like the 50 day moving average. I first jumped in and bought June options one the SPY on June 6 and sold them today for a nice percentage gain. I sold because I held June options (I should have purchased July options) which expire Friday, meaning I had to make a move between today and Thursday.

Having said that, if you are a bold swing trader, a purchase on a slight pullback tomorrow may be a savy move if you are ok with short term volatility, which could present itself.

What does this mean for break out stocks, IBD style? Be cautious. If you are bold, take a small pilot position in a stock breaking out and see how it behaves. If the market improves and the stock rises on nice volume, maybe pick up a little more as long as you aren't chasing it (over 5% from buy point). I plan on doing this as soon as I zero in on a good prospect.

Be prepared for anything in this market, which means have stops in place and protect that capital. It's been a tough market and one could easily argue the path of least resistance in the long run is down. But markets have a way of fooling investors, so be open to the possibility that we could go higher. It may sound somewhat contradictory or noncommittal when reading this paragraph, but it's the reality in the market that conditions can change and you simply need to be nimble and ready to take advantage of this.

It's good to be aware of resistance and support levels, but don't prognosticate. Rather, anticipate and be a good listener and take what the market presents step by step. With stocks setting up in solid bases, know your buy point and be ready to act with conviction, and be ready to exit with as much conviction if you need to.

As IBD points out, all bull markets have started with follow through days, which we experienced today, but not all follow through days work out.

The Traders Expo Was Terrific

For those of you who didn't make it to the trading expo here in LA, it was a great show. There were many traders there offering their viewpoints on the markets, including Investor's Business Daily. There were so many opinions that it was like watching CNBC for a couple of hours. You would have heard all kinds of things, which can be a little overwhelming. When choosing an approach that works for you, stick with it and don't stray from it.

I choose to trade IBD style break outs primarily, and when the markets are not in an uptrend, I do short term swing trades based on methodologies that are in harmony with some of the ideas behind the mechanics of a break out stock (price and volume action, resistance levels, trend lines). I always cut my losses with a stop - preserving capital is the most important part of the battle. It's ok to load up on a position, as long as you keep a stop on it in case you are wrong.

One tool I ran across at the expo which I coincidentally only discovered online about a week ago is an online charting software that will allow you to view actual FREE real time data for stocks. It also allows you to view forex currency pairs and other screens. It has all kinds of indicators you can put on it and it will allow you to view your stocks in multiple time frames with multiple screens - again, all while providing FREE real time data (it can do this because it is ad supported, which I find perfectly fine as it is a clean interface).

It's called http://www.freestockcharts.com/ Check it out, you will love it.

Keep Your Watch List Sharp

Pardon the long delay in updating the blog. Being that my main vocation is running political campaigns, I was a bit busy ahead of the June primaries.

If you buy break outs in uptrends (I'll call it IBD style), you haven't missed anything.

Looking at the daily chart of the SPY below (the etf which tracks the S&P 500 index), you can see the price action of the market. IBD hasn't fired off a market rally indication yet, but the market's action shows positive behavior lately. To the naked eye, it shows some rounding bottom action. I'm not calling a near term bottom, but it could be enough constructive action to propel the markets higher for a short stint or even longer.

My personal view is the market could get a bounce higher, and who knows, it could set off a new rally. I'm doubtfull it will turn into anything meaningful just yet, but as always, let the market's action tell you what it is doing.

For this reason, I'm revising my watch list, which I'll post soon. A number of stocks in the IBD 100 list are showing potential to shoot higher if the market gives them the support needed.

While I wait for IBD style stocks to set up in bases and break out, I'm engaging in short term swing trades. I have bought call options in the gold etf, GLD, as well as silver, SLV. These are not IBD style plays, just to be clear. I'm just trading in ways I'm comfortable with (using good old fashioned price and volume action in conjunction with support and resistance areas and trend channels) while I wait on the bigger moves from break outs.

I may sell my SLV call as it doesn't show the same action as GLD. I originally liked the SLV because it plays catch up with GLD and GLD looked (and still looks) good, but it hasn't done much for me. In fact, I'm down slightly, while I'm up with GLD, so how's that with catch up.

The reason I liked gold has a fundamental background to it. Fear in the Euro primarily is the cause, and bloated budgets and high debt in governments around the world are creating tremendous uncertainty, causing gold to be a safe haven, almost alternative currency vehicle.


I also like the technical action. Looking at the daily chart, you could interprate a cup in handle that broke out on April 27. I announced this to our meetup group at the time, but even I didn't buy into it because the market was still showing upward potential and I was holding onto some stocks that had broken out.
 
 

 
After the market went into correction, gold launched into a new uptrend (with the support of the cup with handle break out) and I bought it on a pull back to its support area (near the break out level, or visually on the chart, along the bottom white trend channel line which marks the bottom of the trend's channel). You can see that it is slowly climbing higher and is hovering around its highs, similar to how good stocks that are going higher behave. When stocks or other financial instruments make new highs, they tend to want to keep doing that, and gold shows potential to do the same. I have no idea how long it will last, and that is the trick to trading: knowing when to take profits.
 
What I also like about GLD is that you can see some positive volume coming in on its recent breakout. To me, this is a nice confirmation that big money managers also like gold right now. To be clear, the GLD etf is a fund that buys gold and it alone does not cause the GLD to go higher or lower, but rather tracks gold, so it isn't as clear a supply and demand issue as it might be with a stock chart. But it is highly indicative that money is flowing into gold, and we know money is flowing into gold around the world.
 
Prior to this trade, I had shorted the market after the big break on May 6, when it rallied close to its 50 day moving average (the red trend line on the SPY chart above). I covered those positions recently, and am now long the market (again, just a short swing play for now).
 
Oil also shows potential, like the stock market, to go higher, perhaps up near $80 where it has clear resistance looking at a daily chart of it. On the below chart, I present the USO, an etf which tracks oil. The $80 crude oil level I refer to would be roughly equivalent to just above the $36 level of the USO. As with stocks, you can see where previous price action was, which now offers resistance since the current price is below that level. As a trader, it is a valid trade to attempt to make money off a move, in this case up to $36 or so on the USO (with a stop at a reasonable level if we are wrong) until it gets to an area it used to trade at often. This is resistance, and you can just see it looking at a chart. No fancy indicators are needed, although many traders use them to help time moves more precisely. Use what works for you. How did I decide to buy at these levels? Because it rebounded some off the bottom, made a recent high, pulled back and then broke out above that very short term high. Profit targets on these kinds of trades need to be tight, very much unlike IBD style stock break outs. This is a key point of difference between trading some instruments while I wait for IBD style stocks to break out and buying the actual IBD style stock break out. Upside potential on break out stocks in market uptrends is tremendous and open-ended. With short term trades, it's more defined by retracement moves and support and resistance areas.