Beer Goggles Made Out of Gold and Silver

Ugly day, indeed, for the precious metals miners. We know that they are extremely volatile to trade, and today has may traders looking to go short and call a top. However, looking at the weekly charts of the junior gold and silver miners, we can pretty clearly see that we have some ways to go before the recent weekly breakouts could even become close to be considered negated. Earlier today, I reduced my exposure to the metals for the sake of locking in gains and discipline. However, I am reluctant to call a top or go short for anything more than a quick scalp at this point.

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Actually, this is not a bearish piece on the airlines at all–I just liked the title.

As you can see on the daily chart of the XAL (Amex Airline Index) below, today’s daily candle is residing completely below the lower Bollinger Band (“BB”). Indeed, this is a particularly rare occurrence, as even the prior times when price has dipped below the lower BB, the entire candle was usually not outside the band as well. Hence, it is fair to say that airlines are oversold here on a short/intermediate-term basis.

So, how does one go about playing the oversold airlines? First, I cannot stress enough the importance of having a clear stop loss in place. Oversold bounce plays are not situations where you want to be careless with risk management. After all, we are talking about stocks in downtrends, and a failure to adhere to stop loss discipline could easily see you fall victim to another leg lower.

As an example, take a look at AMR, forming a potential bullish hammer reversal candlestick today after a steep downtrend. We know that hammers need to be confirmed in order to register as a bonafide bullish reversal, so it makes sense to have a tight stop loss in place below the bottom of the hammer. Although it is not particularly enjoyable to be shaken out of a tight stop loss, you simply cannot risk getting caught in another sharp move lower. When they work out, oversold bounce plays are fun and make trading seem easy, which is all the more reason why you should be extra careful with them.

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{NOTE: This was worth posting again}

With AA officially kicking off yet another earnings season when they report after the closing bell today, consider this a friendly reminder to check and then double-check your current portfolio holdings to see when they are scheduled to announce. As a relatively short term swing trader, I am almost always looking to significantly reduce or outright close a position into earnings. There are simply too many variables for me to have an edge.

Even if you have illegal inside information about what a particular firm’s earnings will precisely be (and would thus face the distinct possibility of winding up in a federal pound-me-in-the-ass prison, with no conjugal visits) there is still no way to know how the market will react. Stocks can just as easily sell-off on great earnings as they can on horrific ones, and vice-versa.

Technical analysis has its clear limitations in that it can only demonstrate what is currently known and knowable by the markets. To presume that charts can dictate everything into the future is pure folly. Trading IS gambling, as we are wagering on outcomes yet to be determined. Instead of running away from that fact, a better approach is to embrace sound risk management.

In sum, leave the heroic all-in bets on an earnings play to old men trying to recreate their youth as they imagine themselves as Steve McQueen in The Cincinnati Kid. For those of you who have seen that movie, they will likely face the same fate as McQueen’s character did in the end as well.

The underlying weakness that I wrote about this morning proved to be too much of a drag for the senior indices to stay firmly in the green. At the time of this writing, the S&P 500 and Nasdaq Composite are flashing red, and quite a few momentum players who bought this morning find themselves trapped in positions. WIth that said, we are far from witnessing any kind of dramatic breakdown or reversal. Rather, the market simply did not have enough juice in the tank to blast through the outer limits of our trading range, for now at least.

This type of price action is not sufficient for me to turn bearish or move to 100% cash, quite yet. Instead, it is merely enough for me to put initiating or adding to existing longs on hold for the moment. I would turn more cautious if we lose and close below Friday’s lows in the broad market. The 30-minute chart of the SPY should illustrate that this development would force me to respect the fact that the bulls would have been turned away from resistance and the upper end of the trading range in general. On the S&P 500, this would translate into a close below 1322.

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Consider this a follow-up to both this morning’s post discussing how to buy support plays for swing trades, and this post I did last week about the electronic medical records plays. Hey, at least you can’t say that I leave my readers hanging out to dry. At any rate, these plays have now consolidated, as expected. Thus, chasing them would have been disastrous. It is also a pretty good exercise in discipline, as far as identifying strong areas of the market, yet also being able to wait for them to come in a bit first. See my notes on the annotated charts below. Oh, and if you go ahead and buy these names prematurely, just tell ’em large Marge sent ya!

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Despite the major indices flashing green this morning, the bulls are turning in a rather lackluster effort underneath the surface, without much leadership and buying energy. As an example, the solar names had pulled back to logical support zones headed into today, only to lose them thus far. While this could easily just be a shakeout designed to trigger a slew of stop losses, that type of price action is a pretty good reason why automatically assuming support levels will hold is a dangerous way to swing trade. Instead, my style is to wait for buyers to present themselves in a meaningful way first, and then try to quickly find a high probability entry point.

Broadly speaking, the S&P 500 and Nasdaq Composite continue to come to terms with the upper end of their multi-month trading ranges of around 1330-1332 and 2800, respectively. One area that impresses me is the financial sector, and I am overweight finnies in my portfolio.