iBankCoin
Full-time stock trader. Follow me here and on 12631
Joined Apr 1, 2010
8,861 Blog Posts

CHESS MOVES

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In my estimation, it is now worth putting some capital at risk in this market. Even if we do not close at the highs today, the type of candle that is likely to be printed in many indices and stocks is a bullish one, especially after the steep downtrend we have seen. As I have said before, a market like this requires you to either sit out, or make some adjustments.

Taking risk is part of being a trader. Risk is everywhere and is involved with everything, just look at 2008, and then what followed in 2009. Being a contrarian is not a regular part of style. However, there are certain times when the risk/reward is too favorable to pass up, at least for the next few days. I believe this is one of those times.

I put 40% of my capital back in to the market on the long side. I am still 60% cash.  All trades documented inside The PPT.

(These are trading ideas only. Please use stop losses and do your own due diligence.)

LONG–Full positions

  • $NTAP
  • $AAP (h/t alphadawgg)
  • $NR
  • $CRM
  • $LULU

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All FAIL the 1040 Gods

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MARKET WRAP UP 06/30/10

Today was yet another example of the kind of mass psychology that is at play when everyone is looking at the same thing. The discussion of the 1040 level on the S&P 500 acting as support had become so ubiquitous that it was only a matter of time before that price was violated. After being flat on thin volume for most of the day, stocks eventually gave way in the last hour to another bear rout, as the S&P 500 closed down 1.01% to 1030.

The intraday low today was actually 1028, which represented a slight breach of support from last Halloween, when 1029 was the intraday low on November 2, 2009. Beyond that level, 1019 was the intraday support from the lows of the early fall correction on October 2, 2009. Those levels also represented a great deal of resistance from late last summer as well. Thus, the 1019-1029 zone is likely to represent a less obvious, but also more valid, support level than 1040 had become in recent days.

Beyond those support levels, the bears also pushed us down through the lower end of the broad trading channel that had been forming over the past five weeks. As the updated and annotated daily chart of the S&P 500 illustrates, testing a support level can only hold for so long before it eventually gives way (see below).

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Interestingly, the Nasdaq has yet to breach the lows from February of this year, as I indicate with the pink line in the chart seen below.

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Moreover, it can be argued that the small caps are still making a series of high lows, as I indicate in the zoomed out daily chart with the pink line, seen below.

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Now, objectively speaking, bulls will argue that these are bullish divergences, as the small caps and Nasdaq charts indicate that we have yet to see a major breakdown. Bears will argue that the S&P has already broken down, and that the Nasdaq and small caps are simply going to play catch up to the downside.

Personally, I believe that we are oversold and nearing a tradable rally. However, I have yet to put money to work supporting that idea. Adjusting my style for this market, I would be looking for a gap down tomorrow morning to buy. If we open sharply higher, or merely drift around like we did this morning, I may very well take a pass and stay in 100% cash.

Finally, let us take another look at my main tell for this market, $FCX. The weekly chart indicates just how significant this $59-$60 zone is, going back to last summer. As you can see with the pink line, this level was key resistance all throughout the summer of 2009, before the stock eventually broke out above it and ran to above $90 by January of this year. What is at issue now, is to confirm whether that prior resistance level can now be deemed a current key support zone, from which the stock can move higher. To convincingly break down below it would tell me that the S&P is eventually headed much lower.

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NOTE: I have discussed the seemingly inevitable “death cross” (as I call it) coming in the S&P 500. “The Big Picture” blog, currently ranked #2 on iBankCoin’s list of the top finance blogs on the internet, has some great work out today–taken from another blog–on the historical statistics associated with performance after a death cross on the S&P. Check it out here.

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All Hail the 1040 Gods!

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MARKET WRAP UP 06/29/10

Days like today illustrate the phenomenon of when a great many market participants hone in on a key technical level. With talking heads on financial television (who usually gloss over technical analysis) speaking in earnest about head and shoulders topping patterns, as well as the all important 1040 level on the S&P 500, it is no wonder the market revisited that level in a hurry today. Keep in mind that we closed yesterday at 1074, and even opened today at 1071. However, that 1040 zone acted like a price magnet, with all eyes fixated to it. I always find it humorous to see ardent fundamental investors, who prefer macro and micro data to price action and volume, all of a sudden become enamored with a certain technical level.

With the S&P closing down 3.10% to 1041, the veracity of the lower end of our recent trading channel is being challenged. As the updated and annotated daily chart of the S&P 500 shows, the channel is widening out. This reflects the sharp disagreement between bulls and bears concerning the value of equities. The last time we saw this pattern was when we topped out in late April. I was much more apt to call that pattern a bearish “megaphone” top because it took place after a sharp run up from February, whereas this pattern formed after a sharp correction. Either way, however, the pattern is neutral at best. Sloppy and choppy patterns with wild price swings are all friends of the bears. (See chart below)

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With the arrival of the end of the quarter, combined with the long July 4th holiday weekend, history favors a bounce in the next day or two. Despite that possibility, I moved back to 100% cash within the first hour of trading this morning in order to try to take some quick profits on my hedges, and to avoid any further pain from my longs. While we are certainly becoming oversold, we can easily see another bout of heavy selling tomorrow in order to shake out the complacent dip buyers who automatically assume that 1040 will hold as support. One possibility is a final push down to the lows of Halloween from last year, at 1029. There are also the late September 2009 lows of 1019.

Above all else, the way this market is unfolding, I believe that there are two main strategies for non-daytraders. The first strategy is to simply sit in 100% cash until the market heals itself and becomes constructive again. There is no way of knowing how long that will take to happen. The second strategy is to try to buy sharp dips, such as the one we are experiencing now, and then to quickly take profits into any 2-3 day bounce. After that, you would look to put on some short exposure for the next leg down, presumably playing a broad trading range, with a bearish bias. Of course, that strategy carries the risk of assuming any kind of range will hold.

The bottom line is that we are seeing sloppy charts across the board, in key stocks, ETFs and indices. If you want to trade these moves, being nimble and being correct are essential, as losses will tend to be exaggerated by the size of the swings.

NOTE: The PPT is absolutely perfect for times like these. The Fly posted a screen today inside, for distinguished members, which lists stocks and ETFs that are technically oversold, using a variety of factors, e.g. accumulation/distribution and volume. But The PPT does not stop there. This particular screen then shows how each stock or ETF performed historically, in the days immediately following when they had been previously deemed technically oversold by The PPT algorithm. Thus, you can actually quantify the best ways to play oversold conditions. It is an exceptionally useful tool that will save you lots of time, and will help you to bank loads of coin.

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Channel Checks

Over the past week, I have noted the emergence of a wide and choppy trading channel in the S&P 500. With today’s huge gap down, we are testing the lower end of that range. 1040 is a huge level, going back at least six months. I would imagine many stop losses will be triggered should be blow through it, despite the fact that we are becoming oversold again.

While there is certainly a distinct fear and pessimism in the air again, trading based on sentiment can be a tricky and highly subjective game. Instead of getting caught up in the emotion, keep this chart in mind as to whether we are truly seeing a major breakdown here. It is a zoomed in up to date daily chart of the S&P 500.

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I went back to 100% cash early this morning in an attempt to take some quick profits on my hedges, and to not let my longs get too far away from me should the market continue lower (it did). Needless to say, this type of market has been brutal for swing traders. I am leaning more towards buying potential support plays than anything else, but I am in no rush to be a hero.

My main focus is still on preserving capital until the market becomes healthy again.

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CHESS MOVES

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Back to 100% cash. Hedges taken off, and sold out of all longs. Go check The PPT for timestamps.

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