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

Chess Moves

Given the fact that the very oversold conditions of the broad market and many individual issues have clearly been worked off since last week, not to mention the fact that we are bumping our heads up against overhead resistance, I have decided to get aggressive on the short side.  I have taken three new positions today. Please note that the following positions currently account for no more than 15% of my overall portfolio.  They are leveraged instruments, so tread carefully if you choose to buy them.

I went long $SKF, $SDS, and $TZA. They are all inverse ETFs, meaning that I am essentially going short by buying them.  I have bought a 30% starter position in each individual name thus far.

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Forest for the Trees

At the conclusion of the week ending on April 30th, I made a video and annotated a chart detailing why I thought that the Nasdaq was on the verge of a sharp correction. Below, you will find my chart from that weekend.

My point of showing you this is not to gloat that I got the call right.  Believe me, I have made plenty of idiotic “full retard” mistakes just like everyone else.  Rather, I am trying to illustrate to you WHY I got it right.  I was seeing the forest for the trees. Despite what looked like a multitude of bullish earnings reports and improving economic data, the Nasdaq was up against severe, long term overheard resistance dating back to the highs of the post Bear Stearns rally that ended in the late spring of 2008. To not expect a majority of the longs–who had held on throughout one of the most vicious bear markets in a century–to sell when they were finally made whole again, was misguided…at best. Even for those longs who had not been on board for the entire ride, they were still looking at the same weekly chart that I was, and no doubt decided they would sell before every other chartist started screaming to take profits.

The take home lesson is to remember to regularly take a step back and look at the broad indices and sector ETFs.  As fun as it is trying to find small caps that are about to explode or crash, at least seven out of ten stocks move in concert with the broad market.

As far as where we are now, below you will find an updated version of the Nasdaq.

This is where the rubber meets the road.  We bumped our heads up against that spring 2008 resistance and faced heavy selling.  However, we are (barely) holding on to the pink support line that dates back over a year.  Something has got to give. Either we are going to have a huge break out, or we are facing another leg down in this correction and thus we would be breaking down below the multi quarter support line.  Because we are pinned so precisely on that support line right now, I believe it is a good idea to refer back to this weekly chart.

As far as the S&P is concerned, I remain extremely cautious.  While it is tempting for me to become aggressively short here, we are still above the 200 day moving average and thus must give the bulls the benefit of the doubt.  However, I must say the chart has all the makings of a bearish wedge.

The trannies are doing a good job of hanging tough, but the bulls have the difficult task ahead of them in maintaining the uptrend, as the chart below shows.

The small cap bulls are also against the odds here, as the daily chart indicates.

As The Fly mentioned tonight, China is looking horrendous. The ETF looks like that ten day old sesame chicken that you forgot you had in the back of your refrigerator.

Finally, the strongest area of the market has (disturbingly) been the precious metals miners, namely gold. However, the miners are getting close to their all-time collective highs, so I would wait for a consolidation period before entering for anything other than a daytrade at this point.

I hope this post was able to give you a broader perspective of the market as it currently stands, rather than just focusing in on individual names.

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Not Buying Whatever You’re Selling (Market Wrap Up 05/11)

“Never mistake activity for achievement.” -John Wooden

Many traders often do not need someone pressuring them to make trades when they have no edge.  They do not even need “the wolf of Wall Street” in their faces giving them the hard sell on a stock, because they are too busy pressuring themselves to just do something…anything.  With the current volatile, confused market full of broken charts, I find it difficult to see how a swing trader could be active in this environment. The indecisive action today should support my belief that the market is jumping around, scratching its head and figuring out what to do next.

Rather than shunning patience, a better approach would be to consider the capital you would have lost had you grown impatient. Sure, for daytraders there have been some good opportunities, but beyond scalping here and there, the market is still trying to decide where its next move is going to be.  I expect to see more clues in the coming days, but I would rather be an objective observer via an outsized cash position, than be beholden to the violent, seemingly incoherent swings we have seen over the past few weeks.

For those of you who are struggling with keeping yourself from trading out of boredom, I would like to refer you to two pieces that I wrote over the past few months here and here, that will hopefully be helpful.

I will post some charts later this evening, but I wanted this post to capture more of the big picture and to make sure that we are always seeing the forest for the trees.  I guarantee you there will be better swing trading setups in the future, but the real issue is whether you will have the ammunition to take advantage of the easy targets when they eventually present themselves, instead of having used it up in this current choppy market.

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Sources tell me the Goldman Sachs CEO was seen in Europe over the weekend, helping to craft the bailout plan.

Also, with the futures indicating a weak open, one sector I will be watching closely will be the transportation stocks. Yup, that’s right, I want you to go Eddie Murphy-style and be a trannie lover. They are traditionally leading indicators, and despite hanging relatively tough so far, if they roll over you should reconsider your strategy if you are currently heavily long.

Specifically, I will be honing in on $UNP and $FDX.

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Let’s Bounce! Market Wrap Up 05/10

Stocks moved sharply higher today, on the back of the news out of Europe yesterday.  With the $SPX rising 4.40% to finish at 1159, the market is clearly searching for a direction in light of the heavy selling we saw last week.  Despite the positive action across the board today, the daily chart of the S&P does not offer as bullish a view.

While it is a positive for the bulls that we closed above the key 1150-1152 level today,  that area needs to hold over the next few days.   As usual, when fighting for a reversal, follow through is key.  Beyond that 1150 zone, however, the bulls face tough overhead supply above 1160, including the 50 day moving average.  Basically, the concept of overhead supply dictates that many of the longs who bought above the 1160 level and held throughout this recent selloff are highly likely to lighten up if they are made whole, given all of the pain that they endured on the way down.  It is that shift in psychology, from buying the dips successfully since March 2009, to selling the rallies that has me concerned about initiating long swing positions at this point.

If you have not read many of my posts up until the past week or two, I would not blame you for thinking that I have been overly cautious for being heavily in cash.  In fact, I missed out almost entirely on the big move up today.  However, I would urge you to please take a look at my earlier postings here and here, when the market was healthier and I consistently offered many actionable setups.

I am primarily a swing trader, holding for at least a few days or weeks.  My philosophy is to be extremely selective yet also very aggressive when I believe I have an edge.  However, when my analysis shows that I do not have much of an edge, I have no problem backing off from the action until charts reset and offer better opportunities.

Two examples of stocks that were once excellent, high momentum long stocks are $GMCR and $CREE. Let me go on record as saying that I think both firms are fantastic in their respective sectors, and deserved to be in the spotlight for many quarters since March 2009.  However, the price action in both names as of late should be a blinking red light as far as initiating long swing trades in general.  These stocks were the leaders on the way up, and when they start to break down, you had better take notice.

Folks, believe me when I say that I trust the aggregate price discovery mechanism of the marketplace in the leading stocks over what any economist or lagging economic data tells me.  If you want to wear a pocket protector and have your 49th birthday party at Chuck E. Cheese, then by all means go make your investment decisions based on the Calculated Bulging Disk, The Big Liberal Picture, and Zero Friends blogs.

However, if you are serious about making money in the market, then you will focus solely on what the price action in the market is currently telling you.  Right now, we are seeing wild price swings and an elevated level of news driven volatility.  Those facts are not constructive to swing trading with an edge.  By all means, go ahead and trade if you are an expert day trader who is confident that you will not get chopped up.

With that said, there are two possible setups that I am considering in the coming days–$GLD and $SLV. Given the unique nature of the underlying metals to those two ETFs, I am not surprised to see their charts looking constructive.

Above all else, do not be afraid to move to a larger than usual cash position as long as we continue to see these wild price swings.  As exuberant as the bounces may seem, many charts are broken and need time to heal before we should consider making bold bets.  If anything, some excellent short selling opportunities may present themselves soon.

Thanks to everyone who voted yesterday as well as those of you who have read my work, and I am looking forward to us banking some coin together!

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