“Rare day-trading day” strategy applied to Wednesday’s market squeeze

Did you catch it?  Hope you did!  We had a number of signals that alerted us for a squeeze.  If you missed my last post on “How to spot a rare day-trading day, how to trade them”, then you may want to take a look at it.  Today (Wednesday’s relief rally) was another wonderful example of a rare, powerful, and day-tradable squeeze day.  Let’s go through those steps:

Step 1:  What is the state of the market (premarket): Market sold off big time on Tuesday on news of bank weakness;  perhaps selling was accelerated by news of new president.  We took out Thursday’s lows, so it’s NOT a good idea for swing longs ( low probability).  However, leadership sectors still held ground despite selloff.  Noticing strength in school stocks and medical stocks, therefore, as concluded during yesterday’s selloff, it was NOT a good idea to enter new swing shorts.  In fact, I issued a “you better hedge your shorts” warning.

Going into the market…

Step 2:  Check volatility- VIX is red!  Reversal from yesterday’s test of 55, back under 50 we go.

Step 3:  Find the sector influencing the market and the VIX. Answer:  Banks.  Find the stock or stocks in that sector that dominates investor sentiment.  Answer:  BAC

Step 4: Did banks hit an intraday bottom?  Is stock from step 2 (BAC) squeezing?  Yes.  Probability for squeeze up.

Step 5: Find the intraday “relief point” (check technicals on market).  Got it, near 8000 or 8050! (there was actually a lower “relief point” but, I didn’t trust it.  Went for confirmation.  Actually, 8050 was from Agwarner, our old tabbed blogger Adams Options guy.  We both went long FAS).

Step 6: Make the call!  “BAC > 6 = market new highs = FAS new highs”   … FAS was up about 8% when I made the call.

And here’s how everything played out…

• Vix reversal (Step 2)
• Breakout above relief point (technical confirmation; Step 5)

(Step 3, 4)

• Same Dow Jones chart, but compared with BAC since that was our stock we were using for direction.  Remember, above 6, market explodes!
• The relief point / breakout point again.  Notice the channel that was broken to the upside.  Bears don’t like quiet channels, especially after a big down day.

• And, make the trade.  I got long FAS, but capped my gains at 5%.  If I let them run, it would have been another nice 15% day.  Once again, “rare day trading days”.

(Step 6)

… what a crazy and volatile market!  I warned about not picking a side just yet.  We have to let a few cards come down first before we place bigger bets on the swing trade.

Again, don’t worry that you missed an opportunity, or try and force a trade.  The next one is coming to you as we tweet.

Aloha!
-gio-

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In their article, Education Stocks Make the Grade, they mention “Education services are hitting high marks as more workers, including the newly unemployed, look to enroll in classes to upgrade their skills.”  That sounds familiar, no?

Just kidding.  They didn’t quote me, but that would have been cool. But really, I read that article and it felt like I was reading myself.

From a post in early January:

“I would be cautious shorting education stocks here, especially if STRA can hold the 189 area.  There’s actually one education stock I want to get long, ***E.  It’s too early to call a top in APOL, so until you see STRA and APOL both reversing, then the dips must be bought in this sector.

… I’m trying to figure out why education stocks are in their own bullish cycle?  My guess is that there must be some kind of correlation between our rising unemployment with the demand for higher education. Which makes sense a little… people generally feel that if they have extra education, then their chances of getting a job will be better.  I could be on to something.”  – http://ibankcoin.com/gioblog/?p=2656

…here I ask, “why.”  Why is a bull market a bull market?  With some homework, a day later we found out why:

Post:  “Smart Money in Edjewkayshun”

I was sitting in the doctor office today watching random stuff like Family Feud, and during the commercials, I would see a bunch of “go back to school” commercials.  Have you noticed this too?  They really are pressing it! Notice the air time they are picking to post these ads… during work hours.  Obviously there’s an unemployed target market here.

Anyway, it was a topic that caught considerable interest in Twitter land, and in my comments section a few posts ago.  And what we came up with makes sense… in a recession, people tend to change jobs and careers (thanks Dogwood), and in order to do so, you need education!

Another trend I brought out, was that there must be some kind of correlation between unemployment numbers going up with demand for education going up.  And that makes sense too, because when you think about it, the higher the unemployment pool is, the more the pursuit of higher education to bolster one’s chances.  Survival of the smartest.  Enrollment grew 18.4% at APOL, and I would pay close attention to this type of data (source).

It will be interesting to see how the education stocks perform in the weeks to come.  With APOL, a leader in the industry.

Okay, now after reading those two post, go and read Fortune Magazine’s bullish article on education that came out today.  Biters!  Lol.  It’s fine… it just illustrates a fundamentals approach to investing. Find out which sector is moving, then find out why.  Look for trends in society, and see if these trends are fueling a certain sector with cash.  Every time you go shopping, hang out at the mall, surf the internet, watch TV- constantly ask questions (in your head, and not out loud please) about why things are moving in a certain direction.  Ask, “are people willing to spend money on this?  Are people still willing to spend money on this?”  It’s a great way to use fundamental principles in investing, and I got that idea from Mr. 10-bagger, Peter Lynch.  I remember way back when I used to go to the local convenience store to count the number of rows Monster energy drinks were taking up.  I went from Green Monster, to Khaos, to Low Cal, to the coffee mixes… then the competition started to come up, like RockStar… throughout all those observances I was long HANS… until the coffee mixes came out, then I knew they were over-diversifying their product portfolio.

… anyway, that is how you invest (not trade).  Keep your eyes open to trends, and if you spot one, let me know!  You may have found the next bullish, or bearish, sector before Fortune or WallStreetJournal does.

aLoHa!

-gio-

P.S.  Now that education stocks are getting attention, I’d be careful with going long here.  Bullish sectors tend to suffer profit-taking when news highlights them.

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I’ve been getting tons of questions on Twitter…

“You going to buy this dip?”

“Was that a Vix spike?”

“Will the finnies rally tomorrow?”

“I need to buy something, anything, what should I buy?”

… wow, tough questions.  I guess a lot of people want to buy the dip, but just aren’t sure, right?  I know many of you were probably thinking that as the NDX and SPX dropped over -5%.  Even I was thinking that too!  Hey, that’s fine… that is, if it’s only for a hedge on an already beefed up short position. See, I still don’t like the idea of going net long.  As long as we live under the 200 day, the short side will be the winning side.  Almost every long I had that reached my list early January are now wiped out.  The interesting thing though, while those longs were showing up on my scans, my short list was not shrinking.  The only short I got a cover signal for was EGO.  Look what happened to some of my favorite shorts on Terrible Tuesday.  MELI down nearly -20%, NILE at a new 52-low, DRYS is back to where I covered it, and ARTC down -30% after being down -20% on Friday.  Wow.  Did that work out for the dip-buyer?  So, to answer you longer / medium term swing traders, the answer is that you DON’T want to get long on a tape like this. Your attempts at being a hero will only get you smashed (read my “Sisyphean Rally” Theory Here.  The November-January rally looks to be like a confirmed Sisyphean rally halted.  More on this over the weekend.)

For you short term swing traders, I also suggest you avoid carrying heavy overnight longs.  There are cases where you can play overnight trades, but that only works if you are “letting the rest ride” from an already profitable trade.  This is very important!  There’s a HUGE psychological difference.  A person who has a winning trade, then lets half of it ride into the next day has more focus and much more advantage than a person that buys initial position just before the close with no cushion.  Of the two, who do you think sleeps better at night?

This leads me to my third option, which is the one I have been playing since late 2008.  Basically, it is to NOT enter countertrend plays in hope that the next day rallies (ie, despite the market being down -300 points, I entered no longs.  However, if I had a large short position, I would have entered longs as a hedge).  Rather, I simply wait for the next day for a CONFIRMED intraday counter trend rally. Buy about 2-3x your swing trade position in the direction of the trend and sell 2/3 at the end of the day leaving the rest as an overnight.  This is far more better than “guessing the bottom” (or top) type trades where people wait for the close to buy the dip.  Sure they get it right some of the time, but this type of guessing rarely gives a good return.

… so, to apply all that into what our market, despite holding only shorts, I look to get long to protect my short-bias position.  Therefore, if I see BAC reverse, or the VIX spike then reverse, then I will load up on FAS intraday.  Actually, I’m waiting for late Thursday for short-covering, and also late Wednesday to see if selling slows.  Again, I am going through the same checklist I go through in search for possible countertrends to see if I need to exit a position, or make a daytrade (see post “How to spot rare day trading days”).

What all I explained comes down to, is that it’s just a complex way of position-sizing.  If you are looking for something to buy just to buy, then don’t buy.  You need to remove your emotions first.   If you’re buying on a hope, you need to shutdown your computer and come back next week.  There are always opportunities to trade, don’t force one just because you missed one.  How many times do I see people make that mistake (including myself!).   One thing I do want to point out, is that some leaders are still holding ground, like schools and medical, so that’s making it difficult to enter new shorts.  Oh yeah, and although the VIX got over 55 Tuesday, look how it got there… slow and gradual intraday.  That looks like gradual panic.  Remember, we want spikes!  So even that fact makes it hard for me to go long.  Going back to my poker analogy, its starting to look like the next card on the flop is either a Queen or King, giving the bears the advantage.  But I won’t reveal the card until the end of the week… who knows what the market will do until then.

There’s blood on the street… now go out there and make money!

Aloha,

-gio-

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What a wild and crazy week.  The best thing about last week for me was that volume started to pick up in the market.  After last week’s action on the tape, the first card on the flop appears to be a 10 of spades. Man, this really sucks.  What am I supposed to do with a 10 of spades?  This changes little since a 10 of spades gives both the bulls and the bears an advantage.  Last week provided very little in direction for me!

Once again, looking at the market’s picture, we had the bulls in a slight command from November through early January.  For a review, here’s the hands of the bulls and the bears…

Why would a 10 of spades help both hands?  Well, for one, it takes away one more chance for the Bear’s to grab an ace or queen, so that helps the bulls.  It also gives the bulls an extra spade.  It doesn’t help the bears because now we’re down to four cards left to draw a diamond flush.  But it does help the Bear’s giving us a possibility for a straight, although still a low possibility.

… that’s pretty much how it went down in the market!  On Monday-Wednesday decline provided technical damage to the indexes.  These appeared to be serious technical damage as volume started to pick up, and we were now below many of the moving averages that were providing support.  Huge win for the bears.  Looked and felt like a Queen was drawn.  However…

…here came the bulls.  Thursday’s reversal was a beauty.  Volume picked up, and that provided us with a rally attempt #2 in January.  We went from -200 to +80 on the Dow which caught the bears by surprise.  Then on Friday, same thing happened.  Started up, gapped down, then rallied… another bullish intraday move.  What’s good about these rally attempts is that it came after 2 distribution days on the Nasdaq.  A note about distribution days:  1)  they are bad for the long term charts, but 2) are good for short term charts because they signal a form of panic selling which is usually a flag for a relief rally around the corner.  I think the action in the Vix displayed that as we moved up big time, about 35% to the 50s, but then we bounced.

So how are we supposed to read this?  We went from “it looks like we’re gonna tank” to, “oh wait a minute.  Did the market just fight back?”

In conclusion, the bulls still have the advantage after last week.  The bears had a huge chance, but I think they’re kind of weak right now, perhaps afraid of Obamarama (or laters Bush) day, so they are taking a cautious position.  It’s just not a good time to go heavy short in my opinion, even though going short is the correct play in the long run.  One thing that prevents me from shorting with my bazooka is that I still see some strength in leadership stocks.  Take a look at school stocks and medical stocks… despite the market selling off last week (market closed DOWN for the week), these stocks seemed to hold their ground.

So, with a stinking 10 of spades on the first card of the flop, we just have no HUGE advantage going in one direction.  Let’s wait for the next card to drop before we start making some bets.  For now… “check.”

-gio-

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What a crazy week.  The market was a schizo escapee from a mental hospital.  Even all the “entertainers” (not traders) on CNBC (Cramer was down -40% last year. He makes his money from his book, TV, and website. NOT from trading) were all over the place.  Not the folks on iBC!…

I think this week all the bloggers made nice moves in the market.  Ragin did a good job exiting his shorts and iETFs yesterday, and nailing a nice FAS daytrade.  Alpha exited his swing longs in time last Friday after riding out the hated rally.  Danny smashed the S&P index with imbeccable retracement points.  C-Addict buying beat down longs for major squeezes, then closing out shorts on Doji days.  And of course, Fly’s making money on fundamental shorts.  Going back to the poker analogy, I’d say we had a “full-house” this week.  I didn’t detect any trades with WoodShedder, but he did enlighten us with good studies on the Vix~SPX, and made promises of a new leverage ETF system which is what I’m excited about 2x.

Friday, I took trader honors at StockTwits for this week’s trading.  What really helped was I called almost the exact bottom of today’s tape when the Dow was down -90:  “Bear Trap!”  … bam, 180 point rally, from Dow -90 to Dow +90.  What’s even more cool?  I was mentioned with AndySwan in the same sentence.  I feel honored.  LoL.

A little update on this week.

This week on the swing side was real tricky because we were moving from “momentum trading” back to “volatility trading” as the Vix picked up. Nevertheless, I’m satisfied with the way I played the transition.  I headed into Monday short DRYS, long CWT (water), CPLA (education), and short EEV as a hedge.  I shorted EEV with the intent on “losing money on it.”  Well, I got what I wanted, but a little too much! Lol.  Had to close that out at -8% then -1% average out.  But that’s okay, it was a hedge for our DRYS shorts that I closed out at +17%, just before yesterday’s rally.

I posted earlier how the market was starting to remind me of one giant Texas Hold’em Poker game.  Over the weekend, the bulls had pocket Jacks, and the bears had off-suit Queen and Ace.  I will reveal the first card of the flop this weekend (ie, tell you who has the advantage).  Every week we flip a new card. Ok?

Glad to see iBC repping it over on StockTwits.  And glad to have you as a reader.  Collectively, we are a “human-ticker”, filtering through the market and chatting about the best plays.  Now go make money!

Aloha, have a great weekend!

-gio-

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Okay, I got one question from Mr. Brill about “day-trade setups” and how to spot them.  Well, I decided to let you in on a little bit of my technique.  Not sure if it will work for everyone, but whatever.  If you can get anything out of it, then great:

I recognize the favorable trading conditions from spot checking in and looking back, tho was on other tasks today. For perspective, how rare is this type of trading day? Not to suffer the missed chances, but to help my feel going forward how often such relatively “smooth” conditions up then down in volatility, with volume, happen on a given trading day. Implying how I guess you’ll answer, what’s your experience of the duration of such conditions during a really good trading day, e.g., a few intervals of twenty minutes here, fifteen minutes there? Your thoughts putting today in context may help pragmatic trading, with upcoming opportunities. Since I was not watching the live feed: how different was it for you watching the tape unfold and executing trades, than it appears looking back at the tape? The VIX and candlesticks may be the same in real-time, but if you also watch momentum indicators, they adjust as the ticks progress. Do you have any minimum number on the VIX that draws you into trading, or is it a minimum percent gain in the VIX over the previous close?  – Bob Brill

First, this is how you spot a “favorable day-trading day”:

1)  Search for volatility.  Is the Vix moving, or is it flat? A flat Vix, or one that just “melts down” means there’s not much fear or greed in the market.  When it’s moving, then you know there will be some waves to catch.

2)  Search for news.  Are there any news events, milestone events, companies reporting that have many people waiting in anticipation? More important, what is the context of the event and how does it shape the countenance of the market?

• For example, if oil is tanking, are there any news events like an OPEC meeting around the corner?  Then you know that a few day’s leading up to that event will trigger movement in related stocks.
• For example, is a bad president going to be removed, is a new president being sworn in office?  This was the setup I was using.  I knew that the Vix and the market would pick up at least one week before the event.   What is the context of the market? I map this out using software, but you can just list them on paper.

Here’s what I mapped out going into this week, day by day:

• “The market is reversing on an improper low-volume rally;
• How is the big-three looking on the charts? Wedge patterns everywhere!  (a huge flag that the market will move big soon.  I no longer have to search for them, I just check out Chart Addict’s, Danny’s or Ragins. They usually always spot the wedge patterns and flags.
• What’s going on in the minds of traders? The Vix has moved up 30% in the past 10 days.  Vix on 1/14/09:

• What caused this “spike”? Banks, yet again.

• Where would I look to say “the Vix is too high”? Answer:  above 55.  Did we get there?  Yes.  Does it look like catalyst of the sell-off is fading?  Yes.  Therefore, put your finger on the day-trade long trigger (in this case FAS).
• Other notes:  the market has had 7 straight down days, with 2 distribution in days in the past 3; expect relief rally.
• what triggered those distribution days? Answer:  banks.  What stock to watch? BAC and C. Therefore, watch for this match:  C and BAC find support + Vix reverses down = get long
• How is the volume? Accelerating on selling.
• Which stocks are trading at imbalances? Answer:  the inverse ETFs are trading at high premiums.

Here’s what goes on in my mind during the daytrade:

• How is the Vix? Moving up fast, too fast.  Back above 51, but we were prepared for this:  See Paragraph 1 in “January’s Clear Short Setups” http://ibankcoin.com/gioblog/?p=2721
• Does it look like the Vix is “topping”? Yes… I notice the Vix has reversed and is still falling a little, even though the market continues to fall. (search for anomalies).
• What is the context of the market?  Why is the Vix moving so fast today? Answer:  BAC is down 20%, single digits for the first time in years.  Bank panics everywhere.
• Did C find support? Yes, get long the indexes.
• Which stocks have been trading at imbalances? Answer:  the inverse ETFs, in particular, EEV and SRS.
• Do these imbalanced stocks looks like their overextended path is slowing down? (pendulum theory for momentum traders)  Answer:  yes.  SRS yesterday was red, even though the market was down -70 points.  SRS was barely green when market was down -90.  (this information from the previous day is very valuable information).
• Do we have a confirmation that the Vix has topped intraday and that the stocks triggering the Vix spike are bottoming? Yes, Vix =55 and C  and BAC reversing simultaneously, and continuing to reverse despite the Vix moving up! Likelihood of intraday short-squeeze just went up like crazy now that we have a match.

• Where’s the intraday resistance on the SPX or DJI? (the “relief-point”)  Found it!  Dow @ 8055.

• Did we pass that point yet? Yes we did!  8055 breakout.  Get long FAS!  FAS moves up about 14% from there.

… so, I hope you can understand what was going on through my mind as I made the trades.  Due to the uncertainty of the markets in the past week (starting on Monday), I knew the rally could be “fadeable” at the close.  Therefore, in the final hour or so I switched positions and shorted FAS.  From that point on, it’s mostly instinct.  If the trade is moving in your direction, there’s no reason to switch sides.   Just “set-it-then-forget-it”… if I had done that on the long side, I would have had caught a huge upswing with the bulls.  Today’s -200 to +80 is a very rare occurrence, and the events prior to it suggested we would have this type of day soon.  I usually cap my gains at 3% per day trade, but the move in FAS was so decisive, I released the caps.

… it most certainly dropped under 14, even 13 at the close!  And Vix =55 was most certainly the spot to go long in the morning.  Not bad, eh?  Do your homework.  Wait, that analogy is weak.  It’s a war on the streets.  Make sure you’re ready for battle before stepping on the battlegrounds.

Hope this helps!

Aloha,

-gio-

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