It’s dawned on me after spending few minutes on twitter this morning that many  people are ready to call an absolute top.  The tweets you can imagine are all the same, “Did you see barons this week?”, “My local paper with dow 14k headline! retail about to get creamed!”.   While I find it interesting like anyone else, I don’t think it’s THAT easy.  I think people are sometimes forgetting how far euphoria / fear can go.  Imagine this scenario in the reverse, as the market was tanking in 2008 saying, “This has to be the bottom!” only for the market to continue going lower.

I see all the same sentiment data everyone else is seeing and it’s at record levels for sure.  This type of upside excess should push to you lock in profits, but I would not try to bet against this going short because you have no idea how much longer this could go on.  People are still skeptical and this screenshot of a comments section to Bloomberg Facebook is another great example.

Imagine a scenario where we pause for a bit, but then the market continues to go higher? Wouldn’t that frustate everyone and defy all logic?

I’ve been thinking about writing this post for days now because I’m seeing an alarming trend on twitter starting to go parabolic. I don’t want to go naming names, but let me break down the formula on how I *THINK* this scam runs:

1) Create your twitter account
2) Pitch bunch of trades, lie about your size (absolutely no capital management, full cowboy)
3) Claim to make obscene amounts of money the trades
4) 2 Months later, sell a subscription service for $100 a month

I’m not trying to be a hater, so I won’t be naming names, but it smells like bullshit to me. If I end up being wrong on any of these people I’ll gladly admit that, but I dont know. Only Premium guys I can honestly vouch for are guys that grind out a living. Show you how to trade and don’t claim to be making obscene amounts of money everyday on every trade.

@DanZanger – This guy is audited so it’s no bullshit. Holds records for his swing trading one of the real pros out there.

@gtotoy – Great trader, puts out free content everyday. Free month access to even see what goes on in his chat room

@chessnWine – Real dude, puts out great videos everyday who’s been on long enough so you can ask people about him if you need to

@OptionsHawk – Wealth of knowledge about options who’s been around long enough

@OptionRunners – Good trader who pitches out free content everyday who’s been around for years now.

If I missed anyone, it’s by mistake or I haven’t tried their service/know them. You won’t go wrong trying any of those guys, but good lord at least be cautious of all these new guys popping up everyday now. Don’t let the greed blind you.

P.S. – If you think I’m a jerk off, or know nothing, write a comment. I’m writing this post through the eyes of someone actively trading for 2 years now so I don’t assume I know everything.

I want to start the year right with two ideas I’m really digging here:

1) FCX – a play on Copper rebound

I’m currently looking to leg into a long position on /HG copper future contract in the new year I really think it’s got great potential to go much higher. I really like the weekly chart here I feel there is going to be a resolution to this soon as the range is getting tighter and tighter.

I’m really liking an entry on FCX here as it’s still holding up for a possible play to $36. I’ve been playing a lot of weeklies on this with it working out 50/50. Looking further out you see lot of OI in FEB.

THE TRADE: The FEB $36 calls look pretty good I would look to pick up 25 calls at 0.61 (0.50 would be better). Here’s a generated return if that trade works out:

2) SIAL

The weekly chart on this name looks great

THE TRADE: The April $80 calls if I can get them at .50 I’d look to pick up about 30 of them. Here’s some run down if the trade works out on the returns for that trade:

We all know tech fucking blows right now and it’s been nothing but a pain trade yet the market is still up. Taking a look at those components in this ETF some of the charts are showing better price action with increased volume (great!).

AMT

SSS

PSA (SLOPPY CHART, BUT COULD BE START OF SMALL BOUNCE)

BXP

SPG (REAL TEST OF STRENGTH AT $156 COMING UP)

I want to keep an open mind here and present to you some numbers on betting against this stock was under the 50 day moving average.  The results are pretty stunning I have a total count of winning returns vs. losing returns if you bought it and held 7 days, 15 days, and 30 days later.  History is in favor of buying weakness in $AAPL, but we also want to use our best judgement as history does not mean it will repeat again.  It does however remind you to keep an OPEN MIND as it has recovered strong in the past when these events occur. I have generated these numbers from yahoo finance close data that was parsed and thrown into a script (I work as a software developer for a living).

Strategy:  Buying when under the 50 Day Moving average in $AAPL

1) Nice smooth Rally from November to April.
2) A steep correction from April to June
3) A rally that defied all odds from June to present

I’ve only been actively investing for little over a year now so this year has been great to see every facet of the market.  One that is trending up, down, and sideways.  What I really want to focus on is #3: The rally that defied all odds from June.  Since I trade purely off technicals I want to share a few charts that could help you if we come into a similar situation in the future.

June 4th:

Entering the trading day on June 4th, the previous sessions we had seen heavy selling with lot of volume behind it.  It was perfectly reasonable to expect that we were going to keep going lower to possibly tag 1200 (that was my target).  What happend was we probed lower, but reversed and created a Doji.  Now that candle doesn’t mean anything without follow through the next day, but that’s exactly what we got! If you look at the chart below, you can see clearly what happend:

Now of course you’re saying, “Hey Greg, it’s easy todo this in hindsight”.  Yes, of course it is.  What I’m trying to say is, if you bought on June 7th after the 6th was a positive close showing you the market had FOLLOW THROUGH to that reversal Doji candle, look at the position you would be in now.  You could’ve simply set your stop few points under break even considering how far we pulled in the risk/reward was great.  The chart was also showing us at the time MACD and RSI were improving.  I remember many technicians as the days went on pointing out how it looks like we’re forming an inverted head and shoulders pattern which is very bullish.  Around June 18th it was clear that right shoulder was forming  and also where the neckline stood.

Another chart that could’ve helped you out during this time to show how lopsided the market had become was a Put to Call ratio chart.  It simply measures how many Put options vs Call options there are at a given time in the market.  Below it shows how on June 4th there were 1.35 Puts for every call out there being sold. Looking at previous years on the chart that area has often led to great buying opportunities over the years.  I’m not saying every time we enter this area it’s 100% you will never lose money, but history has shown that this often will give you an extra edge which is all you need to make money over the long run.

Now most traders (myself included) chose to ignore a lot of this thinking that the market had to repeat what it had done in previous summers which was sell off hard.  Technically, the charts were showing that at the bare minimum there was a bounce trade worth trying for on June 7th.  It is also worth pointing out that this rally was not easy to stick with.  Somehow, some headline from Europe or rumor over here would send the market rocketing higher.  @ChessnWine will often repeat in his videos that these are just excuses for what market was going todo anyway.  We can clearly see the buyers never let this market slip out of their hands showing up every time it looked like we were on the brink of collapse.

July 26th

One of the more important things that happend during this rally was finally around this time (give or take some sessions) we started to see the 50day moving average turn up.  We had been following it for some time after the steep drop from April as traders we knew it could take some time smoothing it out.   The sharp up and down action that happend during June and July did exactly that: smooth it out.  I like to think of it as the market trying to get a grip on itself and move in a new direction so of course there is going to be wild indecision where price is swinging 1-3% (sometimes more).  Once we started to enter August, the market took on a whole new form where everything became nice and calm.  Notice the nice and tight candles? It seems very familiar to the rally we had back in November right? Completely different look from the wild swings back in June.

Final Thoughts:

Going forward, how can you be on the look out for something like this? Well, for myself now I have few things I do daily as a trader.

1) Check to see how lopsided the market has become in terms of people placing bearish/bullish bets.  You can do this yourself on stockcharts.com http://stockcharts.com/h-sc/ui?s=$CPC&p=D&yr=3&mn=0&dy=0&id=p31058407684

Try to clean it up by removing RSI/MACD as it is not needed.

2) Be on the lookout for reversal candles after sharp pullbacks.  The reversal candle itself doesn’t mean much, but if it has follow through the next day(s) the risk/reward is in your favor for taking on a position.

3) Watching the 50day moving average to see if the market is changing direction.  We can clearly see in late July/early August the 50day starting to turn up and from there we rallied another 100 points.

4) Look for money to rotate.  When the rally started we saw health care/defensive names start moving.  Then it was the big caps, financials, and small caps that started to rocket higher.

Send me comments or suggestions @gregnb

When I walked into this week, I scanned around for the sectors that were beat up and had to play catch up.  The Russell 2000 was great starting point as many small caps have not moved much with this rally mainly happening off the backs of mega-cap stocks.  Lot of these mega-cap stocks are already up big % wise so it’s tough to jump right in without decent pullback or sideways consolidation.

Remember, it is still a stock pickers market you must do your RESEARCH.  This could be beautiful market setup for rotation daily where we might only go up 2-5 pts on the SPX, but if you watched the charts you could find names that go up 5-6% in couple days.  I’m going to be look at these following charts for names to play:

(FULL DISCLOSURE:  LONG EBAY MA AFFY)

GS – Consolidating nicely

C – Nice consolidation

ULTA – Powerful bar breaking downtrend

AFFY – Biotech so becareful but over $17 and it could get interesting.

ACOM – Consolidating nicely, no heavy selling w/ volume either.

TSCO – Consolidating recent gains, could move back to $100.

VAL – Break over $53 gives you decent probability of good run after.

IBM – Inverse head & shoulders could touch $205-210 again. It must keep holding $199-200 as support/base for higher prices.

What can you learn from all of this? Having a thesis or opinion is just too costly.  Although someone might reason with me that it’s the “House’s Money” I don’t know how anyone can take that serious .  That’s exactly what a loser will tell you in my book as a LOSS IS A LOSS.  I can write a book on the reasons why this market shouldn’t be at 1400 with all the headwinds we are facing globally it’s incredible.  That’s precisely the wrong question to ask though and it’s too costly.  Focusing on too much of why instead of what the market was actually doing is how I got thrown off in July.  Constant thoughts about fading each mini rally up only to be slammed as it continued even higher!

Almost two weeks ago I finally realized this was going to get worse before it got better so I decided to back away completely to get better objective view on the market.   After hitting a cold streak and the 50day firmly sloping up I knew it was time to take a break.  I came back late last week, with a different outlook and risk management.  Switching to tiny position sizes just so I could bat in a few runs to get in the game again.  Although there have been a few strikeouts, overall the average is back to where it should be and I’m not holding any stupid thesis about what should happen.

So yes, I’m baffled by it and it seems like we could break this rising channel any day now, but you might go broke fighting it all the way up before you ever get that to happen.  The market could very well go down 500 pts tomorrow and making it seem like the thesis was right all along, but think of what you could’ve saved yourself during all of this as you’re busy playing catch up.  Next time, it’s better you save the thesis for grad school where it won’t hurt you like it does in the market.

Let me get to the point though, as a trader who uses mostly technicals it’s interesting to see how this fundamental nightmare is playing out.  I brought up a weekly chart here which looks a bit messy. I rarely add Bollinger bands, but I like using them to show extremes on a chart.  You can see we’ve had consecutive weeks closed out of the upper bands.  Usually this signals some of sort pullback, but it hasn’t happened.  As a technical trader, this would look like a decent setup to short but we must remember technical analysis has it’s limits.  The fundamental drive in $CORN could continue sending this stock higher while being extremely overbought by standards of technical analysis.

Full disclosure: I have some NOV put options on $CORN, but only a small position to speculate as I completely understand this could continue much higher with real demand fueling this move.

$CORN weekly shows shooting star DOJI with consecutive weeks closing outside upper BB

We all know how the strong dollar has greatly effected commodities as of late, but coffee prices have been coming down 2011.  Lots of analysts said it was too early for those prices to give SBUX a lift but it could become a Q2/Q3 story and here we are!  I’m looking to be a buyer of SBUX here with coffee prices continuing to go down and the technical side the chart is firming up here.  It looks very similar to AAPL in terms of how it trendless and drifting in an range.  The name also has huge growth potential as it expands all over the world in an endless quest to fatten up the rest of the world.  I’m a buyer baby!