Correction Road Map

In order to succeed in any business venture, be it trading or startup or corporate monotony, one must have a plan.  It does not matter if the plan is perfect.  Once you have a plan, you can respond to live conditions as needed, always returning to the plan drawn out during a calm state-of-mind.  There is no free lunch ever, and with trading you can end up being lunch.  The best traders I have ever met work incredibly hard.  If you want to succeed, you should too…and have a plan.

We are working through a correction.  It just so happens this correction is different than all the others because it is happening in January after a strong year.  It is also happening with a backdrop of negative news flow—no surprise there.  It is also happening on a macro level, with currencies and volatility rearing their lovely head back into the action.  This is all very fun, you see?

I tune out all of that.  I am trading stocks, many of which are nestled in the NASDAQ 100.  Therefore, the behavior of this one indicator can tell me more than any news channel or derivative.  I understand being very micro and treating every stock as its own situation, but at the least I will build a framework (read plan) for assessing the index.

First, I run through the control.

Long term control – buyers: this can be seen on a weekly chart.  Price has made higher highs and lows since last January.

Intermediate term control – sellers: yesterday’s action put price below recent lows, pressing price out of intermediate term balance.  The sellers now control the intermediate term timeframe.

Short term control – sellers: the price action over the last three days has been dominated by sellers.  This can be seen in market profile via selling wicks, range extension lower (price trades lower than the first hour of trade), and value migrating down.

Yesterday’s control – sellers, but signs of balance: price action was again in the control of the sellers, however, we did begin seeing signs of balance with price trading back to the midpoint during the afternoon.

Overnight control – sellers: we have a thin volume , wick print on the overnight profile likely caused by the drop in AAPL shares post earnings.  This was extended upon before finding buyers at 3465.75.

Therefore we can see sellers still predominantly controlling price action.  I expect their control to continue as we work through correction.  However, it is my expectation also that we are nearing the end of correction.  Calling the left side of a sentiment chart is difficult, but I have drawn out a rough road map of what I expect to occur as we close out January and head into February (see below):

The low print you see coincides with a naked VPOC dating back to 12/18/2013, one of Ben Bernanke’s better days of action.  Price likes to retest these big “moment” days to see if the catalyst for creating the moment still exists.  If not, if buyers do not present themselves at these levels, my take on the left side of the sentiment chart may be wrong, and we may not have seen true panic yet.  However, if it holds, we may begin working through the very lucrative process of discouragement, where our micro stock analysis can begin working again.

Apple is out with their earnings and share price is headed lower.  I could begin to speculate as to why, but the short of it is simple—there are more people selling shares of AAPL than buying.  I got off half my positon today, taken Friday amdist the calamity, but that will do very little to shield the loser.  This will end up being a losing trade.

The question becomes, does the NASDAQ get lit up tomorrow?  The market stopped its one-directional jaunt this afternoon, of only briefly, which allowed individual stocks to behave a bit.  However, tomorrow is news heavy and price could get loose. 

I have lots of exposure to the long side.  For me to sit here, in my underpriced chair and tell you I am comfortable with my position would be a lie.  I would like to have more cash and less call positions in the red. 

However, I am still green year-to-date, odd as it may seem.  This may change tomorrow. 

Intermediate term balance is teetering on the edge of the abyss—the abyss being prices we have not seen since November.  Living to fight another day is always paramount, even if you are wrong on a trade.  I may be wrong in expecting a revision to the mean on intermediate term balance.  At least, that is what the market information to- this point is leading me to believe.  

On a more positive front, Elroi caught the turn higher this afternoon while I was freezing myself in the arctic cold.  He earns a gold star.  May he continue to labor through the night, trading opportunities he sees fit for algorithmic success.

I trimmed the Apple long position purchased yesterday to a modest earning’s announcement size.  It was a cheap fix yesterday and I took some of the money.  My book is otherwise intact.  I want to see tomorrow’s print with my book of longs.  There are plenty of earnings out this week.  The overall action is about to get very interesting.

I am #teambreakout.

After live tweeting the open inside of the 12621 trading room and buying a few bits of risk, I am taking a step back from the action.

My book is 85% long after buying $GMCR calls and some SINA common.

I will now take a meeting with my top consultants, the pigeons at the park, before returning this afternoon to reassess the carnage.

Be careful out there folks!

Friday we experienced a trend day down in both the NASDAQ and the S&P, with equities trading as correlative instruments to other macro products.  This corrective-type trading was different in behavior from recent trade, and the selling pressure was dynamic enough to push the S&P out of intermediate term balance dating back to 12/20.  What I find interesting however, is that the NASDAQ futures have not been pressed outside of the intermediate term balance dating back to the same date.

There are a few other divergences.  The volume price of control for the NASDAQ never moved to its uppermost distribution.  Instead is stayed in the middle of the action at 3565.  I will be focusing on the NASDAQ as the market works though this correction, as it attempts to demonstrate relative strength.

First I have drawn out a volume distribution dating back 24 sessions to 12/20/13.  This set of trading days represents the intermediate term NASDAQ balance.  From it, I have highlighted the key high and low volume nodes to monitor:

If the NASDAQ is going to sustain trade within the intermediate term, prices need to hold 3495.25.  In the past, these lower regions have been the site of strong buying demand.  Should that not be the case this time around, we may need to rethink our market stance.

The buyers are still in control of the long term auction, which can be seen on the daily and weekly composite charts (not pictured).

The trend down from Friday followed through for a bit in the globex session Sunday evening and into the morning, but buyers came in overnight and auctioned us higher.  Their actions left a tail on the overnight volume distribution suggesting responsive buying took place.  Early on, I will be on watch for a gap trade back down to 3531.50.  This would close the weekly gap and also take us back to the scene of overnight responsive buying.

I have a current upside algorithmic buy stop target of 3549.50 which coincides with a low volume node on Friday’s profile and an area of support that was converted to resistance during the final afternoon panic selloff.

To recap sentimental control:

Long term – buyer

Intermediate term – balanced with selling pressure

Friday – sellers, overnight – buyers.

Finally, here are the RTH profiles on the NASDAQ.  Note the plunging 33ema.  Price always returns to the 33ema.  Will price revert to value, or will value catch up to price?  See below:

The cold kiss of nature did me a solid this morning, oh about 10 minutes after my morning post, by knocking the humble casa de la Raul completely off the grid.  This naturally took Elroi, my servant robot, offline too.

Finally I am back with power to make any last minute adjustments.

Apparently, everyone has gone entirely mad in one short week.  These people, in all their brilliance, are tripping over one another to buy the Japanese Yen.  Let that simmer a bit…money is making a flight to Japan, who is closer to war now then they have been ever in my lifetime.

It just doesn’t quite add up.

Everyone must be going insane.  Or, I may have lost my mind…it’s a theory.

I finally get my electric on and I begin the process of booting Elroi and start rifling through my charts.  Much to my chagrin I am down another 3.5% (nearly 7% in two days) but none of this matters.

None of my setups are broken.  I don’t have time to explain this right now, but I will.

I bought a small AAPL long.  I have more buying I want to do soon too.  I have names I want to buy.

So either, I go down in a blaze of glory, or, I make a big win soon.

I actually like my odds here with 12% cash.

Get out there and buy some blood, IMO.  Go trashy like TNA.

More waves of selling rippled through the marketplace last night, as the afternoon bounce in both the S&P and NASDAQ were faded.  A bit of a risk divergence emerged from the move.  While the S&P was able to take out our low on yesterday’s session, the NASDAQ held.  Since reaching short-term oversold conditions on both indices, we are coming off the lows into the early USA hours.

With my really fancy futures data (FFD) I get to a clean look at exactly the ticks where events of interest have occurred.  I share these ticks with you, finest people of the interwebs, because we should all have this information available while making our educated guess on market behavior.

I will make one note and then present my intermediate term balances.  Yesterday the NASDAQ market profile print had a smack of long liquidation—a temporary market phenomenon driven by forcing participants to liquidate their positions.  It resembles a lowercase letter b.  These typically signal a strong initiative seller entered the market in the morning, but the force of selling was met by sufficient buy flow.  As a result, no further progress was made in the afternoon.  This is what may have sparked the afternoon ramp.  Be aware there are large timeframe traders here, aggressively battling for control of an intermediate term balance.  Try not to get too beat up in the waves they produce.

We are on the [very] low end of intermediate term balance.  I will be looking for signs of buyers. I have highlighted this intermediate term balance using the following two volume profiles:

I had a post written up in Word ready to submit to the fine readers of iBankCoin which was corrected into bits of electronic vapor (no eCig) when this POS Dell machine I am operating from went black.

Thus you get only a synopsis, which is likely 10x better.

We are still in intermediate term balance but that was some harsh selling, intraday.  We should keep calm and carry on with our prowess.  The only catalyst to a true across-the-board correction is China and Japan starting World War III.  This is the talk of the down after Sinzo Abe made some left-handed peace talks in Davos yesterday.

Since the news flow has decided to go full World War III East Asia Edition, my book, 25% nestled into LED stocks, is getting lit up.  I ended the day down 3.25%

My Amazon trade has gone wrong mostly because I did not buy enough time.  I still want Amazon, but it appears my option strategy was too tight on time.  I can either shop for some further dated options, buy the common, or move on.  This may be how the addiction forms.

Elroi took no trades today.  He does not like long vertical moves.  He instead prefers to catch the initial turn in the market.  Why he missed the afternoon ramp then?  The edge diminishes in the final hour, when the market goes rouge.

I have 18% cash and made no adjustments today.

Be well

Sell flow worked though the markets last night after the buyers pressed a bit higher during the globex session.  The S&P continues to lag the NASDAQ and one must start to consider which one of these indices is telling the story here.

The /ES_F (S&P electronic future contract) is currently trading 5 points below yesterday’s close.  The gap trade will be in effect today, as buyers work to fill this overnight void.  I have envisioned more back-and-fill action for the S&P as it continues working through intermediate term balance.  Should we instead see an aggressive drive away from intermediate term balance, it would suggests a longer timeframe trader is acting upon the market.  The first chart is a scenario I envision, and the second highlights the intermediate term balance and key levels within it:

Turning our attention to the NASDAQ via the /NQ_F contract, we see prices made new swing high yesterday.  It will be interesting to see if these prices sustain.  Overnight the market found buyers at 3610, the intermediate term value area high, and quickly rotated higher.  I will be keen on this level today as a break likely brings a retest of the VPOC at 3602.  Here is the intermediate term balance in /NQ:

Finally our NASDAQ daily market profile is presented below.  You can see it printed a high VPOC suggesting value is migrating higher and perhaps beginning the process of discovery higher, in hunt of new value.  We are set to open inside range, inside value today.  Thus we are presented with a lower risk/reward environment intraday.  Keep in mind a strong drive (either direction) at the open could change this sentiment rather quickly.  Otherwise, my expectation is for price to work through a bit of back-and-fill along with the S&P.   I have presented a scenario below:

You knew it was bound to happen.  You knew CREE cannot spelunk after ever single earnings announcement, right?  To be honest (and we keep it honest in the humble world of Raul) my feet were chilly to the thought yesterday too.  I went into earnings only half sized.  Do you know where I was most certainly not reducing LED exposure?

In LEDS, in RVLT…the “party rock”

I floated some statistics about CREE stock behavior during and after their earning’s announcement on the pelican stream.  They were rather interesting, really.  They are free, too, in case you are wondering.  CREE only trades higher 44% of the time after an earnings announcement BUT the session after an earnings announcement closes higher than the open 77% of the time.  Hence, therefore, thus…one does not simply trust CREE through earnings.

Quite the contrary, you instead hunt an entry the next day.  I bought CREE after it gap filled down and was trading BELOW where it opened today.  The deck was stacked for your boy Raul.  I made it a full size position, market order like a glut, and the rest is history.  They I bought OESX at the low of the day.

Do you see what I did here?  I completely pwned the LED trade, live on the interwebs.  I am not exactly dancing the tapioca over here yet.  My book is 25% concentrated into the LED industry as of the bell.  A concentration some of you may perhaps deem mad.

Let me ‘splain something else to you.  SINZO ABE will not be instigating any wars in the Far East.  He took center stage at Davos proclaiming these words.  He instead intends to lead an industrious nation and keep his battles economic in variety.  This is very good news for the LEDs we love because most of their tiny components are assembled the laborious hands of China men and women.

Thus I am pressing the envelope with my LED exposure, and I intend do so until I see the whites of Thomas Edison’s eyes—live from the land of the dead.  That last sentence makes no sense whatsoever.  I possess the will of a madman is what I am trying to convey.  Just be aware.

I have lots of other risk, side bets if you will, companies whose goals are all centered upon intelligent humans making more intelligent decisions.   I could go on, but I have already said too much.

Take time to enjoy the traditional lighting around you if this is something you hold dear, for soon it will be only a small piece of your nostalgic pie.