The Daily Breakdown: Time To Sell The Banks

The banks have been very strong recently. Many have surged above their 50 day moving averages. While this is short-term bullish, keep in mind that most of their 50 day averages are trending beneath their 200 day moving averages, which is longer-term bearish.

Examine the Philly Bank Index

While the major downtrend has been broken, make no mistake, bank stocks are not immune to a pullback and a retest of the downtrend.

I want to identify overbought bank stocks to short. I am looking for those that will offer multiple points of gain during a pullback and test of the 50 day average. 

I’ve screened for stocks in the banking sector with a 50-day average volume greater than 100,000 shares. The industries  within the sector include Foreign Money Centers, Regional Banks, Money Center Banks, and Savings & Loans. Without the volume variable, there are over 511 stocks in the banking sector. Obviously many are too thin to trade.

Then, I’ve selected those stocks with an RSI(2) > 98. Read this article for a brief primer on the use of RSI(2) : Improve Your Timig With RSI(2).

Adding RSI(2) > 98 yields 29 stocks. Get the spreadsheet here: Banks RSI(2) > 98, or use this list:

[[WM]] [[RY]] [[MTB]] [[OZRK]] [[TCB]] [[CMA]] [[WCBO]] [[BAC]] [[BANR]] [[ZION]] [[C]] [[TSFG]] [[TRMK]] [[PFB]] [[CNB]] [[TONE]] [[WTFC]] [[VCBI]] [[TFSL]] [[PBKS]] [[STSA]] [[BNS]] [[SUPR]] [[BKUNA]] [[FMBI]] [[WBS]] [[GBCI]] [[UMPQ]] [[CORS]]

Liquidity is important since I will have to use limit orders, so I might eliminate those stocks trading under 500,000 average volume. One from the list that I like a lot is [[ZION]]

I believe ZION will serve up five juicy points on any pullback. There are many others on the list that look juicy, but ZION fits my liquidity needs and printed a bearish candle on Friday. Do not forget that some managers will chase yield. Picking a bank with a low relative yield may also improve the success of this trade.

There are also some Banking ETFs that might work for shorting the pullback [[KBE]] [[KRE]] [[RKH]] [[XLF]].

Should I choose to short some of the banks, I will look to be in and out of the position within a few days. I am betting on a pullback and some profit-taking, not that bank stocks roll over from here. Honestly, I will consider the banks to have bottomed as long as they remain above the 50 day average.

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Year-to-date, I’m up 5.2%. I am very satisfied with my results so far.

This log contains only trades that were initiated in 2008. I had quite a few big winners that I started in late December 2007 and closed out in early January and during Week-of-the-Crash-that-Wasn’t.

As you can see, most of my trades were shorts.

Two of my losers, the January 23rd trades of [[SKF]] and [[SRS]], violated my rules as I did not plan to enter them the night before. Had I not violated my rules, I would have saved myself 300 bones, and my results would have been impeccable, in my opinion. As it stands, I think I’ve worked through last year’s slump and am ready to start trading larger positions.

If you have any questions or comments about my calculations, please leave a comment.

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Well I was going to post some celabratory stuff for the Platinum Party, but then, the party was over at like 7:00 p.m. Eastern time.  WTF? I had just gotten dressed for it, too. Also, I was going to post some videos and stuff, but it seems both Fly and Jeremy are too busy to answer a fucking email. So, all you get is this mediocre post with a catchy title.

Seriously, I think tomorrow could be a nice day for the bears. However, I will stand by my plan to wait to see how the Employment Situation turns out Friday before making a bunch of new trades.

My top pick for those who want to initiate a trade tomorrow is [[EWZ]]. I may hit it on the open. It is an even better setup now than the first time I posted it.

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The indexes are sitting just beneath resistance, hanging around in no-man’s land. Both the SPY and the COMP are still beneath the 20 day moving average. Short-term, they are more overbought than oversold, but are in a neutral area when looking out over the past month. Both MACD and Stochastics could crossover to the upside, or reverse back without crossing over.

The setup here is precarious for both longs and shorts. The temptation will be to place bets after the Fed’s announcement, but in my opinion, that will be premature. There is still some significant, market-moving economic data to be released at the end of this week. Likely, even after the Fed announcement, the indexes will still be trading beneath resistance. I feel strongly that it will be best to stay on the sidelines until Monday, using the weekend to research and develop a list of plays.

Unless the Fed is unequivocally bullish and cuts .50bps, my suspicion is that the markets will sell-off.

The other possible wild card is the ADP Employment Report, due out tomorrow morning at 8:15 a.m. Eastern Time.

No matter what happens this week, after bottoming, markets typically do not re-gain significant upside momentum until they re-take their 50 day moving averages. The charts show that junction to be a long ways off.

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Monday morning I sold short a basket of stocks. These stocks were cherry-picked from my post 14 Short Setups from the IBD 100.

 [[OTEX]]  [[MA]]  [[CEDC]]  [[SXE]]  [[FLIR]]  [[LKQX]]  [[WFR]]  [[LIFC]]

 While it is a questionable trade, opening shorts two days before the Fed announcement, there were a couple of reasons why I decided to do so.

 1.  The market is in a downtrend. Other than a tepid bounce, nothing has changed about that.

 2.  These types of setups have been working very well in this market.

 3.  All of the setups present clear stop loss points, i.e., it is easy to know exactly when the trade reaches the point of not working. 

4.  Since I can not monitor the action from work, either the Fed makes everyone happy, and I get stopped out, or the Fed disappoints, and I bank coin. What, me worry? Although, a case could be made that the markets will stay in a holding pattern until the employment situation is released. Regardless, you get the point.

As you can see from the quotes above, some of these positions are well in the money, and are down in an up market. And if they aren’t down, they’ve only risen a fraction above my entry. In fact, I’m up if you consider the gross achieved from selling the 8 stocks on Monday.

I have set stops on some that will take me out with a small loss, and on others I will get out break-even or with a small profit, should the markets move against me. My goal was to set the stops wide enough to allow for Fed-Day volatility without getting stopped out before the announcement.

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In November of last year, my boss entered my office and said that she was hearing “rumors.” Of course, I asked what rumors she was hearing. “That you are daytrading.” I admitted that I opened my brokerage account from time to time to “check things out,” and that I had placed a “few trades” while at work. I mentioned that these events were no different in my mind from someone balancing their bank account online, or bidding on an Ebay item (common occurrences in the office). I told her that I was not a daytrader. (That is true). Whether I was or wasn’t a daytrader really did not matter one damn bit as she would not know the difference between a daytrader and a pile of camel crap. I asked from where the rumors originated, and she mentioned a certain department.
 
After racking my brain for a few hours, I finally remembered going to a conference over a year previous with a certain girl from said department. During a lunch break from all the stupid seminars, we were sitting in the hotel lobby, and I whipped out the laptop and tried to get a wireless signal so I could check my positions. It turns out the hotel’s wifi was malfunctioning, but it ignited a conversation between myself and my colleague. It went something like this:

“So, you are an investor?
“Yeah.”
“Cool. My husband is into stocks. He wants to put a lot of money into them.”
“Yeah, you can make and lose a lot of money.”

And that was about the extent of the conversation. Remember, I was never even able to pull up a quote screen.
 
As it turns out, shortly after this conference, this “colleague” and my boss began kindling a relationship which was probably pushing the boundaries of professional distance, i.e., drinking and vacationing together. It became a well-traveled rumor that this “colleague” was gunning for a position in the upper echelon of the company, which would be in the office I work. Was she out for my job? Maybe, although it is more likely that she was more seeking to curry favor with the boss. I’m assuming that was her motivation when she decided to tell my boss the “rumor” that I was a daytrader. What a cunt. Why don’t you go eat a couple of fucking cheeseburgers you fucking bean pole. And by the way, try some Proactive. I mean who the fuck has acne at 30 years old?
 
Anyway, at my old blog, Trade While Working, I wrote an article titled Befriend The Network Admin. The article was sincere, as I had befriended our network admin when I first started trading at work, over 4 years ago. He has known what I was up to from the start. Let’s just say it is a mutually beneficial relationship. After my boss confronted me about daytrading, the network admin and I met out of the office for a cigarette (I don’t smoke). I told him what was going on, and he mentioned that the boss had asked if there was any trading-related sites on my computer’s history. He had told her that Scottrade would appear from time to time, and then he echoed my sentiment that he was unconcerned by this as most everyone spends time on websites unrelated to the company business. Overall, he did not seem very concerned about my activities. From his nonchalance, I deduced he was not being made to log my activities.
 
Over December I took a break from trading, for the most part, and there really wasn’t any reason to open up the brokerage account very often. Still, from time to time, I would open up the streaming quotes and watch the action. I figured it was smart to lay-low for a bit. I even tried to stay away from iBankCoin, but, as you know, the site is addictive. When I came back from vacation after the New Year, I had some positions to manage, and so I once again began opening up streaming quotes during the morning, sometimes over lunch, and then again at the close. I placed maybe a half-dozen trades.
 
Everything seemed cool, until last Friday, January 25^th. The network admin came in my office and whispered, “Be careful.” Of course, I was like, what the fuck? I called him on his cell, and we created a bogus excuse to meet over at some other offices, and away from the bosses, for another cigarette (I don’t smoke). He was fairly pissed off, as he was being made, as of Thursday, to log all of my internet activity. Now the admin could certainly delete anything he wanted from my computer use, but he has a family to support, and I can’t blame him for fulfilling his obligations to my boss. We bitched and moaned for an hour about the job, discussed who we could trust (each other) and who we couldn’t (all the women in the offices who happen to be our bosses). Finally, he set me up on another computer in a remote office where I could trade, should I need to manage some position in an emergency. “Fuck them,” he said.
 
It should be obvious by now that there will be no more trading-while-working for Woodshedder. All trades will have to be entered at home before or after market hours, using limit orders for entries, and stops to manage risk. I do have the computer in a remote office where I can go in an emergency, but it is not something of which I want to make a habit. I tell you all this because it brings the end to an era for me, and because it will force me to re-define myself as a trader. As I will be posting all my trades, every month, you are obliged to monitor my progress, should there be any.

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With the markets in a clear downtrend, I want to continue focusing on short setups. These are all from the IBD 100 list. While O’Neil advocates shorting a stock after several unsuccessful attempts to overtake the 50 day moving average, most of these setups have failed only one time at the 50 day. A conservative way to play these would be to wait for subsequent tests, and then get short to catch the rollover.

My sense is that most of these will make a profitable move down before re-testing the 50 day.

[[PCLN]] #2 from the Investor’s Business Daily 100.

[[CMG]] #6

[[LIFC]] #20

[[MA]] #21

[[WDC]] #37

[[AGU]] #38

[[LKQX]] #40

[[OTEX]] #44

[[ABAX]] #47

[[WFR]] #63

[[CEDC]] #58

[[SXE]] #59

[[FLIR]] #61

[[STRA]] #97

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