My favorite trade is the first pullback after a big thrust higher. The more violent and unexpected the thrust was, the better. One of the best ways of identifying the magnitude of the initial thrust is by using a momentum indicator. Many use the RSI, I prefer the CCI. If you look at how CCI is calculated you will understand how its oscillations reflect momentum.
I started buying FB two Fridays back perhaps a bit overzealous sure, but it wasn’t a full position because the stock had not pulled back into my honey hole. Well here we are today, in the honey hole. Now I didn’t buy any shares today, and I may not buy any tomorrow, but should we see STRENGTH of rhinoceros proportions I want a full position and will add.
Completely aside: I got creamed for a good 2% loss to my portfolio earlier in the year exhibiting my voodoo on the thirty three level as if it was any semblance of support the day after IPO. I learned my lesson, and @chessNwine made sure to iterate that we should wait 3-6 months to get a better technical picture of IPOs. Thus, I am patiently waiting to buy shares in lifestyle brand RH which I can assure you will be in my portfolio in 2013. Developing…
Note the angry bear’s laser like focus on the honey hole:
Mon Dec 17, 2012 12:23pm ESTComments Off on Become Robot Overlord
I’ve been an advocate of the robot revolution ever since I convinced my elementary school teachers I could type my punishment sentences which would improve keyboard speed which would be important as an adult. Only instead I would type their religous drivel once and copy and paste. Fools.
Resisting the advancing in technology is futile. One should instead excerpt themselves to become a robot overlord. The following people (kids) are just a few of the top robot overlords from various corners of the future. Either click here or the below infograph to enlarge:
This morning’s 30 minute TPOs are yet to make any progress to the downside. No new lows in the TPOs not only rhymes but it suggests buyers are not reacting to fire sale discounts but instead pushing their initiative by buying into higher prices:
Mon Dec 17, 2012 11:02am ESTComments Off on Put Some Cash To Work
Sometimes rallies of the Santa variety can be short lived. I want my cash working in the market early so I went to work buying high quality charts. Last night’s homework, 95% of which was done on this BEAST site alone, had me ready to pounce at the first sign of heard buying.
I sold MLNX because it made new lows early this morning and likely won’t find strength until a catalyst comes along, possibly earnings or the massive migration to online shopping. I started new positions in RVBD, AMZN, and BF/B.
My largest position (GS) is performing admirably as is the entire financial sector. All my other positions are still behaving constructively. There’s a lot of session left, but the bulls grabbed the edge early.
After my morning moves, cash has been brought down to about 18%.
Mon Dec 17, 2012 8:09am ESTComments Off on In The Dip Zone
We’re starting the week in my favorite area to do business, the dip zone. More specifically, we’re above my favorite EMAs after making a new swing high.
I’m looking to buy strength today, should the market remain constructive. As of 8am, the S&P futures are priced to open slightly higher, near Friday’s value area high. Critical support for a constructive session is the confluence of interesting profile action at Friday’s lows. We don’t want to see trade sustained below these levels as longs because it’s likely to preclude another flush lower.
Overhead resistance at Thursday’s volume price of control at 1414.25 and above there it could be a quick ride to last Wednesday’s lows which share confluence with Thursday’s value area high. I expect we could see sellers at that level too. E-mini S&P profile below:
Also, the light sweet contract continues to be on slippery footing, after gapping higher on its Sunday evening open it has been smacked lower. The session has stabilized since the USA started coming online, but be on the watch for continued weakness which could bode well for Rhino’s refinery thesis and the airliners:
Mon Dec 17, 2012 12:32am ESTComments Off on Drink Up This Holiday Season
I built a new screen this evening in The PPT to feed me stocks and ETFs nearing hybrid oversold. Considering my desire for instant gratification, I honed the screen in on names with strong three day performances following a hybrid oversold reading.
The screener piqued my interest when the top two names on the list (BF-B & CEDC) were from the Beverage – Wineries and Distillers industry. I then noticed the industries low ranking in The PPT universe. I like extremes so I pulled the charts up and like what I see:
I also like the high and tight flag forming in BEAM, especially where it resides within the range from earlier in the year. A retest of the ranges low end would be the perfect x-mas gift to buy with both hands:
The sector has relatively mild seasonality favoring the bulls, and the charts seem to agree with the thesis. I love spending the holiday season purple lipped from enjoying wine with family and friends. The holidays are always a great excuse to buy high end spirits as gifts and for memorable house parties (full Jason Treu). And in support of the above Santa picture, I still hold shares of PPC aka the chicken don.
After casting his vote for me, one of my favorite all time reads and radio/television sensation Scott Bleier told me to cut out the point and figure crap. This was in reference to the TPO and volume profile charts I have been posting for the S&P futures. Seeing as Scott is arguably one of the most seasoned pros on this site, it’s easy to assume a few others are unfamiliar with TPO charts and how they can be interpreted to glean understanding of a contract’s price action.
First let me very quickly cover the P&F chart. If you desire more background on the charting method, I’ve linked to two detailed sources at the end of this post.
P&F differentiates from most chart styles by not plotting price against time. Instead it uses Xs and Os to delineate upward and downward movement respectively. One goal is spotting breakouts and breakdowns. Below I’ve marked up the SPY chart. Notice all of 2012 is contained within five strands of Xs and Os. Writing about this chart every morning would be grounds for banishment, no doubt:
TPO charts, and more importantly the volume profile, give us much more actionable data. TPO stand for time price opportunity and each letter (usually) represents 30 minutes of trading. As the session progresses, the TPOs build up and take shape. Remember bell curves? They show up all the time in a balanced market. My write ups cover the e-mini S&P future contract. It’s the most traded financial instrument in the world and is derived from the price of the S&P 500 index.
The more time we spend trading at a specific level, the more TPOs build up, and it tells us the market has “accepted” a price as reasonable and buyers and sellers both find the price as reasonable, balanced. Balance is good, but imbalance and price discovery are where the opportunity to bank coin reside. Last Thursday was an example of price discovery which led to the gap fill. You can see the before and after in my posts here and here.
As volume data became more raw, more pure, we began plotting the volume at price to build similar imagery as the TPOs had in the past. Most current users of this type of charting consider tracking the volume to be more relevant and actionable. I agree. If we know where the most volume has traded, we can watch that level and see how the market reacts when we reach it. If we blow through the level, something has changed and the participants no longer agree the price is fair.
I could continue on, but let’s instead look at Friday’s auction and what it tells us. First, I very clearly see from the tight range that there wasn’t much action on Friday and the market found balance. The purple box I plot is the range where 70% of the transactions occurred for the day, using volume at price. It’s called the value area and people make a living trading around these levels alone. We closed right near the middle of the value area, but not before the bears attempted an afternoon push lower. Buyers showed up and price quickly returned to the midpoint. Overall Friday was a balanced day of market stabilization:
In my next post I’ll cover price areas of interest going into Monday’s trade. Levels where we could expect the market to pause or explore.
The halls are decked with holly and wreathed succulents are paring with the aromas of the fire to create a lovely woodsman scent in my home. The animals are lounging and I couldn’t imagine a better way to spend my evening than at home opening Fly’s toolbox, The PPT. The unfettered celebration last night, which brought out the best/worst of my normally politically correct co-workers, was fun and dare I say outlandish. Pare that with the excitement of getting an interim position here, in the hallowed halls, and let us just say I’m just now returning to my senses.
The first time firing up The PPT is like stepping into a formula one racecar. Mario Andretti could configure a car to his exact specs, but you can’t expect to hop in and win the Grand Prix.
I look for a very specific chart pattern when I enter a stock. It doesn’t always look the same but the methodology is simple. There are two steps. Define a stock’s trend, and trade the pullbacks in the directions of the trend. That’s it, momentum trading. Sometimes I wrap a thesis into my positions, other times I seek diversification of industries.
The PPT clearly can increase the odds in trading with one data set alone, seasonality. I’m thrilled to build my understanding of The PPT scoring systems and building their probabilities into my trades, but I built my first screen to build the seasonality edge into my momentum trading. Thus the “Comeback Kids” was born, and I like what I’m seeing.
I built the screener to give me stocks that have underperformed their seasonality this month and tossed in a few fundamental ratios and volume thresholds to ensure I’m not getting any garbagio. The idea is mean reversion to seasonality. If any of the results fit a trading picture I like, I’ll stalk come Monday.
Several of the 37 stocks look ready to make a comeback. I really like Cooper Tire & Rubber (CTB). It has the look I like and a thorough seasonality dataset:
It has over 3% of mean reversion seasonality built into it, which coincides with the first logical scale out point, prior swing highs. Getting that first scale means I’ve done my job, and pumps thereafter are the cream (no homo).
Scientists have proven that, for men, looking at a beautiful woman lowers the blood pressure. With our damning of society in our real life film noir existence, today’s selloff, and the holidays we could all use some stress relief. If you know my style on twitter you know I only follow traders and models. Together they form a symbiotic stream of productivity. One of my favorites Miranda Kerr and her fellow angels made a video for our enjoyment. Enjoy the following video and remember that the holidays are about love and forgiveness:
“We are what we repeatedly do. Excellence, therefore, is not an act but a habit.” – Aristotle
The allure of buying a stock that has been crushed in anticipation of a juicy mean reversion is enough to zero out many traders accounts. On the charts, the positions always look magnificent and take almost no heat. But the nature of a stock cascading lower is much different than what one finds in a pullback of a prevailing uptrend or even a flat liner. The stock is falling rapidly in value because there are more sellers than buyers, and the price is exploring lower for interested buyers. It won’t stop until it’s met with a buying force stronger than the sellers so knowing “where you’re wrong” is vital to preventing portfolio devastation.
Setting a stop is something traders always hammer home, but in my experience the essence of success is more than setting a stop, it’s consistently setting a stop in a methodical manner. I’ll demonstrate my method with my current knife catch, which is drawing blood from both my palms, MLNX:
The levels I’ve drawn are Fibonacci extensions of the prior swing higher. The idea is participants who successfully caught the knife the first time will have stops placed below their entries. Often times the market will go on the hunt for these stops and the next move lower is an artificial lowering of price that will be resolved once the hunt is over. Of course if price continues lower even more selling could be triggered so get out of the way.
By defining the setup and repeating the methodology over-and-over, I can build statistics on the trade and based on the win-rate I can determine position sizing. These types of trades aren’t as high a win rate, but the reward much higher, I usually max out at ½ the size of my normal position.