A Pullback or a Major Trend Change? What’s Ahead?

"This comes from Stephen M, a very active SpikeTrader whose performance won him an award for Q2-2009" - Alex

Charles Biderman, CEO of TrimTabs was interviewed by Bloomberg on Aug. 28, 2009. Here’s what he had to say, "Investors who think the U.S. economy is recovering are going to get a big shock this fall," said Biderman. "Companies and corporate insiders are signaling that the economy is in much worse shape than conventional wisdom believes." His company, TrimTabs has reported that the actions of U.S. public companies have been bearish. In the past four months, companies have been net sellers of a record $105.2 billion in shares.He also said, "The best-informed market participants are sending a clear signal that the party on Wall Street is going to end soon. When corporate insiders are bailing, the shorts are covering and investors are borrowing to buy, it generally pays to be a seller rather than a buyer of stock."
















Now 5 days later, we have witnessed a 4 day selloff, a sharp surge in the VIX and a tripling of the volume as the SPDR GOLD TRUST has gapped and ran. This move is occurring despite a lack of significant selling of the dollar.Gee, I wonder where all of that big “insider money” is going? What do they know that we don’t? Will there be a replay of last Fall? Is a major bank in trouble? FAZ anyone? How bout some GLD?

Here's a way to buy volatility or to hedge a long portfolio by Grant C

Many investors hold long positions as August ends--some because they sell calls against stock, others because of asset allocation, still others because they aren't paying attention, etc. For those thinking about hedging a long portfolio, here's an idea that might help. For others, like myself, who are die hard volatility traders, this idea will work almost as well as options or inverse index ETFs. The VXX is the ETN of the VIX and trades about 3X the S&P. The common method of measuring volatility in the stock market is the VIX, an index based on a ratio between purchased calls vs. puts. Mostly the VIX declines when the market either rallies or goes into a period of complacency or reduced movement. Sort of what happens during the summer months as the big boys go off to the Hamptons to relax. Eventually, they come back and more often than not, they reverse August's action and jam the market into a decline. The VIX, and the VXX, goes up as a sort of "Fear" indicator (more puts being purchased than calls). This is how the Sept-Oct. period got the nick name of the "Death Season". Now, I have no idea if history will repeat itself and fireworks will replace August's inaction, but it is my nature to bet against the extremes. Since the market is at an extreme with complacency or lack of volatility, I'm interested in the other side of that trad, and will use the VXX to implement that strategy. The one thing I've learned about volatility is that it is "extreme" reverting, not "mean" reverting as most of the trading books claim. Price is much more likely to revert to the mean, or an average, and volatility seems to seek the extremes, sort of like water in a pan that is tilted back and worth so it laps at the edges.

The "Big Mac" Play - by Stephen M

Stephen is one of the top-performing SpikeTrade Members. In this post he shares a trading idea with the group - AE

This setup is ringing the bell for me. I call it my BIG MAC play, or more specifically: BIG MAC-Summer, 5/5, C&H . Summer refers to the identified market season as indicated by the weekly MACDH. 5/5 indicates:

1 - bullish S&P chart

2 - bullish VIX

3 - weekly MACDH divergence

4 - MACD lines rising from below zero

5 - EMA rising

C&H refers to Cup & Handle, a Classical chart pattern.

There is good support at 13.80, for a low risk – big potential reward trade.

GLTA,

Stephen M.

A bearish divergence in the S&P? - by Vadim J

I saw the bearish divergence on the daily S&P 500 graph (screenshot attached).

This says to me we are going to test the March bottom.

Or may be I read the indicators in the wrong way?

I will be happy to hear the opinion of other traders.

Sorry for my English, it's not my native language :)

Thanks in advance
-- Vadim J

FSLR potential short - by Stephen M

FSLR = Double Top + Island Reversal

Heads up all.

This is a great short setup with a technical footprint similar to the chart shared by Alex in his SpikeSpeak this last weekend where he showed a false breakout with a missing right shoulder for a short set up.
FSLR has the potential – with the bad news release today - to gap down below it’s trough and slow EMA and form an island reversal for a quality short play. I plan to let it gap and retrace to the pivot, then short.

Stephen M

GM trade - by Eric F

Eric had titled his post A GM Post-Mortem, but I sure hope the stock is not yet dead as I am holding it - Alex Elder

To tell you the honest truth I have been waiting for this trade opportunity to set up for several weeks. When it finally gapped down after I posted about the set up…I was shaking with a combination of excitement and fear! Sort of like dating the hottest girl in school with your inner insecurities kicking in that gives you the feeling she is out of your league. You finally go out on that date and you stumble and bumble and maybe make a move too early before she is ready. Well I jumped in on the gap down day…normally I tell myself to sit on my hands…a man who falls off a cliff is not going to bounce and start running the same day- in most cases! Unless he is some kind of Navy Seal.

I had written out a sort of “target” or “plan” at or near $1…I took (in 20/20 hindsight) a not great entry @ $1.11. I had my mental stop in place! Trust me! Like I have said before: “I am not a very good trader” and I need your help and feedback to try to improve. That is why I am posting up these trades to try to stimulate discussion which acts as “therapy” for a trader and helps put in place better habits and reactions. Anyway the area I need to most improvement is selling! Selling is the hardest decision for me for some reason. I got some therapy today because I sold! I don’t know why but the entry although mostly always fuzzy is more clear than the exit- maybe because of fear, greed, regret…I really need to stomp out those worthless emotions.

Today I hit the sell button at $1.61. Booking a 45% gain and $5000 profit. My target was profit driven along with some function of chart technical’s. I always think it can go a little higher and most likely it will…but it is hitting a potential resistance zone at the edge of the gap. If it pulls back it could set up another classical bullish pattern and offer a reentry point. And then there is the feedback- Thank you all to those that provided comments on the set up idea. I hope we can share more dialog and ideas in the future together. I am more of a technical trader than a fundamentalist. I like to be on the contrarian side most of the time, but not all of the time. Who knows about this one? I just thought it looked very attractive technically! Sort of like the hot Thai Girl looking like she has all the right features, except you never know if you will get a “surprise” when the action starts.

As I look down at my level 1 GM is ticking higher now 1.74…but I am happy. A target was reached and a profit was booked! Now let’s go find another good trade!

Good Trading,Eric F

FIB, the SPY high, little friends and fat rabbits - by Grant C

Fibonacci sequence is a mystery to some, a curse to others, and a Godsend to a few. To me it's a marvel, as is the clarity of a bee's honey comb (natural Fib sequence). To embrace it, or to grasp the Golden Ratio, is to embrace the notion that the market has more symmetry than most are willing to admit. However, since I have centuries of French Catholicism locked up in my genes, it's easy to believe that sin and redemption, Good and Bad, are balanced, or symmetrical in human existence. Therefore, I expect to see repetitive patterns in human behavior as mirrored in our charts. After all we are measuring and exploiting greed vs. fear, as they constantly repeat, aren't we?

I regularly look for Fib retracement levels on the weekly SPY chart just as I look for OB/OS readings on the 5-week RSI and bullish/bearish divergences on the weekly MACD-H. These are my little friends, my play pals, the tools that for good or bad, profit or loss, I hang my hat on week after week. Last Friday, April 16, SPY traded right into the 85-87 range, which was the .786 Fib retracement from the Oct. high of 159 to the Jan 65 low. It also corresponded with RSI hitting OB, and MACD up there too. The little pals were tugging at my arm, whispering that the bear mojo was starting to stir. Weekly price was at a Fib resistance, 5-week RSI was OB and the rally was 6 weeks old, about right for some time symmetry.

The daily chart was just as vivid. Friday's price action was classic churning, lots of Sturm und Drang but in the end a Little Worm or false breakout. The daily momemtum boys--RSI, MACD and FI--pointed, respectively, to short-term overbought on the RSI, declining on the MACD, and a wimpy lack of juice on the FI. To make it more interesting, Friday was the intersection of some long-term trendlines. All my little pals, the ones I grasp when I shut my eyes and dive with Alice down the rabbit hole, said the same thing, buy the 2X inverse ETFs at the close. Along the way down, the hooka smoking catepillar flashed a smile and mouthed, "while your at it grab some of that 3x FAZ."

Now, of course, with the SPX down 37 points at Monday's close cash is the position of choice, the Mad Queen is strutting across the chessboard, the Greatfull Dead are on their way to Terrapin Station, and the little friends are skipping back to that magical place whence they came. We are left trying to figure out how far down is down for this retracement. For that I have no answer, but eventually, we'll get to OS and it will be time to rustle the leaves, play the flute, and invite the little friends to saddle up their hobby horses and go fat rabbit hunting again. But for now, I don't plan to buy the dips, but look for chances to sell the rips.

T, the 1,2,3, Top trade by Grant C

I've written about the 1,2,3 Bottom trade, one of my favorite reversal patterns. Now, I thought I would show a 1,2,3 Top trade. Now that the market has had a rally, I'm starting to see a few of these appear. In the case of T--my last week's Spike trade--things stalled out around 27. The Hi #1 happened in late March, note how high the 13-day FI spiked. At that point, we sold off, retracing to 25 (#2) , which undercut at least 4 closes.

Then, like an old one-eyed war horse, T gathered itself for one more run for glory. However, 27 (#3) was the wall again, and T formed the Narrow-Range 4 bar. This is the small inside bar to the right of the long-range stab to 27. It is the narrowest bar of 4 days and indicates a collapse of volatility, which should lead to another long-range bar. In this case, it lead to two declining medium bars. Note the divergence in 13-day FI on the second stab to 27. From there it was easy, sell short at the low of the Narrow-Range bar, take profits at the rising 20 DEMA (red line); treat yourself to a nice bottle of cabernet.

VIX squeezed by Grant C

Trading is about price movements, but really we're measuring human behavior ruled by gut-wrenching fear and elated greed. The VIX, which is a ratio of puts and calls, measures emotional volitality--it moves up, sometimes violently when fear riens and price declines. When the VIX declines, price is stabilizing and usually rallies; the SPX price bars narrow and everywhere it is happytime. The VIX is an easy way to measure the emotional extremes if you use it properly. I say easy, but most traders think of it like the RSI with absolute highs and lows. Not so, the VIX is a relative measurement and needs to be compared against a 10-day MA to give accurate signals--all of which is for a future discussion.

But today, I want to point out a truly remarkable development on the VIX's weekly chart--something that foretells a major move. After the spike to 90 in October 2008 punctuated the market's big move down to SPX sub-800 (the VIX moves opposite the SPX--VIX up, SPX down, and vice versa), the VIX corrected, finally settling in a range about 50% of the move. We've been bouncing steadily between 35-55 week after week for about four months. While it may not seem like it, the VIX has steadily lost volatility indicating that neither fear nor greed is at extremes. Now, we are entering a rare squeeze on the weekly chart, which portends a major and probably violent move in one direction or the other. Though the indicators seem to be on the lowish side, these sideways moves often create unreliable RSI and MACD readings. So, we need to wait a week or so to fit this piece of the puzzle into place, but past experience says that come what may, either greed or fear will soon cause our little world to tremble and shake.

Pivot and Fibonacci levels for the S&P500 - by Rodryk S

Please find attached Pivot and Fibonacci levels for the S&P500. For those who believe that the market will go down, the areas between 764-769pts and around 750pts might serve as major support levels, as there is a confluence of levels many trader watch out for.

Regards from Dusseldorf,
Rodryk

Short-Term Support & Resistance as Tools for Entries & Stops - by Steve A

I discovered the obvious last week - short-term support and resistance can be very useful in setting stops and entries. I also received a sharp, actually fatal, reminder that one must not forget tactical considerations while establishing or adjusting a trade, expecially in the heat of battle while the market is open. I chose a protective stop that was at a short-term support level, but I just didn't think, and I placed it at a very vulnerable round number. Price dropped and touched my stop, didn't go below it, then immediately took off to the upside. Two days later in my own account I used another short-term support level for a stop but placed it below the round number. Price dropped, touched the round support level price, didn't go below it, and took off, and my position was safe.

By way of background, I picked AVY as my Spike pick last week (March 23). AVY was a strong performer relative to the S&P500 the previous week. On the weekly, the trend was still down, but AVY had closed up the past two weeks and was near the lower envelope. MACD-H showed a bullish divergence back to the November low, having ticked up the previous two weeks; Lines were essentially flat since November, but the fast line was rising, the slow line shallowing. Force Index was generally following price. Price had not yet moved up past the November low and retested it.

On the daily, things did not appear as good over the short term. Trends of price and MACD Lines were up, but MACD-H had just ticked down from its highest level since mid-December. Force Index had dropped sharply the previous two days.

On Monday March 23 the market opened higher and kept going, and my limit order wasn't filled. On Tuesday March 24 price moved sideways and down. On Wednesday March 25 I placed another buy limit order and got left behind again as price streaked up from the open. At this point I was feeling kind of helpless, and that I had to figure out a way to jump onto the powerful moves reasonably safely. I decided to try OCO bracket orders: buy limit and buy stop, each with its own protective stop.

In the course of trying to figure out how to enter these choppy conditions late Wednesday morning, I was surprised in my inexperience to find a couple of solid support and resistance lines on a 25-min chart that had developed over the period since the Monday open. These were located at 22.20, 22.50, and 23.00.

Based on these support/resistance levels, and because I had not proven to be very effective in guessing the market's next direction, I placed OCO orders (buy limit/buy stop) in my own account for AVY, as noted on the above chart. After dropping to within a nickel of the limit entry price (22.60, just above 22.50 support), price rapidly increased to a point half way to the buy stop entry price (23.00) and dropped again until the order was filled at 22.60. Eight minutes later price dropped to my nice round stop at 22.10 support, touched 22.10 exactly, and took off again. It was a bonehead rookie mistake. I used an even, vulnerable stop (22.10) and got picked off. I noticed shortly after that that 22.10 happened to be the mid-day (intraday) low on Monday March 23.

On Thursday March 26 I entered aother OCO order. This time the buy stop (23.00) was hit and the order filled at 23.28, granted with 28 ticks slippage. But I was in! AVY closed this day near 24. Before the open on Friday March 27 I raised my stop from 22.43 (a little below the 22.50 line) to 22.96 (just below the 23.00 line).

On Friday March 27 AVY moved sideways-to-down all day. Price drifted downward to the 23.00 support level, touched it exactly, and drifted back upward. My stop at 22.96, just a few ticks below the 23.00 resistance/support line, saved me, just like in the textbooks!
I must admit that I was surprised at how faithfully the price movements "honored" these rather arbitrary horizontal lines. Last week's experience told me that it is essential that I look further into short-term support and resistance, and I will continue to attempt to use the concept in making short-term decisions in these unpredicable markets

Preparing for a bullish market

It takes buying to move stocks up, but they can fall of their own weight. GE lost more than 2/3 of its value in as many months as it took years to rise. In October 2008 the new low of MACD-Histogram identified the point of the maximum power of bears. In area B the stock rallied into its value zone, between the two moving averages, and MACD rose above zero, ‘breaking the back of the bear.’ In 2009 GE broke support and fell to a new bear market low – but take a look at MACD-Histogram. This indicator is only slightly below zero, much more shallow than it was in October. The moment it ticks up, turning the Impulse system blue, it will complete a bullish divergence, flashing a powerful buy signal.

I use an indicator used MACD XOver, included in all Elder-disks, to identify the level at which that change of color would occur. It tells me that GE must close above $8.20 this week for the signal to occur.

The purpose of this post is to open up a discussion about where we are in the market cycle.

* What are your arguments for being bullish or bearish?

* How will you recognize the bottom?
* Which stocks ddo you suggest putting on the shopping list?

I look forward to a discussion that benefots us all. Contrary opinions and arguments are welcome - as long as they are presented in a civil and collegial fashion.

Alex

Bearish Monthly S&P - by Rodryk S

I would like to share a part of my week-end "market bottom homework" with you, Spikers and SpikeTrade Members via the blog.

Please find attached a monthly chart of the S&P500, including embedded comments. - As I am abroad in Denmark and did not want to update "tons of data" with TC2007 (->roaming costs), I used this time Incrediblecharts.com, which downloads the data on a stock by stock basis.

Bottom process part 3 by Grant C

Bottoming Process—Part 3, Week 13 by Grant Cooke


Part 3 in our comparison of the 2002 and 2008-09 bottoming processes shows that today’s market is considerably weaker and taking much longer to find support. By week 13, the 2002 bottom was well on its way to resolution. We had successfully tested the lows by week 11 and rallied nicely for two weeks until price hit resistance at the declining 20-week EMA. The successful test and subsequent rally had reversed the direction of the 5-week EMA, turning it up for the first time in several months. Even the declining 20-week EMA was starting to respond to the rally, and its decline was losing force and turning sideways. By week 5, the MACD-H had crossed the centerline, and then crossed down on less momentum forming a higher low and a classic bullish divergence. Bids were starting to hold. Bulls, though not snorting and pawing the ground, were at least coming out of hiding. While it would take several more months of sideways action to build a base for the next bull market, the trend was no longer down.

By comparison, the 2008 Bear is much more vicious and prolonged. At week 13, we’re resuming the downtrend after several weeks of sideways churning. The 5-week EMA has pitched down and price is clearly testing November’s lows around SPY 75 (SPX 750). MACD-H recovered a bit while the market churned, and now, but now it’s dropping again. In 2-4 weeks it will be below the centerline, unless something dramatic happens. Price may pause here for a week or so, but it looks like support will crumble and we’ll make a lower low along with the MACD-H.

Most disturbing is the converging Bollinger Bands, indicating we’re entering a squeeze on the weekly charts. These weekly squeezes are rare; the last one was in April 2008 and set the stage for the market’s freefall. Usually, they occur at significant junctures—tops and bottoms—but once in awhile they occur mid-move. If price doesn’t hold SPX 740-750, the subsequent action will be nasty. Conversely, if price somehow holds above SPX 740-750 and the retest of the low is successful, and MACD-H traces out a slight decline and subsequent bullish divergence, then we may get a move up powered by the squeeze.

Clearly, the 2008-2009 Bear market is not to be trifled with, nor ignored if you have money at risk. It is definitely changing the way the world perceives investing. Day traders are kings, and for us swing traders, the rules are simple: bet small, sell strength, buy weakness, and cash the chips quick.

Those sweet little triangles by Grant C

I'm curious by nature; which is often a flaw as a trader, when precision and timing mean more than flights of fantasy. However, over the years my curiosity has lead me into a very fertile area of inquiry for trading--volatility. For trading, volatility usually describes violent and quick changing price moves--think long bars on a price chart, not nice tight narrow-range ones.

Volatility is usually a function of emotion overruling reason, and therein lies profit. Good traders are creatures that understand fear and greed; profitable traders soon figure out ways to exploit this constant conflict in market behavior. The other extraordinarily profitable characteristic about volatility is that, unlike price, which follows a bell-shaped reality and is given to mean reversion, volatility is extreme reverting. This is probably worth repeating, because there is definitely money to be made in this insight (which comes from John Bollinger, BTW), volatility is extreme reverting, jumping from wild swings and long price bars to sudden pauses and short price bars, not a gradual sequential progression at all.

The chart of CAL clearly shows this behavior. Look at the bars on the right side, several long bars separated by three relatively narrow bars, which I've marked off with lines--looks like a small symmetrical triangle, doesn't it? Well, it does and it is exactly that, a period of indecision or confusion. Traders conflicted that the long move down from 21-16 was a trend, or an oversold buying opportunity. This push-pull tension went on for three days right at the 200 DEMA (red line), before fear overwhelmed them, the down move continued as the Bears took command and drove price to 13.

The sell short point is at the break of the third bar, a dime under the low or around 16.48. Since these little triangles, or consolidations, or continuation patterns, show up about half-way in a move, the target is sub 14. In my case, I closed out my position at the end of the first down bar, about 14.5. Notice that volume contracted during the triangle, and exploded as price fell out of it--classic behavior as fear set in once more.

I look for all sorts of volatility contraction set ups--triangles, squeezes on the daily charts, but really like them on the weekly or monthly charts. These little battles between fear and greed usually show up half way through a move and routinely make money. I take them in either direction, but especially like them to appear near 200 DEMAs where the big traders and hedge funds like to hunt--just slip into their wake; but remember to jump first before they reverse direction.

DOW and RSI - by Kerry

As a follow up here is the DOW since 1920 and the Monthly RSI

Kerry

The 1,2,3 bottom pattern by: Spiker Grant C.

The 1,2,3 bottom pattern

Though many Spikers do not to use patterns as trading set ups; I have a couple that are near and dear to my heart. One of my favorites is a retest of a bottom, sometimes known as a double-bottom. I prefer the term “1,2,3” bottom, which comes from Trader Vic Sperandeo’s work. The idea is simple—most intermediate or long-term trend reversals will involve a retest of the original lows. If this retest holds, than the odds are high that we will bounce enough for a trade, and if we manage to establish a higher low, than the trend is up and we can look for a more significant recovery. The rules are straightforward:

1) Price must be in a significant down trend, at least for 7 bars.

2) The first stab down (Point 1) must be followed with a recovery bounce, which retraces (Point 2) at least 4 bars.

3) The retest must come on lower volume and/or momentum. It can reverse above the initial low (1,2,3 or higher low); at the same price as the first low (classic double-bottom); or below the initial bottom (1,2,3 on lower low). The last is trickier and requires a move up passed the initial bottom low to be valid.

The buy point is above the second, or retest, stab down, on the day’s close. The stop goes at the bottom of the pattern bottom or some reasonable percentage.

In the MBI example, the first stab down on 11/20 has a low of 3.50, but reverses to a close at 4.07—short sellers are covering and bottom-fishers are grabbing shares. We double in price to around 7 on 12/04. Now we’ve drifted back down to 4, with reduced volume and bullish divergence in FI and MACD-H, on both weekly and daily charts. We’ll know in a couple of days how this will turn out, but note that MBI has formed two of these 1,2,3 bottoms (first in October) in its overall bottoming process.

These 1,2,3 bottoms don’t always show such strong bullish divergences, but I always look for divergences as confirmation of the pattern. If volume doesn’t shrink on the retest, just move along to the next trade and don’t risk it. This set up has been around as long as markets’ have, and most importantly, it continues to make money.

Trading False Breakouts - the DAG Trade

DAG, the quintessential “Little Worm” trade
by Grant C

Grant C is a long-term Spiker. He started out as a Spectator, was promoted inot the Spke group, and won a number of quarterly championships.

Click on the chart to enlarge it
Both Alex and Kerry have commented on the dynamic occasionally found at the end of long and brutal stock declines, when at the last gasp, a stock will slip through final support, then for some unfathomable reason reverse back in a failed break of support. It’s been called a “Little Worm” trade because when you see it on a six-month daily chart, it looks like a little worm poking through a floor bottom, then pulling back. My twist on the trade comes from the added move outside a volatility band (Bollinger Bands), or beyond two standard deviations from a 20 EMA (normal value). These outlier moves beyond the bands, or price envelopes, often set up a snapback dynamic that Alex commented on in a recent webinar.

DAG is a double beta (moves twice the underlying index) ETN of a basket of basic agricultural commodities—wheat, corn, soybeans, etc. Like most ETFs or ETNs, DAG will trend nicely and together with its opposite number AGA offers a way to trade both sides of the ag softs without getting involved with the futures market. A word of caution—they are fairly new and the daily volume can be low, so take small positions, use limit orders on entries, and get out on a rising market.

I was first long AGA as it broke to new highs in early December. The highs were made with a low-energy MACD-H push so I decided to bail. Then it occurred to me that DAG—its opposite—might be setting up in a MACD-H bullish divergence reversal. Sure enough, it was, so a couple of days later when it slipped through support at 8 and closed outside the lower band, I started to wonder if we were setting up for a failed breakdown and reversal. The next day price pushed even further outside the bands, and my short-term indicator crashed to an extreme low, but MACD-H barely dropped below the centerline. The bullish MACD-H divergence was in, and on the third day, when it popped up and closed on its high, inside the band, I grabbed my position on the close. I figured DAG might be good for a quick run back to the declining 20 EMA, which would be resistance. I sold it on an expanded-range day at the EMA three days later.

This was a clean, classic “Little Worm” trade that offered a fair return at minimal risk, and illustrates a very common price dynamic—reversion to the mean from an overstretched position. Eventually, we’ll get another trade out of DAG, and AGA, but for now we’ll go hunt fat rabbits in another part of the market.
The Little Worm trade also works on tops—see the Qs late October 2007 top with a huge bearish divergence.