Monthly Archives: June 2010

Hole in Wall – Short Trade Set Up (by Facesincabs)

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Short Trade Idea

 

A trade set up that I
have used in the past is called a "Hole in the Wall".  I like to look for these trades especially
after a major shock event day, like Tuesday. 
I would note that both "Jack Damn" and I have mentioned this
trade idea in the past week, so I thought that I would elaborate and share
several charts with its features. 

 

With the gap down on
Tuesday morning, we had several charts displaying the characteristics of this
trade set up.  Here is a list that I
noticed on Tuesday evening.  Please note
that not all these stocks display the full features of the trade set up (e.g.,
some are just experiencing shock events), but AKAM and TIE provide the best
snapshot pictures of a "hole in the wall of worry".

 

Here is an example
that I will probably trade … (click ticker for on-line chart)


(CTRP)

Snap19

 

AKAM

CTRP ** see example

ENZN

FMCN

FXI

ILF

JOYG

LVS

SNDK

TIE

VIT

WYNN

 

You can get a
description of the trade set up here …
http://www.hardrightedge.com/tour/gap.htm … and you can read in depth about
the trade set up in Alan Farley's book (Master Swing Trader).  Here is what I generally do with these
trades:

 

1 – Make sure that
50% higher volume is present for the "hole" day.

2 – Make sure the
stock ends the "hole" day in weakness.

3 – Lay down fib
grids and look for retracement areas into the "hole" or gap.

4 – Compare these fib
lines with a new fib grid of the entire wall of worry.

5 – Select the ones I
like technically, enter the trade upon further signs of weakness.

6 – Set my stops
using #3.

7 – Set initial
targets using #4.



Leisa here: I took the liberty of creating a chart book for you using a 60-minute chart for FIC's picks above. You can find it here

I also created this list in FINVIZ for you. You can find it here.

Top 10 Considerations when Picking a Stock

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CRAMER-STEWARTIf you are actively involved in
trading or investing, it’s inevitable – someone will ask you, “How do
you pick a stock?”  The corollary is that those who like to watch Jim
Cramer won’t wait to be asked.  They have stocks they want to tell you
all about.  Followed by a “booyah” or two.

If you’ve been trading for any length of time with any measure of
success – then you likely have your own system.   Maybe you’ve taken the
time to write it down for meditation and refinement.  This is one man’s
hack at that.  My system uses a trading timeline of usually at least a
week, but the position could last much longer or be closed quickly.  It
could be called swing trading, it could be trend following.  I’m
not a day trader – I have a real job that I really enjoy and can’t/don’t
want to follow every tick of the market.

Notably absent from this discussion will be when to close the
position.  Profits, of course, are locked in at the close of the trade –
but really they are set up when the trade is initiated.  Entry into any
position must also include firm and clear expectations, with
contingency plans if things turn out otherwise.  Those considerations
will have to be the topic of another article.

Today, I’ll write from the bullish perspective – but this method can
be inverted to identify shorts also.

1. Market Supply and Demand: I always start here. 
Are buyers or sellers in control right now?  Is the tide changing?  My
tools for measuring this are bullish percents and cumulative market breadth.  If the New York Stock
Exchange bullish percent is rising, then demand is overpowering supply
and prices must rise over time.  The reverse is also true – a falling
NYSE bullish percent with supply overwhelming demand will lead to lower
prices.  The turning points take some care to navigate, but established
trends (especially as they pass the 50% mark in either direction) make
for high confidence.  By the way, if you don’t understand how bullish
percents work I highly recommend Tom Dorsey’s excellent book “Point and Figure Charting“.  I also mention
cumulative market breadth, of which McClellan breadth is a variation.  This is a faster
moving indicator than the NYSE bullish percent, and serves as a good
confirmatory reference.  Again, the trend is key: I prefer the weekly
chart of cumulative market breadth compared to a 5 to 10 week moving
average.  Cumulative market breadth above the moving average shows that
buying pressure is causing stocks to rise.  These indicators should
tell me which side of the market to be on: long, or short.
If
supply is in control, I don’t want to look to buy long positions – I’d
be swimming upstream!

2. Sector Supply and Demand: Same method and tools
listed above for the broader market, applied to the sectors.  Just
because the broader market is controlled by demand or supply, doesn’t
mean that all the sectors are experiencing the same bull or bear
market.  The exercise of looking at bullish percents or cumulative 
breadth trends within each sector often doesn’t so much identify which
sectors to invest in, as which sectors to currently avoid.

3. Sector Relative Strength: Having determined which
side of the broader market to trade on, and narrowed down which sectors
are of immediate interest – I want to focus on the best and strongest sectors.  Better and stronger
sectors will gain value faster than the overall market, as well as their
peers.  Put another way, if you’ve got a sector that shows demand to be
in control within a bull market – but it’s not outpacing the market –
maybe you should put your money elsewhere.  I should note that this
isn’t an eternal chasing of performance.  I don’t want to be late to the
party, but I’ll try to figure out which one looks like it’ll be more
fun and then hang out there.

4. Screen for Fundamentals: Quality over penny stock
speculation here.  You may have your own fundamental criteria for
ratios like P/E, or you may prefer to use the ratings of a research firm
like Standard and Poors.  Although the suspect and capricious debt
ratings of S&P may be partially to blame for the housing bubble and
subsequent recession, their company reports can help to weed out
companies with obviously bad balance sheets.  It can be a bit of a
beauty pageant to determine which of several leading companies have the
strongest fundamentals, but the rest of the trailing pack is often
easier to sideline.  Many online brokerage sites will give you access to
these sorts of reports, I like to look at (on the long side) S&P
four and five star rated companies.

5. Individual Supply and Demand: By this time I
generally have a short list companies to consider, from a few to a few
dozen within any given sector.  Here I like to look at all the charts
iteratively and in somewhat quick succession.  This helps me to identify
trends within the group, and also outliers.  The first thing I’m
looking for is a buy signal on the point and figure chart.  I like
P&F charts, as they clean the noise out of a chart and help “see the
forest for the trees.”  I’m also starting to eyeball if there are clear
entry/exit points on the chart, but there will be more on that in #7,
“Support and Resistance”.  Before moving closer to buying, I really
would like to see that the chart is on a P&F buy signal, for that is
a clear and unambiguous identification that demand is overpowering
supply and driving prices higher.

6. The Trend is Your Friend: From the point and
figure chart, I’ll move to looking at a weekly and then a daily
candlestick chart.  This part isn’t voodoo, it’s just being able to note
the intermediate and short term trends.  I don’t want to fight the
trend.  If I’m looking to buy, I want a weekly chart that shows
steadily increasing prices.  Perhaps the chart fell recently (right
now, most have).  Since the fall, has the bleeding stopped?  Has it
established an unambiguous uptrend since bottoming out?  Is the overall
line sloping up or down?    Here’s my favorite: if I didn’t
believe the market was currently controlled by demand, would I be
willing to short this stock?
That question right there can
really shake up the decision process and weed out “wish trades.”  This
step and the previous is where I dismiss a lot of charts.  It’s common
to be afraid to miss out on a lucrative entry – but lost opportunity is
always preferable to lost capital.

7. Support and Resistance: This step could also be
titled risk vs reward.  It is key to identify where I want to enter and
then eventually leave the position.  Chances are (and I’ve made this
mistake often), RIGHT NOW IS NOT THE BEST TIME/PRICE TO INITIATE THE
POSITION.  Think about it – what are the chances that this process of
research has not only identified the right stock, but you are also
coincidentally poised at the ideal time to buy it?  This occasionally
happens, or you could be near the right price.  In this game you want
every advantage possible.  Again, lost opportunity is always preferable
to lost capital.  It’s far better to have entry orders never execute
because the stock never met your limit price, than to buy immediately
and find that it was really at an inflection point and now in a
downtrend.  Bottom line – if the stock has been wiggling in a channel, I
should wait and try to grab it at the next swing low.  If it’s in a
steadily plodding up trend, then I don’t wait for a dip that may not
happen.

8. Insider Trading: I don’t start my process at
insider trading, but I like to look here to identify potentially hidden
gems.  The only insider trades that will really catch my attention is
unusually large purchases – I don’t care about award of options, small
purchases, or even sales.  On the bullish side, insider buying can be a
real confirmatory signal.  Look, if some director or vice president
recently parked a large amount of personal cash in their own company’s
stock – then I’ll share some of that confidence and possibly prioritize
this trade.  If there are no insider buys on record, or even just sales,
that won’t stop me from buying.  Why don’t I care about insider sales? 
It’s doesn’t send the same clear message as buying.  Who knows why they
sold (perhaps even a large amount of shares)?  Maybe she’s buying a
McMansion, perhaps he has to pay his kid’s college tuition, or somebody
just bought a yacht.  Can’t tell from the SEC filing.

9. News and Rumors: Has there been a recent,
dramatic price move by the stock I’m considering?  A gap up or sudden
cliff, followed by trading in a tight range?  Check the headlines.  It
could be that there’s something that the market knows about this company
that you don’t.  These events could drive it to temporarily outperform
the market, but that pace may not be sustained.  You have heard the
axiom, “buy the rumor, sell the news”.  That’s great if you’re in a
position to know the rumor in advance.  I don’t try to find those “hot
tips”, but I do try to have a general idea of what’s driven unusual
price activity.  If it’s not abundantly clear, I’ll avoid initiating
that position.  Many times a crisis could have driven a stock way down,
but once the storm has cleared the chart will pick up its previous
uptrend.  That’s actually a really nice setup, because that publicity
spotlight serves to expose many of the dark corners of the company’s
operations – and they could be stronger after the housecleaning.  For
this reason I’m watching BP.

10. Company Calendar: This is one last sanity check
before initiating a position.  Is the company about to release a
quarterly earnings report, and do those reports have a history of
driving large price moves?  Is the company involved in a widely
publicized class action lawsuit with a verdict expected any day now?  Is
the stock I’m considering shorting a big dividend payer, and about to
go ex dividend?  Those first two considerations may actually be reasons
to initiate the position before the news release, but then I have to ask
whether I’m gambling or trading.  The dividend question is one to
consider on both the long and short side – and it could be the decision
point, or no big deal.  A few minutes research can prevent being left
holding the bag.

You’ll note that nowhere in this list is “company was the topic of a
cover story”, “bottom fishing at the new 52 week low”, or even
“mentioned by Jim Cramer”.  Especially not the latter.

I welcome your comments and insights, thanks for reading.  Please
feel free to subscribe
to my writing at AbjectAvarice.com
.

Treasuries (TLT) are suggesting that bad things are coming (Goatmug)

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 Here's a quick note as I'm still trying to get back in the swing of things after returning from Disney and the east coast beaches of Florida.

Just as we saw in October of 2008 we are seeing a move in Treasuries that is abnormal.  Buyers of Treasuries in size are typically NOT Mom and Pop (although I bet we have more Moms and Pops in there than 2 years ago).  Bad things happen when lots of people are willing to put their money away for 30 years and receive 3.94% or sock it away in the 10 year for 2.95%. 

This move in treasury rates is not good and I will be watching the bond market for additional signals that confirm this breakout.  This is not a moment to be a hero and take on a bunch of extra risk.  In fact, if we do get some sort of stock market rally, it must be used as a opportunity to unload some long positions.

ScreenHunter_01 Jun. 29 15.25

A further move up in TLT may portend a ride like this –

EVEREST-Drop-goatmug1

Goatmug 

 

 

Bear Markets and Former Leaders (by Facesincabs)

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[Editor's note:   Clicking on the links will transport you to the charts.  You could also save these links and keep an 'inventory' of charts that FiC watches]

Wow, what a nice
surprise today for "da bears"!

When a bear market
gets going, one of things that I do is keep an eye on former leaders at their
key support levels.  For example, let's
take a look at retail because a couple months ago it did not seem like it would
every stop climbing as it neared life time highs.  Notice that retail took out a key level
today.  That suggests to me that there is
more weakness ahead.

 

http://tinyurl.com/27bkarv
(retail)


Snap17


 

The other observation
that I have about today and the end of this quarter is that redemption selling
is back.  Usually the money managers and
institutions are protecting their quarterly profits on a day like today, but
clearly we have another shock event on the charts today and the selling by
institutions is persistent.  With that in
mind, here is a another fallen price leader.

 

http://tinyurl.com/24vtlwd
(real estate)

Snap18

 

Notice the "hole
in the wall" set up on this chart. 
If you are not familiar with this set up you can get a definition and
examples here … http://www.hardrightedge.com/trader.htm.  I expect that we will be seeing this pattern
on many charts after today.

 

That's all I have
time for now.  Good luck to everyone tomorrow.

 

My Day

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As you might guess, I have read virtually no comments over the past few days, so I am very "out of the flow" of things, which bugs me. I really like to read what people are saying and referencing. But a vacation is a vacation, and I'm getting a bit of leisure time.

Well, not exactly. My day began, as it did yesterday, at 5 in the morning, and I ambled down to the lodge to start the trading day. I had something like 25 longs and 48 shorts, and I was lightly positioned (maybe 30% of my portfolio; the rest in cash), and tilted somewhat bearish. I was struck with immediate disappointment when I saw the /ES was down 15 points already. I had really, really hoped the last two days of the quarter would be a bore, much like yesterday, but it was not to be.

What happened today sets us up for either an immediate (and it has to be immediate), hearty bounce, or we crack the neckline we've all been obsessing about for all these weeks. Look at the S&P:

Picture 3
 

If we break the neckline, a measured target would be around 875. At that point, I think the bear fun would be done for many ,many months. It would just be a range-bound grind from then on.

Ironically, it would be drastically better for the bears if we rocketed toward 1125 – – or even 1150 – – before softening up again. This would be a once-in-a-lifetime chance to load up on shorts at amazing prices. Sadly, that opportunity may not come.

The Dow Jones would fall to about 8250 (and I believe it will before October is over) in a similar scenario. The giant question is what will happen tomorrow. What could the Fed pull out of their backside at this point?

Picture 2
 

I have been somewhat hampered – – – but only somewhat – – by my remote location and paucity of computer equipment. To be brutally honest, had I stayed home, my results would probably have been extremely close to what I'm seeing thus far.

As of now, I have 87 short positions and 3 long positions (FXE, RTH, and TLT). Tomorrow is bound to be volatile, since today probably threw a lot of people into spasms. Whether it's up big or down big is unclear. I am shocked how fast the fall is unfolding. The bulls are in a much more pitiful situation than even I imagined.

15 Stocks the Street is Shorting (by Ryan Mallory)

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Here are 15 stocks that the street is continuing to get more and
more bearish on since the beginning of this year. Their short interest
has continued to rapidly increase against their historical norms,
and should be the leaders to the downside in the continued sell-off by
the market.

Quick note on this…7 new names on the list and all the ones from
the previous time this list was posted still remain.

Here are the 15 Stocks the Street is Shorting.

Checkout Ryan's Blog at SharePlanner.com


Your editor here…..I have created a FINVIZ screen for you for Ryan's pics.

http://tinyurl.com/37p4xzj