Thursday, September 15, 2011

The TSX 60 recaptures the 20 moving average--just barely...

Today the TSX 60 index recaptured the daily 20 moving average. You'll recall from my analysis earlier this week that I was calling for a float up into the 780 gap fill area. Since then we've seen exactly that and closed today significantly higher at 783.11--just .60 points above the 20 moving average. Because the recapture is so slight, it's difficult to tell if it represents a true breakout or a minor pierce signalling a move lower.

Despite this recapture, there is still a lot of resistance at these levels. Going forward into Friday and early next week I will be looking for a followthrough move to the upside or downside, thereby confirming the levels as cleared or continued resistance. In the meantime, my outlook on the TSX 60 will remain neutral.

Tuesday, September 13, 2011

The TSX 60 walks a thin line

The TSX 60 index is walking a thin line after breaking a key trend line on the daily chart. This represents a significant breakdown and could foretell of more downside in the near future.

This trend line has acted as support since a bottom was formed by the lows of August 8th. This means that whatever strength was there to lift it after it fell steeply in late July and early August is gone. It also means that the bear wedge formed by the fall and subsequent sharp bounce has triggered.

Going forward, there are two scenarios that can play out that will lead to more downside--assuming we don't fall more tomorrow. The first sees us trade up into the 20 moving average, 780 gap fill resistance area and then pulling back. The second involves trading sideways for several days and then ultimately breaking down. In the event of further downside, it is very likely that the TSX goes at least to the pivot low at 732 and probably much lower.

In the meantime, I'm favouring sideways to upside trading. After a major breakdown such as this it's typical for the market to retrace back to the initial breakdown area before falling further. I'm also biased towards short term upside on the TSX because of the major trend line recapture that happened on Monday on the S&P 500 in the US. 

SPX trend line recapture

In any case, just remember that the market is weak right now and any bounces should be quick and can be used as shorting opportunities. Bearishness on the TSX 60 will be negated if it can recapture the 20 and 50 daily moving averages.

Follow me on twitter for my latest thoughts on the market.

Saturday, September 10, 2011

The only thing that matters on the S&P 500

I apologize for not posting here in over a week. This blog is meant primarily as a place for me to share longer term swing trade idea, but this kind of volatile market has simply not been conducive to that. This kind of market is best traded on a scalping basis and with good deal of caution.

With that being said, I am watching the longer term forecast for the S&P 500 very closely. As I've posted several times before, I will maintain an upside bias until certain technical factors change. Right now, the one technical factor I'm watching is the bottom trend line on the SPY daily chart (in green below).

As far as I'm concerned, if this trend line holds, the market may continue to trade higher. If it breaks, stocks will almost certainly trade lower. Interestingly, the SPY hit this level almost exactly late on Friday and just barely held. Monday will be important test in determining if we bounce into the next several days or begin to trade down.

It's also important to note that we are trading within a macro bear wedge (sharp down move followed by a secondary move sharply higher), as I've mentioned previously. This means that it's only a matter of time before the market breaks, and a break of this green trend line could be a foretelling indicator of that happening.

Tuesday, August 30, 2011

No change in outlook for S&P 500

This weekend I posted that I'm expecting some short term upside on the major market indices based on sideways consolidation on their daily charts. My position remains unchanged as we've seen this scenario play out.

Yesterday the S&P 500 traded up sharply and today closed flat. If we see another one or two days of flat to moderate downside trading, I expect to see another leg up into resistance at the 1250 level. I will look to short a hit or break of this level as it will complete the macro bear wedge that's been forming on the daily chart.

If we don't see consolidation, either by a large move up or down this week, I will switch to a neutral bias on the markets and will not hold any overnight positions. Ideally, any consolidation will take place within the range of the large up move created by Monday's rally.

Saturday, August 27, 2011

What to expect from the S&P 500 this week

This week the S&P 500 is positioning for a possible move to the upside. Since the week before last, the market has bounced considerably from the 1120 level and is trading sideways under the daily 20 moving average. As long as this sideways consolidation continues, a small bullish flag pattern has the potential to play out.

SPX consolidating micro bull flag for potential move up

A move up will have very little resistance until the 1250 level, at which point it will likely pullback. I will look to short a hit or break of this level. There will also be minor resistance at the pivot high at 1210 and the 50% fib at 1224.

My upside bias is unchanged since I suggested that a short term bottom for stocks was in after the bounce of August 8.  I also think that any movement up will serve to consolidate a macro bear flag formed since the large drop in late July.

If the market fails to move up and closes below the low of 1100, the bear flag will trigger and I will change my outlook to bearish. This is a distinct possibility as the markets are still rattled by European and American debt issues. Now more than ever, it's important to trade all up moves very carefully.

Key medium term breakout area for TSX 60

The TSX 60 index may have some upside in its future if it can make it above a key trend line. This trend line connects the highs from July 25 to the pivot high from August 17, as outlined in the chart below.

A break of this trend line could lead to medium term upside

Since Wednesday of last week, the TSX 60 index has been consolidating sideways underneath this trend line. This resulting bullish flag pattern means that the trend line should provide only minimum resistance.

A breakout above this trend line would be significant as this is a medium term 60 minute chart. I'll be looking to go long here for 1-3 days depending on how fast the price moves up. First resistance on any such breakout will be at the 200 moving average and the gap fill at 795. Secondary resistance will be at the pivot top at 804. A close back below the blue trend line triggers a stop out.

The ETF is a good way to play this breakout, as well as individual stocks. If I find any stocks with supporting bullish patterns I'll post them here.

Tuesday, August 23, 2011

Trend line breakouts--identifying prevalent patterns

Every day I see hundreds of chart patterns play out. Some patterns I take note of while other less reliable ones I ignore. This can vary on a weekly or even daily basis. Today, my chart pattern of choice was the trend line breakout.

To find a trend line, simply connect multiple highs or lows with a line--the more pivots that connect, the better the trend line. Notice how this works on the SPY intraday chart below. I personally played this breakout for a move to approximately 115.25.

SPY 10 min shows clear break of trend line leading to higher prices

Trend lines are a useful addition to any trader's repertoire due to their reliability and straightforwardness in knowing when the trade is working in your favour or not. A break above the trend line is the buy signal and a break back below is the stop out.

Once a trend line has been identified on one of the major indices it's very likely that this pattern will repeat itself on individual stocks. The following charts are trades I took in sympathy to the SPY pattern above.

Notice the trend line double as an inverse head and shoulders pattern

Trend lines can also be bought on a retest of the initial breakout

The 200MA was the logical target on this trend line breakout

Identifying prevalent patterns from one day to the next is just as important as identifying key active stocks and sectors. When you see a pattern playing out in the major indices and key large cap stocks, you'll likely see it elsewhere as well. This is a strategy I use in my own trading every day.

Thursday, August 18, 2011

Deja-vu all over again for markets

Today the S&P 500 closed sharply lower, falling nearly 4.5% on the day. This fall was dramatic, but not entirely unexpected. Yesterday I posted about the possibility of a fall as we were trading within a macro bear wedge on the daily SPX chart.

The potentially bullish consolidation we saw over the last two days is now off the table. I recognized the distinct possibility for this consolidation to fail but I'll admit that I didn't foresee a return to the kind of trading we saw during the plunge last week. However, reviewing the charts late last night I noticed a pattern repeating itself.

In late July, the SPX put in a top and began to consolidate within a large green candle. It appeared to me, and others, that the market was due for a short term push up before ultimately falling. Of course, this was not the case as global indices would fall precipitously shortly after, negating the bullish consolidation.

July 21-26 consolidation fails just before precipitous fall

This week, we saw a very similar situation unfold. We had sideways, potentially bullish consolidation within a larger bearish pattern and expected a small push up before ultimately pushing back down. Instead, we saw the micro bullish pattern fail, triggering the macro bearish pattern as well as massive selling.

A similar failed bullish pattern to July's huge decline

None of this is surprising, especially when the market is as fragile as it has been over the past few weeks. But what it tells us is that we can continue to expect short term patterns to fail as long as extreme volatility remains.

The August 9th bottom is still intact and, as long as we don't close below it, it has to be respected. I will be referencing the fib levels in the chart above for support and resistance as we trade up or down.

Going forward, I will be closely monitoring the progress of the longer term bearish wedge on the SPX chart. Should it play out to completion, we could expect a break of the Aug 9 bottom and a plunge much lower in the coming weeks. However, I don't expect this to happen all at once, nor do I expect it to happen without dramatic bounces along the way. This is why it's so important to trade prudently and carefully as being on the wrong side of a trade in this kind of environment can lead to especially big losses.

Wednesday, August 17, 2011

Markets grind sideways setting up for possible move higher--then lower

The S&P 500 continued to grind sideways today, closing positive by just .09%.  This is in line with my expectations as outlined in yesterday's post.

As long as this market trades sideways, the odds increase that we see a push higher in the coming days or early next week.

Note the bear wedge pattern outlined in green arrows

Please note that we are still trading within a macro bear wedge pattern signalling that the markets will ultimately trade lower whether or not we trade higher first. This means that we are looking at two trade setups within a single pattern: (1) bullish consolidation to push us higher into resistance and (2) a pullback from that resistance triggering the bear wedge.

Tomorrow, I will be looking for an additional day of consolidation before I am convinced of a move higher in the short term. If we break lower first, the bullish pattern will be negated and will trigger the bear wedge.  And if we trade higher, as I suspect we might, I'll look for resistance at the fib levels in the chart above.

Tuesday, August 16, 2011

Doji candle signals indecision for SPY

Today the S&P 500 (SPY) daily chart ended in a doji formation. This is a classic sign of indecision in the markets.

To match this indecision, we have (possibly) the beginnings of bullish consolidation within an overall bearish wedge pattern. Note the sharp down-move followed by a sharp up-move compared to the sideways trading of the past two to three days.

What this tells me is that the market is poised to eventually move lower (bear wedge), but may need to move higher before doing so (bullish consolidation). If this is the case, I would expect a push into the 50% or 61.8% fib retrace levels before pulling back.

Tomorrow's trading will be the ultimate test of this thesis and if there is a significant pullback I'll revise my analysis. The ideal scenario is another day of sideways trading followed by a push into the upper fib levels and moving averages. But rather than to go long, the better risk reward play here is to go short at the resistance.

As the chart unfolds, I'll be updating my forecast. Check back here and follow me on twitter for my latest thoughts.

Monday, August 15, 2011

TSX levels to watch

As the markets normalize, and with US debt issues put to bed for the time being, we can again focus on secondary markets like the TSX 60.

The TSX 60 has bounced considerably from the lows made on August 8. If it continues to move up, there will be several resistance levels to look for. The first is a narrow range between the 61.7% fib retrace, the 20 moving average and the pivot low at 811. This should be very good resistance provided we don't consolidate below it for several days. If this zone is broken to the upside, look for resistance at the 50 moving average. The dominant pattern is a bearish wedge--This means I will maintain a bearish bias and look for pullbacks at these resistant levels.

On the upside, the key levels to watch are the 200 moving average and the down-sloping blue trend line. A confirmed break above these levels will signal a possible breakout and can be bought long.

Oil and other commodities will play a key role in determining the direction of the TSX. If they remain strong, favour upper levels of resistance as the TSX should remain strong in sympathy.

Markets float ahead of Merkel/Sarkozy meeting

The markets are, for the time being, beginning to normalize. This is a welcome change from the huge, almost untradable, volatility and whip-saws we've seen over the past two weeks.

The major indices have had sizeable bounces from the pivot low I called out last week. There has also been a drastic decrease in volume (from over 600m shares on the SPY last week to just under 120m currently) and this has helped to lifted the markets as well.

The markets are trading mostly sideways today as traders wait for the outcome of a meeting between the leaders of Germany and France tomorrow. This is a difficult trade as most stocks are well off their lows and any negative reaction could cause a pullback. On the other hand, volume is light and a positive reaction could easily lift prices.

Technically, the SPY is floating up within a larger bear wedge pattern. Notice the big down-move followed by an up-move in the chart below. The dotted blue lines will be good resistance, if we make it there.

Most professional traders have been trading lightly or not at all these past weeks. This is the prudent way to approach this market as it is still fragile and prone to whips and "aftershocks". As a technical trader, I step aside when macro-economic and geopolitical events take centre stage. This is why my twitter and blog have been much less active lately.

Thursday, August 11, 2011

Possible bottom still in place

The possible bottom I posted about on Tuesday is still in play. I will continue to hold this belief until we close below the daily low of 1101.54 sometime in the next few days.

Going forward, I expect to see more upside. However, be careful as the market is still jittery and prone to selloffs.

As the market normalizes, I will be posting more trade setups. Check back often and follow me on twitter for my latest thoughts.

Tuesday, August 9, 2011

Possible bottom on the SPX?

Today the S&P 500 traded all over the map. The index opened higher and traded up for most of the day before flushing sharply lower on the announcement from the Federal Reserve that interest rates would remain low until at least 2013. After the initial flush, the major indices rallied to make new highs on the day.

From the low of today to the close, the SPX closed up over 70 points. This sort of action, combined with very high volume, is a sign of a possible reversal.

If this rally holds into the open on Wednesday morning, I am very cautiously calling for a short term bottom in the markets. I bought a small long position in the SPY shortly before the close of trading and it is already trading up sharply higher. If the rally holds, I'll be looking to sell at the following resistance levels:

Each dotted blue line corresponds to a fibonacci retracement and/or a pivot low or high. The SPX can easily pull back at any of these levels, but I think the best resistance will be at the 61.8% retracement at approximately 1250.

Monday, August 8, 2011

The flush continues

Today the S&P 500 fell another 6.66%. Technical support levels are giving only minor intraday pauses instead of the normal multi-day bounces we normally see. For the time being, fear is leading the market.

As long as this continues, I will only be trading intraday. Even though I believe that most stocks will have have huge rebounds when the market turns, right now it's simply too risky to hold significant positions overnight. The only position I continue to hold is a small short hedge on the SPY I took out against long swing positions I've since been stopped out of.

Until the market normalizes, I will not be posting any swing trade setups. When the market bounces, all stocks will bounce. But be careful and do not try to catch falling knives under these conditions.

Sunday, August 7, 2011

Catching the falling knife

With the S&P's downgrade of US debt a reality, the question now is finding and trading the bottom on the market.

The S&P 500, as well as nearly every other stock index, was devastated last week. Fortunes were made and lost, and the careers of many amateur traders likely came to an abrupt end. It still remains to be seen, however, exactly how much more downside is left.

It's very likely that a large part of the selling we saw last week was insider trading based on advanced knowledge that the downgrade would occur. This could mean that the majority of downside is already priced into the market. It's also possible that this is just the beginning and we have a long way to fall yet.

Personally, I believe the most severe selling has already happened. I think it's likely that Monday sees an additional reflex selling flush that possibly even lasts into Tuesday. From there, I think it's possible a short term bottom on the market is in.

Alternatively, fear and panic, as well as hedge funds liquidating their holdings, could drive the markets substantially lower. I think this is the least likely scenario as it assumes that large financial institutions have not yet begun to sell.

In any case, I will be trading carefully. I mentioned several times last week that I would not be holding any large positions into this kind of uncertainty and that continues to be the case. I will be looking mostly at short term scalp trades and closely watching for signs of a low in the market. Once the market bottoms, we should see a substantial relief rally.

Saturday, August 6, 2011

S&P US downgrade--highlights

Below are some highlights from the S&P's recent downgrade of the US's debt rating. Also, be sure read my thoughts on the circumstances that lead to the downgrade here.


"We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade."

"The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability."

"Standard & Poor's takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.'s finances on a sustainable footing."
"The [Budget Control] act further provides that if Congress does not enact the committee's recommendations, cuts of $1.2 trillion will be implemented over the same time period. The reductions would mainly affect outlays for civilian discretionary spending, defense, and Medicare. We understand that this fall-back mechanism is designed to encourage Congress to embrace a more balanced mix of expenditure savings, as the committee might recommend.

"We view the act's measures as a step toward fiscal consolidation. However, this is within the framework of a legislative mechanism that leaves open the details of what is finally agreed to until the end of 2011, and Congress and the Administration could modify any agreement in the future. Even assuming that at least $2.1 trillion of the spending reductions the act envisages are implemented, we maintain our view that the U.S. net general government debt burden (all levels of government combined, excluding liquid financial assets) will likely continue to grow. Under our revised base case fiscal scenario--which we consider to be consistent with a 'AA+' long-term rating and a negative outlook--we now project that net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021. Even the projected 2015 ratio of sovereign indebtedness is high in relation to those of peer credits and, as noted, would continue to rise under the act's revised policy settings."

"Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act. Key macroeconomic assumptions in the base case scenario include trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade."

"When comparing the U.S. to sovereigns with 'AAA' long-term ratings that we view as relevant peers--Canada, France, Germany, and the U.K.--we also observe, based on our base case scenarios for each, that the trajectory of the U.S.'s net public debt is diverging from the others. Including the U.S., we estimate that these five sovereigns will have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (the U.K.), with the U.S. debt burden at 74%. By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015."

"The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction--independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners--lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government's debt dynamics, the long-term rating could stabilize at 'AA+'."

Choosing is not a choice

Friday night Standard & Poor's downgraded America's debt rating from AAA to AA+. The "bipartisan" budget deal worked out by US lawmakers last week apparently doesn't pass muster.

This should come as no surprise. The deal is the concoction of a government in gridlock and political parties without the will to make tough choices and risk alienating their most vocal and influential backers. Faced with the option of raising taxes or cutting spending--two very sacred cows--lawmakers chose none of the above.

The situation in the US is unsustainable because neither side of the debate is willing to concede anything, but now something has to give. Spending must be matched with revenue. When the two are out of sequence, the former must be cut or the latter raised--or better yet, both. A business can't survive without this careful balance and neither can a country.

In abandoning this basic principle, the US is now downgraded--and rightly so. Plans that appease everyone serve no one, and so it is with recent American fiscal policy. US lawmakers must prepare to make unpopular decisions or risk worsening an already grave budgetary tailspin.

Americans can either pay more for the services they receive or cut those services and pay less. Both options are valid, but a choice must be made as no combination of the two will work.

To be sure, the coming days and weeks will be crucial ones. Lawmakers and economists will be working hard to assess the damage that has been done and determine a way forward. Traders like myself will be looking to understand this changing dynamic of the global markets and identify opportunities therein.

As this situation unfolds, follow my latest thoughts both here and on Twitter @thetsxpert.

--Read the S&P's downgrade report here--

Wednesday, August 3, 2011

Wild trading leads to possible bottom on the SPY

Wednesday's trading was all over the map. The market opened flat and inched up before flushing dramtically lower, going from nearly 126 to 123.50. From there, the SPY staged an incredible rally pushing up to close near new highs on the day. This is an impressive move for a market that has seen seven powerful down days in a row.

A big flush followed by a huge rally on SPY 10 Min

The market was and is long overdue for a bounce. Financial turmoil in the EU and the US has created an enormous amount of fear and that tells me a short term bottom may be in place.

Technically, the daily SPX chart has a bottoming tail indicating the potential for higher prices in the days ahead. Until we close below this tail, I'll keep an upside bias on the markets. If I'm correct, expect a move back to a 50% or 61.8% fib level before ultimately trading back down.

A bottoming tail signals the potential for higher prices on the SPX

Because this is the first up day after several down, I'm keeping my analysis simple until a bottom is confirmed with a followthrough move higher. When and if that happens, I'll have more concrete support and resistance levels.

Going into the rest of the week I will be trading very carefully until I have a better handle on the direction of the market. Tomorrow's close will be telling.

Tuesday, August 2, 2011

TLT weekly resistance--possible bounce in stocks coming?

The iShares 20 Year Treasury Bond Fund (TLT) has run into major resistance on the weekly chart.

If you connect the last two pivot highs, you form a trendline that stretches all the way back to late 2008. The third hit of any trendline is usually a high probability short, especially when they're as nicely spaced as on the chart below. 

Treasuries often trade contrary to stocks as institutional investors look for refuge in seemingly safer assets. Note the vertical lines in the S&P 500 weekly chart below--this is where each pivot high on the TLT corresponds. You'll notice that each time the TLT makes a top, the SPX is either near or at a sharp up-side move.

It's unclear if this pattern will repeat itself again, but there are several reasons to believe that it might. The market is extremely oversold right now as well as extremely bearish. History shows that when sentiment hits an extreme, it's often a sign that a turnaround is near. This combined with a possible pivot high in the TLT leads me to believe that stocks may be due for some short term upside in the near future. 

If the market does bounce, I won't be expecting much--possibly a retest of the highs at 1350 or 1375. As you can see, the previous two pivot lows in the SPX were consecutively smaller declines leading to shallower bounces. 

I'll be watching this correlation closely in the days and weeks ahead. If Treasuries rally sharply higher from here, or if it pulls back while stocks continue to decline, I'll know the pattern has been negated.

Monday, August 1, 2011

Trade idea: SM long

SM has pulled back over the past week after an impressive up-trend that began in mid June. If it pulls back further, look for support between 70.50 and 71.14.

This range corresponds to three support factors: a 50% fib retrace at 71.14, a previous pivot high at 70.46 and the 50 moving average currently at 70.38.

I will look to take this trade long on a hit or break of the 50 moving average or the pivot high at 70.46--whichever comes first.

Trade idea: WFC long

WFC will hit good support at 26.88 if it continues down over the next few days.

This level corresponds to a gap fill and an important up-sloping trendline.

I will consider entering this trade on a hit of the gap fill at 26.88 and will be watching closely for it to close above the blue trendline. The closer the two levels are to each other , the better the odds of a successful bounce--this is why it's preferable for the trade to trigger in the near future.

As always, use a stop.

Trade idea: WAG long

Walgreen Co., (WAG) will have two important support levels coming up if it continues to decline.

The first level is at 36.68 and it corresponds to a gap fill and a 50% fib retrace. The second level at 34.71 corresponds to another gap fill and a 61.8% fib retrace.

As both of these levels have multiple support factors, both can be entered long for a short term swing trade. For either of these levels, be sure to use an appropriate stop and set it to trailing once in the money.

Trade idea: USB long

USB will have significant support at around 25 dollars if it continues to drop into this week. This level corresponds to a major daily gap fill as well as the 50 moving average.

I will look to enter USB long on a hit or break of 25, though 25.30 will also have good support as it corresponds to a 61.8% fib retrace. I'll keep a stop at a daily close below 25--higher risk traders can put their stop below 24.15.

Sunday, July 31, 2011

Trade idea: BA long

If BA slides into next week, it will hit an important support level at 64.88.

This level corresponds to a gap fill and is where the stock closed just before a sharp rally that has lasted into 2011. Market permitting, a hit of this level should lead to a significant bounce.

I will look to enter BA long on a hit or break of 64.88 and will stop out on a confirmed daily close just below. Traders willing to take on greater risk can put their stop below the nearby pivot low at 62.46.

Saturday, July 30, 2011

Trade Idea: AEP long

If AEP trades down next week it will have strong support at 36.47, just below the current price.

This level has three factors to support a bounce: a previous pivot high, a gap fill and a 61.8% fibonacci retracement.

I will look to enter this trade long on a hit or break of 36.50, with a stop at a confirmed close below it. If by chance this level breaks, there will be strong secondary support at the 200 moving average.

Trade Idea: AA long levels

If Alcoa Inc. (AA) continues down next week, it will find support at two important levels. Both of these levels combine multiple support factors and so have a high probability of bouncing.

The first level is at 14.18 which corresponds with a previous pivot high and a 50% fibonacci retracement. The second level is at 13.16--the confluence of a 61.8% fibonacci retracement and the nearby gap fill at 13.10.

I will look to enter AA long on a break of 14.18 with a stop at a confirmed daily close just below it. If this level breaks, I will enter long again at 13.10.

As with any trade, remember to take partial profits early and use a break-even stop thereafter.

Friday, July 29, 2011

Back to regularly scheduled programming (soon)

It's somewhat ironic that the so-called, and self-proclaimed, "TSXpert"spends most of the time analyzing every micro-move of the S&P 500, America's bellwether stock index, instead of the more local Toronto Stock Exchange. Readers to this blog, or followers of mine on Twitter, may wonder if I look at the TSX at all. Such confusion is understandable.

Part of being a successful trader and student of the market is knowing where the action is, and right now that's the United States. The outcome of the present debt ceiling debates in that country will have a profound effect not only on US finances, but also the macro direction of Canadian stocks as well.

As these issues in the US continue to preoccupy global markets, the major Canadian indices have taken a second stage. Even the best technical analysis is unreliable in the face of inevitable whips and saws caused by events inside the US. For this reason, I've chosen to stick mainly to the S&P 500 as it's most closely linked to the important issues at hand as well as to American trader and investor sentiment--a key psychological indicator.

But what's here today is gone tomorrow and these issues will not be the focus of the market's attention for long. Once that's the case, I'll resume focusing on TSX analysis while always keeping a close eye on the US. But until then, enjoy the show and trade carefully.

Thursday, July 28, 2011

Markets pause as the US House votes on key debt resolution

Tonight's market wrap-up will be brief as there isn't much new to report. The markets gyrated up and down today before closing the session flat. This isn't unusual after a big move in either direction, but today it's mostly due to traders waiting for the US House of Representatives and Senate to vote on Speaker Boehner's plan to raise the debt ceiling.

The outlook for tomorrow is simple. If the House votes yes and the Senate votes no, I will expect a moderate decline in the markets. If both the House and Senate vote yes or no, I'll expect either a large rally or a large fall respectively.

The only way to handle situations like this is to tread lightly. I'm positioned mostly in cash with just a few long positions because I think a deal will eventually be struck. I'm also holding a small short hedge just in case we see further selling if no deal is reached tonight--or worse, if no deal is reached even by August 2nd. I will not be breaking the bank no matter what the outcome is.

Tonight I will be watching the futures closely to see how they react to the US House vote. I suspect that if it passes, the markets will take it as a sign of Speaker Boehner finally getting his party in line--even if the Democratic held Senate votes it down as promised. If not, it indicates that a consensus between the two parties by the deadline is increasingly unlikely.

Tomorrow's trading will be interesting to say the least. Stay nimble, and good luck.

Wednesday, July 27, 2011

Debt fears drive markets sharply lower

Today the S&P 500 gapped lower and continued to sell for the majority of the trading session. Traders and investors are clearly nervous that members of the US House and Senate will not be able to reach an agreement in the short term.

As I posted yesterday, I expected increased volatility as we near the August 2 deadline--and volatility usually means selling. However, even I was surprised by the ferociousness of today's sell-off.

Technically, the daily $SPX chart suffered a lot of damage. Both the 61.8 fib and the 50 moving average support levels were broken and prices closed near the lows of the day. However, it's difficult to put much meaning into this sell-off as it was driven purely by fear and not technical factors.

Fear drives the SPX daily below several key support levels

Whatever the reasons, I'll continue to use the charts as my guide. The markets are now very oversold and due for at least a short term bounce, but when that will happen is anyone's guess. My suspicion, as I've written about previously, is that once a debt agreement is made in the US the markets will rally.

Irregardless of an agreement, the SPY filled a key intraday gap today and that alone may be indicative of a bounce in the coming days. I personally took a small long position close to this level as I believe the markets are due for some short term relief. If we continue to fall tomorrow, I will re-evaluate this position based on several factors such as decline velocity and volume.

Gap filled after near continuous selling on SPY 10 min

Please note that even though today's sell-off surprised me, I did not expose myself heavily to the long side--instead opting to slowly accumulate on the way down. The advantages to this approach are minimal losses and the opportunity to buy stocks at lower levels. It is especially important to remain prudent when there are so many political and economic unknowns looming in the near future.

Going forward into the last half of this week, remain cautious and do not weigh yourself too heavily on the short side. The market is incredibly fearful right now and that usually signals that a turning point is near.

For my latest thoughts throughout the day, be sure check here regularly and follow me on twitter.

Tuesday, July 26, 2011

Trade idea: CA long

CA Inc. (CA) could be poised for an inverse head and shoulders breakout if it can confirm above the blue neckline.

Potential inverse head and shoulder on CA daily

I will enter this trade on a confirmed daily close above the blue neckline. If it closes significantly above, I will look to enter on a retest of the neckline. A close back below the blue neckline will negate the trade and initiate a stop out.

Target 1: 24.38
Target 2: 25.06

Markets grind sideways towards the US debt ceiling deadline

Today's trading on the S&P 500 followed the same pattern we've seen over the last several trading days. The index opened flat at 1337.39 and then traded down as low as 1329.59 before catching a bid back up to the 1338.51 level. From there, profit taking and lingering debt fears pushed prices back down to close towards the lows of the day at 1331.94.

Whips on the SPY 10 min continue during Tuesday's trading

This kind of trading will persist as long as the US debt crisis remains unresolved. What we're seeing is panic driving futures lower leading to either a gap down in the indices or follow-through selling pushing down prices in the early morning. From there, dips are bought by large funds causing steep rallies in stocks and flat closes on the markets.

As the August 2 deadline approaches without a US debt deal passed, I expect investor jitters to increase as well as volatility in the markets. This was evident today as prices sold off sharply into the close--no doubt traders are looking to protect profits into the after-market session. But as I've mentioned in previous posts, I'm anticipating a relief rally on stocks once an agreement is inevitably made between the two US political parties.

On the daily chart, not much has changed since yesterday. We're still consolidating within Thursday's sharp move up and are trading above the 20 moving average and several key Fibonacci support levels. Assuming a deal is reached before the deadline, and prices don't sell-off, an agreement is the perfect catalyst to cause a rally up from this consolidation pattern and possibly even a hit of the 52 week highs towards 1370.

Consolidation on the SPX could push prices higher in the coming days

Tomorrow will be another mixed bag as the market digests a combination of positive earnings and debt fears. As these factors will effectively cancel out any momentum in either direction, I'm not expecting much action aide from intraday whips.

Be sure to check this blog daily and follow me on twitter for my latest thoughts on the market.

MCP explodes off of inverse head and shoulders pattern

It pays to trust trust charts and read technical patterns.

Yesterday I posted an alert to enter MCP long at or near the confirmed daily head and shoulders neckline. I entered this trade myself just prior to posting at 59.35. Today, the stock exploded to the upside and is now trading nearly 5 dollars above my entry price, up 7%.

The internet and media are buzzing with buyout rumours and general hype surrounding this stock, but none of it matters. Just read the charts, know the patterns and do what they tell you.

If you entered this trade, sell half at 66 and then set a breakeven stop for the rest of the position. The final target is 72-78, depending on how quickly it trades up.

Monday, July 25, 2011

Markets continue to whip as debt negotiations stall

By this point it is cliched, but also accurate, to say that US debt ceiling negotiations are driving the markets. Events in the European Union, such as Greece's downgrade by Moody's last night, are now merely an afterthought to global traders--at least for the time being.

This morning the S&P 500 opened sharply lower as "bi-partisan" negotiations seemingly broke down over the weekend. But within 20 minutes of the opening bell, the S&P 500 easily started its climb back up to Friday's close at approximately 1345 on the SPX.

Market whips continue on the SPY 10 min chart

The day's rally lasted until midday, when the market topped at the gap-fill and started to decline, this time accelerated as US Republicans and Democrats traded barbs and publicly rejected each other's proposal. The drop continued for the rest of the session, with the SPX closing at 1337.43--more or less flat on the day.

Right now, the pattern on the daily SPX chart is the beginnings of bullish consolidation--a move up followed by several days of sideways trading within the range of the initial up-move. The longer we see sideways trading, the more likely that we eventually trade higher and approach the daily double top at 1370. This pattern confirms my suspicion that if a a debt resolution manages to pass the House and the Senate, the markets will rally as a sign of relief. And please note that the market does not care if it's a Republican or Democratic plan that passes, as long as this uncertainty comes to a timely end.

I have every confidence that a deal will pass by the deadline--to do otherwise without a contingency plan would be political suicide for all parties involved, not to mention the collateral damage to financial markets.

Going into the rest of the week, continue to follow the charts and consider news events only as a means of understanding the intraday whips of the market. We're still in an uptrend, though admittedly extended on the charts, and will remain so until we either hit resistance on the way up or break back to the downside. In the meantime, expect the whips and saws to continue until there is some sort of resolution.

Trade idea: MCP long

MCP recently broke out of a perfect inverse head and shoulders pattern and could be due for a fairly big upside move. Inverse head and shoulders patterns have a high probability of playing out successfully.

The first target for this trade is $72, at which point I'll sell half and put in a break even stop. The final target is 78, just shy of the double top.

I entered this trade just prior to posting at approximately 59.35, but anywhere near the dotted blue neckline is a good entry. I will stop out on a daily close below this neckline.

MCP inverse head and shoulders

Sunday, July 24, 2011

Trade idea: TXN short

Texas Instruments (TXN) gapped down on July 11 and has since recovered, trading up significantly over the past week. If the stock fills this gap at 32.44, it should meet significant resistance.

In addition to a gap fill, this level also corresponds closely to a 61.8% fibonacci retracement and a previous pivot/area of congestion.

I'll look to enter this short trade on a break of the 32.44 gap fill area and will stop out on a daily close above the 50 moving average.

Trade idea: MS short

MS has had a strong up-move over the past 4 trading days and is short term extended on the daily chart.

Should this stock continue to push up over the next few days, it will have good resistance between 25.50 and the 200 moving average. This level also corresponds to a 50% Fibonacci retracement.

I will look to take this trade on a break of 25.50 with a stop at a confirmed daily close above the 200 moving average.

Saturday, July 23, 2011

Trade idea: Allstate (ALL) Short

In the event of further upside in the market next week, watch ALL for a pullback at 29.50. The stock has been in a significant downtrend since early May and is trading below its 20, 50 and 200 moving averages.

The 29.50 level corresponds to a gap fill and is very near to a pivot low and a 50% fibonacci retrace. Should this level break to the upside, there will be strong secondary resistance at the 20 moving average and the 61.8% fibonacci retrace.

I will look to short ALL on a break of 29.50 with a stop above the 20 moving average.

ALL has strong resistance at the 29.50 level

Thursday, July 21, 2011

Another big up-day for the SPX

The S&P 500 traded sharply higher today up nearly 18 points, or 1.35%. This rally came presumably on the back of good earnings reports and optimism that US debt ceiling negotiations may be close to an end. Progress in Europe in securing a bailout packages also helped to buoy prices.

Readers of this blog will know that I don't believe in fundamental explanations of market moves. As I've written numerous times, this 50 point rally we've seen so far since Monday is based simply on technicals and contrarian market psychology.

You'll recall from my previous posts that last week the market was oversold, overly-bearish and into technical support at a key 61.8% Fibonacci retracement level. Interestingly, traders last week and over the weekend were as bearish as they've been in years--this is what gave me the confidence to call not only for a pause but a significant bounce in prices this week.

Monday's hit of 61.8 fib level leads to big bounce on SPX

Psychology plays an important role in determining the short term cycles of the market as big financial institutions look to shake out smaller traders from their short positions and devalue their put options. Once these same traders have been discouraged enough and become bulls, you can be sure the market will reverse and correct downwards. Combine this this contrarian psychology with good support and resistance levels and you will see powerful moves in the market.

If you were monitoring intraday trading on the SPY or any other major market index, you saw these concepts in action on a micro level. At approximately 12:40pm ET, the SPY rallied sharply on a rumour that debt negotiations had concluded, only to fall back sharply 10 minutes later on another rumour that a deal had not been reached. Both of these reports turned out to be either inaccurate or unsubstantiated and the SPY continued to trade upward as normal.

SPY 10 Min whips up and down then continues sideways

Going forward, I'm no longer strongly bullish although I think the likelihood of further upside tomorrow is reasonably high. I mentioned earlier this week to look for resistance at the 1340 and 1356 levels on the SPX. Today, we breezed through 1340 but 1356 should continue to act as resistance should we reach it. I may consider picking up some short positions if we reach 1356, but I will keep them small and maintain a tight stop.

Check back here regularly and follow me on twitter for my latest thoughts on the market.

Wednesday, July 20, 2011

A day of rest for the markets

After a big move up or down, the market usually needs a day of rest before continuing on its way. Today was no exception as the S&P 500 traded mostly sideways and closed fractionally lower on the day.

Today's SPX candle is known as a doji--something created when the price trades within a narrow range throughout the day. A doji means indecision, and that's fitting considering the mix of good and bad economic and earnings news traders have been digesting over the past several days. I expect we'll see a continued move up tomorrow, but any surprise news regarding European or US debt issues overnight could complicate things.

As I explained yesterday, don't be distracted by earnings when trying to make sense of the bounce we're seeing. The current up-move is simply a factor of technical support and contrarian psychology. Continue to hold any longs you may have picked up and be sure to have breakeven stops for each of them.

I'll be watching closely as the charts unfold and will have good resistance levels as they approach.

Tuesday, July 19, 2011

You Win Some, You Don't Lose Some

I’ve only been writing here a few weeks, but this isn’t the first--and won’t be the last--time I mention the importance of setting stops and sticking to them.  This surely isn’t a novel concept and is highlighted in any good 'Trading 101' book or program. If you always abide by your stops, I applaud you, and you're probably well on your way to being profitable. But I know some beginners read this blog, so I'm going to add my voice (and today's example) to the many telling you why stopping out is such a critical component of successful trading. 

As I have reported, before today I had been holding short and, a 2x short ETF of the SPY, long.  They were working well for me, and I had set what I hoped were reasonable targets.  However, I never enter a trade without knowing not only where I want to exit (my target), but also where I need to exit if things go bad (my stop).  Pre-market today, it was clear that these were going to hit my stop out levels.  So I set my order, and when they were triggered almost immediately at the open, I wasn't overjoyed.  But I also hadn't lost money, so I wasn't unhappy, stressed, or in the hole. 

Given the rally today, I am quite happy to be out of these shorts. Would I have liked to make money on those positions? Obviously--you hope to profit on every trade. But that's not possible. The next best thing is to never lose money. 

It's especially tempting to hold on to positions now that I am blogging - trades that go against me are now public.  But that is all the more reason to show that I stick to my rules.  So if you are a beginner, this one post may not make you to abide by your stops, but I hope it helps you on your journey.  I'm not perfect, and I'm well aware of wanting to hold on to that position just one more day to give it a chance to turn around.  I know when I first started trading I always had good intentions but didn't necessarily know how to follow through on them, and of course I'm human so I still make mistakes.  So I will try periodically try to come back to this topic, because it's something that even experienced traders like myself can't hear too often.

"Surprise" rally crushes bears

Today the markets rallied sharply, catching quite a few traders off-guard. But for anyone who reads this blog or follows me on twitter, it shouldn't have come as a surprise.

Yesterday and late last week I called for a bounce based on technical support and market psychology. Today's trading shows me that I couldn't have been more correct.

Nothing but upside since yesterday afternoon on SPY 10 min

The SPY opened the session up at 131.34 and then pushed further as high as 132.89. As you can see, the 61.8% fibbonacci level from yesterday held beautifully and today we saw more follow-through to the upside. The fact that so many traders are/were bearish I'm sure helped to propel prices as they got squeezed out of their positions.

Do not be distracted by all the talk of good earnings, etc. This is still a weak market with lots of underlying problems and will continue to be so for the foreseeable future. This is simply a relief bounce based on good technical support and a contrarian move to punish traders who over-shorted the market. Rest assured that prices will eventually fall back down just as quickly as we saw them rise today, but until that time we will enjoy the ride up.

I'll continue to look for more follow-through upside into this week. Any long positions should do well as this rally appears to be broad-based.

Huge bounce off of 61.8 fib level with follow-through today

I'll keep this update brief as there is little to discuss. Assuming we continue up tomorrow, look to start taking profits first at the 1340 level and then at 1355 on the SPX.

Monday, July 18, 2011

Monday Market Summary

Today the markets saw some sharp selling as European and US debt fears continue to irk traders. The SPY opened at 131.08 and fell as low as 129.63 before recovering to close at 130.61.

Big drop and nice recovery on SPY 10 min

Despite this selling, I continue to hold a slight upside bias for the short term. I think the markets are currently oversold and that the debt fear premium has been priced in for the most part already. The SPX broke the daily 20 moving average but still should have some short term support at the 61.8 Fibonacci retrace.

Good bounce off 61.8 fib on SPX daily

I still continue to hold a small position short the SPY via the 2x ETF, as well as another small short in On the long side, I have a position in based on the hit of the double bottom at 31.79 and another position in PG based on bullish consolidation above the 20 moving average.

Going forward into the week, I'll be watching the news and futures closely pre-market and after-hours. Debt negotiations in the US have overshadowed issues in Europe for the time being and traders are watching it with full attention. The market has priced in a lengthy, last minute agreement between Republican and Democrats which means an early resolution will cause a rally and no resolution will cause a fall. No debt resolution is a very unlikely scenario, in my opinion.

Tonight I'll be scanning for long setups in the event that we bounce as I expect we will. If we break lower, I'll simply look to buy stocks at the next set of levels down on the charts.

Saturday, July 16, 2011

AMGN Bounce Level

AMGN is very close to key support and if the market holds up next week it may bounce.

The 54.70 level corresponds to a gap fill and a 61.8% Fibonacci retrace. I'd consider taking this trade on a hit of this level with a confirmation stop just below it. If this level breaks, there will be secondary support at the pivot low of 53.16. This trade is somewhat higher risk due to the precipitous fall it has seen recently, but could bounce as it's very oversold.

If the level holds, look to take profits at the 200 moving average and use a trailing/breakeven stop thereafter.

AMGN may bounce if market holds

Please be advised that if the market looks to fall early next week, I will not take this trade. Always be aware of overall market conditions when taking any trade and never fight the market.