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.

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

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.

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.

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 FTS.to short and HSD.to, 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 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 HSD.to 2x ETF, as well as another small short in FTS.to. On the long side, I have a position in GIL.to 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.