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 POT.to 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 SU.to 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.

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.

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.

In Sickness and in Wealth

If you’ve been following this blog, you know I like to post my market updates shortly after each day’s close--and you might also have noticed that Friday conspicuously had no such update.  When you work for yourself, there is no point in making excuses--lying to the boss is lying to yourself.  But there is also no point in not analyzing yourself--to be able to trade well is to know yourself--or taking learning opportunities wherever they present themselves. My own crashing yesterday after a long week is one such opportunity.

To succeed in this business you need to know your limits, and you need to take care of your health, both physically, mentally and emotionally. On top of my regular trading, I have added the task of creating this blog that I hope will be worthwhile to readers. That coupled with some personal issues and too many nights of fast food, and I ended the week with a whimper, not a bang. I need to learn that there is a limit to how far I can push myself.

I am doing what I need to recover this weekend.  But the main thing I, and any trader, can do, is to remember that our minds are our machines, our bodies are our workforce, and if we don’t treat them well, we can’t expect to stay in this business for long.

Lesson: Why I Never Trade Fundamentals

Today’s 10 minute SPY chart is a great illustration of why I trade technicals, not news. When the FOMC minutes this afternoon merely hinted at QE3, lots of fundamentals based (or, at least, fundamentally influenced) traders jumped on and went long. I watched this spike from the sidelines as there was no clear technical reason to buy there.

While hopefully some were lucky enough to get out for a quick scalp, many surely did not—and were burned when the news of Ireland's downgrade by Moody's brought the markets all the way back down to make new lows on the day. And to add insult to injury, the talk of QE3 turned out to be just a rumour anyways.

Whip, meet saw.

This shows one of the fundamental problems with fundamentals. News is by its very nature unpredictable and what I strive for as a technical trader is predictability. Fundamentals and news trades are ultimately traps for amateur investors to hand over their money to the big hedge funds and banks. And without a crystal ball, at what price do you buy and sell?

That’s why I let the charts be my crystal ball.  Though obviously not perfect, with higher probability trades and good money management on your side, your odds of being successful go way up. Just be careful during earnings, options expiration, and other events that cause major moves.  And if you keep your account flexible, you should be able to weather any unexpected fundamental news that comes your way.

Don't Fight the Trend: A Lesson

When I first started trading, I had tunnel vision. I took what I learned about indicators and applied them one chart at a time.  And while I had become fairly competent at charting, nothing ever worked out quite like I expected. I got caught in a frustrating loop: I’d see a setup and take it expecting a big move, but would only get a small one. I wouldn’t get out in time, and I’d end up stopping out. Not wanting to get burned the next time, I’d see a setup and take the first bump I got, only to see the stock continue to rise along with all the profits I wasn’t making.

Fortunately, money management kept me from losing big, but I also wasn’t making big. My technical analysis was missing a key component--I wasn’t paying attention to the overall market conditions.

If the markets are roaring, shorts are going to be more difficult to predict. If the markets are dropping, few stocks will buck the trend. That’s why now if I’m looking at an oil stock, you can bet that I’m also looking at crude oil, and the energy sectors in general. Or if a gold stock looks bullish but gold is in a down-trend, I’m going to think twice before going long.

Since I trade both Canadian and American stocks, my eyes are glued to the TSX 60 index, the S&P 500 and the US dollar at all times. I have to have as solid a grasp as possible on what is happening in all areas of the market before I make any move to make sure I'm not fighting a trend.

MFC.to had a nice bull flag setup but fell with the rest of the market

This is why I didn’t buy MFC.to last week, despite its beautiful bull flag. What tipped me off was the fact that the TSX 60 index was incredibly extended and due for a pullback. This told me that going long any TSX listed stock would be like rowing a boat upstream--i.e., possible, but difficult and likely to fail.

So while this chart looked great by itself, it didn’t look great enough to fight the market, and sure enough it got a big pullback today along with everything else.

Overall, as a lesson for beginners, never stop paying attention to the underlying market conditions, because no stock trades in a vacuum. And if you see a chart with so many factors that you think it just might buck the trend, keep a tighter stop and expect a smaller move.