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.

Tuesday Market Summary

Today was very much the kind of day you'd expect after a big move up or down in the markets. Trading on the $SPY was interesting due to a few surprises, but was ultimately muted and confined to a range.

As a contrarian trader, I expect days like this. After yesterday's sharp drop, lots of amateur traders who read about it the night before piled on the short side this morning expecting to drop further. This is a perfect opportunity for the big financial players to whip the market around and stop these traders out. Also, keep in mind that this week is options expiration and erratic trading during this time is somewhat the norm.

Another reason why I expected this market pause is because of the technical support we hit at the daily 50 moving average on the SPY. Whenever you hit a major moving average or support level, you have to expect at least a small pause or bounce--just as I explained yesterday.

From an intraday perspective, the SPY opened the day down slightly at 131.69 and chopped sideways from there. The only surprise move came at 2pm ET when it was revealed that QE3 had been discussed as per the FOMC minutes. The SPY spiked almost 1 dollar on this news but shortly after it was announced that Ireland had been downgraded by Moody's to junk status and this brought the market all the way back in, going as low as 131.36. The SPY closed the day around the lows at 131.45--basically flat.

News whips market up then right back down

This is a good example of why I trade technicals and not fundamentals. Traders who bought the FOMC QE3 spike ended up giving back all their gains shortly after when Ireland was downgraded. For this reason, it's very important to follow the charts and only look to trade the best support and resistance levels. This strategy is crucial to avoiding the whips and saws of the market as much as possible.

Tomorrow is more of an unknown to me. Since we've satisfied the small pause/bounce requirement after yesterday's big move, Wednesday could either resume the down move or have another small up-day. The only scenario that would surprise me is a big move up. And of course, this assumes we don't get any other surprise news out of Europe overnight or pre-market.

Keep following this blog and my twitter feed for my latest thoughts. It will be interesting to see how the market digests Ireland's downgrade overnight. In the next few days I expect to have more long and short ideas on the market and in stocks. I just need

Monday Market Summary

Today the markets opened sharply lower again after debt fears in Europe resurfaced during overnight trading. The latest worry is that Italy will be the next country to be downgraded and/or default.  

The SPY opened this morning down $1.65 at 132.75 and went as low as 131.91 before getting a bounce back up to 132.50. From there the SPY traded back down and briefly touched 131.84, breaking the intraday double bottom and getting another small bounce. The SPY then traded lower again, hitting 131.66. From there the market traded mostly sideways for the rest of the day as is typical after a big move in any direction.

SPY 10min traded down for the majority of the day

These European debt issues are and will continue to be a serious issue for the markets, but the fact remains that the major stock indices are severely overbought and overdue for a correction. As long as this remains the case, any news the markets interpret negatively will cause them to sell.

Technically speaking, a second down day in a row after such a big rally during the past two weeks is significant as it tells me we're definitely in a short term correction. The question now is how much more downside can we expect in the short term.

The 132 area is the first level of major support. This was the breakout area before the massive follow-through rally that began the week before last on Friday. Just below here at 131.50 is the 50MA on the daily chart. As long as the market can hold this area, it's possible that we bounce and recover, but if it breaks we may have a more serious correction at hand.

SPY daily will have support at dotted blue lines, resistance at double top

I'll be watching these levels closely this week. Hopefully after a few more days of trading we'll have a better idea of which levels are going to be good for an extended move, either long or short. Until then, especially during options expiration week, I expect to see whips up and down. Weeks like this make swing trading difficult and is better suited for shorter term day trading.

Keep checking back here for daily updates and follow me on twitter for my thoughts throughout the day.

Head and Shoulders on the SPX? Not yet.

The S&P 500 has the potential to create a bearish head and shoulders pattern sometime in the near future. This pattern remains valid as long the SPX does not close above the double top at 1370. Once the right shoulder forms, I will take this trade on a close below the black neckline which right now is just above 1260.

Please note that as of right now this is just a potential pattern; it's not a head and shoulders yet. I've heard a lot of chatter online suggesting that this pattern is already in play--it isn't. This short is in play only on a close below the black neckline and not before. It will also cease to be even a potential pattern if it should close above the double top. In this event the chart may still remain bearish, just not a head and shoulders pattern.

This pattern will not be actionable for a while--likely a week or more--but I will be watching it closely and provide any updates here and on twitter as I see them.

Priced to Perfection: Trading the ADP Jobs Report

The price of the SPY is apparently priced to perfection. I say this because of the sideways trading we've seen for the past couple of days.
 

Sideways consolidation typically tells us that the market has priced in every bit of available information out there and is waiting for more. In this case, it's the ADP private jobs number to be released Thursday pre-market.

The best way to incorporate the results of this data into your trading plan is to not be concerned with the numbers and concentrate on what the market expects versus what it gets. Right now the market is expecting an additional 60-68k jobs to be added to the private sector. This means that if the numbers come in as expected, it should be another muted trading day as the market has already priced this into stocks. If the market is surprised, things could get more volatile.

A surprise will come in the form of either under-performing or out-performing what the market already expects. This should be fairly self-explanatory--a low number will send the markets down, and a higher number will send them up. And the extent to which it under or out-performs will determine the extent of any move in the SPY up or down.

Personally, I will wait for the numbers to be released tomorrow morning before speculating one way or the other. One thing I will say though is that poor ADP showing will put a dent in an already extended market. The market will need a good number, probably above expectations, to keep a rally like we've had since mid June going strong. 

On Friday, Non Farm Payrolls data will be released. I suspect that a neutral ADP number tomorrow will cause the markets to pause again until then before making a move in either direction.

For my latest thoughts on this and other topics, check back here daily and follow me on twitter @TheTSXpert.

Wednesday Market Summary

Today the markets ended mostly flat after briefly trading both lower and higher than yesterday's closing price.

The SPY, a key benchmark, ended up just 16 cents, or 0.12%. It opened the session down 32 cents before dropping to 133.11 and pushing all the way back up to the the key 134 level. Between noon ET and the rest of the day, the SPY traded flat.

10 min SPY chart

On the daily chart, the latest candle is essentially a doji. A doji is formed when the price closes flat after moving both up and down during the day. The SPX index (which is what the SPY tracks) formed an even more defined doji candle. This latest doji candle is in addition to the one that formed Wednesday right next to it.

SPY daily chart

Yesterday I spoke about how a doji candle after a big move up often signals a reversal in trend. I also mentioned that if a second consecutive doji candle were to form, I'd change my analysis. Today we got exactly that. A big up move followed by two flat days is a classic bull flag. This tells me that the market is preparing itself to move upward, or at least isn't adverse to doing so.

Had this pattern showed itself 2 weeks ago, I'd be long the market right now. However, at such lofty levels on the chart I have to leave it alone. Please be aware that bullish patterns at highs and bearish patterns at lows have decreased probabilities of playing out to completion or at all.

This isn't to say that the market won't push up tomorrow--in fact, I'm almost expecting it. The market has been floating up since last week and this latest daily pattern doesn't dissuade me from thinking it will continue to do so.

I'm still holding half positions short in the SPY and the QQQ that I picked up before Friday's sharp rally. The markets are still very extended and are overdue for a retrace. If we don't pull back by Friday, I'll stop out of these positions for a small loss and look to go short again further up in the charts. A push up in the SPY will meet resistance first at 134.30 and finally at the double top at 136.50.

ADP jobs data will be released tomorrow pre-market and it may provide a catalyst for the market to make a move. Stay tuned to this blog and my twitter as I'll be posting about it later tonight.

Mixed Signals

Today the S&P 500 ended flat. This isn't surprising as the market is incredibly extended right now since bouncing in mid June. Even with light volume the market needed a day of rest before going up or down any further.

Yesterday I wondered if the market would go up or pullback today. The signals the market gave us are mixed and require some analysis. Going forward into the rest of the week I think there is an almost equal case to be made for either further upside or a small pullback.

The SPY ended flat and even had a float into the close. Today's daily candlestick ended in the form of a doji. Under the right circumstances, a doji hints at a possible reversal in trend. Idealy, I like to see doji candles form right underneath resistance levels after a extended move--this setup is usually a good short entry for a pullback. We got the extended move and the doji today, but still didn't quite hit the next resistance level at 134.30.

Based on this last candle, there are a few of scenarios that could play out tomorrow. First, the extended move plus a doji could lead to a reversal. In my opinion, this is the healthiest move as we're very extended and it's difficult to go long or short stocks at these intermediate prices.

Alternatively, if we push up into the next resistance pivot at 134.30 we could pull back from there. I will be watching this closely if it's the case as we came very close to hitting this level today and that slightly lowers the odds of it being resistance when it actually hits.

The third option sees us forming a second doji candle on the daily chart. This option is the trickiest because it's still possible to have a pullback, but two sideways days after an up day is very close to creating a bull flag consolidation pattern and hints that there may be further upside still. In this case, we'd probably push all the way back up to the double top. If this ends up being the case, I may decide to cover my shorts just before the close tomorrow just in case.

With these three scenarios in mind, I will be preparing my trades for tomorrow. As the holiday weekend fades, volume should start to re-enter the market and volatility will increase. I'm confident that soon we'll get a move in the market one way or the other and tomorrow might be that day. I'll be watching the futures overnight as that should give us a clue to what might happen.

FXE and UUP: The FX-factor

Last week I posted about how the US dollar and the Euro are key to understanding the market. I explained that I was suspicious of the big S&P 500 rally on Friday because the major currencies did not follow. This week, as stocks continue to float up, my position remains the same.

The Euro typically trades inverse to the US dollar and in synchronicity with the stock market. If you look at the chart below, you'll see that the Euro (FXE) did not participate in Friday's rally nor has it moved up since. Also notice that it has not moved above the key blue trend-line. The pivot high at 144.86 and this trend-line remains strong resistance. These levels roughly correspond with inverted support levels on the US dollar charts.

Unless FXE can trade and close above these levels, I have to be suspicious as the stock market continues to float. I'll continue to stake out good short entries further up in charts and maintain stops on my current positions. If the FXE does breakout, I'll expect the market to trade back up to 2011 highs. If it doesn't, look out below.

Weak showing for TSX60

The TSX60 Capped Index ended up 0.62% Monday while US markets were closed for the July 4th long weekend. On Friday US markets rallied sharply while Canadian markets remained closed.

As you you'll recall from last night's article, I expected the markets to gap up by approximately the same percentage basis as the US markets rallied Friday. This was not the case as the TSX closed up only by about 1/3 the latest SPY close. In fact, earlier in the morning the TSX was actually trading negative.

Float up, fade down.

This kind of showing is interesting. The fact that the TSX under performed the S&P 500 by a good margin shows that perhaps some of the exuberance of Friday's rally has faded. It also confirms my suspicion that the TSX might lag as it had not yet hit major resistance just above Thursday's close.

If the TSX does continue to push higher it will hit strong resistance at the 860 pivot low and ascending trend-line. If Tuesday's market pulls back, the 50MA at 850.95 will remain a barrier.

With Canada's exchanges re-opened, what remains to be seen is how the US market trades post holiday weekend. The SPY is arguably in a more precarious position as there is no real support until all the way back at 132, the breakout level from Friday afternoon's initial spike. On the other hand if US markets continue up, there's no real resistance until just above 134 and then all the way back to the double top at around 137.

The futures will be re-opening for the week shortly and I'm eager to see how they perform. I'm still short the market and will be looking to get more short in the event of further upside. Personally, I think it's likely that Tuesday is an uneventful day with little price movement either up or down.

If any news is released overnight, I'll re-evaluate my position. Follow me on Twitter to stay up to date with my latest thoughts.

Friday June 1 Market Summary

Yesterday I posted about a possible up move in the markets despite technical resistance because of the low holiday trading volume. Today we got exactly that, but to an extent that even I didn't anticipate. The SPX rallied +19.03 to 1339.67, or almost $2 on the SPY. This is a very big move, so I'm glad I decided to wait until after the holidays to add a second round of shorts.

The trading session actually opened uneventfully and stayed in a narrow range, as you'd expect on a Friday before a long weekend. Then at 9:30ET, ISM numbers came out at above market expectations and the SPY spiked almost $1 within a single 10 minute candle. For the rest of the day, the markets floated on extremely light volume without ever pulling back.

It's hard to put much meaning onto this rally considering the volume, but the price action is all that matters at the end of the day. I'll continue to have a stop in place on all my shorts and will look to add further shorts higher up in the charts if the market continues to float. The market remains very extended and the probability of a pullback soon is still high.

If we do continue to rally next week, as we well may, I'll look to add more shorts on the market and on stocks at the the SPX 1346 and 1370 levels. I think it's unlikely we go as high as the 1370 double top, but it is possible.

Last night and this morning I posted several short setups that should play out when the market pulls back. And assuming we don't pull back before then, I'll probably enter some of these shorts mid next week.

• MCHP Short 
• LLTC Short 
• INTU Short
• FTS.to Short
• NXY.to Short
• CCO.to & FM.to

I'm currently short FTS.to and partially short the SPY and NASDAQ. I will be sure to advise of any future shorts on this blog and via twitter.

Key level: MCHP Short

MCHP is into strong resistance at the current levels. When the market pulls back, this stock should as well. I will consider shorting this stock if it pushes back to today's highs, otherwise I'll keep it on watch for next week.

There are five resistance factors here: the 50MA, gap fill, bear flag, 50% fib and a previous pivot.Good short between 38.34 and 38.67. I'll look to enter at 38.67.

Key level: LLTC Short

Linear Tech Corp (LLTC) hit strong resistance today at $33.27 and pulled back. In the event of more upside tomorrow there will be a good opportunity for a short entry.

There are 3 resistance factors here: the 50 moving average, a gap fill and a previous pivot low. The short is valid anywhere between $33.44 and $33.61. I'll probably look to enter at around $33.50, just above the gap fill.

Thursday Market Summary

Thursday was another sharp up day in the markets. This should not be a surprise to anyone who reads this blog or follows me on twitter. The S&P 500 index broke through the 61.8% fib level, the 50 moving average, a pivot low and a down sloping trend-line. I think it's possible we go higher to the 1330 or 1345 levels, but we are currently into strong resistance that should bring some sort of pullback.

I took a short position on the SPY at 131.70 and 132.05 via the HSD.to 2x ETF, as per my post yesterday. I also shorted the NASDAQ at around 2773. Both of these positions ended flat on the day.

The timing of these shorts could be better as we're entering into a holiday period. Those who've been following me know that I generally assume an up market in light volume holiday trading. In fact unless we get some kind of horrible news out of Europe, I wouldn't be surprised to see a flat or slightly up day tomorrow. The shorting levels should still work once the holidays are over.

Canadian markets are closed tomorrow for Canada Day. The TSX60 is into strong resistance as well, but I'd like to see it higher before shorting, preferably into the daily 200MA or even the 50MA. I'm less confident that a top is in on the TSX so I left it to short on Monday or Tuesday in case the markets float up again.

I'll be watching the markets on Friday but I expect trading to be extremely light in volume and therefore fairly boring. If I see anything interesting I'll be sure to post it here or on twitter.

Wednesday Market Summary

Wednesday's trading was the same float up we saw on Tuesday and pretty much exactly what I've been calling for since last week. And after three days of trading to the upside, I now have a better idea of when to expect the pullback.

The SPX looks similar to almost every other chart I've been studying lately, both US and Canadian--a sharp down move followed by a sharp up move. This is a classic bear wedge. You'll notice from the chart below that we're heading straight into 4 areas of strong resistance--a trendline, the 50 moving average, the 61.8% Fib and a pivot low. Combine this with the bear flag and you have 5 factors saying to go short. This level corresponds roughly with 132 on the $SPY.

The only wildcard left is the timing. I'll short a hit of the 50MA, but before the holidays are over next week it won't surprise if we trade even higher temporarily. In light of this I may wait until we go slightly above this level to make sure I still get a good entry in that event. In any case, I still feel confident that this area has a high probability of being a short term top.

I'll post an update on the market later today and let you know what I'm thinking on twitter throughout the day.

Update: $SPX hit my targets and I'm now short a small position. The timing of this short could be better, but the levels are still good.

Holiday Float Continues

This week's trading has been unfolding much as I outlined in several posts over the weekend. The slow, light volume holiday float up has continued. And while it's been a bit boring to watch, the gains to the long side have actually been fairly substantial.

If you follow me on twitter (@thetsxpert), you'll know that I was looking to pick up several long positions into this week. This included stocks like FTS.to, HSE.to, CNQ.to, IMO.to, ECA.to and SU.to, as well as commodities like oil and natural gas via the HOU.to and HNU.to 2x ETFs. I thought that since the markets were oversold and approaching a holiday period, picking up stocks long into key support levels would be a safe bet. My analysis also showed me that oil & gas were making bottoms, so I concentrated my picks in those areas.

Unfortunately, these stocks came within cents of my entry targets before taking off sharply to the upside--in most cases dollar plus gains so far. The only position I ended up getting filled on was HNU.to and ECA.to, both natural gas related. I'm very happy with their performance but of course I'd be much happier with more long exposure given the gains in the market.

But what the market giveth, it also taketh away. I'd probably be looking to take the gains off the table by now, or close to it. In fact, I was debating towards the end of today whether or not to take profits. I ended up holding as I think we may have a day or two more of upside, but I have breakeven stops in any case.

Both the TSX60 and the SPY are close to some major resistance levels, which you can read about here and here. My position is the same--if resistance levels are hit later this week or early next, I'll short them.

I also think there's a decent chance of going sideways tomorrow. The market appears to have priced in Greece's parliament voting in key austerity measures tomorrow morning. Therefore if the vote passes as expected, the market should hold on to its gains and do little else. Alternatively, a surprise impasse in the vote could weigh on the markets to the downside.

In any case, I'll be looking for trades on both the long and short side so that no matter what happens tomorrow I'll be ready to take advantage of it. I'll advise on my findings later tonight both here and on twitter.