What to do when market confuses?

Posted on May 14, 2012 by Eva Zaleski

Market seems sending mixed signals. At times like that I like to zoom out to a longer term to see a “bigger picture”.

For this week I chose EEM not that it is of any specific situation. Many ETFs are forming very similar patterns.

Step one – zoom out to a monthly view:

I am trying to predict a pattern before it is solid. On this chart I am looking at major reversal points and their volume. Here volume confirms the bounces from the lower range of what I am guessing might be forming. Volume at rejection points (upper range) was not significant, but MACD cooperated.

Step two – zoom in to a weekly view:

I am trying to zoom in on the possible pattern. It seems in tact. Here also volume confirms the bounces. Rejections are also in harmony with MACD. As you can see the same support/resistance level at $44 is visible with more detail points of crossing over/under.

Step three – zoom in to a daily view:

I am looking for a possible next move. EEM has been rejected four times from the upper level of down sloping channel. It doesn’t mean that this channel is “hardcoded” somehow in the memory of the market but it is quite possible that many traders are watching it and trading accordingly. The current price is in a significant distance from the upper level and a bounce from the lower range of the down sloping channel is of high probability.

There is of course no guarantee that EEM will bounce soon. The weekly chart still shows some room to the downside before next significant support.

Eva

Take your money and run!

Posted on May 7, 2012 by Eva Zaleski

What do you do when you see a stock jump and zoom up? Do you join the energized crowd and buy, buy, buy? What if this is a stock that you already have a position in? Do you hold it with hopes and for a bigger win? This wouldn’t be using the odds to our advantage in my book.

Rapid rallies, breakdowns, turns, are very emotional moments in the market. They are very often driven by quite simple technical causes like automatic stop loss (become market orders at any price), shorts (have to cover at any price) or even a crowd of emotional traders after too much coffee that just have to pull a trigger at the same time.

Only calm, calculated approach is the way to go. It is true in every market, not only stocks. And it is true not only in markets but generally! High emotions generate losers.

Know your plan, know the resistance/support levels (most of the money moves happens at levels).

Take CHK last weeks action.

The resistance was around $20.50, support around $16.50. What happened on May 1st? I remember some rumors were floating on Bloomberg and the stock was moving up in frenzy. I trade only ETFs but I was thinking “nice short covering action!” and it was right toward the resistance.

What happened the next day? After the market closed on May 1st CHK released not so great earnings plus “Chesapeake Energy, McClendon under U.S. SEC probe”. Wow, that’s the news to move the stock lower! The stock plunged to support.

Why then the stock jumped so high on a day just before the news release? One of my guesses is somebody bigger than you and I wanted to get out quickly at a good price.

Anyway, whoever was investing in this stock should have done their homework and should have known the long history of Mr. McClendon dealings. Whoever was trading the stock should have considered what may happen around the day of earnings release.

Eva

Reading charts to decide on the next step?

Posted on April 29, 2012 by Eva Zaleski

Do charts give us clear signals? – No. Can I put all my money or lots of it on a chart signal? – No. At least I would not recommend. Charts give us good enough signals…

Every trading day I look for my favorite setup to show up in the charts. One of challenges is to know when it is the right moment to put the money to work. When markets are at resistance I like to use hourly charts because I get answers faster and I can move money faster without risking too much of it.

My favorite setup requires me to enter a trade early before any solid confirmation of reversal. I enter when the hourly chart is at the low extreme. Do I know if it will not get lower? No. I do not know that. I can only rely on the odds of it going not too much lower before at least short covering to make my trades profitable. Also I need to plan for the case of it still going lower……….

To illustrate my technique I will use TNA (moves fast and I can use smaller sizes of trades). I look at the hourly chart of TNA after I check the daily chart of IWM.

Last Friday morning. I have my coffee. IWM on daily looks mixed, in the center of the range – “toss of a coin” day…

Fine. I let the first 15 minutes to shake things out because TNA opened up.

Wow, I like that! We reversed from the higher open, and dropping! Good! I will wait for the entry. I am checking the hourly chart to see what the chances are for a good entry at BB support.

Hmm. MACD looks ready to cross down. The last candle is nasty. I decide to wait longer, sensing that chances of retesting BB on hourly chart are good. It is Friday – a short term trade from hourly chart on Friday has to be quick for me or I would have to carry it over the weekend.

What is your take on the next intraday move of TNA based on these charts? Is it going to test low BB or reverse and zoom up?

For me the chance was 50/50. I decided to wait for a “cheaper” entry. I have my eye on $57.50 entry based on support/resistance that worked last 10 days.

TNA went down a bit more but the lowest it got to during the first hour was $57.77 before it bounced back toward upper BB on hourly chart. I didn’t make my trade on Friday. That’s OK. I was playing safe before the weekend.

I already traded a similar setup on Monday from a much safer level. We’ll see what this week brings. As far as the swing trades – I am still in some of them exiting as the market pushes up. I still have few that are negative but with a high probability of being profitable – so I sit with them “tight”. I keep in mind that that there are still positive winds for the markets but that can change.

Eva

Hard to be contrarian?

Posted on April 23, 2012 by Eva Zaleski

Yes, emotionally it comes difficult to most people, including traders to go against the prevailing opinion.

I go back to the 2005 or so when I went to visit Arizona with the intent to invest in another property. Real-estate was hot. Everybody wanted to be “in”.

The problem is we never learn from history. Either because when it repeats it hits a new group of participants or we have short memory or both.

What did I see when my agent took me property shopping? I saw increased density of new housing (huge houses on small lots – were they running short on desert sand?), waiting lists of potential buyers paying above asking price, multiple bids without even seeing a property, creative financing (cheap at first glance).

I am not a real-estate expert now, and was even less in 2005, but what I saw was not logical….

We decided not to invest more at that time. The math was not working for us. For few more years the boom seemed to continue and my feelings of “I missed” the market and investment were strong.

Why I mention it now? Just to keep myself in line and remind that it is just a matter of time in every market: stocks, real-estate, whatever else, that reality will be verified.

What defines the value? For the stock market many investors/traders use various formulas, one common is P/E. AMZN P/E is 138.67, AAPL P/E 16.31, GOOG P/E 18.03

Seriously, could I base my investment decision on such “imprecise” number? How would I know the true detail behind the calculation of earnings? How would anybody predict the future of a company? For me this is as good as guessing.

What is there for me to decide on my trades – the near future that I can access by looking at the charts and current “chemistry” of the markets?

The longer term charts tell me that we still may have some room for the move up. However I do not want to get blinded when the crowd pushes up and a resistance looms ahead.

15 year monthly charts still look OK, with QQQ potentially having much more room but scary at the same time. Please remember QQQ values from 2000 were the same “quality” as housing at the peak!

In the meantime I am just looking for shorter term opportunities and take gains when I have them.

Eva

Would you buy it now?

Posted on April 16, 2012 by Eva Zaleski

I do not trade individual stocks. I trade only ETFs. However sometimes I like to look at stock charts and remind myself why.

Here is one that caught my attention:

It’s an hourly chart. Would you buy it here? Would you sell it now? Would you hold during that last day?

Would you keep your cool? Not for me!

Granted it’s an hourly chart. OK let me zoom out to a daily chart.

A bit more info. At least I can see some significant price levels that I might use as support. Oops – after the last day (the ugly day from the hourly chart) we are almost testing a significant support! At the thought on how easy it was for this stock to get within a matter of hours to the significant support – I say: not too many buyers. Today volume was high and the price dropped to support. Not a good sign.

Now I know why I continue to stick to trade ETFs. These were charts of GOOG after they reported earning on Thursday 4-12-12. Does that mean that GOOG is a short? Who knows? The daily chart is very hectic – too hectic for me to bet any money on it.

There are traders that prefer to work with individual stocks. I will stick to what works for me though…

Eva

What are traders watching?

Posted on April 10, 2012 by Eva Zaleski

Last week definitely shook off some late entries. VIX is getting back to life. I do not like when VIX is hovering below 20. When nobody cares, when nobody is afraid or excited markets do not seem real. It’s often like a quiet time before a storm…

Are we going to get more “shaking off”? Probability is high with all the “happiness” with the recent move up toward all time high. For me “all time high” is always a danger zone.

Maybe you are an “aggressive trader” – go for it. I trade: sell at resistance/buy at support + patience. Boring? Maybe; Profitable? Yes; Fast? No

What are traders watching? With so many trading techniques and participants you need to find what works for you.

I like to stay within my selected and proven group of ETFs. Currently I watch weekly charts.

XME has not been trading well during the most recent market move up. With XME lagging the market, I used that as a warning and I have been trading accordingly.

XME seems to be trading within a bearish H&S pattern on the weekly chart. Are other traders noticing that pattern? Is it going to entice some short term negative response in other market areas to give me opportunity for more good trades?

For now I am assuming that to be the case and I will use XME moves to guide my trading.

Traders are talking about the bearish pattern of “rising wedge” on many major charts. I use MDY for my swing trades. I am writing this blog on Monday morning. MDY is currently breaking down out of that pattern.

Do traders care about the possibility of the double top? (points 1 and 2). Is MACD rollover coming? The possibility is high.

The market is in an uptrend. Decent pullbacks to major levels or any other widely observed indicators should be bought until proven otherwise.

Eva

What if the market breaks out?

Posted on March 31, 2012 by Eva Zaleski

I am taking a week off and writing this blog before the Friday 03-30-2012 close. To prepare for the time away from the market I was cashing out step by step from my active trades. I am going to leave some trades still open to be closed automatically once my targets are reached. Besides that I just have cash. Am I going to miss a rally – maybe? The risk is higher to stay with lots of open trades at this point.

So what am I going to do if during my time off we zoom to the moon in spite of all bearish patterns: rising wedges, megaphones, overbought conditions etc?

Well, I am going to look for pockets of the market that traders hated the most in recent months. If and only if the move out of the major resistance on SPY (around $160) is confirmed, I will enter trades in the ETFs that were definite laggards. My current candidates for fishing: EWZ, XME, EWC, EEM.

Happy trading,

Eva

Re-enter the trade?

Posted on March 26, 2012 by Eva Zaleski

How should I know when to re-enter a trade after cashing out from a swing trade? It is always a probability game and weighing risks/reward.

There is one simple test that I use in addition to examining the charts:

The equity (I trade only ETFs but it should also apply to individual companies) broke out and confirmed the new trend – I will re-enter the trade

The equity broke down and it is oversold and approaching a significant support – I will look for an extreme low and re-enter

The rules for setting the targets for such trades always go back to my general rules: sell at resistance. What if the equity broke out and there are only blue skies above? I don’t worry about that right now because all ETFs that I trade have some sort of resistance ahead of them.

Let’s look at MDY.

I cashed out a trade on March 19th. It was one of the trades that it took quite a long time to reach the target. What is my risk/reward for re-entering the trade at current level? Not very good. We are squeezing in a rising wedge, with possible H&S (neckline at $173). Possible negative divergence of price and MACD. Rising volume on recent selloff days. And no fear in the market………

I am not ready to re-enter MDY for a swing trade yet. However I entered a trade on March 22nd from an hourly chart around $179 (you can check my earlier blogs for my favorite setup). I am still in this trade. Considering the fact that my swing trade “test” is not working yet for this trade I will not let it go negative for me.

What do I mean by that? I entered this trade as a high risk if treaded as a swing trade. To lower the risk to my accepted level I will perform this trade strictly as an hourly trade. I have a target in mind based on significant resistance levels from the chart. If MDY struggles and goes below my cost – I will exit. For me it would be a good enough indication that it was the wrong trade.

Eva

Is a change coming?

Posted on March 19, 2012 by Eva Zaleski

It’s always a matter of time for the market conditions to run the course. “What is next” always brings life to trading. With the market, “on surface” very quiet (VIX extremely low by historical standards) we always need to keep searching for signs of change.

I like to use relative charts to try to spot potential changes. The challenge is, as usual, that once I find a chart that looks like a signal, I can’t tell if it’s going to be meaningful.

Let’s look at the relative chart of TLT and UUP within last 9 months.

The ratio kept between 5.20 – 5.40 for several moths. And then something changed. On March 13th TLT sank on what looks like the Fed Statement made some impression on the market.

“The Committee expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.”

TLT is testing the support of SMA(200). Ready for a bounce or a significant drop? The move up in rates would not be welcome by the market but it would continue pushing money out from bonds.

Is it anticipation of interest rates going up that pushes bonds down by money moving out of bonds? At least it looks like what happened recently. Is it a lasting shift or just a blip – we never can’t tell while it is developing.

After checking the daily chart of UUP I still don’t have an answer on the direction of TLT.

The Friday’s candle was a “selling” day. Would there be enough force to sell the dollar to break down from an up trending channel?

What about the cozy rule of “dollar down, TLT down and market up”? Is it still true?

Eva

Zoom out!

Posted on March 12, 2012 by Eva Zaleski

I spent three weeks talking about walking the Bollinger Bands on the hourly chart. I hope that I covered the idea for now in enough detail…

Time to zoom out and look around.

Lets start with the daily chart of XME to see what direction it took us. Last week I wrote “The daily chart looks inviting for the bears with the 3rd close below SMA(50) – look at the possibility of SMA(20) crossing below SMA(50). This move would indicate a high probability of XME trip toward $48 or even $45 (check the weekly chart) before completing the pullback.”

And it did -XME tested $48. Look at MACD synchronized with the SMA(20) cross under SMA(50). Look at W%R “bounce” of the extreme low of 100.

These indicators worked this time in tandem as they should have. It is beneficial to watch for any anomalies – if they happen it’s an important signal.

Look at the Friday 03-09-12 candle – it shows that XME got pushed back from the resistance at around $51. Notice how many times in the last 6 months the zone $51-$52 played the role of resistance/support.

You may keep drawing more lines to look for more “zones”. I included some of them in my daily chart above.

Check the year long daily chart of UUP:

It shows that UUP is traveling within an up-trending channel.

You may say it is not exactly aligned with the shape of XME. However you may notice that turning points on both charts are still pretty synchronized. Check the dates on both charts: 10-4-11, 10-31-11, 11-25-11, 12-6-11, 12-19-11, 2-7-12, 2-16-12, 2-29-12, 3-6-12 – reversals in opposite directions on same days! Pretty close!

This time the “rule” should continue. If the “rule” like this stops working, that would indicate either an “anomaly” or an underlying shift in market dynamics.

A break down of the UUP channel should push XME much higher. If UUP continues the march within the channel – use the turning points as indicators for your trades.

Eva

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