Tag Archives: EWZ

What if the market breaks out?

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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

12 months have come and gone (Part 1)

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That was fast! What are the results? Very mixed.

My accounts are slightly positive on average. However this is not satisfactory for so much work that I had put into trading.

With market being negative for the year so far, it is very little comfort. It is time to revisit the approach and the trades in more detail.

So far the approach to my trading proves itself. The bigger challenge is to continue to tune the size of trades under the market conditions. I do not want to just outperform the market on relative basis. I am targeting to consistently make real money every year. It is always work in progress.

Below is the list of ETFs that I follow. I do not trade all of them. I am most comfortable trading MDY, EEM, XME, SMH, EWC and EWZ.

“%GL” is the % from the top value reached within last 12 months. The market is under pressure to say the least. XME retraced almost 40% from the high. You can’t just buy and hold.

Look at the chart of XME:

XME121811

XME seems to have formed a triangle oscillating around a center line of about $60. Holding XME in a portfolio for long term doesn’t look appealing. However XME as a trading vehicle is quite predictable if performed with patience and proper risk management.

ETF Performance

Symbol%GLLast
SLV-40.33$28.85
XME-36.88$48.88
EWZ-36.88$56.94
XLF-27.09$12.54
EEM-25.60$37.52
EWC-25.48$25.76
EFA-24.89$48.34
EWA-22.79$21.89
EWJ-22.18$9.05
SMH-20.83$29.12
XLE-18.24$66.14
IWM-16.76$72.26
GLD-16.48$155.23
MDY-16.08$155.22
IJH-15.91$85.56
SPY-11.36$121.59
QQQ-7.55$54.86
UUP-3.89$22.49
TLT-2.14$122.32
TIP-0.87$116.97

Looking for similarities

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I check once in a while if any of ETFs form similar patterns. Why?

When I identify that some ETFs trade somewhat together, then I can just choose the one that looks more predictable, has higher beta or has a better entry point and use it to put on a trade.

When I trade, an answer to the question: “why?” is much less important than an answer to the question: “what?”. However finding that some ETFs don’t follow the same pattern, keeps me on my toes for monitoring possible pattern changes.

I take nothing for granted. When a group of traders “decides” that they see a specific technical formation and the news gets out, more traders also see it and act on it. With time and aggregate volume the trade is “done” – there are very few new traders getting on board and they will go hungry soon.

Try to watch a group of antelopes, for example, feeding on grass. A leader will find a new fresh green area and the crowd will follow. Slower ones will get there last when all the grass is gone already. The process repeats…

Do EWZ and EWC look similar? I think so.

For the next 3 weeks I will be trading from Europe. It will be quite interesting to get exposure to their media interpretation of recent events.

Eva

Playing the catch-up game

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I do not chase the trades. It’s against my rules. I rather look if there is anything, from my selection of ETFs, which might try to play a “catch-up” game.

Most of the time I find at least couple of candidates, as it was the case this time.

What do I look for? Good risk/reward: ETFs that have a support with lower risk = closer to the support and enough room until resistance.

Why does it work most of the time? Possible reasoning: a lot of traders will be thinking to catch something. They will not want to miss the market move. They will look for what had underperformed and has to “return to the median” etc.

This time I had my eye on EWZ and EWC (see my previous blogs).

On June 27th SPY was fighting for life at deep waters of SMA(200) with MACD trying to cross over.

On the same day IWM was already in a better shape, fighting for life at more shallow waters of SMA(20), but below SMA(50). I like that! It was time to look for “underperformers”.

EWZ was in the open deep ocean waters, far below SMA(200) but with support around $70 (see my blog “Who took the money?” From June 20th 2011)

Here was my choice of low risk, good reward trade under the conditions of a good market.

So do not chase and do not despair, look for a good trade within your rules. And, of course, always manage your risk.

Happy 4th of July!

Eva

Who took the money?

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If you keep trying to catch every possible trade in this market you are probably giving a lot of your money to the market and your broker. Don’t do that. Make only high probability trades and know your risk management!

With the market happily singing “buy buy buy” just a few weeks ago and lots of traders in love with their portfolios, now suddenly a parade of bad news: Greece, US debt, earnings warnings etc.

Was that all really sudden and unexpected? No, not for those of us, who know how to read and watch the news sometimes. Greece is not the only one that is in trouble, US debt is not going away. And the earnings surprises come and go. BTW, who knows if the estimates were accurate to begin with?

The market is not really moving because of all these news and surprises. The news and surprises impact the market to a small degree, sure. If you throw a stone into a river, do you change its flow? No – but you may create some splash or waves.

The movement of money moves the market. It is a combination of your retirement money, your savings that you “invest” or trade trying to make more of it (because your bank pays you interest close to zero), pensions that are managed for you, but also a lot of risky bets using a lot of leverage by sizable funds.

When markets are happy the leverage goes up fast and pushes the prices even higher; the same mechanism is working when the market reverses the direction – the leverage is removed quickly and so is your “real” money.

Initially, we never know the reason of the reversal, we do not even know if it is a reversal.

Let’s try to predict the next move in EWZ. The 4 years weekly chart of EWZ, looks like its consolidating in a narrow range with some interest from buyers around $70.

EWZ 4 Year Weekly Chart

A closer look at 1 year daily chart of EWZ shows a trading range $70 – $81. EWZ closed last Friday at $70.89 close to lower BB, MACD falling, W%R trying to turn up.

EWZ 1 Year Daily Chart

10 days hourly chart of EWZ is showing some life with some buying over last sessions. Was it enough to get ready for the push over $72-$73, resistance zone?

I see possible scenarios:

  1. EWZ holds $70 but gets stopped in the $72-$73 zone
  2. EWZ holds $70 breaks above $73, but gets stopped around $75. If breaks above $75 with nice volume, the probability of testing $79-$80 will be quite good
  3. EWZ does not hold $70 and continues within the falling channel toward the next stop at around $66-$67

Entering a new trade in EWZ here doesn’t have a good risk/reward for me (see the resistance/support levels within scenarios). For long trades, I would rather wait for a drop to $66-$67 to play the bounce toward $70; or enter on a move above $75 with a good intraday and 10 day hourly setup.

Eva

Don’t ignore VIX signals

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I have heard many explanations how we should look at VIX and what the levels of VIX mean.

My usage of VIX is rather simple: daily chart of VIX for 10 day hourly charts or daily charts trading; five minute intraday chart of VIX for intraday trading. I just apply the general technical rules to that chart to assess the probability of market direction.

In my last blog “Waiting for a longer term resolution” I wrote: “The way the daily chart of VIX looks recently makes me very careful short term.”

What I noticed on the daily chart of VIX a week ago on Friday was: 1) fell below support of 15.5 but was retesting the low from 4-20-11; 2) fell outside the lower BB and was retesting (this one I like especially for a good probability of a snap); 3) MACD histogram was sloping up and MACD lines were ready to cross.

Adding to that the craze in metals (see my mention of parabolic chart of SLV and rising wedge on GLD in my blog “What happened to $?” from two weeks ago) the chance of a market pullback was growing high. Traders know that parabolic moves and rising wedges are bearish and require attention.

Where do we go from here?

Last week’s sell off was nice, but was it enough?

I am looking for opportunities of trades in commodity related ETFs – possibly through EWZ, EWC.

SLV and GLD are trusts. “The purpose of the Trust is to own silver/gold transferred to the Trust in exchange for shares issued by the Trust (iShares)” (Reuters). I think that as such, when the buying hysteria reaches critical mass they may become markets themselves. Why this happens: buying of trust shares, requires buying of more metal by the trusts and that pushes the price of the metal up – and so on. The opposite should be true in panic selling. Very often the shares of trusts will trade higher (or when panic approaches bottoms, lower) than the commodity.

As a rule I avoid trading shares of trusts…

EWZ seems to be in long consolidation – ascending triangle. Many traders by now got used to: “sell at $78- $82”. It will be very interesting what happens if this one is broken above $82. For now I am just trading this one on a 10 day hourly chart basis.

Another possibility is EWC, with nice support $28-$30. I am also trading this one for now only on 10 day hourly chart basis.

And – do not forget to check what our $ is doing. The reversal of last week caught my attention.

The possibility of testing the resistance around $22 is high. The bounce in $ should limit the upward moves in EWC, EWZ and commodities related trades.

Eva

Left out in the dust?

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Do you feel sometimes like you missed a major move in the market? Do you ask yourself “what was I doing?”

Maybe you were listening to the “Sirens” from my previous blog?

Look at QQQQ on 5 year weekly chart. While the market “gurus” were talking that the market was overbought and due for a big pullback, QQQQ moved quietly above the decade high! Wow. How could that be? It looks like a large H&S with the neckline around $50-$55. It went through it without a fanfare.

I do not trade QQQQ but I like to check how it’s doing once in a while.

SMH is also trading in what appears a slightly tilted H&S, just above the neckline.

Look at IWM, MDY, they look similar:

IWM 5 year weekly chart looks impressive. What looked like a correction in 2007-2008, was followed by a large 6 months plunge of 2008-2009. It boldly climbed up for 13 months and went through a 6 months long correction of April-October 2010.

Currently IWM is trading against the resistance at a high from July 2007. It has not retested the support of $75 after it went through it at the end of November 2010 (then a resistance). MACD flattened.

Look at daily IWM. IWM tried to correct in January, 2011 – SMA(50) held at low BB. It started correcting again Feb 18th 2011. Is it going to hold SMA(50) or retest &74-$76 area?

Look at SPY 6 month’s daily chart. Look at how it traded in November 2011 and how it’s trading now. Apply to your charts: MACD(12,26,9), BB(20,2.00), SMA(20), SMA(50), SMA(200), W%R(30). I don’t like to overload my chart with too many indicators however for this exercise you may also look at RSI(14) or STO(14,3,3). The current correction looks similar to the one from November last year so far. SPY may retest nicely SMA(50) but it also may try to retest $120-$122.

I will keep this chart in front of me when I trade this week to make sure that I tailor the risk accordingly.

Maybe, just maybe, the market will give me a nice entry for a longer term trade (longer trade for me is longer than couple months). On longer term trades I use 5 year weekly charts to manage the risk (support/resistance levels) and 6 months daily charts to define more precise entry/exit points.

I start looking for good entries on ETFs that may correct significantly (10%-20%). Keep in mind that ETFs with high beta (XME, SMH, EWZ, XLE, EEM) very often correct around 16-20% while SPY may correct only 6-10% in the same time.

Can we correct more, much more? Sure! But we can also: break out and continue push up, or just correct 10-20% before a bigger move up. Observe the market for clues.

Below is a list of ETFs from my watch list:

ETF % Pullback from last significant high Last Close
EWZ -10.54 $73.14
XME -7.92 $68.75
SMH -7.69 $33.95
EEM -5.29 $46.03
EWA -5.27 $24.97
XLE -5.19 $75.11
EWC -4.74 $32.59
IWM -4.29 $80.18
EFA -4.26 $59.34
XLF -3.84 $16.54
MDY -3.11 $173.25

However if the market decides to keep pushing up and up regardless of “the sky is falling” messages from the media I will continue trading at these levels but decide to switch some of my current long entries from “short term” trading to “longer term” trading…

Eva

Why ETFs?

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Last week I was on the road with limited access to the computer and very limited new trades.

Let me start with addressing a general question about trading ETFs: where to find information about ETFs, would I trade TZA, etc.

If you are interested in specific ETFs read about them on Yahoo Finance, or go to the source (iShares , ProShares, etc).

It took me several years of trading to make a decision to focus solely on trading ETFs. I limited the selection based on my observations over the years which ETFs trade in a way that I can predict the next move with a better probability. ETFs, also like stocks, have their “behavioral” patterns and volatility. Some of them are more predictable, some less.

I want in my selection: volatility, market segments/industry/international that can move faster or are significant for the market direction.

I am not interested in researching why they act the way they do over time. I am mainly interested in noticing the patterns and assessing the next move and the risk.

Why do I use the narrow group? It’s a selection I am most familiar with and that familiarity gives me a better chance to be consistent with my trades. I prefer to trade IWM over TNA. I do not have a need to juice up my trades. TNA is too fast and never gave me consistency of trades. A simple choice: do I want to make money slowly or loose it fast? I chose the former.

Why don’t I trade TZA? Not in this market first of all. Why would I want to waste my energy to swim against the currently prevailing market force?

It is true that RUT is close to all time high. What is the next segment of the pattern? Is it going to be a double top or a breakout? I don’t know. I am certain that nobody knows. I will just keep trading…

Look at the most recent 10 day hourly chart of IWM. Check my blog from January “Buy at Support – Sell at Resistance”. The setups keep coming.

IWM 14 Day Hourly Chart

The ETFs that I trade frequently are IWM (for non IRA account) and MDY (for IRA account). These give me the broad market of small and mid caps with volatility. For these ETFs I manage risk without using stops. Instead I time the entry based on charts, use the position size and modify frequency of trading. I do not have a loosing trade doing that however my risk is in time how long it may take to make money on some of the trades.

When I trade EEM, EWC, SMH, EWZ, XME I don’t use initial stops. Instead I time the entry based on a chart and write a plan for next trade: levels of support/resistance, buy points, partial trades. However once I have a winning trade I mostly use the technique of rising stops to avoid turning my gains into losses. Very often I may decide to exit if market is giving me mixed signals.

It is much more productive to take the money when I still have it and look for a fresh opportunity vs. sitting in a winning trade with a growing chance of a reversal at resistance.

I don’t put more than 10% of my account value into a single trade. I define a trade as an event in time on the same ticker. This way I may have a position that is bigger than 10%.

I am never fully “invested”. I am a trader so I need cash for trading…

The market is an always changing formation which I respect a lot. I do not trust it though.

Eva