Tag Archives: IWM

Reading charts to decide on the next step?

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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…

IWM Daily Chart

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

TNA 5 Minute Chart

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.

TNA Hourly Chart

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

Next winner: Weekly or Daily

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What should guide the trades this week?

Some ETFs I track show H&S on weekly charts (EEM, EWC, XME). These H&S started when the market took off in July 2009.

See weekly chart of EEM: left shoulder top around $44 in January and April of 2010, head around $50. Now approaching $44 – is that right shoulder or just a stop on the way toward $50 within a triangle?

Daily chart of EEM shows base building with resistance at $44. EEM currently testing SMA(20) and above SMA(200). SMA(20) and SMA(50) pointing up already. MACD positive but topping.

SPY already broke out from a similar base on the daily in January 2012. DIA, IWM, MDY, QQQ look similar or better.

Are ETFs like EEM, EWC, XME going to break down while the market keeps moving up? I doubt it. Either these ETFs should improve while market moves up, or they are flashing a warning sign for all of us.

As for my trading: I stay focused and disciplined, and trade what comes available with good setups (see my blogs from last year).

Eva

Traders Fatigue

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Is that wishful thinking or I am just getting tired watching these dramatic market moves? I just reviewed some of the major 5 years weekly charts and I do NOT see a confirmed downtrend yet.

SPY looks like it is retesting the breakout of last November from bullish inverse H&S, “tilted to the right”. It is quite possible that the test will not hold at the right tilted neckline (currently around $115) and we will see a pattern of new bearish H&S with a neckline at around $100 being tested. This would be a bearish development that would finally lead to confirming for me the downtrend on the weekly chart.

The other market ETFs look similar IWM, MDY, QQQ with the latter looking the best. However they have a common problem: MACD is weakening.

The trades from 10 day hourly chart were finally working last week (see my previous blogs for the setups).

Being a disciplined trader myself I do not have to trade every day – and I don’t. But being a trader – I would like to start getting more “traction” in my trades. Without solid setups beyond 10 days it’s hard to commit bigger capital.

So back to watching the market and improving my work!

What about daily charts? Take SPY – at support of longer term, consolidating but not giving up yet, with MACD trying to fight the bottom, it may have a chance to test SMA(50) and $125 resistance.

Currently there is no solid entry point with good risk reward ratio. SPY closed at $117.97. Support at $110 and resistance at $121.5 – too much risk.

I like to enter trades when everybody is running away. And I did, when SPY was testing $110 on 8-18 (I used MDY). Part of the trade still has to work.

Eva

Not My Money?

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Lat week I wrote about the “sunk money” phenomenon. I used a hypothetical trade, not a recommendation or any description of a setup that I would use. However I am sure lots of traders got themselves involved in IWM the way I just described in my last blog.

Now let’s see how a trader that got into an IWM long trade at a much better entry could reason.

Possible long entry between March 21st and March 24th (we can find many explanations why any of these days is better than the other one, but it really would be splitting hair) at $81.

IWM 6 Month Daily Chart

Everything looks good and we are making money happily rising our stops. On April 6th MACD is at a high range, but we are not exiting to lock the gains. There is that strong temptation of making more money. We decide to place the stop at close below SMA(20). Please remember this is not my setup, or any recommendation, this is just an example of how many traders acted.

Oops! April 12th – we are caught during the day trading below SMA(20). No, we’ll not exit – we decide to exit next day on a bounce. Another oops! IWM is not bouncing enough. We decide to move our stop to get even at $81. Lucky us! IWM holds it and resumes the move upward toward $86!

Handling that pullback was much easier because we were still above our cost. There was no pain of “sunk money”. It was just a possible pain of giving up possible gains.

Now you can try to continue to walk through the scenario from my last blog but still with your trade of IWM at cost of $81 per share.

How does it feel now? There is less pain if IWM pulls back but holds above $81. The pain starts when IWM gets below $81 (“sunk cost”).

Knowing how we react to loss helps us manage our risk.

Why so many traders, even experienced ones, go through the full cycle of gain/loss to just exit a trade with a loss? PSYCHOLOGY!

Master your reactions and the technical knowledge will work better during your trades.

Eva

“Sunk Cost” Trap

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Trading is a losing proposition for many. For me one sure thing in trading is risk. Can I manage my reaction to it?

If I am one of many technical traders, and most of them have access to very good technical platforms, often better than mine, training, news etc. how can I beat them? The only way that I can attempt to excel in, is controlling my emotions and use that skill to “outsmart” other market participants.

I am looking for typical behavioral “loosing” patterns of the crowd to find what I can do differently. By acting differently I can increase my chances for a better outcome.

One interesting behavior in economics, and financials, is “sunk cost”. It is very difficult to make a decision to walk away from an idea after investing some money in it. Traders have emotional problems exiting loosing trades and tend to hang on to them for much too long.

Technical analysis helps us to see the areas where emotions may be hiding. Even if you are not planning to trade as a “contrarian” it is very beneficial to be able to spot these areas.

Let’s look at a hypothetical trade of go long of IWM at $86.50 on 4-29-11

  1. Next day reversal and a pullback! Possible thought process: “We are still in an uptrend, the mental stop loss at SMA(50)
  2. 05-05-11 – all good, we are holding SMA(50) and possibly reversing. The hope keeps working
  3. 05-11-11 – another reversal. “It’s ok, we are going to retest SMA(50). Another mental stop at just below $81.40. How low – hard to decide…
  4. 05-19-11 – great! second day close above SMA(50), all good, the hope keeps working
  5. 05-23-11 – wow – what a drop. Now hard to exit at below $81.40, so much money lost real money! What if we hold and reverse! Remove the stops – Hope, hope, hope. Let’s walk away from the computer, forget it!
  6. 05-27-11 – what a “smart trade”! MACD reversing, good!
  7. 6-1-11 – oh, no! What happened? CNBC all scared! Hope, hope, hope… tired… no stops, refuse to accept the loss
  8. 6-13-11 – almost testing SMA(200). Let’s place a mental stop at below $77.50
  9. 6-21-11 – very tired, making a decision to exit once recover the “sunk cost” of $86.50 or close enough

How often we see that scenario repeat? How often we were among these “trapped” traders? How often we exited at point #8 in above list just to see the market reverse again?

Learning to recognize these behaviors and making a plan for yourself how to counter them in your trading helps to “outsmart” the crowd.

The weakness of others should benefit us in trading.

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

Intraday Trade Part 3

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Question: “Since the trend of longer time frame determines the resistance in your set up, I would like to know what conditions have to happen for you to consider the “up trend” change to either consolidation or down trend?”

Let’s continue with day trading for time being. Let’s try to make sense of the setups that are given to us regardless what others are saying. Can we see anything that may work?

The 10 day hourly chart of IWM doesn’t look pretty, does it?

We closed last Friday at the low for the day, which was the lowest of last 10 days. The up trend within 10 day hourly chart was established with the reversal on May 25th from low around $81 and ended with the reversal on June 1st around $84.7. Easy to say after the fact? Sure, it is. But if you trade probabilities, you would have gotten this one right.
I see the down trend currently within 10 day hourly chart (lower highs, lower lows, EMA(20) sloping down, BB sloping down).

Just look what happened in the one time frame up, on the daily chart: do you see we are bouncing in the down sloping channel that developed with the “lower high” on May 11th. I would be lying to you if I said “I new that on May 11th”. I didn’t, however the probability was high that the upper BB may hold. This is why I like trading with BB.

Are we in a downtrend on a daily chart of IWM? I don’t think so, not yet. Look at the line that defines the uptrend from March 2009, through August 2010, until now. SMA(200) is up trending, SMA(20) and SMA(50) for now are flat. I am voting for a consolidation within a down sloping channel for now.

What do I do within consolidation with my day trades? I continue to look for setups and execute, however I am very alert for any possible fun with market running fast through stops if anything goes wrong.

You can use the intraday setup that I described in the recent two blogs also as a warning when not to enter new long trades but wait a bit. Look at what happened at the open on May 31st.

IWM opened very nicely, CNBC was jumping with joy! But wait a second, do you see CCI at +400! This is just a mirror image of the setup I had described. What does it mean? There is a very high probability that it means something exactly opposite to “buy now”. For me it just means “Wait!”

The next similar one was developing at the end of the day on May 31st with CCI around +300. If I were still long in my short term trade at that time I would have closed my trade and waited till next day action.

Currently scenarios for my day trades:

  1. The support established by an uptrend line from March 2009 will hold around $80 and 10 day hourly will bounce here from lower BB and continue toward $84 with some stops on the way
  2. The support mentioned above will not hold and we will take an elevator down to test SMA(200) and support from 5 years weekly chart at around $77.5 (at this point I will become more interested to swing trade for the bounce from this level because the long term trend on 5 year weekly chart would still not be down)

Another observation: market seemed to look for “security” in Swiss Frank and was running away from the dollar altogether. Commodity ETFs were mixed. Many didn’t go up with cheaper dollar, though, maybe with exception of GLD and UNG from the ones I watch.

We shell see…

Eva

Intraday Trade Part 2

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Question: “If there is a lot of momentum, usually there isn’t any pullback…what would you do then?”
Answer: “There is always a pullback. It’s a matter of time. Look at multiple time frames. I never chase, I always wait for a good entry…”

Have I missed a lot of momentum trades when crowds were screaming “buy, buy, buy” – yes, of course. It is always emotionally painful when those momentum trades are in progress, however it is very rewarding after the momentum disappears. Then my setups come and with patience and method I make my good trades.

Let’s look closer at the day trade setup that I described in my last blog, and that repeated on May 25th.

My goal when I day trade is to make money quickly and I don’t care how much I “leave on the table”. I treat it as a gift…There will be another entry and another and another.

Another setup like that was next day on May 26th.

How do you know what is a good setup? I have used this setup for quite a long time. Nothing is 100% certain; however this one has at least 70% probability. It just makes me money. When the trade doesn’t work right away after the entry, it is only temporary and I have to be ready to hold the trade longer (risk management).

Warning! If you read my earlier blogs, you have noticed that I do not use stops (only exception would be a controlled quick exit at market disasters), I am never fully invested, and I use size of trades to manage risk. If you don’t feel comfortable with my approach, you have to develop your own risk management before you try my setups with your own money.

Notice the resistance levels on 10 day hourly chart. Also check what is happening on the daily chart.

To assess probability of a good intraday trade on May 25th:

  1. Daily chart will try to bounce from lower BB (close to support at around $80, MACD at negative extreme, W%R at negative extreme)
  2. Ten day hourly will try to hold lower BB (it will be even better if MACD develops a positive divergence in this time frame and CCI develops a positive divergence as well) – that was developing on May 24th already
  3. Define the support and resistance levels in play for the day (not so hard – just look at the chart and use the levels built most recently on 10 day charts and daily charts)

To monitor during the day on May 25th on 5 minute intraday chart:

  1. After the entry at market open drop with CCI at low extreme (“-200” area, I like that!) and MACD at low extreme on intraday 5 minutes charts and positive divergence on 10 day hourly charts – go, go, go
  2. The probability was high that the resistance at $81.40 will be in play, and it was, I get out. My intraday trades have lower targets than swing trades – just take what was given to me!

To make a decision if you enter this setup you have to decide the risk reward for you. Your gain if you follow the setup will depend on how far away the resistance is. Your risk will be defined by the support and if you are ready to hold through the test of it.

You may use this setup if you decide to hold your trades through the day using the technique of moving stops up, but be ready for pullbacks at resistance levels.

Eva

Intraday Trade Part 1

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Even if you are not a day trader it is beneficial to observe intraday chart for a better entry for your trades.

I do day trade. Not every day, because not every day I can be available in front of my computer with 100% focus.

I prefer to day trade during the first 30 minutes after market opens. I day trade only if I see my favorite setups develop.

I will use IWM 5 min charts to describe some of the trades. I will only trade from the long side.

I always check the daily chart situation to know if my possible trade would develop within a pullback or as a counter daily trend bounce. Why? If it’s a pullback within the daily chart marching up, my target gain has a better probability of reaching at least the level of resistance. When I enter an intraday trade within a counter trend bounce, I take my smaller gains much faster even before they reach resistance.

Let’s see how that worked on March 17th, 2011. IWM was approaching the lower BB on March 16th after couple weeks of falling.

IWM opened more than 0.5% down, falling through its low BB on the 10 day chart.

Quick look at the intraday chart – I have a trade: CCI dropped to an extreme “-300”, IWM opened close to its April support around $81.4

VIX, at open was slightly positive, just about 2%.

I enter the trade with a high probability of the bounce and holding the support at least during the first 15 minutes or even 30 minutes. Target for my gains is just the resistance from the previous day close. That is it, with IWM testing the support on the daily chart I would not plan to “see what happens”, I just take my quick gain and move on.

I always keep an eye on the intraday 5 min chart of VIX:

Any turn up in VIX gives me an early warning to get ready to take my intraday gains very soon…

This was also a very good entry for trading within the 10 day hourly chart, and a daily chart as well – you need to define which time frame you trade and execute. You may have multiple trades within multiple time frames, why not? Just follow your rules on each trade.

Eva

Waiting for a longer term resolution

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Please revisit my blog from April 3rd “The ducks keep coming”. What’s new? SPY is about 2.4% higher when I write this blog at the end of Friday.

Look at the charts: IWM 5 year weekly and SPY 5 year weekly.

IWM is already making new highs. SPY still has some room to run before the resistance at the highs of 2007 and it is running. Notice a sloppy, tilted inverse H&S on SPY, with a breakout above it in September of 2010. Some may say, it’s not a “book perfect” H&S. To me it is a message of the psychology of the market at the strengths of the money behind it.

Look at what happened to UUP and TLT in September 2010.

UUP couldn’t hold a support at $23.25 and those who were speculating about a “double bottom” bounce got caught surprised.

TLT stalled and reversed down (rates started going up).

What else happened around that time? On August 27th of 2010, Mr. Bernanke said in his speech to central bankers that the Fed would “do all that it can to ensure continuation of the economic recovery.”

That is a lot of money pushing this market. Nobody knows how this experiment will end.

Myself – I just keep trading with my eyes on the money. The time may come soon that I will be able to hold my trades longer once we all happily get above all previous highs and sail up, up….

Until, then “buy at support and sell at resistance” for me. The way the daily chart of VIX looks recently makes me very careful short term.

Eva