Possible Double Top

It was a very interesting day today. What started out as another gap up and continuation certainly did not end that way. The buyers were very eager this morning as Geithner was answering questions about the economy to a congressional committee.

In what can only be described as 'panic buying', the indices marched straight up right from the open with very little breathing room. You either had to chase or be left behind. The ES emini futures topped out at around 923 - right at last week's highs and filled the gap from last Monday 5/11.

That's when the sellers stepped in. The selling was intense and accelerated in late afternoon. ES ended the day right at 900, while the Dow Jones retreated all the way from around 8600 to close at 8422. The daily chart of the SPY shows that we are in a very congested area, with a tightening triangle forming, along with a possible double top. The 'glass half full' argument would debate that we may be forming a Cup with handle that will be triggered with a push above today's highs on volume. There is a valid argument to be made for either case, but the fact remains that until this area gets resolved one way or another, it is going to be very choppy. The weekly chart is still overbought and the stochastics have crossed, but the sell signal will only be triggered if we take out last week's lows.

The next few days will be key again for the market. There are support and resistance levels galore, and one of these levels will have to be taken out. Although I am leaning for a correction, I am prepared for either scenario. Ags are looking mighty ripe for a correction, as are energy, solars and coals. Gold and oil look good for a continuation.

Stay alert and good luck with your trading. I'll see you on twitter.

Bear in bull's clothing, or more bear stew?

The pullback week that we have all be waiting and yearning for is finally here. After a historic monster of a rally, stocks took a much needed breather last week with the indices down between 3-5%. However, some sectors took bigger hits, e.g. XLF, IYR, XLE and XME were down between 6-11%. I think it is safe to assume that the 'character' of this rally will be tested in the coming week, if not the next few days. Is it a bear in bull's clothing, or is the bull setting up a trap for more bear stew?

This move sets up a much important test for the market. Many stocks are at 'logical' pullback buy points - whether you are looking at stochastics, CCI, MACD, etc. or simple pullback chart patterns. Additionally, many stocks are resting at the 20 or 50 MA on daily charts. Declining 200MA resistance still sits comfortably above the majority of stocks and the indices. Usually, the first test of this resistance fails, and the second test on strong volume is a good indication of a recovery in the chart pattern.

Although the daily charts do look very promising technically, the corresponding weekly charts are pointing to an even more significant pullback if the lows of last week are taken out convincingly. The SPY weekly is setup perfectly for a stochastic sell signal on the weekly chart and has historically been a very accurate indicator if/when triggered. Obviously, this does not mean the same thing will happen. It is very possible we may not even retest or breach the lows of last week. Also remember, that there are now 'trapped' longs who jumped in late on this rally and will be anxious to 'break even' the longer we do not get back up to the highs (more fuel to the selling fire).

Additionally, my TA system is showing a strengthening of the US Dollar vs. Euro and GBP, which could adversely affect commodities and oil - meaning a more severe pullback might be in store. Furthermore, MOO closed with a 'doji' on Friday with above average volume. Ags have been unstoppable the last few weeks and are due for a pullback, especially with the 200MA in close proximity as resistance.

In conclusion, I think it is safe to assume that this is becoming more and more a stock picker's market. Focus on the strong stocks in strong sectors for long positions (i.e. the leaders), and short the weak stocks in the weaker sectors. There is no shortage of watchlists for both longs and shorts in this market, so be prepared for both scenarios and look to book profits when you have them.

The burden of proof now lies squarely on the shoulders of the bulls. Is the worst over? Will more banks fail? Is unemployment going to hit 15%? I don't think ANYONE really knows the answers to all these questions. The market will let us know in due time. No need to guess or force our opinion on anyone, including the market. Prices are THE best leading indicator - follow the market for your cues, and stick to your trading plan.

I hope everyone had a great weekend and is ready to make some profits this week. Good luck and I'll see you on Twitter.

Assessing the damage

Well - it sure wasn't pretty! Actually, the adjective that comes to mind is: Ugly. That's right, it was downright ugly today. If one were to pick up a newspaper (like anyone ever does these days), or go to Yahoo and see that the indexes were down around 2-3% they'd probably think 'Ok, not too bad'.

But the real damage was 'under the hood'. Yikes. In fact that there was carnage out there. Steels down about 10%, solars -9%, energy -9%, real estate -8% - you get the picture, and don't even ask about casinos. The momentum stocks got crushed today with losses of 10% and more. Decliners outnumbered advancers by about 9 to 1. The bulls could not even muster the usual late day rally attempt.

When analyzing charts, especially for SPY (or ES), I like to look at multiple timeframes to get a feel for the short and long term trends. The weekly is setting up as a stochastic sell which has not triggered yet. A move below last weeks lows and I believe we are in for more correction. The hourly chart is looking precarious - trend lines that extend all the way back to Mar 10 have been broken for all majos indexes, and the 20MA is about to cross below the 50MA. This was attempted several times in the last several weeks, only to be reveresed rather quickly with a resumption of the rally.

It is obvious, and quite healthy, that a pullback was needed in this market. Many people (myself included) who don't like to chase have been calling for some consolidation, and an opportunity to get on-board. This is the bulls chance to show the rally is for real. The daily chart still looks intact and bullish - we are still above the 20 and 50 day MAs. There is some strong support in SPY around the 87 area - if that gets taken out easily, then the next area of support is around 83-84.

Fundamentally, it became rather obvious with today's retail numbers that the consumer is still ailing and the economy may not be rebounding as others would like to think. Unemployment is still rising, and the treasury bond yields are rising as well. The bulls have a lot to overcome here.

Regardless of what happens, there should be some fantastic opportunities to profit in this market - long or short. Remember to stick to your plan and take profits when you can.

Good luck with your trading.

Some support and resistance levels to watch for

I watched some absolutely phenomenal analysis this weekend by great traders like @tickerville and @HamzeiAnalytics. Traders I would not have known or met without Twitter.

In addition to the great analysis already done, I wanted to get some charts out on SPY, QQQQ and VIX to show where some of the support and resistance areas might be and perhaps watch for signs for reversal or continuation. The first thing to notice on SPY and QQQQ is the fibonacci retracement from the pivot high to the low. We are sitting right at the 38% retracement level. Does this mean it's time to short? Absolutely not. We just need to watch this level to give us some guideline on the next move. Also notice the proximity of the 200MA to this level in both ETFs.

The other level of support/resistance is called MOB (Make-or-break) which is an eSignal proprietery indicator. Notice historically how the price either bounces off this level, or continues in the same direction after going through. It is an important tool in my analysis as it acts as a 'magnet' for prices and in most cases the price will often test this level.

For SPY we are at that level (MOB and 38% Fib Retr), with possible continuation to the 99-100 level and then pretty strong resistance around 106-107. A slight correction would take the SPY to around 81-83 level, a more severe correction to around 75, and a really severe correction takes us back to the lows.

Similarly, QQQQ has tested the MOB on a couple of occassions, has gone through the existing MOB level, and next areas of resistance are around 36, and very strong resistance at 38. A slight correction will take the QQQQ back to around 31-32 level.

The VIX is currently sitting at an important MOB level and I am 'expecting' a bouce here in the coming week. The next areas of resistance are around 40, then around 50 and 56-57. The thicker the MOB on the chart, the more powerful that level of support/resistance is.

Please remember these are just points of reference and NOT meant to be hard targets. Historically, prices gravitate towards these points, but not always. A reversal at a point just means there is a good chance for a trend reversal. A continuation through the levels means just that - trend continuation.

One thing for sure though, I believe the market is setting up for a buy on pullback. Additionally, any shorting of stocks should happen on weak stocks in weak sectors. For now, I'd stay away from shorting the leaders, such as financials.

Just some additional things to think about on a lazy Sunday afternoon. :-)

Quicksand...

Happy mother's day and I hope everyone is having a great weekend.

I was reflecting on my one year anniversay of being a day trader, and I went over my records and journals to see what mistakes I have made and the glaring weaknesses in my trading. It is interesting to see the evolution of my trading during that time. I must admit, I have adapted and tried many different styles and strategies. Some were good, some were bad. Overall though, I feel I have settled pretty well on my strategies and style for day trading as a means of making a living. It is also interesting to see that most of my losses were mistakes made by ME, and I had no one to blame but myself.

In going over my journals, I noticed a few times where I made one common mistake. The last time this happened was in October last year where I lost 15 times more than what I had originally lost in that day. Becasuse I was trying to recover my initial profits and eventual slight losses. It was probably the wildest trading day of the year (maybe ever) where the VIX spiked to almost $90. Remember that day? I sure do. I'll never forget it. I was lucky enough to recover from that day - but it taught me several extremely valuable lessons. I always fear making this mistake and I believe I am overcoming that emotion.

If you've watched the movie The Replacements with Gene Hackman and Keanu Reeves, you'll know what Quicksand means in reference to football. The coach (Hackman) asks the team: what is your greatest fear? The QB (Reeves) replies: Quicksand. Things are going well for you, then you start making mistakes. All of a sudden it's a downward spiral and you cannot control the sinking - like you're in a quicksand. The Detroit Lions are very familiar with this concept - clutching defeat from the jaws of victory.

But seriously, I think the same concept applies to trading and has happened to me on a couple of occassions. You are making a profit. Then a couple of quick losing trades and you are now down. You want to 'make up' your losses and your emotions and fear rule over logic. You are now trading recklessly and pretty soon you are down a lot more than what you were trying to recover - Quicksand. Overtrading.

It took me some time, but I was able to overcome this by putting a limit on myself. If I make 3 losing trades in a row OR I lose 2% in one day - I am out for that day. I stop trading, regardless of how 'good' setups are. It is important to understand that there are opportunities to make money every day in the market. Wealth is accumulated over a period of time and many trades, not in ONE trade.

As you look for opportunities to go long or short in this market, make sure that you are following you trading plan and set rules for yourself on risk, profit, losses, etc. It's the only way to ensure consistency and survival in this business.

Good luck.

What's my stress?

So, finally, the stress test results are out. Surprised? Shocked? Stunned? No.

Do you feel it was a scam? The banks will fail? Or do you feel that we are out of the woods and 'green shoots' everywhere?

Ok, here is my opinion - I DON'T CARE! Sorry, don't mean to shout. But these are things that I have absolutely NO control over. And to me, it's all noise. So, why should I be worried about what the government thinks about the banks. Even if ALL banks failed the test - it has been demonstrated that money can and WILL be printed to 'let no bank fail'.

The only thing I concern myself with is PRICE ACTION. I react to the market. Let's face it, I am not one of those traders who 'positions' in front of news and anticipates reaction to news. A) It's not my style, B) I don't have deep pockets, and C) I don't have the analysis and experience necessary to do that. In any event, by the time you see it and position yourself, the BIG BOYS are already ahead of you.

So, what's my stress? Not seeing my price patterns for trading and not getting any buy/sell signals from my indicators. That's it. I am only worried about watching the action unfold and recognizing price patterns that fit my strategy and trading plan. Once I see it, I will trade it. My focus over that last 9 months has been and will continue to be, intra-day price action. I am not interested in holding anything overnight for now. I absolutely love this rally, and when I see good setups, I feel confident that I will start swing trading again. We need to let the dust settle and let the market prove to us that we are out of the woods, not hear it from some CNBC analyst.

The job numbers are out and futures have retraced a bit. I am still 'expecting' a minor correction - but who knows with this market, one day may be all we get for now.

Good luck in your trading and I'll see you on Twitter.

Will BAC be the catalyst for a correction?

A story is breaking this evening at the Wall St Journal regarding BAC needing an additional $34B in capital to survive. This news has caused the futures to dip quite a bit. So, I wanted to take this opportunity to post an update of my thoughts on the overbought indicators I am seeing on the SPY.

I read a post earlier by Keith Shepard (@keithshepard) where he talks about the NYSE Bullish Percent Index approaching overbought levels, and how it might be time to be defensive. On the SPY chart, I have included the traditional Stochastic and RSI indicators on a weekly chart. The stochastic is setting up as a high percentage low risk sell, but is yet to be triggered. 1 or 2 down weeks will trigger this signal and the market should go through some correction - how much is yet to be determined. My initial target would be around 80-81 for a minor correction, and around 60-63 for a more severe retracement. The RSI indicator is also overbought at these levels and one can see the historical response to these levels on the chart. Declining volume over the last few weeks is also of some concern.

The question we have to ask is: will BAC or stress tests results or any bad news for that matter, produce enough of a catalyst to induce a round of profit taking. If so, then the next dilemma becomes do we buy the pullback or watch this market sink to new lows? One step at a time. Let's get a pullback first and then we can react to the market as it unfolds.

I personally think a pullback is going to provide some fantastic opportunities for longs in leading sectors.

In the words of the always real @tickerville: Let's keep it real.

Good luck.

False breakouts? Or something else

I hope everyone had a great weekend and is ready to get back to work next week.

This market just refuses to give anything back. Every little intra-day dip is being bought without any fear. A little too complacent in my opinion. Volume has just been not very impressive the last few weeks. However, volume or not, the points are racking up on the SPX and DOW and we continue to march upwards. There are still heavy resistance levels overhead and this week's news should provide some direction. April unemployment data is coming out, and it will have to be absolutely disastrous numbers to even make a dent in this market. The bigger news is the stress test results. The fact that the release of the results was postponed on Monday is not a very good sign - but that's just my opinion.

Looking through charts over the weekend, I could not help but notice a divergence in chart patterns. No longer do all charts look the same as has been the case for the last, oh I don't know eight/nine months. Many stocks are breaking out either from a cup and handle, or forming the right side of a cup. Last Friday, many energy, commodities, ags and steel names ripped higher on strong volume. I'll definitely be keeping an eye on these sectors for longs the coming weeks. The only problem I have with breakouts at this stage of this rally, is that we have come too far too fast and personally, I will not be chasing this strength. Mistake? Maybe, but I'd rather miss out here and let these stocks consolidate until I find my setups.

On the other end of the spectrum, bios are looking very precarious and teetering on the edge of collapse. Almost every bio stock retreated noticeably on Friday on heavy volume setting that sector up for continued weakness. Many housing, financial and real estate stocks are setting up for short opportunities this week as well. I believe some of the regional banks may be in trouble, and all you have to do is look at some charts of the weaker banks to see how they are setting up for more downside, e.g. ZION, RF, STI. Watch this sector very closely for short opportunities.

It is clear though that the leaders are emerging and setting up for continued strength as/if we move out of this bear market. At the same time, there will be lots of weak companies that will setup very nicely for short opportunities.

Stay vigilant and take profits while you can. This is one tough market to figure out. Good luck next week.