What You Need to Know About SPY's Change in Character

My recent bias has been short term bearish, intermediate term bullish.  Short term, the character of the market seems to be changing.  Price made a strong reversal on Friday on decent volume.  More importantly, price pierced through the 200 day moving average.  This is bullish.  

The negative volume pattern is slowly losing steam.  While not quite bullish, recent volume puts the distribution pattern in question.

On the chart below, notice that from the start of 2009 to now a "cup and handle formation" has emerged.  This bullish pattern often sets up a continuation pattern off bottoms.  

RSI has changed in character.  It recently made highs and now steadily resides in the to half of the range.  

As we can see, things are looking quite bullish.  So does that mean it's time to go "all-in"?   No, it's not.

There still are some concerns.  The 2009 high is two points away.  This could provide resistance.  Also, in a perfect world, volume would have picked up more than it has during the latter half of the bottom formation.  

A long trade still can be made, but I am still not going with a big position size.  Risk should be managed closely in case of pattern failure, which is a distinct possibility.  

Three SPY Trades

1.  Wait for pullback to bottom of range ($88--89).  Place stop below 50 day ma ($86).  Targets at $95 and $100 (see longer term chart).

2.  Enter now, above the 200 day ma ($92).  Place stop under Friday's price bar ($90).  Targets $95 and $100.

3.  Enter now, with stop under 50 day moving average.  To justify risk, target must be $100.  This is a longer term trade.

This was on excerpt from the Monday's Trade Report. Subscribe to receive the report 4-6 times per week, featuring my nightly journal, market outlook, focus list and trades.

Another Coal/Solar Trade Candidate

The chart speaks for itself. Ideal entry is at the bottom of the trading range.

Today's Trade: PCX

I entered 400 shares of PCX at an average price of $8.66.  My stop is around $7.40 and my initial target is $10.50.  This gives me a 2:1 reward to risk ratio.  

As noted in the blog and report last night, the coal sector looks great and PCX shows strong accumulation and a bull flag setup.

Those looking to enter can do so at this level or better yet, on a slight dip.

Sector Watch: Coal

Coal is currently one of my favorite sectors for long trades. Among coal stocks, PCX has one of my favorite patterns. Entry at the bottom of the bullish flag consolidation range is ideal.

Today's Trades: SKF and SRS

I used today's strength to enter two bearish focus list stocks today, SKF (financials) and SRS (real estate). Both are inverse shorts. Note that strong volume pattern during the price consolidation range.

There is still room to pullback, so I used small position size.

300 shares SKF at $44.11

400 shares SRS at average price of $20.91.

Stops are place below recent lows.

Coal and Solar

I like the Coal and Solar sectors. I will probably enter one or two stocks from these sectors on a pullback.

Part-time Trader Series (tip 1): Weekly Focus List

As a part-time trader, time management is as vital to success as picking stocks or managing my portfolio. Over the years I have developed tricks to streamline what used to take me up to 4 hours a night, down to about 45 minutes.

Over the next week I will share some of these tips. 

Time Saving Tip #1: Create a Weekly Focus List 

As a swing-trader, I spend most of my time building watchlists. Watchlists can provide a number of beneficial functions. Of course, the primary function of a watchlist is to find stocks to trade. However, well built watchlists also can provide insights into areas such as market sentiment and sector rotation. 

My watchlist is organic and can have anywhere from 100-300 stocks, depending on market conditions and how many different setups I am trading. However, I rarely trade more than 5-10 stocks at any given time. Most of the stocks in the watchlist are a few points away from ideal entry points, so it is a waste of time to go through the list every day. 

Now, instead of wasting valuable time analyzing a few hundred stocks daily, I create a focus list every Sunday, after my sector review. I go though my watchlist and pick the 20-30 best setups, and put them in the focus list. This is the list I trade from during the week. 

The focus list saves me an hour each night. That's about one extra day of "time" every month, time better spend analyzing my past trades, researching setups or just relaxing and having fun. 

Another Stock Showing Strong Distribution: WYNN

WYNN was on the long list for quite some time, but has now reversed and is the perfect short setup. A bear flag has formed, with volume that's showing distribution. Many like to wait for price to breakdown out of the flag pattern. I prefer to enter early, when price is at the to of the range.

Strategy Session: Using Distribution Patterns to Predict Trends and Trend Failure

The second most important aspect of my trading strategy (behind support and resistance) is using volume to classify stocks that are under accumulation and distribution.

Distribution is under way when, over a period of time, stocks show higher volume on down days and lower volume on up days. In a bullish trend, this predicts the trend will pullback or fail. In a bearish trend, expect the trend to continue until the distribution pattern is reversed.

Take a look at GME. This stock shows classic distribution. During the recent uptrend, positive volume was putrid. Trend failure was easily predicted. Currently, the distribution pattern is continuing. This suggests a retest of recent lows.

I will likely short this stock soon.

Trade Results: March 2009

I am making an effor to get caught up on my trade results. The last results post was from February 17-March 16. To get back on a regular monthly schedule, this post completed March 2009.

March 17-31

Total Profit= $1921

Total Wins= $2776
Total Losses= $855

Total Trades= 6
Total Wins= 4
Total Losses= 2

Win Rate= 66%

Average Win= $480
Average Loss= $427

Total Profit from February 17-March 31= $5385 with a 62% win rate

The Trades:

March 18:

400 SDS @$80.83. Exit at $82.83 and $80.83. +640 (+1%)
400 SRS @$54.05. Exit at $61.90 and $54.55. +870 (+3.4%).
200 FAZ @$26.55. Exit at $33.55 and $26.54. +700 (+13%).

March 25:

500 FAS @$6.58. Exit at $5.49. -501 (-15.2%).
600 SSO @$20.34. Exit at $19.75. -354 (-2.9%)

March 30:

200 CTRN @$20.61. Exit $23.44. +566 (+13.7%).

Thoughts:

I am satisfied with the win rate. I'd like the average win to be much higher than the average loss. I don't have a lot to complain about since FAS has gapped down below my stop. There isn't much I could do about that bigger than normal loss.

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One That Got Away: IBN

A useful tool for improving trading is to analyze trades that you did not take. IBN has been on my radar for since the April breakout. I did not trade it because the volume pattern was not to my liking.

However, the risk ratios have been good through out that time period. Price has been near support and provided classic entries, the latest being the recent consolidation pre-breakout. Lately I've been lossening my volume requirements when I get favorable risk ratios (usually above 3:1). Obviously IBN would have been an ideal candidate for my new stategy.

4 Stocks For Tuesday

Here are the four stocks I am looking to enter on pullback Tuesday.

Trades: BKE and RL

I used morning strength to short two stocks from last night's focus list: BKE and RL. See charts from the last post to see setup.

Game Plan For Monday

Here is my detailed plan for Monday and the coming week, as sent to subscribers in today's Trade Report:

May 18, 2009

Market Notes:

The market has pulled back close to the entry point we've been watching (87-88).  The pullback is not ideal, as price has not pulled back in an orderly fashion.  Also, while volume is not significant enough to show distribution, the pullback was not on below average volume.  

These two consideration decrease the probability of a successful trade, and could point to a deeper pullback to the 50 day moving average.  However, the setup does offer a good reward to risk ratio.  An entry at $88.50, with a  stop at $87 and target at the old high around $92.50 gives us a 2.5 to 1 ratio.  This ratio makes the trade acceptable, even if the probability has decreased.

Another factor that concerns me about the long trade is that my focus list is starting to show more short setups.  I am still willing to trade SPY on the long side since the risk ratio is good.

Game Plan:

Get long SPY if it hits my target entry area.  Balance this trade with short setups from the focus list.

Sectors:

Here are the top performing sectors that also show good price patterns:  Dairy, Ag, Internet Service Providers, Drug Manufacturers. Beverages.

Banks, real estate and auto related fields lead to the downside.  

Trade Tracker:

I am still holding NTRS short and SDS. 

Focus List:

shorts: bke, rrgb, cpla, ntrs, brcm, gme, rl

BKE broke it's uptrend and now shows a distribution volume pattern.  Bearish flag is forming.  

RRGB is similar to BKE.  Broken uptrend with consolidation under new resistance.  

GME shows distribution and is pulling back up to moving average support.

BRCM is not as clean cut as the above chafrts, but does show negative distribution and the possible start of the second leg down.

RL shows more of the same.  A pullback to the 200 day moving average would be ideal.

Longs:  IBN, MTN, PPS, MRVL, ACL, MSTR, ERTS

Extreme oversold setup:  DHI.  It's not ready quite yet.  I'll detail this setup tomorrow.

Disclaimer:  All information and opinions expressed in this report are to be used for entertainment purposes only.  The author of this report is not an investment adviser and does not give buy, sell or hold recommendations.  Trading stocks is a risky undertaking, and due diligence is required before making a trade.  Consult an investment professional before making a trade.  The information in this report is not verified and may be incorrect.  The author of this report may or may not hold a position in stocks mentioned in this report.

Partial Profits in SDS

I took partial profits in SDS at $60.22. I've been unwinding my shorts that were based on a market pullback and looking for longs to setup in the coming days.

Thinking Out Loud (both on and off topic)

1. The overall market looks good, but resistance is looming.

2. A few more points down and I will start letting go of my short positions (already got rid of RTP).

3. I will likely enter SPY around $87-88

4. Most stocks are pulling back with bullish undertones (low volume, orderly price movement).

5. Lots of good looking breakout stocks have emerged over the past few weeks.

6. I am extremely short term bearish (though this condition is being worked off), intermediate term bullish, but longer term we are still in a bear market.

7. Point 6 is a good example of how important time frames are to trading.

8. To actually call a bottom, I'd need to see more volume

9. However, the price pattern looks good for bottoms, especially if SPY mounts the 200 day moving average.

10. New leaders are emerging. Get those relative strength scans and filters going.

11. Lebron is the best since Jordan

12. Manny Pacquiao is the best since Ali. He will destroy Mayweather.

13. This Minnesota Vikings fan to Favre: Please go away.

14. Why do so many poker players go all in pre-flop with AK? Against any pocket pair you will lose money over time (55/45 with QQ or lower, dominated by KK and AA). And who is going all in against you with AQ or lower?

15. Smallville, yes Smallville, is the best show in television. If you are even slightly a comic or comic movie fan, get the DVDs and watch all 8 seasons.

16. What was the big deal about Wanda Sykes Limbaugh jokes? Rush has said far worse, and nobody says boo.

Longer Term SPY Chart

SPY Adjustment

I originally was looking to enter SPY short as close to $95 as possible, but today's "bearish engulfing" pattern leads me to believe we will pullback before that level is reached. I took a partial position today in SDS at the close (inverse short).

The Mother of All Short Setups

is almost upon us. One more bounce and it's on.

SPY Chart Analysis

I posted the SPY chart that I sent to subscribers last night without any annotations and a few blog readers weren't quite sure what the chart meant.

The key is the two line drawn and support and resistance. If SPY gets close to the top line (around $93-95), that sets up a great short entry. The market will go from overbought to extremely overbought, the moving average comes into play along with price resistance. Obviously this is the move I am hoping for.

If we don't get more bounce, but rather a pullback, long entries can be made near the support line.

At this moment, I am only managing positions. I dont' see good entries, especially long entries.

SPY Chart

7 New Additions to the Focus List

Here are the new additions to my focus list. All require pullbacks.

Taking Partial Profits

I took partial profits in my NTRS short ($54.02) and SDS ($64.50). I have moved my stop up to entry for the remainder of the positions.