Wednesday, May 23, 2012

Today COULD Be the Start of Something, But Bulls Still Have Much Work to Do

If you read my weekend post, I said that most bounces that occur from extreme oversold conditions usually see a big push higher, followed by some heavy selling to test the bulls, and then some choppy trade sideways, with an occasional new rally instead of the sideways chop.   I expected to see something like that start this week - a bounce that would last two or three days, some heavy selling for two or three days, and then a period to reassess things.  I did not expect this process to be condensed into the course of three days.   That's basically what we've seen this week.  We got the big bounce on Monday, followed by a nasty reversal on Tuesday that certainly tested the mettle of the bulls.   We saw a nasty open today and some heavy selling early, but then another reversal started at lunch and with a very strong close, bulls look to be somewhat stronger than I expected them to be here (at least as of now). 

Although I am holding three long positions into tomorrow's session, I can't say I am "bullish" quite yet.  I am obviously getting there but I think the bulls still have some work to do.  If you read this blog often, you know that I focus heavily on the nine day EMA as a short-term trend indicator and the market is still underneath this key level across the board.  If this level is overtaken, I will get "bullish", at least in the short-term. 

Nasdaq

If it can clear that nine day EMA, the Nasdaq still has to deal with some key overhead resistance around 2885.  If it can clear that on heavier volume, I think the bulls have a chance.   Ideally, we get above those levels on a big session, then rest for a few days.   We'll see if that happens.  On the other hand, if today's lows happen to be broken, all bets are off.

Nasdaq

Here are a few setups that I am watching here.   No need to rush - if this does turn into something meaningful, there will be plenty of opportunities to make money.  My focus remains very short-term and I am looking to take profits as I get them, even if it means 3-5% gains instead of 10-15% ones.

EPAM
 FB
 KORS
 MGAM
 THLD
 RST
All Charts from TC2000, Courtesy of Worden Brothers, Inc.

Good luck Thursday.   Hopefully we get a big push here into the end of the month, but honestly, nothing will surprise.   Keep your mind open - things are looking better after today's reversal but if the bulls don't run with it, then we will likely be back to chop.  

Saturday, May 19, 2012

Guess What - We're Oversold. Now What?

After five straight losing sessions on Wall Street (three of which were more than 1%), the buzzword for all traders right now is "oversold".   You have probably read several articles or blog posts already this weekend discussing how oversold this market is, and yes, there is no doubt we are very oversold.   What I did this weekend is look at a few of the indicators that are my personal favorites for judging overbought and oversold conditions to see what we can expect to happen from here.  Those indicators include the McClellan Oscillator (otherwise know as Worden's T2106) and my own RSI(2) indicator that keeps track of the percentage of stocks above 90 or below 10.

Let's start with the T2106.  We closed Friday at -419, which is extremely low but not as low as it has been at two points during the prior two years.   As you see below, however, those two lower points were the only ones over the past four years lower than where we are at now. 


After comparing current levels to prior levels, I matched the extreme oversold readings shown above to the corresponding action on the Nasdaq over the past four years.  Most people just assume that extreme oversold readings will automatically lead to a big bounce and the start of a new move higher.   As you can see below, that is not really the case at all.   The best case scenario in most cases was a sharp bounce of two to three days, followed by a lot of choppy, extremely volatile trade for a month or two.


If you take a look at the last two extreme levels below, you'll see that after a sharp bounce, the market sold off hard immediately and chopped around for weeks (or months last summer).   When we hit -479 last August, however, the selloff we saw had several huge down days, something we have really not seen yet today.  That selloff included a -5% and a -6% session.   So far, our worst day in this selloff was a -2% day on Thursday.   That makes me think that when this relief bounce does come, it will not be as sharp as some think. 

All Charts from TC2000, Courtesy of Worden Brothers, Inc.

In looking at the RSI(2) indicator I came up with and have kept track of the past few years, I see a market that is again not as extreme in terms of this recent selloff as some may think.  I think this indicator gives me a look at how oversold individual stocks are and as you can see below, we are nowhere near as extreme as we were almost a year ago in August 2011.


This makes some sense when you look again at the fact that we've only had one 2%+ selloff in this recent decline (and that was barely over 2%).   Over the past week, I have continued to see short setups emerge, which I found odd given that the market just kept selling off, but even this weekend, I see stocks like DECK, ZAGG, and RNDY as shorts, and if the market wasn't down five straight sessions, I would look to short them on breakdowns.  I have to assume that this means the possibility of further downside before a bounce emerges is a strong one.

In my opinion, what this all means is that at best, we're looking at a market that will have a relief bounce soon and then chop around for a while while individual charts repair damage.  This possibility seems even stronger to me as we enter the summer trading season, where volume decreases and volatility increases.   Just look at last summer for a clue - up, down, up, down, but we went nowhere.   It was tough for a swing trader and that's what we could be looking at for the near future this summer as well.   Although I will have no problem playing it if it occurs, I have a hard time seeing a market bounce and just keep moving straight up over the intermediate-term from here.

I still hold two short positions as of now, but will be looking to close those early next week if we see any more selling just because I don't want to get greedy.  We are at levels that can produce a relief bounce and I am certainly looking for it, but at the same time, the selling last week was so steady, controlled, and deliberate (and also without any panic from what I could see), I realize it's possible that we'll see that T2106 get even lower and maybe challenge that August 2011 level.  A bounce is likely but not a given, and if it does occur, it will only last a few days before another selloff occurs that tests the bulls(based on the charts above). 

I will be looking to get long this market via some ETFs on any sign of a reversal or bounce, but I will also keep my stops tight on any long attempts just in case.   If I am lucky enough to catch a bounce, I will be looking to sell into it a few days later.   In general, my timeframe will now be very short-term.  After significant sell-offs, swing trading can be hard due to volatility, so you have to adjust your style.  That's what I am going to do and I would advise you to do the same.

Summary Points:                    
  • Market is in position to bounce and is likely at some point this week but it is not a given.  May need to get a little more extreme before a bounce occurs.
  • Most likely the bounce will be short-lived and be followed by a sell-off that will test the bulls' mettle out.   Sell into the bounce.
  • After the bounce is tested with some selling, that's when you reassess things.  Most likely the market will chop around for a while.   Trade with a very short-term time frame and keep your profit targets more conservative than usual.  Take what you can get.
Good luck next week.  It should be interesting.

Sunday, May 13, 2012

Stock Market Video - Outlook for Week Ahead - "Is Obvious Now Contrarian?"

Hi, traders - I know I haven't been writing much or doing many videos at all recently, but there is a good reason.  We are in a very weak market at the moment and because of that, I haven't been trading much at all.  All evidence I see points to a market that can very easily go lower.  It does seem to me that a lot of traders are expecting a bounce soon, but I think some are overthinking things here.  Being contrarian just because you think everyone is leaning one way might not be the best thing to do. 

In the video, I go over the evidence that is causing me to stay in cash and perhaps start looking at a few shorts this week.  I also discuss what signal I am looking for in order to get bullish on this market and look at some longs. Setups are also included in the video.

Good luck next week - this is a tough market and one to be avoided if possible.


Sunday, May 6, 2012

A Trading and Life Update

As you may (or may not) have noticed, I haven't written for about three weeks now.   Two main reasons for that one - one market-related and one life-related.   First, let's talk about this market.   To put it bluntly, it sucks.   Sucks for bulls and sucks only a little less for the bears.   I have only traded for about six or seven years now but one of the many things I have learned is that the market really only presents two or three tremendous opportunities to make money each year.  We saw one of those tremendous times from January to March of this year.  Unfortunately, outside of those two or three great periods, the market mostly chops around in a way to screw everyone as equally as possible.  I think we've experienced that "screw everyone" period for the past month now.  

If you have traded well and been successful during April and May, congratulations.   I do think you are in the minority.   I know my account is down about seven percent for this quarter, and I really haven't even traded much the past two or so weeks.  We've just been moving sideways now for over a month, with the bears showing more strength than the bulls but just not enough to move us into a full-blown intermediate-term correction (or even bear market) that would have me shorting things left and right.  All you really have to is look at the chart below to see what I am talking about.

S&P 500
 Chart from TC2000, Courtesy of Worden Brothers, Inc.

Since the beginning of April, one other disturbing trend I noticed is that I started to see virtually no setups when I went through my scans each night.   They just weren't there.   This gave me pause and in hindsight was telling me something.   I am not just talking about long setups - there were hardly any short setups as well.  It was kind of weird actually.   This is one big reason I haven't written in a while - I never just want to put stuff out to just to put it out there.  When I don't see any setups that excite me, there really isn't anything to write about.  

In addition to the market telling me in various ways to not trade as much, life has seemingly done the same over the past few weeks.   Termites, water leak, sewage backup, even a little mold (from the water leak) - all words that homeowners fear but I have had to deal with all of them over the past few months.   Normally, that wouldn't be a big deal but the sewage leak occured at the same time that I was remodeling our kitchen so doing two projects at once really was difficult.   I am pretty much done with all of the kitchen stuff and wrapping up the fixes needed for the basement now, but it's been very, very hectic.  Throw in a nasty cold/virus that went through our house over a week ago (with all four of us still having a cough and feeling run down) and you have a good reason to step back from trading a bit.  

I am not sharing this expecting any pity or anything like that, because I don't feel that way.  I don't need any.  Life throws things at you and you deal with it.   Things can always be worse - for instance, my wife's uncle found out recently that his house burned down the same day he was going in for surgery for lung cancer.  Now that's bad.  My point in sharing is just an explanation why I haven't been writing or trading much.  Since all of this is free, I guess I don't have to give a reason, but I feel I should.   I am looking forward to summer very much as hopefully we get a little respite from the stresses I have had recently and can relax and regroup.  Maybe I can even get back to trading - IF the market tells me it's time. 

I haven't been trading much but I really don't feel like I have missed anything.   This has been an awful market to swing trade and I don't know if it will improve anytime soon.   Earnings plays aren't working.  Breakouts have been working only occasionally (at best).  I may consider shorting a little if we break down further with a weak rally following, but all Uncle Ben has to do is hint at QE 4 or 5 or 10 (I've seriously lost count) and we are up and away again, screwing the shorts.  My signal has vacillated back and forth between neutral and sell for the past month and until I get a clear buy signal and start seeing charts that act well, I will stay mostly in cash.  As I said in the previous paragraph, the market has to tell me it's time, and so far it hasn't said anything like that.   I'm listening though.   Good luck if you're trading and if you're not and just sitting by like me waiting, don't worry.  Better times will come.  They always do. Take care.