I’ve written about the 1,2,3 Bottom trade, one of my favorite reversal patterns. Now, I thought I would show a 1,2,3 Top trade. Now that the market has had a rally, I’m starting to see a few of these appear. In the case of T–my last week’s Spike trade–things stalled out around 27. The Hi #1 happened in late March, note how high the 13-day FI spiked. At that point, we sold off, retracing to 25 (#2) , which undercut at least 4 closes.Then, like an old one-eyed war horse, T gathered itself for one more run for glory. However, 27 (#3) was the wall again, and T formed the Narrow-Range 4 bar. This is the small inside bar to the right of the long-range stab to 27. It is the narrowest bar of 4 days and indicates a collapse of volatility, which should lead to another long-range bar. In this case, it lead to two declining medium bars. Note the divergence in 13-day FI on the second stab to 27. From there it was easy, sell short at the low of the Narrow-Range bar, take profits at the rising 20 DEMA (red line); treat yourself to a nice bottle of cabernet.
I would like to post this question. There are two images attached.I’m using the Triple Screen with the MACD 9 12 26 and the force index 13 periods. These indicators are going up on a weekly chart and don’t show any divergence or weakness. On a daily chart, however, these same indicators are drawing a shape common to most of the indexes and stocks I follow. See attached XFN as an example, the ETF of the Canadian financial sector.I wonder how to analyze the chart in order to look for a trade. I also wonder when the divergence will be over in this example.Thank you very much for your input.Didier
Trading is about price movements, but really we’re measuring human behavior ruled by gut-wrenching fear and elated greed. The VIX, which is a ratio of puts and calls, measures emotional volitality–it moves up, sometimes violently when fear riens and price declines. When the VIX declines, price is stabilizing and usually rallies; the SPX price bars narrow and everywhere it is happytime. The VIX is an easy way to measure the emotional extremes if you use it properly. I say easy, but most traders think of it like the RSI with absolute highs and lows. Not so, the VIX is a relative measurement and needs to be compared against a 10-day MA to give accurate signals–all of which is for a future discussion.But today, I want to point out a truly remarkable development on the VIX’s weekly chart–something that foretells a major move. After the spike to 90 in October 2008 punctuated the market’s big move down to SPX sub-800 (the VIX moves opposite the SPX–VIX up, SPX down, and vice versa), the VIX corrected, finally settling in a range about 50% of the move. We’ve been bouncing steadily between 35-55 week after week for about four months. While it may not seem like it, the VIX has steadily lost volatility indicating that neither fear nor greed is at extremes. Now, we are entering a rare squeeze on the weekly chart, which portends a major and probably violent move in one direction or the other. Though the indicators seem to be on the lowish side, these sideways moves often create unreliable RSI and MACD readings. So, we need to wait a week or so to fit this piece of the puzzle into place, but past experience says that come what may, either greed or fear will soon cause our little world to tremble and shake.
Please find attached Pivot and Fibonacci levels for the S&P500. For those who believe that the market will go down, the areas between 764-769pts and around 750pts might serve as major support levels, as there is a confluence of levels many trader watch out for.Regards from Dusseldorf,Rodryk
I discovered the obvious last week – short-term support and resistance can be very useful in setting stops and entries. I also received a sharp, actually fatal, reminder that one must not forget tactical considerations while establishing or adjusting a trade, expecially in the heat of battle while the market is open. I chose a protective stop that was at a short-term support level, but I just didn’t think, and I placed it at a very vulnerable round number. Price dropped and touched my stop, didn’t go below it, then immediately took off to the upside. Two days later in my own account I used another short-term support level for a stop but placed it below the round number. Price dropped, touched the round support level price, didn’t go below it, and took off, and my position was safe.
By way of background, I picked AVY as my Spike pick last week (March 23). AVY was a strong performer relative to the S&P500 the previous week. On the weekly, the trend was still down, but AVY had closed up the past two weeks and was near the lower envelope. MACD-H showed a bullish divergence back to the November low, having ticked up the previous two weeks; Lines were essentially flat since November, but the fast line was rising, the slow line shallowing. Force Index was generally following price. Price had not yet moved up past the November low and retested it.
On the daily, things did not appear as good over the short term. Trends of price and MACD Lines were up, but MACD-H had just ticked down from its highest level since mid-December. Force Index had dropped sharply the previous two days.On Monday March 23 the market opened higher and kept going, and my limit order wasn’t filled. On Tuesday March 24 price moved sideways and down. On Wednesday March 25 I placed another buy limit order and got left behind again as price streaked up from the open. At this point I was feeling kind of helpless, and that I had to figure out a way to jump onto the powerful moves reasonably safely. I decided to try OCO bracket orders: buy limit and buy stop, each with its own protective stop.In the course of trying to figure out how to enter these choppy conditions late Wednesday morning, I was surprised in my inexperience to find a couple of solid support and resistance lines on a 25-min chart that had developed over the period since the Monday open. These were located at 22.20, 22.50, and 23.00.
Based on these support/resistance levels, and because I had not proven to be very effective in guessing the market’s next direction, I placed OCO orders (buy limit/buy stop) in my own account for AVY, as noted on the above chart. After dropping to within a nickel of the limit entry price (22.60, just above 22.50 support), price rapidly increased to a point half way to the buy stop entry price (23.00) and dropped again until the order was filled at 22.60. Eight minutes later price dropped to my nice round stop at 22.10 support, touched 22.10 exactly, and took off again. It was a bonehead rookie mistake. I used an even, vulnerable stop (22.10) and got picked off. I noticed shortly after that that 22.10 happened to be the mid-day (intraday) low on Monday March 23.On Thursday March 26 I entered aother OCO order. This time the buy stop (23.00) was hit and the order filled at 23.28, granted with 28 ticks slippage. But I was in! AVY closed this day near 24. Before the open on Friday March 27 I raised my stop from 22.43 (a little below the 22.50 line) to 22.96 (just below the 23.00 line).On Friday March 27 AVY moved sideways-to-down all day. Price drifted downward to the 23.00 support level, touched it exactly, and drifted back upward. My stop at 22.96, just a few ticks below the 23.00 resistance/support line, saved me, just like in the textbooks!I must admit that I was surprised at how faithfully the price movements “honored” these rather arbitrary horizontal lines. Last week’s experience told me that it is essential that I look further into short-term support and resistance, and I will continue to attempt to use the concept in making short-term decisions in these unpredicable markets.
One of our SpikeTrade members has sent in his second letter about China. It is posted here without editing – AlexCurrent Myth:
- China has $1.1 trillion of foreign reserve, they are strong financial sound country.
I didn’t know the BDI and added it immediately to my weekly check list. Thank you.Rodryk’s last post on the BDI which was instructive for me. Now, we can see that it has been going down for 3 weeks while the markets have been going up for exactly the same period.
I wondered whether the shipping industry could be used as an indicator of a possible recovery of the markets. I compared both the MG776 (index of the US shipping companies) and the BDI as of 2009-03-26. Unfortunately, MG776 follows the main indexes and hit its lows at the same time although the weekly MACD remained very positive. It didn’t bring us any new information compared to the BDI which was up since the second week of December while the markets tumbled as Rodryk pointed it out.Didier
This index has been popping up in SpikeTrade discussions, and is a part of my daily homework. This is why I want to share with you this email from a friend, Yannis R, a trader in Paris:“I have read a lot of things about the Baltic Freight Index and I would like to put things in their right perspective. There is a widespread need to identify leading signals for economic recovery. The paradox is that people involved with the shipping industry try to find signs on what their industry will do by analyzing the economy. The rest try to see what the BDI does as a signal for economic recovery!!! This is very dangerous for outsiders as the mechanics of shipping are complicated. I am in the industry 20 years and claim to know 30% of it. So for the latest developments let me lay out the following:1. During the downturn a lot of ships and especially the big ones (Capesizes) were laid up. These were around 400 ships. That’s a lot and not counting the ships slow steaming as to win time.2. These ships now are reactivating and see what is happening to BDI..!3. On top we have the huge order book of new buildings. Even with the reported cancellations their size is 46% of existing tonnage due for delivery this year and next.4. When demand returns to normal levels in the economies, shipping will still have to fight its own demons that were created during the greed years.***** after receiving this email, I sent Yannis the following message ***************
************************** he responded: *****************************Regarding DRYS I have to say I am biased so I might not be able to guide you accordingly.
- Firstly I do not trust the guy who runs it.
- During the drop he sold 10 ships from his private company to Drys .
- Drys paid top money for them even though the market had dropped 50%.
- I think the deal never went through goes of public outcry.
- During the 90’s and the junk bond craziness he got 150 million from investors and bought bonds back at 30 cents..!!!
- As I said the fundamentals of shipping for the next couple of years are not looking good because of the new buildings coming in and the low expectations for economic growth.
- DRYS has a huge
I am new to trading, and after missing several strong moves by the stocks that I have been following and trading (DECK, AVY) I began to feel pretty frustrated, like so many others, and didn’t know how to handle the situation. Didier and Stephen M have articulated this very well. I felt though that there had to be a way to do this – and it would have to involve not only careful entry technique but also a somewhat different attitude toward the quality of the fill.In the course of trying to get in on Monday and missing that move, and then getting whip-sawed on Wednesday, I noticed some possibly interesting things on the intraday charts and decided to look into it further.Below is a 25-min chart for AVY covering Mon 3-23 through Wed 3-25 [CHART 1]. It shows a series of short-term areas of support and resistance that you don’t have to squint too hard to see. (But the chart is a little busy, so it will take a little scrutiny.) There are two points of support at 22.10; one point of resistance and one or two of support at 22.50; and solid resistance on Tue 3/24 (and possibly the close on Wed 3-25) at 23.00.I noticed these zones during the day on Wed. Since I did not have any idea which way the market would go, I decided to try a buy limit/buy stop (OCO) order that used these zones. Around mid-day I placed a buy limit order at 22.60 (just above the 22.50 area) with a stop at 22.10 (a rookie round stop!). I also placed a buy stop order at 23.00 with a stop at 22.60. As price dropped, the limit order was filled (no slippage), and as price dropped further the stop was triggered. Price touched the 22.10 support level and bounded back up to near the 23.00 resistance level! If I hadn’t used such a dumb stop I might have survived the trade. I thought, “Well, that was quick,” but then I thought that maybe there was something to this support/resistance business. I decided to try the same thing the next day
Today, Thu Mar 26, I placed another buy limit/buy stop (OCO) order before the open: buy limit 22.60, stop 22.07 (a few ticks below the 22.10 line); and buy stop 23.00, stop 22.43 (below the 23.50 line). I was filled at 23.28 – that’s 28 ticks slippage, but I did get in and have a little ride (see CHART 2)! Yesterday’s support/resistance lines weren’t really tested today, but price went up to 23.60 in the first half hour, hovered between 23.00 and 23.60-23.70 for half the day, then oscillated around 23.70 (23.70 zone not marked on chart) before breaking out to close near 24.00.
Looking back on all of this, I think that the lines of support and resistance may have been useful guides. I also may just have been unlucky (first trade) and then lucky (second trade). Time and more trades and experience will tell.In fast markets, slippage and gaps are inevitable. I think that when things are squirrelly, as they have been lately, if a decision is made to trade, bad fills should be anticipated and controlled with very careful money management (stops and position size). It is likely in such conditions that entries will be missed, winning trades may not be as good as usual, and losing trades may increase. I am guessing with this, but it stands to reason that when uncertainty goes up, the results have to suffer somewhat.One other point: Besides the issue of thinly traded stocks usually exhibiting more slippage than very liquid stocks, I noticed that of the two stocks that I have traded so far, DECK seems to have a much higher bid-ask spread than AVY, even though they trade with similar volumes (1/2 to 1 million shares/day). This is something that I will watch out for in subsequent stock picks.
This comes from Stephen M, one of the leading SpikeTrade Members. I hope that some of the responses will include charts! – AEI would really like to see a blog topic on entries started. It seems that the group is missing some nice gains as a result of picks for some but entries for others. Take LDK for instance. Up 114% for the week. It showed a beautiful descending wedge and bullish divergences on the weekly chart on Sunday. On Monday it took off. It seems to me that a key objective in front of a tremendous bullish background is to “get long.” I remember watching an old VHS tape of you on the “Triple Screen Trading System” as well as in camp videos. In there, questions were asked as to limit orders, etc., etc.. Your emphasis was when these patterns develop, pull the trigger and get long… even at the market the next day. I think we have been in an interesting transition period the last months and weeks and have seen these beautiful patterns materialize. It’s hard though to get long on a gap and feel like you’re chasing the stock. The weekly pattern will come to your rescue though-generally-in quality stocks with these quality patterns. Perhaps a little less caution should be on entries and more on exits?Don’t get me wrong, I’m still very cautious and quick to run, but it feels good to ride a few of these trains leaving the station vs watching them.Thanks,Steve M