The Squeeze, sometimes called a Slim Jim, is a pattern I and a couple other Spikers trade. The pattern indicates a decrease in volatility followed by a surge and a strong move. As volatility declines, the Bollinger Bands squeeze together indicating a period of base building. Then usually a news event or a buyer in size, will trigger volatility expansion and a wave of new buyers will plow into the stock. I use Bollinger Bands to find them, and look for circumstances similar to the one SPN is showing.In mid-September, SPN announced good newsaccompanied by a major spike on high volume. The spike closed far outside the bands, which indicated significant strength and the potential for more upside. Then it traded sideways for several days (make sure it’s at least 12 bars). As the bands come together, it had a little test of resistance at 27, then drifted back as the short-term indicators dropped into ST/OS area. A trader could have bought as the short-term indicators first dropped and anticipated the squeeze, or at the point of the false break (which I did and had to sit through the test of support again), or on the recent decline of the 2-day RSI below 30. The reality of these lateral squeeze patterns is that they usually set up in front of a news event, so picking direction can be a gamble (I won’t trade them into an earning announcement.)Anotherstrategy is to buy an option straddle as volatility drops and wait for the move (I met a guy that had made a fortune doing this on S&P squeezes during the 1990s). I usually take a position in the direction of the initial spike and trend and keep a tight stop on it. If you get stopped out, pay attention and look for a second entry.A couple of other comments–if you find a squeeze setting up around a trending 20-day EMA take a position early and let the Squeeze set up. At other times, they will set up in the last gasp of a move, so be careful. Sometimes they form right after a top or bottom completes, and initiate a new trend. I also look for them on the weekly charts and trade the subsequent move off the daily charts.
[This message came from Kim B – a SpikeTrade who has just earned her Bank Robbery Award – Alex]Bernanke’s Fed are likely to announce what they are going to do about Quantitative Easing at the next meeting on Nov 2-3. It appears that this market (at least parts of it) have already factored in the Quantitative Easing, so that any disappointment on this score might bring the markets down hard.Although shipping stocks have been lagging and may well rise if the quarrel with China is resolved, other stocks, commodities, and ETF’s are relatively high and have room to fall. The aftermath of the G20, so far, seems to be that the US will keep devaluing the dollar until China softens its stance on keeping the yuan low. But if the country and the markets become “surprised” to hear at next week’s Fed meeting that there is NOT to be adequate “quantitative easing,” that might swing the elections against the current administration. It appears GS is “gunning” for a fall with short positions….A negative surprise in the Federal stimulus plans could potentially produce a rout, as the timing of that would disappoint stock markets that are already destabilized by elections uncertainty. If that happened simultaneously with elections, it could severely harm the current administration’s chances of re-election in two years. I tend to believe that there will be devaluation of the dollar in the face of intransigence by the Chinese.Kim B
Flipping through some charts, I stumbled across Cirrus Logic, or CRUS. This stock has formed two exceptionally odd chart patterns. On the weekly, it has formed an almost perfect symmetrical pattern except for point #2. But the spirit of the pattern with lower highs and higher lows and price compression leading to the apex is intact. On the daily chart, the pattern is also odd with two 1,2,3 Bottoms inside a more or less symmetrical shape. CRUS had this enormous run from about 8 to 21, and is working it off by trading sideways. The decline barely reaches the 32.8% Fib ratio, instead of the more normal 50%, and is forming this pattern above the rising 200 EMA. These are signs of a particularly strong stock. Eventually, we’ll know if CRUS can live up to it’s promise, but it sure is an unusual pattern on both charts.
At the Spike Reunion (which was exceptional) I was talking with some folks about symmetrical triangles. I thought I would do a post explaining it a little better. CM is a fundamentally sound Canadian bank that forms both large and small symmetrical triangles as part of its price behavior. Like most world banks, CM sold off in late 2008. Eventually as the good banks got separated out from the crummy ones, CM improved in price, rising from around 30 to a new high around 78 in April 2010. Instead of correcting by decline, it traded sideways between 78 and 62, eventually completing a multi-month symmetrical triangle on the weekly chart. It busted loose in late August and is now moving steadily to test the 78 highs. Symmetrical triangles typically form mid-way through a trend move, have 5 points, and usually resolve in the direction of the trend. If you’re lucky enough to find one forming, you can begin to buy at point 5 in anticipation of the break out.If you missed the move on the weekly, CM was nice enough to form a small “Dynamic Triangle” on the daily chart. The break offered another chance to get long. Now, we’re almost ST/OB as we challenge the highs at 78. While you could take a chance and buy on a solid break of the old highs, the surer trade would be to wait for a pullback and retest. Buying on successful tests of support, and letting the short-term indicators (2-day RSI and 2-day FI) decline to oversold is the preferred and most reliable approach. CM’s 2007’s high was at 109 in 2007, so if we break the 78-80 area we should head there. If so, then buying dips and pullbacks on CM will work well.
I was flipping through some charts, looking for examples for a presentation, and came across CM. CM’s weekly chart is a classic example of a symmetrical triangle formed by volatility contraction, then being resolved with volatility expansion. Symmetrical triangles–weekly ones are rare and usually powerful–are continuation patterns. They usually break out across the 2-4 line, not the 1-5. Generally, they form about mid-way through a move, so CM may top 120 eventually. Right now, it is short-term overbought on the daily. It may slip back to the rising 50-day EMA around 70, which would be a logical support level.
Doug Kass is a high profile hedge-fund manager who recently declared that “short bonds is the trade of the decade”. Since I trade bonds, I thought I would take a look, and darn if I don’t think he’s on to something–maybe not the “trade of the decade” but at least something with profit potential. I choose TBT, the inverse bond ETF for my trade. If we get a close above 32.12 it will complete a 1,2,3 Bottom on the weekly chart and give us notice that the trend as reversed. The daily chart has completed a 1,2,3 B with a higher low, so the game has started.
I like to use patterns to provide insight into the markets. They often give me a heads-up to trend reversals and other profit-generating behaviors. Today’s market as represented by the SPY offers a very interesting pattern. Let me start by noting that the SPY weekly chart has retraced about 62% from the 6/25 low of 107 to the 4/23 high of 122. This is a classic Fibonacci reversal zone, which adds probability to the idea that we’re entering resistance. The daily chart shows a broadening pattern (RST) cumulating with a 1,2,3 Top. We also have an inside day, which is usually a sign of exhaustion or indecision at tops. Now, I’m not saying we’re reversing–just pointing out some of the market structure now in play. If anything, caution may be prudent until/if we push through 115 on volume.
Boy, are things about to get interesting! The SPY has formed a rare
Typically a ‘Diamond’ Pattern signals nasty reversals of tops and is very bearish. However, it can also signal a bullish continuation pattern, as described below by Trending 1.2.3.A Continuation Diamond (Bullish) is considered a bullish signal, indicating that the current uptrend may continue.topDescriptionDiamond patterns usually form over several months in very active markets. Volume will remain high during the formation of this pattern. The Continuation Diamond (Bullish) pattern forms because prices create higher highs and lower lows in a broadening pattern. Then the trading range gradually narrows after the highs peak and the lows start trending upward. The Technical Analysis occurs when prices break upward out of the diamond formation to continue the prior uptrend.No one is considering this to be the case with our current market, but look at the pattern similarities of the S&P 500 weekly chart below.Perhaps this market will continue to surge and burn September bears, challenge the top then burn the new bulls in October?Stephen M
[this post came from Jeff P, one of our Spikers – AE]Last week I had lunch with fellow Spiker Mike Brenke. I’ve known Mike since we both became Spikers the same quarter in 2006. We live about 10 miles apart and talk often.Over the past 6 months or so, he has become a different trader. I can tell it in the way he talks and more importantly, you can see it in his results. The story of his recent evolution is very instructive and interesting and I encourage him to tell it as his story is not mine to share. However, as often happens in life, a single comment he made to me has refocused my direction and led to this entry.He was telling me about the changes in his focus and thought processes when he paused and said, “You know, I think it can be of great benefit to clear all your assumptions and consider how you would train someone to trade if they were starting with no experience.” Wow, that was a very profound thought! I’ve rolled it around in my head for a few days and I’ve decided that I would take this approach, but I would be my own student!I decided as an initial experiment, I would imagine sending a message back to me when I began trading from me, “Future Jeff”. This message contains 7 ideas that I wish I had known at the beginning. Perhaps learning them properly, at the beginning would have prevented the need for the market teaching me over the years, in some cases more than once!No single trade will make your career so don’t let a single trade end it.Ah, the eternal quest for the home run! A trade which may make 1000 dollars could make 2000 with twice the size. 4000 by going on margin. If you buy the bottom and sell top, as we all do, the sky is the limit!Trading is not like winning the lottery. A successful career is made over years and contains many losses. A prerequisite for making it is not evaporating your trading account. Never put yourself in a position where one trade can wipe you out. Always have a stop loss in the market and keep your position size at a level where even the company going bankrupt doesn’t leave your account the same way. Survive, then thrive!No trade can be made unless you can explain why you are making it and what will take you outMaking a trade is such an easy thing to do. Make a few mouse clicks and suddenly, you are in a trade! It’s exciting and fun! It’s so easy to do, you may be in a trade with the only explanation being “I think it will go up.”Well, that is not adequate. Not only do you need to have a plan prior to entry, it needs to be clear enough to explain to another person. Ideally, another trader could take your plan and execute the trade the way you intend. If it’s not clear what condition will put you into the trade and why and similarly, what takes you out at a profit or loss, then you are not trading responsibly but instead are gambling.Understand Price ActionMost traders spend their development years looking at tons of different price based indicators most if not all of which are derivative of price action. The signals produced certainly have value, but a key to interpreting them is understanding the overall market structure. A MACD histogram divergence will have different meanings if the price is trending up rather than down.My trading has improved as I’ve reduced the number of indicators I consider and instead focus more on the structure of this market and how the price is reacting.Think about the risk firstIt is our nature to look at a trade and consider how much money we can make. That is certainly a necessary part of the trade evaluation process; however it is not to be done in a vacuum.Survival and ultimate success in the market is determined by the risk one takes. A trade which makes 10% if it works is a reasonable bet if you have to risk 3% on it but not so much if you have to risk more than 5%.At this point in my career, I determine my entry and protective stop first so that I’m not tempted to tweak those values to improve the odds.Expect, accept and plan for the losing tradeThe losing trade can be difficult to swallow. A big losing trade not only slams your account but it also can be devastating to your confidence.All traders take losses. If you know they are coming and expect they will happen from time to time, it’s easier to keep them in perspective. It will also reduce the chance that you will fall victim to the twin mistakes of moving your stops further away ( or pulling them completely) or averaging losers thinking the position will now have to move less to get profitable.Ultimately, these actions come from an unwillingness to take losses. The attitude needs to be developed where losses are just part of the cost of doing business and a losing trade is one of the statistical group that just didn’t work out.Trade Often – Trade SmallI remember Alex once saying that at the beginning of a career is when a trader is at their worst and the key is to survive and improve. Much of the prior writing will help in the survive aspect, however to improve one must trade and analyze the results.As you begin, or recover from a down period, you aren’t going to produce life changing income. So trade small. Make sure the amount risked is all but trivial. Get a track record of trades and once success is established, move up the risk a little and repeat. Keep making progress and keep performing post mortems on your trades! That will help you improve the quickest and get you back on track when things start going wrong.Pick a single stock and look at it every day If you follow one particular market day in and day out, over time you will see most every situation play out. That alone has great value, but even more important is that you will see it in context. You will see topping patterns after following it during a long uptrend. You will develop a deep perception concerning when it is over or under sold.A good selection for this is a market proxy such as SPY or a conglomerate such as GE. If you have a particular favorite you want to follow, but it is a bit focused such as Timberland, I say by all means but I would strongly suggest adding a GE or SPY or another along those lines.Each trading day look at the weekly, daily and at least one intra-day time frame. Not only will it further your education, it may lead to some nice trading opportunities!ConclusionAfter several days of thought, these are the best suggestions I have. However, I suggest that you each go through this exercise and document any ideas you would share if you could train yourself at the onset. Feel free to post the ideas to the blog and if this grows, I may talk to Alex and Kerry about combining the thread into a single document.Jeff P