Apple: Holding Up Like A Champion
I’m more than happy with Apple’s price action since the correction began a few weeks ago. It’s holding 190 like a champion, showing that institutional buyers are making a noble stand at that level. However, the chart still looks moderately “broken”, raising the odds for a downswing that fills the gap at 175. That’s also the price level of the 200-day EMA.
Trade Collaring
(Reprinted with permission from The Master Swing Trader Toolkit: The Market Survival Guide; McGraw-Hill April, 2010. All Rights Reserved)
The financial markets cycle through phases of opportunity and danger, with pattern cycles pointing out the true nature of the current stage. With this in mind, it doesn’t make sense to play a tightly converged trend using the same strategy as a choppy and divergent range. Collaring recognizes these behavioral shifts and adapts the trading plan to match short-term risk characteristics.
A trade collar is just like the one you put on your dog to keep him in check:
- Keep the market on a tight leash when risk is high and opportunities are tough to find.
- Loosen the collar and let positions “run free” when the market is trending, with a single-minded goal of ramping from one price level to another.
In other words, be aggressive in times of the greatest opportunity, and defensive in times of the greatest danger. The collaring process works best when traders make small adjustments each morning, in response to that day’s reward: risk profile. But longer term collaring is just as important in building the right exposure to major position trades and even multiyear investment portfolios. The collar signals when to let profits run, and when it’s the worst thing you can do. It also defines the right financial instruments to trade at any point in time. For example, it makes sense to play volatile small caps when the collar is loose and the market is printing money, but then stick with low beta issues and dividend plays when visibility is low and nasty reversals are the rule of the day.
Let’s define the characteristics of an opportunistic market that demands more aggressive trade collaring. It starts with the index futures, which need to be trending higher or lower, in lockstep. Daily performance might vary, but these markets need to show nearly identical positioning in their current pattern cycles. This goes back to the issue of context. Ask yourself the following question. Where are the indices trading in relation to big highs and lows, as well as charting landscape features, like gaps, hammers and retracements? Just like profit targeting, few obstacles on the index futures up the next resistance level or down to the next support level increase the odds of a strong trend into that magnetic price.
Next, look at conformity between the index futures. Have they pressed above or below nearby barriers in unison, or is one still lagging behind? Consider how these markets acted when they came into the vicinity of the March 2008 “Bear Stearns” low in the second half of that year. The SP-500 broke down first, in July, while the Nasdaq-100 held above that price level until September, when it also broke down. The subsequent convergence triggered one of the steepest declines in market history, with the SP-500 falling 40% in just two months. This synergistic behavior isn’t limited to generational crashes or bubbles. Rather, these inflection points set up continuously in smaller scales, with rapid price movement and fewer whipsaws when the index futures move from divergence, into convergence, and pass through major charting landscape features in unison.
Time For Short Selling
2009 was a tough year for short selling but this classic strategy should yield reliable profits in the months ahead, as the unique impulses of the post-crash environment fade into history. As a result, traders should wind down their rally mindset and adopt a bilateral approach that doesn’t require a relentlessly rising market.
However, short selling can be risky in the early phases of a correction, and you can’t just flip over last year’s strategies and chase a falling market. Realistically, even if the major indices drop 25% in the next six months, nasty squeezes will still undermine the profits of reactive short sellers who don’t pick their trade entries and exits with precision.
Four effective short sale strategies can be utilized at this stage in 2010 market development:
- Sell failed breakouts to new highs. This is known as the “2B Reversal”.
- Sell breakdowns of topping patterns, trendlines and moving averages.
- Sell pullbacks to new resistance after (a) or (b) is triggered.
- Sell narrow range patterns before (a) or (b) is triggered.
To put the odds firmly in your favor, look for correlation between the specific instrument offering the short sale pattern and the broad sector or index that tracks that instrument. For example, if you see a potential short sale on a Nasdaq-100 tech component, like Qualcomm (QCOM) or Netapp (NTAP), look for index relative weakness to support the specific trade entry.
That bearish convergence and a cool disposition are all that’s really needed to profit from the short side of the market. That said, you’ll find the emotional aspect of successful short selling is harder to master than the specific techniques I’ve outlined today because our brains are hardwired to believe in an endlessly rising tape.
Canadian Solar (CSIQ) Dip Trip
Canadian Solar (CSIQ) sold off from 52 to 3 and bottomed out last March. Its been moving higher since that time in a strong recovery that got even stronger, starting in November. The move topped out at 33.68 on January 6th and gave way to a steady pullback that accelerated to the downside on Thursday. The stock dropped within 30-cents of its 50-day EMA last Friday and closed near its low.
The selloff has crossed the 50% retracement of the 5-wave rally between 19 and 33. This suggests more downside before a decent bounce gets started. The 62% retracement at 24.71 should be watched closely because the selloff could easily undercut the 50-day EMA intraday, tag that level and close out with a bull hammer that might offer a good dip trade entry. If taking a position, keep stops tight and consider that reward is limited to the 38% retracement over 28.
January Momo
My January momentum lists keep on growing each day, with new plays hitting the market. I suspect the momo will die as quickly as it began so let’s make hay while the sun shines.
My strategy with these plays is simple enough: I don’t chase them, no matter how strong they are during the intraday. Instead, I wait for the daily/120 min patterns to set up better entries, like Smartheat’s (HEAT) small cup and handle pattern on Monday.
My current momo list:
- A-Power Energy Generation Sys,APWR,19.11
- China Automotive Systems Inc,CAAS,26.35
- China Agritech Inc,CAGC,38.43
- China Green Agriculture Incorporated,CGA,17.74
- Canadian Solar Inc,CSIQ,32.56
- China Securties & Surveillance,CSR,8.95
- Smartheat Inc,HEAT,18.03
- Incyte Corp,INCY,11.09
- Ion Geophysical Corp,IO,6.73
- China Finance Online Co Ltd,JRJC,9.01
- Kandi Tech Corp,KNDI,6.49
- Origin Agritech Ltd,SEED,14.50
- Solarfun Power Holdings Co Ltd,SOLF,10.42
- Trina Solar Ltd.,TSL,61.55
- Telestone Technologies Corp,TSTC,23.47
- Yingli Green Energy Hlds Co,YGE,18.84
Gold: Beware the Harbingers of Doom
(Originally Published RealMoney.Com 12/28/09)
Gold futures rallied up to 1034 in March 2008 and pulled back for the next seven months, in loose correlation with the worldwide equity crash. The contract bottomed out at 681 in October of that year, when it tagged its 200-week moving average, and began a slow recovery that preceded an historic breakout over 1000 about three months ago.
The rally carried up to 1228, where it topped out on December 3rd. The subsequent decline has brought yellow metal prophets of doom out of their caves, pounding the tables about the end of the powerful uptrend. However, I think they’re dead wrong and the gold rally will eventually push toward 1800, a target I established back in October.
Even the strongest uptrends grind through trend and countertrend waves, so the current decline doesn’t bother me. In fact, it’s likely to yield one of the best trading opportunities in early 2010. The trick is to sit back and let the charts signal when the gold downswing has finally run its course and the contract is ready to resume its upward trajectory.
That defining moment might come in the next few weeks but I’m willing to wait until the pullback reaches the initial breakout level near 1000, highlighted by the intersection of the two blue lines in the weekly chart. No, I don’t think the decline will get that far, but even it does, the broad uptrend will remain fully intact.
Indeed, several factors indicate the gold selloff is finally near its end. First, the contract closed out the holiday-shortened week with a bull hammer candle over 1100, showing that buyers are getting more aggressive. However, this one-bar pattern needs verification with a subsequent bar that trades above the hammer and closes the week strongly.
In addition, weekly Stochastics has now swung from an overbought to an oversold level, indicating that bulls have been shaken out of their positions. Notice how gold bounced strongly (red circles) the last three times it hit an oversold level, including the dramatic turn in October 2008. This suggests the contract is setting up to move higher, at least for a few weeks.
Whether or not gold successfully “takes out” the December high on the next upswing is anyone’s guess. At a minimum, any bounce will be a step in the right direction because it’s likely to dampen bearish fervor on the yellow metal and yield a more balanced market that’s supportive of the major uptrend in place since 2008.
The selloff dropped gold into a three-month trendline and the 50-day moving average on December 17th. That support level broke on Tuesday, with a quick downthrust to 1075. The contract then bounced and closed the week just below new resistance at 1106. This price action sets up an interesting scenario for this week, and into early January.
Friday’s close marks a key inflection point because a rollover will confirm the trendline and moving average breakdown, opening the door to a downswing that could reach “big” support near 1000. More importantly, a rally back over this broken level will trigger a “failure of a failure” signal that could mark the end of the decline.
That might be the bullish tell I’ve been waiting for since the selloff began on December 3rd. However, thin volume worldwide between Christmas and News Year’s Day will undermine the validity of any buy and sell signals in the futures contract. So, this is likely to remain a short-term trader’s realm for at least another week or two.
Additional resistance near 1135 could define gold’s future in coming months. That’s the price level where the contract broke through the Dubai swing low, posted in late November. You can see this zone also marks the 38% retracement of the selloff, as well as seven trading days that failed to mount the significant barrier.
While the fast-fingered crowd can take advantage of any bounce above the trendline and 50-day EMA this week, longer-term players should pay attention to the shaded box I’ve outlined on the daily chart. A rally above this zone should mark an “all-clear” signal for the resumption of the gold uptrend and a rally to new historic highs.
Wynn Resports (WYNN) Getting Heavier By The Day
Wynn Resorts (WYNN) might be setting up an end of year short sale. The stock bounced higher in three waves after bottoming out at 14.50 in March. The 3rd wave topped in September 75 and gave way to a selloff that found support at the 200-day EMA at 51.The subsequent bounce printed a lower high, followed by 2 downswings to the 50-day EMA.
The stock broke that level on Thursday and has dropped into the 60 strike. This could mark the next downswing in decline that eventually tests the low at 51. Short sales are tough strategies in 2009 so its best to wait and see if we get a failed test near the gap top at 62. A rollover at that level could trigger enough momentum to drop price into the low 50s in a hurry.
Alcoa: Not Ready to Lead the Dow
Alcoa (AA) has been a top Dow performer for the last few weeks. The aluminum giant bottomed out near 5 in March and entered a steady recovery that reached the 200-day EMA in August. Price action has been choppy since that time, with a series of highs above the average, undermined by a steep October selloff. The current uptick has returned the stock to the October high near 15.
The weekly chart shows two main obstacles. First, the current positioning isn’t favorable for a quick breakout so another downswing appears likely. Second, the April into October rally printed higher highs that now mark resistance around 17. So, the best scenario for the bulls will be a shallow pullback that sets up a better breakout pattern, with aggressive profits taken at the rising highs trendline.
Boeing (BA): Caution Now, Buy Later
Boeing Co (BA) sold off from 108 to 29 and bounced in March. It’s lagged the Dow Industrials since that time but has perked up in recent weeks. Notice how the stock has stalled at resistance in the mid 50s several times and is now trading near that level once again, after a month long bounce. Accumulation has declined significantly this year, although price has risen to a breakout level.
This raises a bearish divergence because the pattern has evolved into a decent looking cup and handle base. You can find another trade setup similar to this one in John Deere (DE). That stock broke out and eased its bearish divergence during the initial phase of the new uptrend. That’s possible here but I prefer long-side exposure when the technicals are firing on all cylinders.
Rackspace (RAX) At New Highs
Rackspace (RAX) came public near 10 in August 2008. The network provider then rallied to 11.95 and sold off with the broad market, bottoming out near 4 in February. It entered a steady uptrend in March, hit 19.20 in October and dropped into a sideways pattern. The stock broke out in Friday’s session, posting heavy volume and closing well, although other tech stocks got whipped around by the intraday reversal.
The stock is now trading at an all time high. A rising highs trendline in place since June limits initial reward potential to just above 22. The best trade entry should come when it fills the gap, which is a distinct possibility given the volatile tape. Alternatively, watch for a 60-minute consolidation pattern and buy the breakout.