In the news

Ever ask yourself what is the point of financial news releases since more times than not the market/stock price reacts opposite to what one would expect given the details of the release? For example AMZN jumped $10+ intraday after missing earnings expectations last Friday.  I guess the question would be who's expectations are being missed and why should we even care about someone else's expectations?  I for one (and many other conspiracy theorists) believe news is nothing more than a tool of manipulation to get traders and investors alike to react is an expected way and take advantage as they proverbially herd the crowd in the direction they desire.   I don't particularly pay attention to financial news that comes out but I do make sure I'm aware of these so called market moving news events and when its expected to be released.  You have to ask yourself again why would news be market moving?  Would it be because we react to anything that can potentially make or lose us money so closely that you can smell the greed and fear in the air?  Imagine if you already had a little birdie tell you the news ahead of these market moving events would you take advantage and position yourself accordingly based on the expected reaction?  Shame on me for even asking.  How could I ever question your strong code of ethics.  Unfortunately, not everyone shares our fear of God mentality.  However, if you believe as I do that news is a great way to buy or sell as the poor uninformed herd look the other way you can use this to your advantage.

As an example, today was the FOMC meeting.  Yes, one of those market moving events.  I could not tell you what Benny said but I can tell you this that we saw the highest trading volume in a month.  To me that signals that the big boys made some big moves today.  As you can see from the chart below the SPX came to within .35 of a point of the previous all time high of 1698.78 before closing way off its highs and near the low of the day.

Today's action was certainly bearish and the story that has unfolded over the past three trading sessions has been supporting the bearish case (price closing at or near the lows).  However, remember that our support level of 1684.3 continues to hold so I wouldn't want to jump the gun loading up short until we see a break.   If we do break then the price action we have seen this week would give me much more confidence to short this market.   So we wait patiently and watch and react.  Maybe this is the big boys positioning ahead of the jobs report on Friday?  Should be a market moving event nonetheless!

Thanks for reading!

Story Telling

I realized that analyzing the stock market is a lot like story telling. Although this story doesn't include a blonde, three beds and big bad bears, the stock market can get just as nasty.  I've been trying to come up with clever analogies to better explain my market analysis.  Each price and volume bar really does tell a part of the overall story.  Think of each bar as a paragraph in a book. Just as you need to read several paragraphs to get the complete picture,  one price and volume bar doesn't tell the whole picture but just as important to the overall story.  If price and volume are the paragraphs then support and resistance would be the chapters.  It is at these inflection points that we need to have a clear picture of the market story to determine what price is going to do next at these pre-defined levels.  You would be doing yourself a great injustice by only looking at each price volume bar in a silo.  Remember the adage "one day does not make a trend"?  Well it's true, but I like my paragraph and chapter analogy better!

So lets look at the paragraphs for this week and see what the market is telling us.

I'm reposting the PnF chart from my last post early in the week again to identify the support and resistance levels.  What I didn't highlight (that maybe some of you keener's saw for yourself) was that the 1673.9 area of support and resistance came into play this week.

Below is the candlestick chart with the support and resistance levels.  Lets go through each day.


July 22 - Small price range with very low volume with price closing near the middle of the range. This indicates that demand is weakening.

July 23 - Another small price range with a slight increase in volume closing near the lows.  This is bearish as supply is beginning to enter the market at the all time highs.   This is typical at all time highs as some investors are trying to time the top and get nervous since they are actually seeing a profit.

July 24 - Large price range closing near the lows with an increase in volume.  This bar is interesting because we closed near support on increased volume with the mood of the market now turning slightly bearish.  The plan would be to see how we close the next day.

July 25 - Volume increases steadily with price closing near the highs and above support at 1684.3. This indicates to me that demand is overcoming supply at support which is what you want to see for a continuation of the overall uptrend.

July 26 - Price drops at the open only to hit support (1673.9) mid-morning (low was 1676.03) before rallying for the rest of the day.  The price range is large with price closing at the high for the day and again above the 1684.3 support level.  This is bullish as it solidifies our bullish analysis the day before.  There was a transfer of ownership from weak to strong hands at support (demand overcoming supply) as one would expect at support

Conclusion:  The supply that we saw come into the market this week was been accumulated as we hit support which is bullish and portends higher prices.  So what did we learn today?  Something about price and volume being paragraphs and support and resistance being chapters and that Goldilocks might have had a dark-side to her.

Thanks for reading.

Oops

Well as giraffes say, you don't get no leaves unless you stick your neck out.

Okay so that low risk entry trade I spoke about last time didn't really work out.  However, the lesson here is that the loss was minimal since it hit above our theoretical stop loss of 1684.51 for small 8 point or 1/2% loss.  So we move on to the next opportunity. There will always be losses but the key is to make sure you keep the losses small but the profits larger. 

Lets look at the markets from a longer term stand point.  First I want to highlight the key areas of support and resistance.  Below the SPX PnF charts highlighting some of key areas of support and resistance we have been talking about.  Notice that they may be off by a point or two due to volatility but just as accurate all the same. 

Next I'm going overlay the above support and resistance levels over a weekly SPX chart and see what it tells us for a longer term perspective   Once again for those that are slightly visually impaired those levels are 1684.3, 1653, 1625.2 and 1597.3.  

You can see that recently the high volume down bars were actually transfers of ownership from weak to strong hands.  After a decent rally the big boys need to accumulate cheaper shares and they do that by shaking out the weak hands.  The bigger the shake out the stronger the rally.  Don't believe me? Just look at the last shakeout with two large volume bars and a drop to 1560 only to see this current four week rally ensure chalking up so far 130+ points.  

This week we saw the narrowest weekly price range since the week of May 6th.  Is demand weakening or taking a breather?  What happened in May was another up week followed by a six week drop.  Although anything can happen we should stick to the facts and those are that we currently above resistance of 1684 albeit slightly. The prices bars are closing near their highs which is signs of a strong demand filled market and volume (on a weekly chart) has been average.  If instead the large weekly price range bar for the week of July 8th was accompanied by larger than normal volume I would have been more suspicious of this week's narrow range bar.  That might have indicated exhaustion and big boys unload shares to the small folk at resistance.  So whats the verdict?  Its all bullish so far!  However, a close below support of 1684 on higher volume will change that.  For now we just have to follow the flow which is clearly up.  For those that use the term overbought I would appreciate a definition.  Just something to think about we you hear people use these expressions haphazardly.  

Thanks for reading!

Example

"Live by example rather than advise as to what to do!"

The purpose of this blog isn't really to make a bunch of stock market predictions so that one can blindly follow without having to learn a thing and worse yet not be accountable for their bad trades.  However, credibility will make or break anyone's reputation so I feel the need to follow through on my trading analysis. Yesterday, I stated that a close below yesterdays low (1677.89) on increased volume would be indicative of supply coming into the market since yesterdays low volume small range price bar represented lack of demand at resistance.  Lo and behold that is exactly what we got today.  If I was a betting man and was looking for a low risk entry then maybe entering a short trade on the SPX at the close today with a stop loss at yesterday's high (1684.51) and a profit target at the next level of support (1654.1) might have been a prudent choice.  But hey, I'm not a investment adviser and legally I'm not allowed to provide advice because someone might put their life savings in a trade like this, mismanage it, lose everything and then sue me because they didn't do their own due diligence (if they even understood what that meant).  I'm just another talk head sticking to my trading rules and my proverbial guns.  Consistency is paramount in trading. Let see how this plays out.  Please hold the applause until price hits support.  If we break above resistance then I will simply delete this post and maintain my perfect record of 0 for 0.

Below is the daily SPX chart showing the evidence!

Thanks for reading

Clearly

The SPX 60min PnF chart clearly shows the recent run up after 1623.5 resistance was broken.  Clearly that level was significant so draw it on your charts as it will come up again in the future.  The last three trading days we saw a large move up closing near the highs on average volume on the first day and now the last two trading days we see small range days on decreasing volume.  As a matter of fact today's volume on the SPX was the lowest for the year if you minus the July 3th holiday session (and July 5th after the holiday Friday session when everyone was clearly on vacation).   We are bumping up against resistance at 1684.6 (today's high was 1684.51) so the volume is either indicating that demand has dried up or supply isn't present due to lack of selling pressure and the daily bars closing near the highs.  However, we do know that in order to break resistance we need an increase in demand to overcome supply which we clearly didn't have today.  A close below today's low on increased volume would be our first bearish signal since the run up.  This would clearly signal supply entering the market.  But boss how far will we fall? First I hate when people call me boss. Second, if a drop where to ensue a move to support is likely which we can see from our PnF chart below would be at the 1654.1 area.   Pretty clear.  

Say tuned for the most shocking trading session yet (was watching reruns of the bachelorette when writing this). 

Thanks for reading. 

Been awhile

I must apologize to my millions (5) of readers out there for only posting once last week.  I know many of you felt in the dark, left all alone, startled by the slightest noise, wondering what is poking at you.  If you were short the market it was the feeling of bull horns crashing into your buttock.

Last post we talked about the 1652 area. Below was the light I provided to those in the dark.  I was also leaning bullish just because the daily candles were closing near their highs. Bearishness was no where in sight. 

"We are at a critical price point since a break of 1652.1 resistance will likely lead to a retest of the highs at 1687. So we don't rush in an short here. The prudent move would be to wait for either a break of resistance and a test of that broken support to initiate a long position or a close below today's low 1642 on increased volume to initiate a short. Lets see what happens."

What ensued in highlighted in the chart below. Basically, a large gap right over resistance leaving us sitting on our hands.  Stuff happens.  We move on and wait for the next opportunity.  However, look at the volume and price bar at the blue arrow. Interesting bar.  Increase in volume breaking resistance slightly.  I know this was at the time of the FOMC meeting minutes which many traders and investors were paying attention to.  Did the big boys use this as an opportunity to accumulate shares on news?  Well I don't have to guess at what  happened.  The increase in volume was buying from the big boys vs selling from the big boys to the retailers.  This type of buying absorption from the selling at resistance without any really drop will signify that demand is overcoming supply at resistance.  Next day they don't even give the little guy a chance to get on board  instead  they ripped the markets higher.

Where do we go from here? Most likely we are going to challenge the 1687 high which is only a few points away.  What will be important is what happens at this price level.  Do the big boys unload all those shares they picked up between the high volume down days from June 20-24 to the unwary traders and investors or do we have to wait for an high price level before they do that?  Either way the cycle will continue and I will be here like the Sirius star in the dead of night.

Thanks for reading.

Targets

Talent hits a target no one else can hit; Genius hits a target no one else can see.Arthur Schopenhauiser 

In a perfect trading world a prudent trader would enter a long trade at or near support and sell at or near resistance. Sounds simple. However, I chuckle at the many times I've so calmly and methodologically entered my trade after identifying a high probability set up with my stop loss in place and my support and resistance levels clearly marked on my chart only to bail out of the trade in a panic to lock in the slightest of gains only to see the price rise (or fall) to those predefined levels of support and resistance. Was it my subconscious desire to prove myself right that even the smallest of profits would validate my trading system or was it that I had very little faith in my trading analysis to being with and just grateful that I didn't lose money? I have to admit it took me awhile to truly believe in my trade analysis. I slowly gained confidence as I began to fully understand my analysis to the point that I felt I could defend the merits my trading system just like a student defending their doctoral dissertation.

Buy support sell resistance is a statement that even the dumbest of traders will quote to appear they understand the markets. Although that sure sounds like a great trading plan finding support and resistance and determining if its going to hold or break is really what separates the successful traders from the ones that blame a corrupt market from reaching financial freedom.

So now that I've finished digressing lets move on to the subject. Oh yes targets. Below is the PnF chart posted July 1st highlighting support and resistance levels. We spoke about the 1626.4 level and the 50dma and 20 dma both of which the market cleared on Friday breaking out of trading range. But what would be the next likely target if the market continued it moves up? Using the PnF chart below you could see that 1652.1 would be the next level of resistance. Bingo bango today we closed at 1652.32. What does this mean for tomorrow. First we have now reached the same level of June 19 before a 90+ point drop from high to low occurred over a four day period. Remember that I wrote about how I saw this as bullish as it represented a transfer of ownership from weak to strong hands and now here we are are back at the same area. However, it took ten days to get back to this level from the lows. Although we are resistance the daily price bars have not signaled any bearishness since they are closing near the high ends of their price range indicator demand is winning on a daily basis. We are at a critical price point since a break of 1652.1 resistance will likely lead to a retest of the highs at 1687. So we don't rush in an short here. The prudent move would be to wait for either a break of resistance and a test of that broken support to initiate a long position or a close below today's low 1642 on increased volume to initiate a short. Lets see what happens.

Thanks for reading.

Break, Test, Enter

No system is 100% accurate.  What does it mean to be accurate in trading anyways.  I was thinking about this over the weekend as my inbox was filled with promises of 100% returns on trades with holding periods of just 1-3 days from various stock and option newsletters.  How can I say no to something like that? All I have to do is blindly follow a few stock option picks and bingo bango financial freedom is mine!  If only life could be that easy.  The only thing they are selling is hope to the hopeless.  Now back to accuracy.  If accuracy is measured by how many times you turned a profit on a trade well I see that as only one component to a successful trading system.  Take for instance credit spread trading which usually has a very high number of profitable trades.  All it takes is only one bad trade to wipe out all your gains even after a string of profitable trade.  If instead these newsletters marketed themselves as capital and risk management gurus they would have more credibility with me.  When you place a trade you need to decide on allocation of your risk capital (amount you are comfortable risking) and of course an exit strategy that includes both a profit target and a stop loss target.  As for allocation of your risk capital this should be a percentage of your portfolio that will not get your emotions running too high shortly after placing the trade.  I find traders think too much in terms of how much they are 'going to make' on the trade versus how much they are willing to lose.  This way of thinking has giving me a huge psychological advantage because it keeps me from dumping a large amount of my portfolio into one position hoping for a big win.  If you think of it in terms of potential losses then you will finding yourself adjusting the amount so you are more comfortable with placing the trade..  What determines my profit and loss target is simply support and resistance.  Placing your trades close to pre-defined levels of support and resistance will allow for smaller losses since a break of those levels will quickly let you know you were wrong.  Just remember to get out of the trade when you are proven wrong instead of hoping for a recovery in your position.  The key obviously is to accurately define these support and resistance levels then use volume as your indicator to see if demand or supply is leading the move higher or lower. Break, test and enter is just a name I gave the steps of a trade setup that I execute on frequently.  The sequence is as follows:

Break - Pre-defined level of support and resistance (S/R) has been broken
Test - The broken level of S/R is tested confirming previous support as resistance or vice versus
Enter - Enter the trade only after the price bar closes above/below the high/low of the test bar. 

To demonstrate this lets first define our levels of support and resistance.  Below is a snapshot of the SPY 15min PnF chart on Friday @12:28EST.  It is clear that $162.43 is resistance and the next level above that is $162.80 (which we mentioned several times in previous posts).

The next series of charts are 1-min candlestick charts of the SPY throughout Friday to help highlight the principles. (Note I used thinkorswim vs stockcharts because of the zooming in feature of thinkorswim.)  Based on the principles above I've highlighted where a trade entry might have been considered.

Example 1:  Short Entry - SPY breaks $162.43 support on increased volume after which price rallies on lower volume to retest this broken area of support to confirm as resistance.  

Example 2:  Short Entry - SPY breaks $162.80 support on increased volume after which price rallies on lower volume to retest this broken area of support to confirm as resistance.  

Example 3: Long Entry - Multiple breaks of resistance with retests.  

I used a 1-min chart to demonstrate the principles but the principles are applicable to any timeframe.  Also remember this is one of just a few trade setups that I utilize. Is it 100% foolproof?  Of course not but with proper position sizing and risk management (I place my stops slightly above/below my S/R levels) I think you may find it profitable.  Questions or concerns?  Post it.  Otherwise send me $199/month to start your journey to financial freedom filled with fast cars and fast women.

Thanks for reading.

Same Old Same Old

"The stock market can be a cruel mistress."

I'm not quite sure who came up with that quote but it's far too deep for me.  I don't remember the stock market every satisfying me in that way to be referred to as a mistress.  The stock market has been more tame (boring) the past five trading days with price bouncing around 1601 to 1626.  What is interesting to watch is the way price reacts around not only the 1626 resistance area but the 50 day and 20 day moving averages (dma).  I've re-posted the SPX 30min PnF from Monday's post only to highlight the 1626.4 resistance area.  This continued at act as resistance on Tuesday (7/2) when price hit a high of 1624.26 before backing off.  Coincidentally, the 50dma was 1623.94 at that time and price closed below 20dma as well.



I'm going to do something different today and that is give my analysis of the past 5 daily trading bars highlighted in the chart below labeled with 1626.4 resistance and the 50dma and 20dma.

1st bar (6/27) -  Price hits a converging 50dma and 20dma area of resistance on the lowest volume in the past five trading days.  The signifies that demand could not muster up the strength to break that area of resistance.  Price closes near the middle of the price range. Neutral.

2nd bar (6/28) - This bar is actually very interesting for a couple of reasons.  First, the volume spike was considerable and price fell to 1601.06 before recovering slightly.  Second, 1601.06 is awfully close to the 1600.7 bottom we see on the above PnF chart before a rally ensued.   One might ask was this an transfer of ownership from weak to strong hand or strong to weak hands.  Typically when you see an increase in volume at or near support that typically is a transfer from weak to strong.  However, the next days up move confirmed it was the latter.  Neutral to Bullish (wait and see_

3rd bar (7/1) - Price rallied to the resistance area of 1626.4 and the 50dma (1622.91) where supply overcame demand (at lunch time) and price fell for the rest of the day closing below the 20dma. Bearish

4th bar (7/2) - Price again rallied to the resistance area of 1626.4 and the 50dma (1623.94) where once again price was met with supply (at lunch time again) and price fell closing below the 20dma. Bearish

5th bar(7/3) - Price behaved differently today (refer to the SPX 5 day 15 min chart at the bottom).  The past two days we saw rallies that we sold off at resistance.  Today we saw price open lower hitting a low of 1604.57 before recovering and continuing higher throughout the shorten trading day. Bullish.

The volume was low because the market closed at 1pm EST.  However, was this a test of the 1601.06 area?  If so then I would expect higher prices soon.  It has been my observation that price doesn't hang around the 20dma for very long and that typically a big move will transpire shortly after.  Our job is to react when it does and hop on board for the ride.  I was (and still kinda sorta am) expecting a drop back to the high volume area of 1576 but i'm not married to that position (i'm actually married to my wife).  A high volume jump over the 20dma, 50dma and 1626 resistance would get me on board for a continued move higher.  However, the facts are the facts and price is basically having trouble with this current area of resistance but at the same time prices really haven't fallen much.  So what do we do? Wait, see and react.

Thanks for reading.

SPX 3 month daily chart

SPX 5 day 15min intraday chart

Just a plain ole PnF chart

I'm a bit strapped for time today so no witty commentary or any psychological insights into why you are all terrible traders.  Just plain ole' analysis.  

I took a snapshot of a 30min PnF chart intraday to highlight some key support and resistance levels.  Notice the resistance level of 1626.4 and support of 1596.4. There was also the 50dma at 1622.99 to contend with and the 20dma at 1617.7.  Price closed below all of these levels today after challenging them on low volume. 

The SPX daily candlestick chart below has overlaid the support and resistance levels labeled from above as well as the 50dma and 20dma.  You will notice that volume has dropped off considerable today as we hit this array of resistance areas.  The volume was the clue that resistance was most likely going to hold since it was clearly signaling a lack of demand at these levels.  In order for resistance to be broken we need demand to overcome supply.  Price and volume were signaling otherwise.  So far my master plan of a retest of the high volume area around 1578 and 1594 (and yes I realize that the PnF chart is showing 1596.4 as support this is due to volatility) is still in place.  That does not mean that we can't just rocket higher from here but I'm looking at this move from a probability stand point and the retest path seems most likely. 

Thanks for reading. 

Thanks