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Jan

Investing Systems Research Lab Blog for Week of January 23rd, 2012

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It seemed like a strange 4-day trading week. I saw a lot of odd behavior in individual stocks on OPEX Friday.

The indexes just seemed to float up on light volume last week and actually made it through the resistance zone and into the green circle I drew last week.

I posted here 4 trading days ago, that the rally was getting “a little long in the tooth” and I still believe that. However we definitely have to respect the strength and I certainly do.

Under these circumstances, every day next week I will be hyper-vigilantly watching the indicators for a potential top and reversal.

The scenario is pretty much the same as it was last week, it could continue to push higher and thwart early shorts, but we are nearing that “musical chairs” moment, and you don’t want to be holding a ton of stocks on the next pullback.

As far as the overall market is concerned, I’m more inclined to have minimal exposure up here, trade lightly and look to take advantage of the inevitable “next cycle-down”.

Did you notice how Silver traded Friday?

Did you notice AGQ (2x long silver) on the Grid?

Here’s a chart of Friday’s silver futures.

As of the globex close, March Silver was up an astonishing 5.4% ($1.66) on the day.

ZeroHedge.com has an interesting explanation for this move…

After I looked at the chart above, and the chart of SLV and AGQ it got me thinking…

One of my favorite silver stocks is AG. I have a little in my IRA with a cost basis of 18.

As most of you know, I’ve been an advocate of “investing” in physical silver for quite some time now, perhaps a decade. That may sound far-fetched to new members but ask anyone that been with us since 2000. Check out this mark-up for SLV on this blog from August 2010.

Anyway, all of a sudden AG looks interesting again. I haven’t analyzed it in quite some and I see some potential here.

However there are a couple different ways this can play out. In the back of my mind I give a high probability to one more “shake-out” in the price of silver. Friday’s move is going to be the topic for traders all weekend.

I marked up a daily chart of AG with a potential trade scenario. (notes on chart)

Then I zoomed in a bit to the smaller timeframes and the 60-minute seems to offer the best view of the current potential levels.

So here’s what I’m thinking…

Gold has quietly been climbing and silver makes a 5% move in 1 day? But the mining stocks are severely underperforming and not confirming the move in the underlying. So something’s gotta give. Either these miners are ready to move higher, or the next “shake-out” is coming with GLD and SLV and perhaps the overall market, and these mining stocks are the proverbial “canaries in the mines”? I won’t even mention the coal stocks here. This is part of the reason I’ve been taking stabs at EGO…I think they are going higher, but they are very volatile, so the timing has to be just right. There’s a chance I’m wrong in the short-term, especially if the market corrects and takes all this with it.

Gold, Silver and the mining stocks got crushed along with everything else in 2008, and we don’t want to lose sight of that.

However, as I mentioned, I know at least a dozen reasons silver should be much higher, and I always stand behind it as a long-term investment. Part of the reason is simple supply and demand, which in theory trumps margin requirements…

As far as the “potential” that AG IS headed up…

Say it doesn’t work out as I expect. Buying and adding on strength and using prior lows as stops ensures that no matter what, I can never get hurt too badly on this trade/ investment. I’m basically risking a buck on each entry and using stops on the way up, and I’m totally out under 16. If that happens I’ll just use the proceeds for the next great trade. If the timing is right and AG is headed for the upper-trendline on the daily chart and IF it breaks through that, it could make a huge move. This is an idea for a patient trade, actually perhaps an investment. I always say the best investment you can make is to buy a stock at just the right time, and it never goes below what you paid. the longer you hold it, the further it moves away from your entry price, then you can re-evaluate it at your leisure to decide when to raise the stop.. I’m thinking a“scale-trading” strategy might be a good approach with this one.

The risk-reward is clear. IF AG is headed into the 20’s, it will pass through 18 and 19 on the way there – a mathematic certainty. IF it is destined to go much lower, perhaps the single digits, it will do it without me, because as I said. “Under 16 and all bets are off”. It’s all about timing the right entry with the proper risk-reward. If you look at a 2 year chart of AG you see clearly that once it starts pushing higher, the run-ups can be “incredibly significant”.

Which brings me to last weeks Blog post…

I hope you read it. I demonstrated a little mock-up of how I try to “pinpoint” a good entry of a trade using different timeframes.

Here’s the 5-minute chart of IDCC from last weeks blog with the details of the trade I imagined.

Here’s what it looked like at the close Friday.

The crazy thing about this mock-up was that the stop was so close, for such a volatile stock, that the odds it would come within 2 pennies, yet NOT hit were extraordinary. The low of the pattern was 41.82 as you see on the chart.

We can see how dramatic the subsequent move was clearly on the 60-minute chart.

I’m not trying to overdo it here but I wanted to point out those areas on the MACD I had circled that provided one of the “clues” I was seeing.

Why didn’t I put this one up as a Trade Plan?

Simple…

I want you to read this blog each week and take it seriously. Some of our best trade setups appear on the blog and never make it to the Trade Plans, typically because of the limitations.

For instance, with IDCC the Trade Plan I had mocked-up would have certainly “blown out the stop” had I actually had the nerve to activate it.

Just look at how ridiculous it would have been to use such a tight stop.

That’s just how it goes sometimes…

Perhaps I should have taken it more seriously eh?

Ahh, but it was just an example, remember? There will be plenty more…

Here are some stocks with interesting patterns we’ll be watching.

(notes on charts)

So there are a few charts to add to your watchlist.

The standard disclaimer and rules I always mention here still apply…

————————————

A new member sent me an email with a couple questions and comments and I thought you might be interested to hear my reply. If not then please skip this section. The reason I’m putting it here is that it gives some thoughts on the overall market as well as our trading strategy and my perspective.

…I’m disappointed you got in EGO and not PLCM too. My stop got hit on EGO Friday unfortunately, but the other trade balances things out. And the prior trades make one stop out negligible over a series of trades. I understand that you might want to pick and choose, but suppose you choose the wrong one? The gold and silver stocks have been acting weird, with the price of gold up and especially the fact silver/SLV was up 5% Friday! AGQ was on the Grid and just look at that 5-minute chart. Something’s up and the miners are suspiciously weak. I’m scratching my head, but I will say this. EGO is probably going to chop around in the 13′s, then move back into the 14′s on it’s way much higher. If you only have a small position and you didn’t take the stop, you might widen it out. I hate to get shaken out like that and it’s not out of the question I get back in it at a higher price, when it’s demonstrated that the current pullback has ended, it consolidates and starts heading higher. I think at some point over the year we will see EGO at a considerably higher price than the 13-15 range we see now.

Under 13 and all bets are off…that’s really where I would have liked to set the stop. But you know the Trade Plans, they are very rigid. The inherent volatility in many stocks precludes them from being "ideally appropriate" for the trade plans, so I have to make judgments on that.

IDCC on last weeks blog (and a recap on this weeks later), demonstrates that. I’m kicking myself, by the way for not having the "nerve" to activate that in the trade plans. What was I thinking?

I’m not sure what you are doing as far as position sizing with your trading, but right now, I’m taking these swing trades with about half a normal position. This is because the market is up at the top of a cycle. So eventually, perhaps sooner rather than later, there will be a down-cycle and I don’t want to be heavily exposed. When the market rolls over, I fully expect any Trade Plan swing trades I’m holding will get stopped out. So it’s like a game of musical chairs right now. I know the market falls faster that it goes up, especially with the recent "float up" on low volume environment. One day soon, there will be a big volume down day. It could start at any time.

Hopefully we can catch a few more good long trades this week and perhaps next. When the trend change is apparently underway, maybe we will take some trades on inverse ETF’s or the VIX or something. Sometimes we kind of sit it out, sometimes there are groups that are still doing well.

In the bigger scheme of things, I think Jeffrey is spot-on with his SDS campaign trade right now and I have high confidence it will work out for him. It’s a totally different sort of trade and strategy and it’s much easier than trying to pinpoint the exact turns on the zoomed-in scale the trade plans require. So between the two we have really great symbiosis right? If I’m in a couple trade plans and the market tanks, the stops get hit, a lose a few bucks, but the SDS makes it’s move and theoretically more than makes up for it.

We shall see…

OK, I could go on but I gotta get to work on the blog post, maybe eat some food.

Have a good weekend and check the Trade Plans each morning. Don’t be afraid to go for them all because it’s a statistics thing and this years sample so far is too small to mean anything. Until we have 10-20 closed trade plans we won’t really be able to tell how we are doing.

I guess the take-away from that is…

I don’t trust the overall market, but I’m more than willing to take short-term trades on good setups. I’m not willing to try and call the top of this cycle at all, but as you know, I’m always prepared for the eventual down-move, and trust me they ALWAYS happen.

Just watch the psychology turn on a dime on the next pullback…

Always use stops and always keep a watchlists of stocks like those above, as opportunities are always there.

For the next few weeks be certain you know the earnings Release Date of every stock you hold and every stock you consider trading.

Personally I don’t like holding “trades” over earnings, but I make exceptions sometimes as long as my position size is small.

Join us Monday morning at the market open and we will discuss the merits and pitfalls of holding the current Open Trade Plan through the earnings release Monday, after the close.

If you watched the Live broadcast Friday you know we “took it up a notch”, adding the ability for ‘yours truly’ to broadcast charts live.

I hope you can join us this week….I’ll have it mastered in no time.

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Jan

Investing Systems Research Lab Blog for Week of January 16th, 2012

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Another 4-day trading week…and Options Expiration week…

As we discussed last Wed-Fri, this week we are expecting the market to “take a little breather” – it needs a “rest”.

It will not surprise me to see a small pullback, correction, or cycle-down, however you prefer to characterize it, over the next week or so.

However that nice round number 1300 is right overhead…

We know the market has been moving in wider ranges recently. And we know that “they” might try to shake out any shorts, who might try to arrive early to the party. after all, it is OPEX week. So I’m not ruling anything out just yet.

With that in mind, let’s take a quick look at the SPX 60-minute chart and then I want to do something a bit different this week.

For several weeks now I have been pointing out the “resistance zone” shown in the green rectangle. We also discussed the downward-sloping trendline, the “big Kahuna” as I called it last week.

“They” might decide to give it one more “push”, which I think would take it up to the green circle on the chart. But honestly, that seems like more of a stretch than the pullback scenario at this juncture.

The red arrow shows the likely “least path of resistance”. Zoom in on your 60-minute chart and watch how the price action behaves with respect to the 17 period ema and the 43 period ema. That will be the tell.

We will be watching that closely next week and providing analysis in the Research Lab as it “manifests itself”.

——————————————

Next, I wanted to show you something really cool…

An analysis on just one stock using multiple timeframes and views.

This is NOT a recommendation to buy this stock or take this trade.

It is an example of what “went through my mind” when I looked at the chart of IDCC briefly. The funny thing is that “in my mind”, everything you are about to see happened in the “fire of a synapse”, literally.

It took me over an hour to mark up these charts and save them. It will take at least another hour to explain what I see and what I was thinking when I saw it. So here goes…

Hopefully you will enjoy hearing my thought process. It happens very quietly. It may perhaps help you in the future when you see a similar setup.

Again, this is just an example. The stock may or may not “behave” in a manner even remotely demonstrated below…it’s more about the analysis of a potential trade setup.

Know your timeframe. It’s one of the most important aspects of trading, and it’s very personal. Each trader is different and should know their primary “trading timeframe”.

Some of you scalp dimes and quarters. Some take daytrades and seldom hold overnight. Others are “in for the swing” and don’t have time to sit in front of the screen from 8 to 5 like we do. Heck, I bet there’s even some “investors” left out there and they don’t want micromanage things and probably don’t have time anyway.

Regardless of your style, it’s a good idea to examine a potential trade on multiple timeframes…

Let’s dig into the example with IDCC starting with the most zoomed-in view first. Here’s an intra-day 5-minute chart of Friday’s action.

Notice on the chart above I drew a downward-sloping trendline that got broken towards the very end of the day. The stock spent the last hour basically trading sideways. This is the first sign that the stock may have potentially bottomed in the near-term.

Also notice I drew some horizontal lines, one at the low prior to the trendline break in red. The yellow line is the more recent low, which is only about a dime away from the current price. As I will show you in a minute, in the big scheme of things, the dimes and quarters we analyze on these zoomed-in charts are barely perceptible.

Let’s look at a little wider view, still on the 5-minute chart. I added a “note” on the chart of what I would consider a reasonable “trade plan”. The most reasonable thing about it is that I know the maximum risk if the stock “hasn’t bottomed” here.

In the view above, you can also see where the first downward-sloping trendline originated.

Based on what I see “all zoomed in” like this, I can draw logical points of support and resistance (the horizontal lines).

The basis for the Entry part of “plan” you see on the notes on the chart above, will be the stock breaking above the most recent horizontal resistance at 42.05, and giving it a few pennies leeway.

Also look closely and notice the 17/43 EMA’s and how the stock would have to move above the 43 ema to hit the entry. Shortly thereafter it looks likely the 17 would cross up through the 43. Keep in mind this is a 5-minute chart, but it seems I’ve heard that 17/43 thing before…

Ideally, what we are looking for in the longer run is a break-out above the bigger downward-sloping trendline where I have the green arrow. However there is a lot of “work” to do first and significant resistance above, which it will have to surmount to even make it up to that trendline..

As we zoom out to the final view on the 5-minute chart, we can see where the major trendline originated.

From the looks of the above chart, we may be a little early trying to catch the bottom here. It’s for this reason that I would “fully expect” to get stopped-out if I took this trade. I would not take the trade at all unless I was prepared to lose twenty-eight cents doing something as foolish as trying to “micromanage” an entry at a “potential” bottom.

The prudent thing to do would be to wait for the major trendline break, so the stock “confirms” a change in direction. Ideally the trendline break would come on above average volume and at a time when the “market” itself was in a more favorable environment.

Now let’s look at IDCC on the 15-minute chart to see what that timeframe tells us…

Notice on the 15-minute chart above that the stock would have to break above the 17 period EMA in order to hit the entry target. You can also see that the 43 is sloping down and is likely to coincide with the first “minor target” in the plan. At this point the stock is below the 17 and 43 on the 15-minute chart, which typically means we are way early to the party and we aren’t really sure that the party is even gonna happen…

But then again, the idea was to attempt to catch the “potential change in direction” at the earliest time, ahead of the guys waiting until it “confirms”.

Stocks go up and down every day and IDCC trades in an average daily range of 3.5% or $1.49 PER DAY, over the last 20 days.

Guess what? Setting a $ 0.28 stop-loss on a stock that trades $1.49 a day is “practically insane” unless you plan to get hit on your stop. Wouldn’t you agree?

Now actually, there a a few different ways to play a setup like this and perhaps make the risk so negligible, that’s it’s ok to try something like this. Say we took a very small, like 1/4 position at the entry, then waited for the next trendline break to “add to the position”. We would only be risking a tiny amount of capital in that case, and twenty-eight cents wouldn’t be any sort of a big deal. Especially if we were lucky enough to actually catch the “bottom of the cycle”.

The chart below is the daily chart, which shows the wide-view and as you can see “in the big scheme of things”, what’s twenty-eight cents on a stock that moves a buck-fifty a day? See if you can spot the original entry and stop on this chart.

When I look at the daily timeframe chart above, it makes me want to “just watch” the stock to see if it can really take out the major trendline – and if it does, it looks like there’s plenty of time to get in.

How you would trade this “potential setup” is directly related to your personal trading timeframe…

The thing of it is, that this stock is very volatile, or should I say it was extremely volatile in the past, but the “average range” has been tightening up for a few months, and is actually now the “narrowest range” this stock has had in quite some time. And to think on any given day it’s moving 3.5%. That means in two days it should not be a surprise to see IDCC travel in a 7% zone.

The chart above shows the primary short-term trendlines on the daily - the upward-sloping support drawn under the recent lows and the downward-sloping resistance drawn across the recent highs.

Where those trendlines cross, it almost looks like an “X”.

Based on what I see on this chart, a decent “entry zone” would be around the area where I drew the green circle on the chart and a reasonable “stop-loss” would be where the red circle is. The red horizontal line is the actual “stop”, where you lose the twenty-eight cents…

What would this look like if I actually loaded it into the Trade Plans in the Research Lab?

Let’s a take a look.

Here’s the original scenario, where we enter at 42.08 and use the tiny stop at 41.80.

Does it look to you like this trade could hit the entry or stop?

Now you know what I’m up against with the Trade Plans.

Here’s what I would visualize as a more “reasonable” area to set the entry and stop…keep in mind the average volatility of IDCC.

Hmm…from that view it looks a little more “dicey” because of the wide range the stock has been travelling in and honestly, there a good chance it would go either way at this point.

(By the way, ignore the extra candle on the right. The system inserts that on weekends)

The main take-away is the idea that we analyze potential trade setups on multiple timeframes and look for opportunities “all zoomed-in”, because that offers the “theoretical” best place to get an entry IF, indeed the “trend-is-a-changin”.

All we can do is analyze the previous points of support and resistance, draw the trendlines and work with the price pattern.

If that last chart doesn’t scare you, then congratulations, you are a true speculator!

Oh, wait a minute….I almost forgot – let’s take one more look at IDCC on the intra-day timeframe.

Let’s go back to the 60-minute chart as I’ve added some additional thoughts on the notes.

When I look at the chart above, here’s what comes to mind.

I see the MACD looks similar to last time the stock “bottomed and reversed”, but as you know, I am a big believer in “repeating patterns”.

So I am inclined to think there might be a “spike-low” on the horizon and perhaps that would offer a good opportunity to take that “first small position”, maybe as a Plan B, if the 5-minute timeframe proves to be “ridiculous” on a volatile stock at the same time the market is likely to “have a pull-back”.

Hmm….

So many ways to speculate, so many stocks, so little time…

Fortunately for everyone, my eyes and “mind” spot this kind of stuff all the time and the “mental analysis” happens in a few seconds. All of you that have “written down on paper” what you were thinking know that it it takes much longer to type than to think eh? I t was an interesting exercise for me to document the concept…I really had to think it through and I;m sure I left some a few things out.

But nevertheless an interesting introspective…

I hope you all have/had a great Holiday weekend.

I’m actually looking forward to next week and especially the week after that. Next week is dicey, but a little “rest” for the market will set us up for countless “high-probability” trades down the road.

One of the hardest things to do as a trader is “be patient”, but that’s exactly what I will do next week.

I don’t trust anything. Especially the notion that the market “always goes up”.

The recent price action may have fooled some people into thinking that, but they are in for a rude awakening at some point here in the near future.

But we call it as we see it, and next week I hope you can join us for that.

We will be Live in the Research Lab this Tuesday at the open. Normally we only do M-W-F, but since the market is closed, we decided to “go for it” right out of the gate this week.

See you on the show!

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