Dec

Investing Systems Research Lab Blog for Week of December 19th. 2011

In the big scheme of things, the market was pretty uneventful last week. It definitely had a negative bias though, starting with the gap down at the open Monday.

It felt like one of those weeks that it was best to sit back and avoid being aggressive or active.

The reason for this is that the market is right smack in the middle of “no man’s land”.

Last week the S&P 500 got “deflected” off the 200-day moving average and has retraced exactly 50% of the last “big up-move”. You remember, the 8% rally a few weeks ago when the problems in Europe were supposedly solved…

Here’s a look at the daily chart of the SPX that shows we are right in the middle of a big triangle.

I actually like the look of this chart because it’s easy to see what’s going on. The market is getting squeezed into the apex of the triangle and is going to break one way or the other within the next couple weeks.

One nice thing about the recent “action” (if you can call it that), is that we are seeing more “narrow range” days. Contrast that with the crazy intraday and daily volatility from August to October.

This means that the market is finding a sort of “equilibrium level”, gearing up for the next big move.

I said this last week and the week before, but I have to say it again, “I won’t be constructive on the market unless and until it breaks above the 200-day moving average”.

As we have been discussing, the downward-sloping trendline, the 200-day moving average and the highs from December 5th-7th are all acting as overhead resistance.

If and when the market breaks through all three of those, a “big” move up wouldn’t surprise me at all. It would likely surprise “the majority of participants”, so I’m not ruling it out.

The most likely scenario this week though is a test of the lower trendline drawn up from the recent lows and hopefully a bounce off of it. That would actually set up a lot of stocks for good swing trades.

Right now the main thing to watch is how the market proceeds in this triangle as it happens to bead almost dead-center. This triangle’s days are numbered and it’s going to break one way or the other.

With this being a Holiday week, most people will have their focus on things other than the market, so it could potentially coil up even more. That will make for an exciting “last trading week of the year”. It really doesn’t look like the triangle can contain the price action for two more weeks…

So things should get interesting soon…

Or maybe not…

The last two weeks of the year are typically strong and the market typically acts well, but the volume is low and there is a lot of year-end “positioning”.

Here’s a look at the pattern on the 60-minute chart.

We talked about the short-term“rounding top” pattern last week and it’s pretty clear on the chart above.

The upward-sloping trendline pretty much coincides with the left-side of the pattern so it would not be uncommon to test that.

The big “what-if” comes if we break to the downside. A break of that trendline to the downside would not be a big deal initially because the market would likely find support around 1158, the low of the prior pullback. Below that it starts to get ugly…

Do you see the ? right above the green downward-sloping trendline? That’s where things will start to get fun, but I have a feeling I will be moving it to the right for next weeks post, which is fine.

Let’s enjoy the Holidays this week, knowing the volume will probably be fairly low and look forward to “getting aggressive” in the New Year.

We need to see how this plays out and it’s almost “appropriate” that the market is marking time until the next big move.

As usual I looked through a couple thousand charts this weekend…

There is not a lot to get excited over right now. Relatively speaking, there are not a lot of great looking charts right now. I do see some decent “potential” setups, but they are not “high probability” for the most part.

In other words, many of the stocks that “don’t look so bad” would require the market to move up in order for me to want to be involved and I can’t assume the market is ready to move up just yet. It has to prove to me it wants to move up…

So instead of marking up some charts that look “just ok” ahead of a week that will likely be dull, I thought I would show you what I saw on the chart of MNTA that made it look like a good swing trade.

Here’s the 15-minute chart.

It should be fairly self-explanatory if you watched the video on “swing trading with the 15-minute chart” video in the Strategy Room of the Research Lab.

You had a nice pullback that lasted seven trading days and you see the trendline I drew across the highs of that pullback. The 17 period EMA had been riding below the 43 period EMA and then you see where they crossed where I drew the green circle.

The next day the stock gapped up and broke the trendline, established a near-term high, then had a little snap-back to fill the gap and wash-out the “chasers”.

The 17 and 43 then converged and squeezed together where I have the other green ellipse drawn. The subsequent price action moved back above both the moving averages and they began to spread apart.

The entry was right on a break of that prior high at 16, with the stop-loss down at the bottom of the lows of the pattern.

At this point, a “very conservative” trader or one with a “significant position” could move the stop up to the afternoon lows of the 14th, say around 15.50. This same conservative trader should have also taken profits at Target 1, which was 16.40

You can’t really see it on this chart, but this stock is quite volatile from day to day. A stop at 15.50 could easily get hit with a slight downdraft in the overall market, so my idea was to trade a smaller size and give the stock a little leeway.

I see a lot of cases like this where the obvious stop is at the recent lows, but there is also a good place to put a tighter one if that makes you feel better.

Target 2 is at 16.80 and if it makes it there, the stop will get moved to the Entry at 16. I will be taking profits at Target 2 (if it hits it). There’s a time to be aggressive and there’s a time it’s better to settle for small gains.

As we mention from time to time and as is detailed in the Trade Plan documentation, in an “uncertain environment” like we are in now, it’s not a bad idea to “sell all” at Target 1. Doing that you would have a 75% win rate year to date with the Trade Plans, which “ain’t bad”. Personally I like to shoot for 5% to 7% moves, so I typically put my sell in at target 2 and let it ride…

There will be a TON of great Trade Plans in the New Year. Many of them I will shoot for Target 3, but it all depends on how the chart looks.

This setup looks good on the 60-minute chart too.

I like the 60-minute chart because it’s a little cleaner and less erratic. Notice the 17/43 cross on the 60-minute, which is a great confirmation that occurred prior to the entry.

This trade may or may not work for us. That is the nature of the game.

When you sit down to play poker with your buddies you don’t expect to win every hand…if you do you will be sadly disappointed. Same goes with trading.

We find the good setups, some fill some don’t. Some gap over the entry and run away without us. Some fill and look great, but then the market rolls over and takes everything with it.

The best we can do is take logical trades based on proven patterns and be selective. We try to make our trades as “actionable” as possible and give an EXACT entry price so that one can program it in ahead of time.

Our Trade Plans are exactly what we say. Exact entry, stop and targets.

If you are trading along with us there is absolutely nothing wrong with using a little “subjectivity” and making decisions based on your own decisions. Like I mentioned, you can always use a tighter stop if that makes you more comfortable. You can always take quicker profits and you can always choose to sell at any time if you aren’t confortable with the trade.

Our system however “sets them in stone”. Once activated, a Trade Plan will stay open until it plays out…

No changing our mind, no waffling or “on the fly” decisions. That’s why we call it “a plan”.

Here’s the track record going back to the beginning of 2010.

So there you have it…

Our Track Record speaks for itself…

As I said above, there will be a TON of great trades just like these in 2012.

Every morning you have something to look forward to. Log in the Research Lab, click to the Trade Plans and hit the “Waiting” page to see what stocks we have “on deck”.

We have had an excellent year with these trades and it was just slightly better than the year before. We ran the data from the above trades to see what the actual cumulative gain would have been if you “sold all” at any of the three targets and if I remember correctly it came to roughly 86% year to date if you bought each trade at the entry, set the stop and sold at target 3. Interestingly enough, if you sold all at target 1 you did almost as well, which makes sense since the hit rate was almost 75%.

Not too shabby considering the market is down for the year and most “professionals” did not have a great year…

So be sure to join us at the market open Monday on the Live Broadcasts in the research Lab.

We will see you there.