Jan

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

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”.

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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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One Response to “Investing Systems Research Lab Blog for Week of January 16th, 2012”

Investing Systems Research Lab Blog for Week of January 23rd, 2012 on January 21st, 2012 8:31 pm

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

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