Jan

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

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…

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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.