Jan

14

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”.

——————————————

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!

Share and Enjoy:

Jan

7

Investing Systems Research Lab Blog for Week of January 9th, 2012

Filed Under Main Content | Leave a Comment

Finally we are back to a regular schedule with the first full week of trading for 2012, and the market gearing up for Earnings Season.

We actually got the Santa Claus/Year-end/New Year rally, with the S&P 500 adding about 75 points since the close on Dec. 19th. That’s a pretty big move in 12 trading days.

Those of you that have been with us for a while can never accuse us of being ‘complacent”. When it comes to the overall market, I never really trust it.

While most of the talking-heads in the traditional financial media seem to be optimistic, I am getting a little wary up here in the “resistance zone”

Last week started off with a big gap-up into the green area on the chart below, then essentially traded sideways. Last week we had several days that started off with a big drop, then mid-day recovery.

Here’s a look at the 60-minute chart of the S&P.

The chart above shows about a month of trading and you see that the last time the S&P was in this area was all the way back in late October. You can see what happened subsequently…

Last week the market had the “seasonals” on it’s side as well as typical New Year positioning. Technically speaking the S&P is above the 20-day, 50-day and 200-day moving averages and this is very positive, however I think it might be due for a little pullback.

I could be wrong and this recent strength might carry into this week, but as I mentioned last week, it needs to break out of the top of the green area and move above 1300 to prove it wants higher. But then, looming right overhead is the “big kahuna”. The downward sloping trendine drawn from the highs of 2011.

Here’s a daily chart with a green arrow pointing to this trendline.

I think it’s unlikely that the market will attack that trendline this week. I’m looking for some sideways consolidation, perhaps a small “cycle-down” first.

We’ve been watching different triangles here for a few months, but this one is the biggie. The market needs to break above that major trendline before I’m convinced it can make a significant move up. The funny thing is that by next week, the trendline and the top of the “resistance zone” will likely be converging, just in time for earnings season to really gear up.

As long as the price stays above the upward-sloping trendline that forms the bottom of the rising channel, the market is in a primary uptrend. If for some reason it breaks it to the downside, down the road…things could get ugly.

I expect these two trendlines to contain the price action this week, then it should get really interesting…

——————————————————————————————-

Two weeks ago we reviewed the Trade Plan in MNTA, which worked exactly as planned.

This week I wanted to review the trade in ABMD, which didn’t work out the way we intended. It’s actually a great example of some pitfalls that are very common when swingtrading, especially when trades are planned in advance and “set in stone”.

When we originally created the Trade Plans software, we had some logic that said a trade can “only get filled on a move up – a green candle”. However in real life trading, this wasn’t really feasible, especially setting up the trade in advance, programming it into the broker before the market open. So we decided that “a fill is a fill”, though we still would prefer to get filled on the way up since most trades look for a break-out of a range or trendline.

It really cuts both ways…sometimes a stock will gap over the entry and pull back just enough to fill the order before reversing and moving up in the intended direction. Sometimes it continues to fall, as in this example.

Since the market gapped up big to start the week, several of the trades we had on deck gapped so far out of range they would have been deleted right at the open.

Here’s a look at the “ugly fill” on a 60-minute chart.

You can see prior to the entry the stock had a nice trendline break and the 17 was coming up to meet the 43. The stock had been trading in a sideways range and was poised to move up and break above the green horizontal entry line.

Instead, it gapped over the entry, then began selling off with the overall market and fell right back into the sideways area. It drifted around for a couple days then finally hit the stop.

The larger view on the 60-minute chart below shows a better picture of what the setup looked like and shows the big move up the last time it was in a similar pattern.

In late November it had a similar trendline break, traded sideways briefly then made a huge move up. This time the same pattern was setting up and the sideways consolidation went even longer, which we took as a sign the pattern had a good chance of repeating.

The stop-loss was at 17.85, just below the upward sloping trendline across the lows.

So this one didn’t work as planned however I think it’s instructive, mainly due to the fact that it would never have filled had it not been for the big gap-up in the overall market to start the week. The open was an “outlier” and not really a valid breakout up through the horizontal resistance.

Let’s look at one more chart of ABMD to get an even larger picture. This 60-minute chart shows the stock was in an overall uptrend, had a decent pullback and looked ready to “cup back up”. It also demonstrates how “in the big scheme of things” the small zone between the entry and stop was relatively tight.

ABMD had an average daily range of 3.5% over the previous 20 days, so a 5% stop was very reasonable. Heck, it might turn out to have been too conservative.

Nevertheless, this is a good example and lesson that you will always have stop outs when trading stocks. It comes with the territory…

Based on the current chart and the fact that the stock didn’t cycle back up, it almost looks like a potential short now, if it breaks below the November low.

Ok, so now that we are familiar with the pitfalls of entering trades on red candles, let’s move on…

——————————————————————————————-

Normally here I would talk about how gold and silver are the only real money. Or perhaps discuss the latest macro issues that we have to worry about. Or even mention how “Every morning that I wake up and the Global financial systems hasn’t collapsed, is a good day”. Perhaps mention some tidbit about seasonality or correlation between assets.

Other times I will talk about a trading strategy or a trick I use to make money trading stocks. Sometimes I show some stocks or sectors I’m watching or any changes in the overall market environment.

Then of course I generally bring some good trade setups to watch …

But this week I wanted to do it a little different by showing you the setups staged in the back-end of the Trade Plans software in the Research Lab.

As the system identifies potential trades, it sets stops based on a “logical” area on the chart. Many times the stop is a bit wide for the targets we use, so the trade does not necessarily pass through to the “Waiting Trades” page.

These setups require that you actually open a daily chart of the stock, looking at about 6-months to a year of data. The potential trade plans are a very “zoomed-in view” of the recent price action and don’t typically show the big picture.

Here’s an example of one that was staged last week but did not get activated – it didn’t pass all the filters, even though it worked well. We talked about this one Friday on the show.

Here are some that have been identified for this week. Be sure to pull up a longer-term chart…

Keep in mind that these are “preliminary” staged, and potential setups at this point.

As you know, we won’t“ stage” 6 Waiting Trade Plans on any given day. We try to keep them “actionable” so you don’t have to pick and choose.

Our system will likely identify another 6 before the market opens Monday, so we have to do additional analysis to try and identify the two or three that have the highest probability of hitting the Targets without taking too much risk.

It’s not uncommon for a stock to have a very volatile trading pattern and an average daily range that exceeds 3%. In these cases, a 5% stop will get hit a lot, simply due to the normal price fluctuation of the stock. You don’t typically set a 4% stop on a stock with an average daily range of 7.8%…

The Trade Plans system also sometimes finds setups that have potential to go a LOT higher than Target 3. This is another thing to consider on ones that seem to have wide stops.

Of course the overall market generally dictates which get filled and how they move subsequently. If the market begins a “cycle-down” next week, it will likely take most stocks down along with it. The correlation of most stocks to the overall market is very high right now, actually the highest in decades.

So there are a few ideas to watch. be sure to look at the bigger picture on the charts and see if any look good to you.

You might see a couple of these next week in the actual Trade Plans on the Waiting page, or we might find a few better ones as we continue to run the analysis.

I thought it would be fun to “change it up” this week and show some setups from the back-end rather than the normal setups I mark-up on the charts.

We will see you right before the market opens Monday morning in the Research Lab on the Live Broadcast page.

We can talk about these and other swing trades and we will take the stock picks from the Live Grid and see if we can find some good entries and trades…

Cheers!

Share and Enjoy:

← Previous Page

Investing Systems Research Lab Blog

Become A Member of the Research Lab

Free Download

Download The Market Toolbox
Desktop Financial Portal
The World’s Most Comprehensive Financial Software

Blog Roll

More Resources