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Red Alert: Today the SPYders formed a Bearish Doji Star:

Tomorrow’s action will tell whether that becomes a full-fledged Bearish Evening Doji Star or not. This formation is one of the strongest “reversal formations” you’ll see. How would I trade it?

• On a gap-down opening tomorrow, I’d look for any intraday setup to get short for a daytrade potentially turning into a swing trade by the close. A gap down, rise to today’s low, and failure would be perfect, which means it’s unlikely.

• On an opening within today’s range, I’d view it as a short-term swing, waiting for the break of today’s bottom of 146.65 for an entry, with a stop at the entry bar’s high.

• On a gap-UP opening, I might get short on an OGRe, but with a reduced position size. A gap up would indicate residual buying pressure, negating the Evening Star’s signal.

GOOG Pullback After Double Top

With all the 100% positive press Google gets, you’d never suspect that it was pulling back into a big ‘ole double top:

Note the volume pattern on that last upswing. Their earnings “news” Thursday had better be gangbusters, else we may see just how deep (and cold) that water is…

Don’t Forget Options Expiry!

Options Expiry is this Friday. That usually means a great excuse to take a 4-day weekend, as everything gets pinned in a range. However, you may want to have a laptop nearby as you grill and drink. Never know when we’ll have another Black Swan options expiry day like January 20, 2006 (if you click it, read on down- it gets more interesting towards the bottom). The current setup is ripe to be clobbered by a “precipitating event”; be prepared in case we get one.

This morning at about 6AM, my head was full of ideas. Articles, essays, witticisms. Now here I am 14 hours later, and all I can think about is a steak, a glass of warm red wine, a little reading, and a good night’s sleep. Unfortunately I’m still in the live to trade camp, vs. the trade to live one, and I get too tired from my profession to pursue my passion. It sucks.

However, we’re at that place, with the S&P above its February Highs and the NDX threatening. So I’ve got to at least throw out some thoughts.

UNO

Clearly scenario one from my 08 April post has not materialized. So that one’s a shift-Delete.

DOS

Now we’re staring scenario two in the eyeballs. Remember, a failure from this breakout will spell a swift and steep decline. Be prepared. This will call for a rapid reversal by longs, or rapid adds or just high-fives all around by shorts.

TRES

‘Course, there still lurks scenario three, where we all end up long. My short stop is at 148.50 on the SPYders. (The second baseman is “WHAT”, BTW). I won’t like getting long, with the dollar only one cent from a historical breakdown against the Euro, but if the chart raises its shirt and flashes an uptrend, well, how can we refuse?

Food For Thought: SPY, VIX, and Fibs

Here’s a chart of the SPYders, with the volume emphasized, including a 10-day moving average of the volume. Note the volume trend, even with today’s “breakout”:

Now here’s a chart of the VIX, with a 10-day SMA also. Chances are you weren’t with me back when I wrote about the VIX Fade Trade. It’s still a valid concept to keep in mind:

And for the veddy intevesting picture? Let’s look at the VIX overlayed on the volume of the SPY:

Like a hand in a glove, and both showing that the current short-term trend shouldn’t be trusted at this point. In other words, if we’re looking to go long, best to wait for scenario three above, where we get a thrust on higher volume and a nice “take me now baby” pullback.

Finally, one you Fibonacci Retracement fans should note, and one you Fibonacci critics should note even more notably:

The old Golden Ratio, with no other technical analysis, provided a perfect support point to go long after the selloff. Fibs aren’t magical- nothing is. But you’d be doing yourself a favor to keep them in your toolbox with your other technical studies.

Cheers. Let’s make some money.

This morning, QQQQ, SPY and a host of individual stocks opened with what at first appeared to be a prime opportunity to go short, but which rapidly turned into a chance to make a high-percentage long trade. The cue to change directions came from one of our favorite old friends: the OGRe, or Opening Gap Reversal.

In my post yesterday, I talked about the plethora of short setups showing. So what went wrong? Nothing! Setups are not magic crystal balls which always tell us where the market (or an individual stock) is going. They simply help us to judge the probability of a move and (hopefully) give us an edge over pure chance. How we use that probability and whether we make or lose money has everything to do with our Trading Plan (entries/exits, stops, position sizing, etc), not with being “right” all the time.

If you are looking for a way to be right all the time, you should not be trading! Trading is about discipline and money management, and it is entirely possible to make money while being “right” only 30% of the time. It’s also possible to lose money while being “right” 70% of the time.

Good Setups Gone Bad

Good setups can be very powerful. But paradoxically, an even stronger signal often comes from a good setup that fails.

What we got today were failed short setups all around. It’s not that the setups weren’t there. Even Oscar and his OMNI (which is correct so much you’d think he must have drinks with Mr. Dow and Mr. Jones every evening) were pointing down.

What I think happened today is that looking to go short was a little too obvious. There is an old rule that The Market likes to make its moves with as few people on board as possible. On a day like today, the very best way for The Market to shake off the most barnacles (traders) is the old Michael Jordan Head Fake, aka the OGRe.

OGRes are powerful because they catch so many people looking the other way. It can seem counterintuitive at first, but if we learn to watch for them, we can take advantage of these high-probability morning patterns.

Here’s a diagram of what an OGRe looks like on a daily chart:

There’s not a special Japanese Candlestick name for an OGRe, although many notable and powerful candles can start out as OGRes, candles such as the bullish piercing, bullish and bearish engulfing, dark cloud cover and the squirrel on a transformer. Ok, I made that last one up.

Today’s OGRe Example, Brought To You By QQQQ

Many, many individual stocks had similar formations today, so let’s just look at Big Daddy:

The chart never showed a short entry. It gapped down and then ran down farther. Be careful not to be taken in by the panic to get short on a gap-down opening like today. Patience, grasshoppa. Wait for an entry, then when it happens take it and set your initial stop.

At 1005, the QQQQ pierced into the Opening Gap, at which point we’d start watching for the first pullback to get long. That pullback happened immediately, and on the 1020 bars’ break of the 1015 bar’s high, we had a spot for an entry into a beautiful daytrade.

Here’s what today’s OGRe looked like on a daily chart:

This bullish piercing candle, which began with the OGRe this morning, may provide an entry for a short-term long entry tomorrow. I say short-term because I don’t believe this rally. Only a confirmed break of the February highs will convince me.

And, lest I be remiss, I must show my dear AAPL:

That, my friends, is a picture-perfect hammer, the break of whose top will provide a great jump-in point for yet another short-term long trade. Alas, not for me. I am sworn, or doomed, to make my money from Apple on the short side.

That’s all for now, ya’ll. I gotta get to bed.

There are any number of charts that are showing a short setup, but if you’ve read my previous posts you know I’ve just gotta show Apple (Nasdaq: AAPL):

The smart people are probably already a dollar in the money on their shorts, but me, I’m a little more patient and a little more conservative now, so I’ll be joining them below 92. Let’s see if the action tomorrow morning gives a decent entry.

How’s that for a teaser title?

In trading, our job is to read the chart to the best of our abilities, then to position so that we stand to gain significantly relative to the loss we will sustain if our initial stop (and we’ve always got to have one) is hit.

The S&P has rebounded back to the top of the Big Drop Day of 2/27/07. This puts us just into a major area of support/ resistance, and we should be prepared to see some action.

From here, of all the possible scenarios, there are three which I think stand out, and I’ve been considering how I’ll trade each of them. Let’s take a look at them.

Scenario One is where we head down from where we are now, at the bottom of the S/R band:

The diminishing volume leading up to the last close makes this setup very plausible, and it’s where I came up with the plan to add to my short position on a failure from here, moving my stop down to the top of the resistance band or even slightly into it.

Scenario Two would provide an extremely strong signal and trade opportunity. This is the setup where price climbs through the resistance, pops up above the February highs, then fails back below those highs:

Such a failure would be swift and strong, likely falling rapidly to the March lows and probably below. I’m talking, of course, about the start of a Bear Market.

Scenario Three is the optimistic Dorothy setup where we get to go long:

On a strong thrust up and away from the Support/ Resistance area, I’ll wait patiently for the first pullback on decreasing volume, and I’ll get long with great vigor. Of course, I’ll get stopped out of my shorts first.

Why am I keeping the shorts on? Well, first, it’s been cold lately with that Canadian air making it all the way down here. Pa-dum-pump. No really, it’s that I’ve got a position I’m comfortable with and I’m waiting for a signal to add to it, or else my stop will be triggered. All I have to do is follow my plan. Second, I think that the last (long optimistic Dorothy) scenario is the least likely of the three.

I could be wrong. I often am. However, this game is not about being right all the time. It’s about how you position, and then how you manage those positions so that you lose small when you’re wrong (and you’re gonna be), and so that you gain as much as possible when you do happen to get up on your board and ride that big wave towards the shore. Shoot the tube, baby, shoot the tube!

The market’s recent rise on diminishing volume spells setup to me:

I’m firmly convinced that there is no way out of the current economic “situation” that entails a rising stock market. However (and there always seems to be a damned however), I’ve learned my lesson a thousand times over: being right about the call is meaningless if you’re wrong about the timing. And on this scale, it’s easy to be wrong about the timing by months. There’s no way to know if this setup is leading up to the bigger, longer-term drop I’m anticipating. So I’ve gotta mind the rules, and trade the chart.

I have a small short position I’ve been carrying since early March, a position which has its stop above the February highs. On the next break (below the previous day’s low), I plan to add to that position and reset my stops lower.

If we roar on through the (2/27 and 2/22) resistance levels I’ve marked on this chart, well, c’est la vie, I’ll get stopped out.

Getting stopped would give me a great excuse to start drawing lines in the other direction, and look to get long. I’ll do it based on the chart, but I’ll do it with great caution, because my overall big macro umbrella blanket cosmic overarching opinion is that the Fed has been castrated by the combination of slowing growth and still-threatening inflation and that there’s nothing they can do to avert the coming crisis (they’ll try lowering rates and pumping in more money again, but I don’t think that’ll work this time; not enough room to lower sufficiently, inflation will flare, and the dollar will crater).

What a downer. Guess that means I’m thinking we’re near some kind of long-term top, and Goldilocks’ hair is about to fall out.

Well, hell. I guess it does.

Been a while since I posted some charts. That’s been intentional. I haven’t done the statistics to verify it yet, but over the years I’ve come to believe that the weeks after a day like Feb 27 are good times for swing traders to take a break. Daytraders, well, happy days are here again, but I only get to daytrade one day a week (maybe). For the swingers, and especially for the long-term traders, the wild oscillations after a volatility spike usually just serve to stop those positions out over and over. It broke, I’m short! Buying’s coming in, I’m long! It’s failing, I’m short! …stopped out at every turn.

I think, for many prudent long-term traders, Feb. 27 stopped them out (i.e. they went from long to cash), and they haven’t gotten a signal since. Swing traders got a nice little intermediate double-bottom, but the long trade off of it is now losing wind. Here’s the big picture on a weekly chart:

(DOWNthrust and pullback)

Me, I have one little short I put on with a stop above the Feb highs, and otherwise have been just daytrading a little and paying attention to other important things. Y’know, life.

I do like the way my old favorite McShort (AAPL) is looking:

I’ll be sorely tempted if that one rolls over. With CNN, CNBC, Hollywood and 99% of the blogosphere so certain that Apple’s such an obvious buy, I can’t help but look for a place to sell it.

First, a quick look at The Market Today. As you know, the Dow and S&P remain firmly in their uptrends, and both set new highs again today (for the Dow it was another all-time high). I don’t think that’s news to anyone. What may have fallen by the wayside is the fact that the Dow Transports also hit another intraday and closing high today:

That’s what the Dow Theorists would call a bit of confirmation (the stock market version, not the Catholic one). Very rosy news (couldn’t help the pun, with Valentine’s and all), but there’s one more bit of confirmation that would make the picture complete:

Yep, the Nasdaq 100 is still going solidly Sideways, in a formation which, over the last 3 months, looks a bit like a Head and Shoulders (and yes, I’m a bit delirious tonight and started to link to this).

However, we’re also less than one good solid “up” day from breaking out to a new high, so the next few trading sessions will be veddy interrresting. We’re near the top of what would be the right shoulder if it fails from here without breaking the former high of 45.40.

Was lucky enough to work late today, so had an hour or so after the market opened to doodle around with Ameritrade StrategyDesk a bit during market hours (so far I’ve been using it for End-of-Day backtesting). I must say I was certainly still frustrated with the clunky interface, but again pleased with the program’s potential. I set up a test alert screen to kick out stocks which had gapped up, were in the top half of the day’s trading range, and were within “x” cents of the last “y” minutes’ high (I varied this one, for instance, within 10 cents of the last 15 minutes’ high).

StrategyDesk’s charts are simply a pain in the butt, so I just used it for the screener. I had it on my left monitor, Quotetracker (main window) on my middle monitor, Firefox with 3-4 tabbed sites (Yahoo, Prophet.net, Order entry) on the right monitor, and various QuoteTracker charts scattered across all three monitors.

When I cross-referenced the stocks the StrategyDesk screen burped out with my usual Prophet.net screen, I got some very promising results. For instance, early-on the combo was sitting on CIEN and AMAT like Dickey Betts sitting on that last riff in Ramblin’ Man.

After firmly establishing the major tonality with a singing bend of the 9th or 2nd (A) from the Aeolian mode to the major 3rd (B), he basically treats measures 1–6 (I and IV) as a G tonality and emphasizes the root (G), 3rd (B), and 5th (D) notes from the G major triad. Measures 11 (vi) and 15 (I) are the only time that Betts uses the b6th (C) from the Aeolian mode as a quick pull-off to the B (major 7th of C and 3rd of G) for melodic variety. (from the “Fender Players’ Club”)

Yeah… whatever. But AMAT was a good early-day play, and CIEN just ran and ran thru midday, so I’ll be doing more research in this general direction.

A couple days back an astute regular commenter pointed out the huge down day on Mastercard (MA). I had mentioned that we might get a setup out of it. Well, Fan, here’s our pullback:

The pullback broke through the 61.8% Fibonacci level, but that’s not a deal-breaker, just something of note which takes the probability of our setup down a few percent.

The volume has been diminishing beautifully on the pullback. Classic.

What do we do? I’ll be looking to enter short on a resumption of the downtrend tomorrow, if it happens. A continuation of this “up” thrust much past the 50% point (108 and change), and we’ll go into wait-and-see mode, as there may be too much buying interest to go short. If I do Get Shorty, I’ll set a tight stop just above the pullback high, calculate the difference between that and my entry point (tah-dah! “R“), and size my position accordingly.

Cheers… let’s watch…

• Supper Tonight: The fabulous chicken and egg (how synergistic) sandwich with caffeine-free Sam's Choice diet cola. Yum.
• Watching: "The Departed" if I can stay awake