New SPXU Trade

Click on Chart to Enlarge

First off, I am posting a new trade for tomorrow.

Place a day only limit order of 45.00 to buy SPXU. Use 43.11 as a stop loss immediately after entry and for position sizing. In the money management post refer to "Trades WITH a Stop Loss" for this one. That post will give the info on guidelines for position sizing relative to account value. This trade will be the type where there will be either a quick stop out or a quick opportunity to move a stop to breakeven or take a partial position off for a gain and trail a stop for the rest.

Some brief analysis is on the chart above. Short-term model has been overbought for about 3 days and is just coming down from that area now. The major factor in deciding to make this trade is the candlestick pattern confirming the obvious short-term overbought conditions. There is a near perfect looking doji pattern visible on the SPXU chart. Across the board today, the indexes (and the USD index) showed nice dojis which is a classic reversal pattern. For more technical background on this pattern refer to this prior post.

This basic pattern is probably my favorite for intermediate term time frame trading. I consider it a doji/hammer/harami. The reason I like it so much is that it seems to combine the psychological climate of all those candlestick patterns into a clear cut trade entry. The longer tail on the doji gives enough evidence of reversal that I have no "fear" of placing a stop just a penny below/above the respective low/high. But the reward relative to risk is still very, very good.

I am not going into any pattern type analysis today. ElliottWave.com reported recently that the bullish opinion on the Daily Sentiment Index (a market opinion poll) recently hit 90%. Even at the bull market peak it was only 88 or 89. For those of you reading this who are into contrarian type analysis, maybe you have those times when you out-contrarian yourself because you read other contrarian blogs, services, etc. There are those out there who leave blog comments about how everyone is expecting a top here, etc, etc. But they don't really provide any concrete data with the comment. Don't overthink it. The DSI readings and survey readings in recent months on the dollar and stocks show without a shadow of a doubt that the general bullishness on stocks and bearishness on the buck are way in excess of the opposing crowd.

These are longer term signals, but if you are wondering a lot about whether to reduce equity exposure, etc for the longer term, then my suggestion is to stop wondering and do some serious planning and executing of that plan. Maybe the March low was a generational low (which I still don't think), but even so, with excessive optimism in the midst of the price range of last fall's crash, and the historical facts that major bear market bottoms tend to have major retracement of the moves off the lows or more lethargic range bound conditions for an extended period, I personally am not worried about "missing the boat." I can rethink my longer term view several moons from now if the market starts to become excessively pessimistic without making new lows.

Click on Chart to Enlarge

The chart is the US dollar index showing the doji today after a steady but completely un-explosive grind down the last 2 weeks. Sentiment continues to hover near super extreme bearishness despite the lack of much further downside prior to the last couple weeks.

I could not give what I feel is a perfectly sensible interpretation of what pattern is occurring here, but I still view it as completing a large degree correction of a new major uptrend. I would fully support using any candlestick reversal pattern to initiate bullish trades on the dollar with a stop right below the pattern. It may take a few tries yet, but to catch what may be a huge move up, it is worth it. As a side note the vertical blue lines show the most recent times that the oscillator above the chart was oversold and then rose back above 30. They were good enough signals to enter on the next bullish candle and then be able to move a stop to breakeven or better after a week or two. The difference with a major bottom is that price will likely explode more vertically upward off the bottom when it happens.