New SPXU Trade

Click on Chart to Enlarge

The chart above shows SPXU over the last 8 days or so. SPXU is a newer 3x ETF mirroring the S&P 500. It has caught on in popularity and has good volume. For any potential 3x trades I will probably use this from now on to try to avoid some of the problems with my analysis being on the S&P 500, but trading BGZ which is based on the Russell 2000. The slight differences in performance make placement of stops, etc more tricky.

The chart is showing a possible head and shoulders bottom developing (a H&S top in the S&P 500) on a short term basis. Now it would be safest to wait for the neck line to be exceeded, but that will significantly diminish the reward to risk ratio. So I am going to post a trade on it with an entry at current levels. There are mre than enough factors to justify this in my opinion. So ideally the market will fall over the next couple days and we can move a stop to breakeven quickly with possibly a MAJOR market move on the horizon. If not we will probably be stopped out. So make sure that your risk is sensible. If you have any questions use this post to decide how much to risk on the trade. Use the "Trades with a Stop Loss" section.


New SPXU trade:

Buy SPXU today with a market order. Place a GTC sell stop at 52.15 immediately after entry. Blog entry price is the current price of 53.40.


For any smaller accounts that would be following the cumulative method of money management and still holding SDS, just continue to hold and forget this trade. I will either post an exit on that at the next oversold signal, or start to trail a stop if the market appears to be making a major top.

Follow-up Video Update

I made a follow up video today to cover a few things I didn't in the last one. From the most recent data and today's FOMC announcement, I am not sure the market has another few weeks left in this rally. So I wanted to show a bunch of charts so that you know what I am seeing.

I had intended to put a short comment on the FOMC meeting at the end of the video, but there was an accident involving my finger and the "s" key which stopped the video, and I didn't feel like making another one. In short, the statements made seem to clearly indicate that the quantitative easing (massive treasury buyback currently in force) will end in October and the remaining treasuries to be bought will bought over that time frame, which is a slowing of the rate of buy back from my understanding.

Since the FED announced this policy in mid-March, the dollar has gotten hammered. Almost certainly there are many who expected them to increase or extend this program, which would further weaken the dollar. Now that it seems clear they won't, a major fundamental to the dollar's demise appears removed for the near future. I believe this will likely be bullish for the dollar on a fundamental level. That supports the bullish price pattern and extreme bearish sentiment currently.

This would also be bearish for stocks as noted in recent posts. I would anticipate that it would be bearish for gold as well. Since the purpose of that program was supposed to be to keep interest rates low for housing, yet the rates have increased substantially during this buyback, it would seem that the program was a failure (other than a huge equity pump). Now I wonder, if this unprecedented rate lowering external force is removed, will rates explode upward?

Also, there seems to be some indication from the chair of the Congressional Oversight Panel, that they believe that it is necessary for the fraudulent accounting practices that banks are currently using to avoid realizing losses on the books, need to be stopped with a return to mark to market rules. Well that's a step in the right direction, though it is obvious that such accounting fraud has occurred for quite some time, and is still occurring. All these thiefs need to go to jail including Paulson and the rest who orchestrated the theft of our dollars through fear mongering and then directly put a huge amount of that into the banks, who still haven't had to realize the loss from those "toxic assets." Also the FED should go, who monetized debt when they testified to Congress that they would not. So, while nothing has changed yet, if the COP do what they know needs done, then there could be a return to mark to market, which I have to assume will hammer many financial institution and destroy others. In any case, I think there is a real possibility that there may be market moving policy/regulation changes in the near future.

Video Updates - US Dollar and Equities

The videos cover the US Dollar and stocks. I used a video capture program that I haven't used before, and the video quality doesn't look that good, but Oh well.

During this bear market, the dollar has tended to turn up before equities top out, so even if the dollar has bottomed, there may be a period of a few weeks before stocks reach their peak.

My suspicion is that this week may see some sparks fly. There is an FOMC meeting I believe, and also there are multiple bond auctions yet again. Much of the Fed's game plan (assuming the goal is what we believe it to be - growth, economic expansion, etc) relies on keeping interest rates low, and conversely bond and treasury prices high. This is at the same time as the Treasury is flooding the market with auctions for treasuries securities to fund debt/federal obligations. So the Fed has to fight supply and demand as well - try to keep the prices up while supply is being driven up enormously. So the point is, that while these auctions have been occurring regularly recently, it is arguable that the most recent auctions have shown waning demand. This would result in buyers requiring higher yields on the debt they are buying (which would equate to a higher US dollar value and lower bond/treasury prices).

As another side note, the Equity P/C ratio came in very low at 0.49 Friday in conjunction with a spinning top candlestick and a gap up on monthly payroll data which has tended to result in give back of the gains over the next couple days. Readings that low in the P/C ratio have consistently led to negative next day returns. Also, this is basically the lowest reading of the bear market, so this may be an indication of maxing complacency. In addition the VIX has not confirmed the recent move to new highs in stocks, and several sectors did not confirm the indexes to new highs the last few days. So on at least a short-term basis there is divergence and complacency which I expect to lead to a decline larger than the miniscule ones since July 8th.

S&P Outlook

Click on Chart to Enlarge

Most of the notes are on the chart and build on recent posts. I am still waiting for a legitimate oversold signal to exit the SDS trade. I would actually be interested in a bullish trade if the general outline of the bold green line above plays out. That would be a pullback to near the 950 breakout level with short-term oversold conditions.

The most recent real money sentiment readings are starting to get to the level that even in a bull market you expect some give back or a slowing trend followed by a quick give back of gains. From a technical perspective, I would guess that we will have to see some divergences in breadth and momentum indicators occur before any large correction would begin though. Also, as per yesterday's post, at this point I would almost assume that every last post-crash short will be squeezed on this move, which should allow the S&P to move up another 4% from current levels before the juice is gone. Not saying that will be right away, but maybe over the next few weeks.

Once again, the markets closed well above the morning lows. Out of SPY, DIA, and QQQQ, only QQQQ managed a bearish engulfing, and it had a tail under it, so I opted to not post a trade. First I want to have more confidence from the price pattern that the market really may be making an intermediate or longer term top to post a 3x trade. Right now, though the sentiment picture is getting overly bullish, I don't have that confidence, so it probably will be smartest to just let any pullback occur, and first judge whether it is buyable or not.

Quick Heads Up

This is just a heads up that there may be a new trade today toward the end of the day. The trade will probably be either SPXU or BGZ. There is the possibility of a bearish engulfing pattern in the indexes today right at a major resistance point. Recently the market has not closed near its lows, so if it does today, then that is all the more reason to see an engulfing pattern as a possible change in power from bulls to bears.

The Big Squeeze

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It's late and I don't have a lot to say. I made this chart yesterday but didn't post it. That is how I see it. I am willing to start betting against this rally on any legitmate candlestick reversal pattern. Given the notes above, I have serious doubts about any bullish activity above 1050 on the S&P cash. I haven't got around yet to doing a video or major chart blitz review of current data, partially because if this week is an uptrending week, I think the data will be that much more telling this weekend.

In short, dumb money confidence is back at the highest levels of "the bear market" and smart money confidence is back near the lowest levels. From a long term wave theory perspective, the next move down is likely to be either horrible or really really horrible, both in the markets and in a broad economic sense. Other than the primary goal of this blog which is the nuts and bolts of making money very consistently with short-term trading, the second focus I have had is on making sure that nobody reading this gets their life's savings wiped out in this mess - or at least that I did my best to make sure that didn't happen. It takes courage to go against the crowd. It takes courage to click "sell" again when the market goes up another 5% the next week. But with each day the market move higher here, my opinion is that we are getting one step closer to "the day when the buying stops."

There are two ways to make money: #1 is to make money, #2 is to not lose money.

I just hope that everyone is not so focused on #1 that you don't do some serious planning on #2.


Pete

Buying Breakouts - Part 2

I have been trying to temper my longer term bearish outlook with some lessons and trade ideas on quality growth stocks in recent weeks. Even if the market does make new bear market lows in the future, the current rally has been large enough and lengthy enough to be classified as a bull market in its own right. There has been plenty of time for stocks to undergo basing periods since March, and add to that the huge number stocks that did not confirm the new lows in the indexes in February and March. So quite a number of quality issues have been basing since Nov 08.

From looking at tons of charts in recent weeks, and particularly the last 2-3 weeks, it appears that many stocks are forming or have broken out of 2nd stage bases recently. For those who are not familiar with the concept of "bases" or the staging, I am referring to it as in IBD literature. A base is a period of organized consolidation in a stock price at which point many shares are aquired in a fairly narrow price range by institutional traders. These bases typically have a rounded or flat bottom rather than a V shape. There are a few classic basing patterns that show up again and again before major moves in stocks. The importance of recognizing these bases is that big moves in stocks typically occur in short periods of time right after they breakout of a base. So if you don't recognize the base before the breakout, then you often are late to the party on buying.

IBD literature suggests that stocks can often form 2 to 3 quality bases in a bull move, before undergoing large corrections. After 3 bases many basing patterns will be faulty and failure prone. So right now, many stocks may still be in quality basing periods. Having a chart defined stop or a sound % loss limit will help to assure not sticking around in failed bases or subsequent major market turns to the downside.

Now the chart above is LFT which is a top 20 IBD stock right now. This chart was made Friday and does not reflect today's action. The notes on the chart show key points and how I would trade it. I am not in this but may trade it soon. Price moved above the buy point on that chart today, and volume is running high, but it looks more like the handle is continuing to form rather than a real breakout. So it may be more sensible to move the buy point to a few cents above today's high, to help avoid a failed breakout. Earnings is Aug 18 I believe FYI.

This is a chart of JST, another IBD 100 stock. Last week I bought this after it had broken out on heavy volume. I used a limit order of the breakout price (33.00)to catch it on a retest back to that price level. So these two charts show how I would buy growth stocks breaking out of bases. If you see the base before the breakout, you use a buy stop order to buy on a move up above the breakout price (handle, midpoint, old high, etc). If you don't see it before the breakout, or you are unsure about the base, then you can wait till the breakout, and use a buy limit order corresponding to the breakout price to get it IF it comes back down to the breakout price.

The problem with the second way is that you may not get filled because price doesn't come back down that far. However, it may save you from some failed breakouts. Look at the notes for when to get out. In general, you simplify the exit by selling with a market or limit order when the price is up 3 times the amount of your risk (in percent terms). The key to keeping a good risk reward ratio is to exit the stock on any close back below the breakout point - that will get you out several percent better than getting stopped out most of the time, possibly cutting the size of your average loser in half if compared to always getting stopped out.

Another notable stock that is breaking out today is TNDM. I had considered highlighting this recently, but the base is choppy looking, so I didn't really want to use it as an example. However, now that heavy volume is coming in on a breakout, you could use the buy limit method to buy it on a pullback to the breakout point of 31.50. Then follow all the rules about getting out if price closes below that level.

I don't really intend on posting trades on individual stocks like this on the blog (at least not until I believe that we are in a legit long term bull), but I know some of you reading this are familiar with and interested in this methodology, so please do your own homework on any stocks I bring to the table, and feel free to post comments or questions.