The RSI buy

A simple strategy that anyone can use, and it goes like this. Put on a 5 minute chart – on a stock you like for the day, turn on the RSI and make sure that you have Volume showing as well. When you see the RSI breach 30 to the downside, get ready to buy. Here is an example from today on CPHD (Cepheid):

Note the massive RED volume bar on 6/29 and how the RSI reacted (waterfall down through 20 to touch 0) & then bounced. A great spot to go Long there (along with the machines).

Now look at today. A similar waterfall down through 30 to touch near 5 & a quick bounce. A great spot to go Long.

Rage against the machines.

The Mad Scientist

This weekend I spent some quality time in the Lab experimenting with several different indicators. I focused on the Rate of Change indicator after noticing a consistent pattern to charts from prior trades. With the RoC applied, along side RSI with the same time frame setting, it became apparent to me that it could be useful in timing my entries & exits with more precision.

Below is an example of a chart that I did this morning on ARIA (Ariad Pharmaceuticals):

One thing you will notice here is how RSI & RoC seems to track rather closely as expected. It is the divergences where the value lies. If you note the dip on June 6, 2011 you will see that the RoC line made a deeper down move & bounced – a great spot to get long. What caught my eye this morning is how the RoC has peaked & rolled over. A sign that a TL test above may be quite difficult.

I am not one to ever get comfy with my trading arsenal so honing is in fact part of my trading preparation weekly. Robert Sinn did a nice guest post here over at TRB on this very subject of having an Edge so give it a read.

I encourage you to continue honing your trading skills by including chart indicator study – well worth the experimentation in my book.

I feel stimulated

It is a slow day in the small Pennsylvania town of New Castle and streets are deserted.

Times are tough, everybody is in debt and living on credit.

A tourist visiting the area drives through town, stops at the New Penn Hotel, and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs to pick one for the night.

As soon as he walks upstairs, the hotel owner grabs the bill and runs next door to pay his debt to the butcher.

The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.

The pig farmer takes the $100 and heads off to pay his bill to his supplier, the Co-op.

The guy at the Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her “services” on credit.

The hooker rushes to the hotel and pays off her room bill with the hotel owner.

The hotel proprietor then places the $100 back on the counter so the traveler will not suspect anything.

At that moment the traveler comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves.

No one produced anything.

No one earned anything…

However, the whole town is now out of debt and looks to the future with a lot more optimism.

And that, ladies and gentlemen, is how a “stimulus package” works.

Getting a tune-up

When a man imagines, even after years of striving, that he has attained perfection, his decline begins. Theodore Martin

The focus of this post is on the subject of building a Trading Strategy – and the realization that it is a constant work-in-progress. That’s right, you can’t just build it and then it turn it loose. You have to cultivate your process, make appropriate adjustments, pay attention to the pieces that are not working well.

I make the effort each Wednesday to do a quick review of how the week is going with my trading efforts. One adjustment that I have made is in my Price Alert setting. I will use SPRD as my example because my stalking of it forced me to realize that my process had some flaws – some flaws that would have caused me to miss a nice bounce.

If you follow me you know that I use the word Stalk a lot. It is an important component to my trading as I believe it gives me a better feel for the stock (even the whippy ones). I was watching SPRD last week just melt into oblivion and felt that at some point it would get really overdone. Since I can’t watch a particular every second, I let the computer do some work for me by setting Price Alerts. The flaw in my system however is in the basic structure for my alert range, a single range can’t be applied to every stock or situation. Set too wide and it could be weeks before it triggers. Set too narrow and you find yourself resetting it numerous times every day and missing opportunities.

With this in mind, the adjustment that I have made is to now record a comment in my Trading Journal as to what type of Price Alert range I should set on stocks that are under real pressure. A small little tune-up keeps things running smooth – as much as possible.

Zoom Zoom

Trend Reversal confirmation

I received several questions over the weekend regarding the need for confirmation for a Trend Reversal (TR) signal. Since I do note this frequently on my charts, I thought I would show a quick example of a TR signal that is certainly confirmed. In the following weekly chart on PLT (Plantronics) you will note the Shooting Star candle (the TR signal) and the subsequent downtrend move to the 50 Day Moving Average after:

That is clear confirmation of the uptrend reversal noted by the Shooting Star candle for the week of May 13 2011. Hope this example helps to show what to look for when viewing TR candles.

One final note: the stock is sitting on the 50 Day Moving Average so a bounce is possible. If no position, one could plan a new long position here.

Broaden your horizon

As a person that spends a great deal of time studying charts, I continue to believe in the importance of viewing stocks in different timeframes. I have posted several posts previously addressing this, and wanted to show yet another example of why this is so critical for trade entry. In the following Quarterly chart of PM (Philip Morris Int) you can see a Shooting Star candle forming:

This candle forming for the current quarter signals a Trend Reversal that is Bearish (in an uptrend at the moment). but would require confirmation from the next quarter that the trend has reversed.

The volume does look ok here but what is really happening with PM? Let’s take a look at the Weekly chart:

 

As you can see, we have another Trend Reversal candle forming in an Inverted Hammer. However, this is Bullish in that the current trend here is Down.

So how can we get clear this picture up? Let’s move on to the Daily chart to see if we get a better view:

 

Here we see the price attempting to hang on to the 50 Day Moving Average for dear life. The largest Volume at Price bar is at the level just above so we are seeing some weakness here. You do not see the weakness when just looking at the Weekly chart.

What we can get from reviewing all 3 charts is this: the stock is pulling back and is trying to find good support. But by looking at the Quarterly one can see that the stock has likely topped in this quarter and could:

1)  consolidate for a while (digest recent gains)

2) fail to hold the 50 Day Moving Average on the Daily chart and pull back further

3) test the rising 20 Day Moving Average from below on the Weekly chart

Remember, when looking at the action in a Quarterly chart, that action is built from the candles within a Monthly chart. The Monthly chart candles are built from the action within the Weekly, and so on.

Broaden your horizons, expand those timeframes. Make sure you have the whole picture, not just the one you like.

Looking for the Flintstones

 

Reminds me of the market today, Fred has the right idea.

 

I decided to spend some time doing a variety of scans this   evening to get a better picture on where stocks stand. Using Finviz.com I ran the following scan:

http://finviz.com/screener.ashx?v=131&f=cap_smallover,sh_avgvol_o100,sh_price_o5,ta_sma20_pca&o=-shortinterestratio

In reviewing the list, I noticed FRED (Fred’s Inc.) and thought I would take a deeper look at. In reviewing charts on several timeframes, I focused in on the Weekly chart:

 As you can see here, the stock price is continuing to test Resistance above at the 14.40 level and is above the 20 Day Moving Average.

A LOT of VaP (Volume at Price) exists at this level so there is good supply here. The Spinning Top / Doji candle to this week (today) signifies indecision so the bulls and the bears are in a battle.

Keep your eye on this one, now that we’ve found Fred, and set some Price Alerts. I will suggest setting them to 14.25 and 13.50

Jack in the Bean Stalk

I received an awesome question today via twitter that made me realize that my “Stalking” comment likely needed some further explanation. One of the key components to my Trading Strategy is to use Stalk Lists. I think for some of you, that term has given you pause on just what I mean so I’ll dive into it here.

A Stalk List is simply a list of stocks that I want to keep a close eye on as I feel that an entry (either Long or Short) is shaping up. I use Price Alerts to make the management of these lists easier – so in essence I am letting my computer “stalk” the stock for me.

You may have your own word in place of “stalk” but for me it hits the point home – I want to pay a higher level of attention to any stock on my lists. So how do I build these lists? Well the list is built through several methods:

1) Stock Scans using StockFetcher and Finviz.com

2) Several lists that I keep at all times of 40 stocks that I know really well (and trade frequently).

3) Stocks that I obtain by working the Excel spreadsheet provided on a blog by @daytrend

Because I am an opportunistic trader during the day, it is imperative to keep a simple yet effective stalk list system in place – and price alerts help me do that. I also keep my lists sorted by “$ Change Close” – you can sort with your trading system however bests works for you.

Now get to Stalking!

Trend Lines

It’s Crayon time.

One of the simplest trading setups to visualize is a Trend Line test. In the following example for SHW (Sherman-Williams) you can see how price drifts down on Monday June 6 to touch the Trend Line, but holds above it:

Today however, price has bounced and is forming a Doji candle. Often I will put a comment in my charts to “Play the bounce or failure”. What I am referring to is to decide if you think that price bounces at the Trend Line (you go Long), or fails to hold and falls through (you short the Trend Line break).

 

Define the risk

One of the great aspects to being on Twitter is the breadth of experience and knowledge from folks at your finger tips. What flows from that are great questions on a wide variety of topics – just so awesome to be a part of it.

I have noticed a heightened sense of awareness today to the where the SPY (SPDRs S&P 500 Trust Series ETF) is trading. I ultimately elected to play the expected bounce near 129.51 by clearly defining my risk through the purchase of the Weekly Call option for the 130 strike at .94 cents. With this trade, my risk is clearly defined (of course I can stop it out at any time before zero).

For those that asked me questions regarding this, this is certainly one way to do it. For a trade where I want to know my exact risk – this is my choice.

Happy Trading.