60% chance of Rain

If you really want to know about rain, knock yourself out Rain

What we are really talking about here are probabilities. This concept is so important in trading and should be a key component used in determining entry and exit of trades. For an example, let’s take a look at the Area chart of PMTC (Parametric Technology Cp):

As you can see, price is heading up into what I call the Price Zone. The volume has been elevated recently, and this is quite a rocket ship up move for price. So, what is the highest probable path for price here? Can it just keep going? Sure. But was is the most likely scenario? A pause? A pullback?

I asked a question during the week on twitter on whether the Risk was to the upside or downside. Roughly 80% responded that it was to the upside which surprised me a little. In looking at this chart, how would you answer?

 

The Fibohnacheese

I thought I would provide a brief example on how using the Fibonacci levels in a particular up or down move can help in determining where price may attract to. My recent example is GMCR (Green Mountain Coffee Roasters) and here is the Weekly chart:

The waterfall down move after David Einhorn announced that he was short the stock only began to abate as it hit near the 56 level. It then bounced – and as noted on the chart above – it retraced 50% of that down move. It found Resistance at that point and has pulled back to the 71 level, closing just above the 38.2% Fib level.

This is just one tool to use to help improve the timing of entry or exit. Trade ‘em well.

Playing the game of Clue

Looking for clues in the market each day – for direction and money flow - is one of the key things that demands focus. It is often difficult to find a clear-cut clue with so many correlations and stocks running in lock-step.

Some times however you come across something that is quite obvious. Today I was watching the 5 minute chart for NANO (Nanometrics Inc) and noticed the massive volume building (the BIG RED bar). Certainly a clue that money flow is occurring – OUT.

So why is this helpful? To me, an outsized move in price is a nice clue – often a reason that I put a stock on my “to fade” list. But an outsized move in volume is also a nice clue that there is action in a stock and thus worth investigating.

Here is the chart I am watching today (current):

The volume change is so dramatic that it would be impossible to miss. The RSI buy points are pretty clean.

And I think the Butler did it.

Can you spare some Change?

The Obama Report card

January 2009

TODAY

% chg

Source

Avg.. Retail price/gallon gas in U.S.

$1.83

$3.44

84%

1

Crude oil, European Brent (barrel)

$43.48

$99.02

127.7%

2

Crude oil, West TX Inter. (barrel)

$38.74

$91.38

135.9%

2

Gold: London (per troy oz.)

$853.25

$1,369.50

60.5%

2

Corn, No.2 yellow, Central IL

$3.56

$6.33

78.1%

2

Soybeans, No. 1 yellow, IL

$9.66

$13.75

42.3%

2

Sugar, cane, raw, world, lb. Fob

$13.37

$35.39

164.7%

2

Unemployment rate, non-farm, overall

7.6%

9.4%

23.7%

3

Unemployment rate, blacks

12.6%

15.8%

25.4%

3

Number of unemployed

11,616,000

14,485,000

24.7%

3

Number of fed. Employees

2,779,000

2,840,000

2.2%

3

Real median household
income

$50,112

$49,777

-0.7%

4

Number of food stamp
recipients

31,983,716

43,200,878

35.1%

5

Number of unemployment benefit
recipients

7,526,598

9,193,838

22.2%

6

Number of long-term unemployed

2,600,000

6,400,000

146.2%

3

Poverty rate, individuals

13.2%

14.3%

8.3%

4

People in poverty in U.S.

39,800,000

43,600,000

9.5%

4

U.S.. Rank in Economic
Freedom World Rankings

5

9

n/a

10

Present Situation Index

29.9

23.5

-21.4%

11

Failed banks

140

164

17.1%

12

U.S.. Dollar versusJapanese yen exchange rate

89.76

82.03

-8.6%

2

U.S.. Money supply, M1, in billions

1,575.1

1,865.7

18.4%

13

U.S.. Money supply, M2,
in billions

8,310.9

8,852.3

6.5%

13

National debt, in trillions

$10.627

$14.052

32.2%

14

Sources:

(1) U.S. Energy Information Administration

(2) Wall Street Journal

(3)Bureau of Labor Statistics

(4) Census Bureau

(5) USDA

(6) U.S. Dept. Of Labor

(7) FHFA

(8) Standard & Poor’s/Case-Shiller

(9) RealtyTrac

(10)Heritage Foundation and WSJ

(11) The Conference Board

(12) FDIC

(13) Federal Reserve

(14) U.S. Treasury

The U-turn

There are different sayings for closing a trade and reversing course (i.e. have a long position, close it, and then go short the same stock). I call this a U-turn trade.

Today I went short LNKD (Linkedin Corp) in p/m (posted on twitter) and rode the stock down towards the 88 level. I covered some and then set a 1% trailing stop. I covered the remaining before the stop was hit but did not give up on the “opportunity”.

I continued to watch the stock on the 5 minute chart and this is what I saw:

I noted on twitter that the stock was drifting back under where I covered the last portion of the short, but that I would be watching the 88 level. Why? Because the RSI was breaching the 30 level, an oversold condition. A good spot to then go long thus starting the 2nd part of the U-turn trade.

So far the bounce has been almost 1% as price is currently arm wrestling with the 20 SMA on the 5 minute chart. RSI continues to rise.

Getting Collared

A quick post on protecting a Long position in PCLN (Priceline). If currently long above 500, here is a strategy to protect your position – but capping the gain at 530:

1) Sell the November 530 call for $22

2) Buy the November 500 put for $22

This caps your gains at the 530 strike but gives you protection on a downside move. In addition one could use Weekly options to hedge one way or the other if need be.

And there’s you Collar trade for PCLN.

The D watchlist

You may notice from time to time that I post comments on twitter regarding a particular watch list that I use. After a few requests for specifics, I thought I would  give more insight in to what these watch lists look like.

I have a simple label scheme for my watch lists using A-D with A being the strong, high volume stocks that everyone watches. The other watch lists contain stocks from specific sectors as well as stocks that provide tells for me on how the market is behaving.

For today, here is what my D watch list looks like:

I use this watch list for several things. First, I use XOM and MO as tells on risk appetite. When the both of them are RED (like today) money is flowing into riskier stocks. If you follow me you know I trade CF a LOT, and as you can see it is leading the pack today. Risk on. Secondly this list has several stocks within a sector so I can quickly gauge how it may be doing, and if any stock is diverging.

 

 

Adjustment Review

I made an adjustment this past weekend to my trailing stop strategy – primarily based on the current market conditions and what I see as difficulty in maintaining gains in Break Out moves.

The adjustment involved 2 adjustments:

1) When I put the trail stop on (in terms of the time that elapses once an entry in a trade has been made). I now wait until a % of the daily volume has traded. This also requires additional focus on the trade until the tr stop has been set.

2) The trail stop amount (using 1%)

This adjustment is just for trades within the Day-trade account only.

In reviewing this past week’s trades, and back-testing to prior settings, the review yields the following:

4 trades would have yielded a better return if using prior settings but all other trades allowed for capturing more of the gains using the adjustment. So for now I am leaving the adjustment in place.