The Divergences are Diverging

Take a look at this 5 minute chart of TMO (Thermo Scientific Inc):

1) Price is wedging

2) The Accumulation/Distribution indicator is a Rocket Ship

3) Decent Volume in the stock

4) Higher Lows this week for price

I am currently long the stock but see a similar pattern in it today that I have seen in a few others that I sold (the “simmering” disease). I have a trail stop at 56.80 on the balance so I will let the market decide for me on this one.

Promise & Pullbacks

I have 2 stocks in the Fab 5 that have had a distinct difference in performance this week. Both have been on the team for quite some time, have completed the 100 Roll, and I have noted that they would be kept on with a tight stop.

The stock with continued Promise is NKE (Nike Inc):

The stock in a Pullback is PXD (Pioneer Natural Resources):

PXD did hit a trail stop on Monday, February 27, so that position is now closed. I do have MELI as the 6th man to pick up the slack. Good job PXD, the 100 Roll complete, and now time for a new participant soon.  

Also SHW completed Day #3 this week – the 100 Roll is now complete there. I will leave in place for now with a tight stop.

 

A frequent visit

The price action in COST (Costco Wholesale) reminds me of several stocks that I have come across this week – stocks that continue to visit the same price level on a frequent basis. Here is a current Daily chart:

The Doji for today tells me that a nice move should occur soon – really likely with earnings upon us. Can it break this price level for good this time?

 

High Short Interest

One of the scans that I do frequently involves looking for stocks that have a high short interest in the float. I use the following scan on Fiviz.com to find these:

http://finviz.com/screener.ashx?v=111&f=sh_avgvol_o500,sh_price_o10,sh_short_o30&ft=4

The above scan currently yields 30 stocks and ETFs with a short interest over 30% of the float. With this list, you can do several things:

1) play a “short squeeze” if you think the stock has an upcoming positive catalyst.

2) if you think the short position holders have it right then get on board.

3) if you just feel like being long, be sure to use a good stop strategy or own a PUT for downside protection.

The first 20 from the list below:

Looking for Spring

I live in Texas and for whatever reason we are being punished this year with no real Winter to speak of. It is what it is I guess. In the spirit of that, I thought I would go ahead and look for Spring to arrive.

The Spring I am looking for however is the one that I would like to see from a coil coming un-sprung in FCX (Freeport-McMoran Copper & Gold). Here is a current 5 minute chart with just Volume and RSI showing that I have been using today:

I am long today on this earlier bounce (the RSI breach of 40) and will be using a trail stop that is 1.5% for today, just an intraday trade.

Using Correlation to find a pairs trade

One of the strategies that I use for trading setups is the implementation of a pairs trade. For those not familiar with this, here is a brief description:

From Wikipedia, the free encyclopedia
 
Jump to: navigation, search
Example of pair trade graphical representation

Example of pair trade graphical representation

The pairs trade or pair trading is a market neutral trading strategy enabling traders to profit from virtually any market conditions: uptrend, downtrend, or sideways movement. This strategy is categorized as a statistical arbitrage and convergence trading strategy.[1] The pair trading was pioneered by Gerry Bamberger and later led by Nunzio Tartaglia’s quantitative group at Morgan Stanley in the 1980s.[2][3]

The strategy monitors performance of two historically correlated securities. When the correlation between the two securities temporarily weakens, i.e. one stock moves up while the other moves down, the pairs trade would be to short the outperforming stock and to long the underperforming one, betting that the “spread” between the two would eventually converge.[4] The divergence within a pair can be caused by temporary supply/demand changes, large buy/sell orders for one security, reaction for important news about one of the companies, and so on.

Pairs trading strategy demands good position sizing, market timing, and decision making skill. Although the strategy does not have much downside risk, there is a scarcity of opportunities, and, for profiting, the trader must be one of the first to capitalize on the opportunity.

So how do I go about finding suitable pairs of stocks? One of my tools that I use is the Correlation Tracker on the Select Sector SPDRs website. An example of one that I am reviewing today:

The trade for this pair goes as follows:

1) Long 1 lot of XLE (last closing price is 74.85) 

2) Short 2.25 lots of $SEF (last closing price is 33.05)

Note: If you don’t think they cross, but instead repel against each other, do the reverse for 1 & 2 above.