Short and Sweet Traders
After the gap down and snap back after earnings, Netflix has pulled back to re-test its uptrend channel support line.
If you have been looking for a spot for an objective long entry with a stop nearby, this meets the criteria.
The trade is straightforward. As long as price stays within the up-channel, stay long. If it drops below kill the trade.
Disclosure: No position at this time.
Link to annotated Chart: HERE
Finding the Strength within Tech
By now its apparent to most that Technology is leading this market. That's a nice factoid but it doesn't help us much when it comes to understanding where the strength and momentum is coming from within the sector. What names are leading? Which ones are lagging? Is there a rotation occurring within tech? Where should I look for out-performance in the coming weeks?
Drilling down on Tech rotation
I took all the names names within XLK and did a 5 week relative rotation study. The tables below group the names into 4 quadrants of the sector rotation graph.
Leading and Improving Quadrants
Weakening and Lagging Quadrants
Understanding Relative Rotation
Relative Rotation can be a little confusing at times. The relative rotation study looks at relative strength and momentum between the names in the study, not price itself. So in essence, its giving you a peek at performance from a relative strength and momentum standpoint.
Using the study
I like to buy stocks with strong relative strength and momentum behind them. If push comes to shove, I'll choose increasing momentum over relative strength. So I use the study to narrow my stock selection search universe. I will generally start hunting in the Leading or Improving quadrant. I still need to go to the charts to find prime set ups but it makes the process more productive in my opinion.
Happy Hunting and Good Trading
Hope it helps!!
Recap of Last Week
Last week was July options expiration week. These weeks are usually bullish with elevated volume. We really did not see that. Netflix staged an impressive rally / recovery after their earnings-driven sell off but other than that it was a slow week. Oil and Copper stabilized for the time being, but on the whole commodities continue to move down. Divergences on the 60 minute and daily time frames of the major indexes ( SPX / NDX / RUT ) persist which has made me rather cautious heading into this week.
A Big Week for Earnings
Often times the week following options expiration sets the direction for the following month so I watch it closely. We have some big tech names reporting this week. The post earnings moves for these names should set the tone for the market. Here are the names and dates.
QQQ has continued to be the main driver within the market with the big cap names within QQQ setting the tone. With that in mind, it does not get any bigger or more important than this week for tech.
Here are 60 minute charts for SPY / QQQ / and IWM. Note the divergences and trend line breaks.
The Problem: Markets & Trading can be daunting
Back in the day, prior to the GPS era, I drove into New York City in a rental car for a sales meeting. It was daunting. I got turned around a few times, but I made my meeting. When the meeting was over it was dark and that initial trepidation turned to fear as I tried to navigate myself out of the asphalt jungle. I made it out, but not without the help of some kind strangers. I will never forget that day.
In the same way, Markets and trading can feel daunting and scary to the aspiring trader. So many stocks, trading techniques and methods, its easy to get turned around.
An Ace in the Hole
One powerful advantage of trading that often is over looked is your ability to define your own trading game. Imagine a game where you get to define every aspect of it to your advantage. When you'll play, who you'll play, and under which circumstances. Think about that deeply for a moment. Wow! I like those kind of games! Even to the new aspiring trader, the game shouldn't be as daunting and scary as it was before. We can set up the game so that we have the highest odds of winning. A set of rules that give us every advantage.
Defining your Game- a few ideas
Here are a few examples of how you'd put it all together.
Just like, there are many ways to get from point A to point B in New York City, there are many ways to win in stock trading. Certainly an important key is to define a game you want to play. One that plays to your interests, skill level, and objectives. The more narrowly you define your game the higher your odds of succeeding at it. The next key is having the discipline not to move outside that box you've defined for yourself
Thanks for Reading; Hope it helps
Reminiscences of a Stock Operator Ch. 7 page 71 paragraph 3
"People don’t seem to grasp easily the fundamentals of stock trading. I have often said that to buy on a rising market is the most comfortable way of buying stocks. Now, the point is not so much to buy as cheap as possible or go short at top prices, but to buy or sell at the right time. When I am bearish and I sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on a rising scale. I don’t buy long stock on a scale down, I buy on a scale up."
"after the initial transaction, don’t make a second unless the first shows you a profit. Wait and watch. "
"Suppose he buys his first hundred, and that promptly shows him a loss. Why should he go to work and get more stock? He ought to see at once that he is in wrong; at least temporarily."
"Remember that stocks are never too high for you to begin buying or too low to begin selling."
Said another way, Livermore is telling us not to add to losers. When building a long position you want to be adding at higher and higher prices. Same holds true if playing on the short side. Add to positions at lower and lower prices.
When placing your first trade on a stock, you are expecting a move in a profitable direction. If the stock does not confirm the preferred direction right away, you have no basis to add to the position. Wait for the stock to confirm your thesis before making any further transactions. If the stock moves against you and takes out your stop, exit the position and re-assess.
Although adding to losers has never really been one of my major pitfalls, I have done it in the past. On those occasions I have lost money. Adding to losers is a manifestation of an unwillingness of the trader to admit they are wrong.
With many stocks at all-time highs it is also fruitful to be reminded that stocks are never too high to begin buying; they can go higher. A stock at an all-time high has no inherent overhead resistance; no trapped longs at higher prices eager to sell. The same can be said of the overall market.
Thank you for reading; Hope it helps and see you next time.
Consumer Staples - A Brief History
During 2015 - 2016, investors piled into many consumer staple names in a vicious search for yield. During this time, the $XLP outperformed $SPX. The out-performance peaked in February 2016 and has been under performing on a relative basis ever since. Beginning in late May / early June, the sector became oversold and had what I believe is a sharp snap back rally.
Where are we now?
The chart below shows the relative performance of XLP vs SPY. You can easily see the relative performance is back to the downtrend line that has been firmly in place for over a year. I question if XLP has the horsepower to break through.
Drilling down on some names
Yesterday an option trade piqued my interest. A whale came after Kraft Heinz with in the money Aug 65 Puts 3500x + paying $3.70 ask. Overall, PUT volume was 4x that of CALL.
That got me digging into the big XLP names. There are quite a number of big names that have key characteristics that give them a bearish set up.
Charts of Hershey's and Kraft Heinz Illustrate the point
Names for further study
HAIN / BUD / TAP / SJM / GIS / CL / KMB / CPB / PG
You will find the charts of these names showing many of the characteristics of those above.
IMO the downtrend in relative performance of XLP persists and the move over the last 6-8 weeks was an oversold bounce. Being earnings season, most of these names report in the next few weeks. Keep that in mind when contemplating any potential trades.
Thanks for reading; hope it helps
On Friday, July 13, both SPY and QQQ put in divergent highs on the 60 minute chart.
To those not familiar, a divergent high is one where price rises to a new high while the momentum ( PPO or MACD ) and RSI peak at lower levels.
While this bearish divergence can persist for a long time, it is something notable and bears worth watching. It will be very important to watch this relationship in the next couple of days. Does price burn through the divergences and push higher or succumb to the fading momentum? Stay tuned!!
Trade Tip - Zoom down on time frame to identify early turns in price
For stocks you are actively trading, consider creating a 60 minute chart on them. They will signal early turns in price. A 60 minute chart will enable you to fine tune an entry or exit.
Again, this is only really meaningful if you are an active trader and can jump in during the day.
Here are a series of 3 charts that I use to give me a quick snapshot of momentum trends across the SPDR sectors and a few other key areas like bonds, the Dollar and PM's.
Chart 1 Bonds, US Dollar, PM's and Gold Miners
Momentum for Bonds remains strong while the momentum behind the $USD is fading.
Momentum for the precious metals and gold miners remains in a persistent downtrend although with a push the gold miners could make a move above the zero line and DT resistance. If you look at the price charts of several individual gold miner names, they are behaving much better than the underlying metal.
Chart 2: XLE, XLB, XLI, XLF, XLU
Energy has pulled back to the zero line and is flattening; an upturn here would be very bullish. Industrials and Financials remain pretty weak. After a huge push up, momentum behind the utilities looks to be flattening.
Chart 3: XLK, XLV, XLP, XLY, XRT
Tech and Healthcare look strong from a momentum perspective. Indicators for both showing bull crosses either at the zero line or above.....bullish. Staples have flattened out. Retail is losing momentum. Consumer Discretionary has backed off, but is still positive and may be in the early stages of a bull cross move.
For many traders, the negative emotions of anxiety, fear and even anger elicited by either trade uncertainty or outcomes is real. For some, these morph into panic or paralysis. Regardless of how this condition manifests itself, it has a detrimental effect on our psychological well-being and to our trading P & L. These emotions do not lend themselves well to someone aspiring to be a long-time market participant. It’s just not sustainable.
I have a powerful way to deal with these emotions that I’d like to share. As you’ll soon discover, this technique works both inside and outside the markets.
Back in the day, there was a person close to me that used to know how to push all the right buttons to upset me. I am quite sure that the behavior that elicited my response was not intentional, but never the less, it really bothered me. Encounters with this person left me feeling angry and upset. It got to the point of me being angry and upset BEFORE I ever saw the person. Many times, I literally felt sick.
Solve the Problem: Employ and Develop your Inner Observer
George, my counselor at the time, introduced me to a powerful technique to solve my issue. Visualize yourself as a scientist / observer hovering above yourself and the situation…. anticipating, thinking ahead, watching, jotting down notes but not personally involved. When the barbs from the other person come, they are directed to a third person……not you the scientist / observer. Because you have extracted your emotional body from the situation, it takes all the energy and resultant negative response / reactivity away. When I practiced this technique, I found myself able to interact with this problematic person very effectively……he no longer bothers me. Doesn’t mean we’re all buddy- buddy now, but I no longer let his actions throw me into a tail spin the way it did before.
Now, when I am in any situation that is causing me to feel anger, stress, resentment or any other unwanted emotion to take hold, I activate my inner observer. I remove my emotional self from the situation and let my inner observer take charge.
Now let's consider the situation many of we traders find ourselves. Becoming emotionally attached to stocks and trades. Attaching our moxy as traders to outcomes either good or bad. Experiencing that roller-coaster of fear, elation, depression, anxiety, insert your emotion here. Not a great place to be.
When you've had enough of the pain and suffering that comes with this trading lifestyle, read further.
How to use your Inner Observer in Trading
How can we use this in trading? Remember, you are an observer of yourself, the trader. Hovering over your right shoulder watching, taking notes, giving advice from a third - party perspective. Your new-found observer friend might make some comments like this…..
Become friends with your Inner Observer
Your inner observer will help keep you on the path of becoming the calm and confident trader you want to be.
I talk to my inner observer all day long. My inner observer looks at my trades. He reminds me not to get married to trades, to honor my stops, to fill out my trade plan. We talk about all kinds of stuff. When I get mad at a losing trade he asks if I would get mad at a mouse for turning right instead of left. He encourages me to follow my process and to develop new ones that are even better. Yeah, your inner observer can be a real help. With some development and nurturing, your inner observer will likely become one of the best friends you ever had. One who keeps your feet on the ground and eye on the prize, especially during rough patches. I encourage you to make your inner observer part of your winning team.
For Further Study
8 minute Video with simple ideas HERE
Inner Observer Practice HERE
What are Self-Observation and the Inner Observer HERE
The Inner Observer HERE
Let me know how it works for you. Drop me note and share your story at email@example.com
Thank you for spending time here; hope it helps!!