Market Analysis
Facebook (FB) ‘unliked’ 
Well the most talked about = “talked up” IPO at least in the last decade was a complete flop, at least for today. It closed near the dead lows of the day, which was slightly above the offering price of 38.00. Not a very impressive first day of trading by any means if you were expecting to retire if you bought the stock today. Actually, if you bought into the hype (I hope you didn’t) and paid for FB at the open – You are probably not feeling so good at this point. This is not to say you made a horrible investment and you should sell your position. It could very well rip to the upside on Monday, but only time will tell. My viewpoint is strictly on a short term basis and nothing else. So with that said. Were there opportunities to trade FB on intra-day basis and make some money today? Absolutely…
The first opportunity came when FB bounced off 38.00 and consolidated at 40.00 for a couple of minutes (see chart below). This was a good place to start with a Tier 1 position size and place a stop below 39.50. The target would have been the next resistance, which is near 42.00 where all those nasty tails are located to the left of the chart. Tier 2 and 3 would have been added as denoted on the 2 min chart below. Since volume and speed was very high on FB today, you have to give it a little more room. That’s why if I am adding at Tier 3 I am giving it .20 cents of wiggle room. Otherwise, on any normal trading stock I would give it maybe .05 or .10 cents.
The last opportunity came when FB broke 40.00. This was actually when the Risk/Reward was most favorable, assuming you could get shares to short. A short below 40.00 with a stop above 40.35 (the two min pivot high) would have offered a very nice reward on just a .35 cent risk.
Expectations for next week….
If FB could get above 42.00 and hold, then we should see some fresh buying come into the stock and push it higher. But if FB trades below 38.00 and holds, then expect to see lower prices. Anything between these two levels will just be noise, so I would stay away…
These examples are for education purposes only. No trades were taken in FB today…
Will the market hold?
Here is my observation of the market from a pure technical standpoint using the VIX to measure the Fear in the market as of this writing. Given that my objective is to get an idea of the current state of the market, but more importantly where we have the potential to go from here, I am looking at a much longer term picture with weekly charts – A time frame I very seldom use due to my short term style of trading.
As we can see from the weekly chart of the VIX below, it has approached a level that on two previous occasions confirmed a market that was in very high Demand. On these two prior occasions, we had the completion of not one, but two Inverted H & S patterns which produced a significant advancement in the market.
So the question now is, have we put in a bottom? Can we rely on the Big money to begin to flow into the market to begin a bottoming process as they have in the past? Or is this just a pause before the next leg down? This will only be known over time. I believe it’s to early to call this a bottom because the market hasn’t showed any signs of a bottom yet. However, we are at a place where Demand for a piece of this market was so strong, the result was a 100% retracement of the mid 2008 highs and then some.
As of this writing we are currently sitting on top of the prior Demand level, which is currently around SPY 110. I believe we will drop further into the 110-100 level, which was where the Inverted H & S pattern formed. And if that happens, I can almost assure you CNBC and all the various financial media outlets will be going nuts reporting how the world is coming to an end and the VIX is soaring to extreme levels, which it probably will.
So if I was an investor or managing someone else’s money, I would be putting on small positions in stocks that have shown Relative Strength to the market with a stop below SPY 100. However, if we don’t hold SPY 100 and we don’t form any Bullish reversal candles on a weekly basis – Hold on to your SHORTS folks, it’s going to be a wild ride.
I will re-visit this topic next week after we get a close of next weeks trading to see where we are.
Good trading and keep those stops tight!
SPY Levels to watch
Here is a quick chart of the SPY highlighting some KEY levels to focus on tomorrow…
Market Review
Well it looks like the Bulls protected SPY 130.00 right out of the gates this morning. As I said in my last post, this was going to be a level for the Buyers to protect to keep the market in its sloppy up-trend. Maybe a negative headline, like the bleak jobs number is just what investors wanted – to buy the market at these lower prices. Or maybe it was a result of some short covering off Support that caused today’s retracement. The truth to the matter is it doesn’t matter what caused it if you’re a trader. The fact is the market gapped down after an extended period of heavy selling into strong demand.
The bad news for the longs is the market put in an hourly sell at Minor Resistance – 131.50. This area also coincides with a Gap fill from today’s open and where the declining 8 ma met with price.
As I said in my last post, I was looking for a sell setup at / or near the 132.00 level if the market traded down to 130.00. As you can see 132.00 was challenged yesterday and did provide stiff resistance from that point to today’s opening price.
With the market NOW in a confirmed downtrend on the hourly chart, the odds of lower prices are much more real and expected. Depending on where the market opens on Mon – the levels I am going to watch are 130.00 and 130.75 the location of the 15 min sell.
Have a great weekend!
David
The Market is always right!
Double Dose!
As De Niro would say, the markets are experiencing a “Double Dose” of selling, at least for now. With yesterdays significant down day, it should come to no surprise for most of us intra-day traders that further selling should be expected. Yesterday was a very damaging day for the Bulls as the market wiped-out three days of gains on very heavy volume. In my viewpoint, the market has looked very vulnerable since the top in May. The SPY’s have been making a series of Lower Lows and Lower Highs signifying a downtrend. The only problem is that we are still technically in an uptrend. I would like to see the 130.00 level (Daily Pivot) taken out on a closing basis before the market picks up steam to the downside.
If / Then scenario’s
If we crack 130.00 on a closing basis / Then look for the daily 200 ma (126.00) as a potential target.
If we trade down to 130.00 and hold the level / Then look for a retracement to 132.00 for a possible Sell setup.
Nonetheless, it seems like some volatility is back in the markets and with the jobs number tomorrow – It should make for some great trading!
Good luck…
David
Levels in SPY to keep an eye on…
SPY
The SPY is in a Stage 4 downtrend on the 30 min timeframe. The break of the 121.00 level could produce further downside pressure possibly to the 118.75 level, which is where the 200 ma sits on the hourly chart.
Levels: 120.65 Resistance | 119.25 Support
Trade of the Day
Today’s trade of the day was a short in GILD. It was a stock that was not on my watch list because I never trade GILD. I prefer to exclude it from my list of stocks to trade. However, I was not finding much in my basket of stocks as I was scanning through my list – when GILD popped up. In looking at the 30-min chart below – It was time to give this stock a chance to make me some money. At the time I saw this stock trading, it was printing below the 37.50 level which would confirm the transition to a Stage 4 downtrend. It still needed to close below the level to officially call it a successful transition, but with the market as weak as it was and the lower high in GILD within the Stage 3 Phase, I was willing to take a stab once the lower time frame confirmed the weakness. For this trade I used the 2-min chart on the break of 37.40, which would resume the downtrend (stage 4) on the smaller time frame.
My first target was at 37.00 and I stacked my orders beginning at 37.07 with most of my lots at 37.01. The balance was covered on a BRB trail off the 2-min.
As you can see from my trade manager I also took a short in COST, which stopped out for a 2 cent loss. With a nice gain in GILD, I was not willing to give back my profits so I killed the trade early.
Staging the Market
Hello fellow traders,
It’s been a while since I’ve updated my Blog and I thought I’d post an educational piece on Stage alignment. This has been a topic of discussion in prior posts and I would like to rehash this simple, yet powerful concept I use for trading the markets.
First, what is Stage alignment? Stage alignment is taking the market on any timeframe and categorizing it into one of four phases. Accumulation (Stage 1), The Uptrend (Stage 2), The Distribution phase (Stage 3) and the Downtrend (Stage 4). How a trader goes about categorizing the market can be somewhat subjective, but with a basic understanding of Supply and Demand and Candlestick analysis – One can get a firm belief on what the market will likely do next and make a objective decision to establish a position.
So, how do we determine what stage the market is in and how do we use this information to gain an edge in the market? The first step is to understand what each Stage represents.
Stage 1 – Is referred to as the Accumulation Phase. It’s usually an extended period of a tight consolidation. The Moving Averages are sideways and volume is normally light until the end of this Phase. Volume usually increases as the MA’s begin to curl up and the transition to Stage 2 is complete – I refer to this period as Stage 1-3. It’s only when the market breaks out of Stage 1 to make a new high – Pullbacks to make a higher low and resumes the uptrend to take out the most recent high that Stage 2 is officially in place. Than other market participants begin to take notice and help fuel the stock / market higher.
Note: Stage 1 always comes at the end of a Stage 4
Stage 2 – Is referred to as the Uptrend or the Mark up. It’s a period of higher highs and higher lows. The Moving Averages are rising in an orderly fashion and containing price as the market reverts back to the mean.
Note: Stage 2 always comes after a Stage 1 and sometimes resumes the trend after a Stage 3 consolidation
Stage 3 – Is referred to as the Distribution Phase. This phase can be a bit tricky because if one gets to anxious and jumps the gun prematurely, they can be stepping into a secondary accumulation phase. But for the sake of its true definition – It’s a period of choppiness. The market usually trades in a wide range with relatively equal highs and equal lows. The Moving Averages begin to go flat and curl over. Confirmation of a Stage 3 Distribution Phase comes when the stock or market breaks the low end of the range and closes below the range.
Note: If the market consolidates through time in a Stage 3 and fails to break to the downside. Be extra cautious as this might be a momentary pause as the buyers accumulate more stock and get ready to push the stock to higher ground. I like to refer to this a subset of a Stage 3 and I call it a Stage 3-1
Stage 4 – Is referred to as the Downtrend. It’s a period of lower lows and lower highs. The Moving Averages are declining in an orderly fashion and containing the market with each retracement to the averages.
Note: Stage 4 always comes after a Stage 3 Distribution Phase
Now that we have a basic understanding of what each Phase represents and what it looks like on the charts. It’s time to apply this information to formulate a plan. The first thing I like to do is look at a longer term intra-day chart and my trading time frame chart (5 min). I use three moving averages – an 8, 20 and 200 ma. I like to look at several days of prior price action so I can bracket the market like I did in the example below. This is a 15 min chart of X and we can see that X found quite a bit of demand as it dropped to the 200 ma, evident by the uptrend that followed. As you can see when X broke the up trendline – It began to trade in a sideways range. In this example we can clearly see this was indeed a Stage 3. Now, you might make the argument that we are looking at past information and I am using a trade example from a hindsight perspective. And you would be correct, but that is exactly what we are doing when we trade off longer term timeframes. We are waiting for the completion of a 15, 30 or 60 min bar to print and using the close of those bars to interpret their messages and using that information to enter our trades once the shorter term timeframes confirm our long term bias.
Let’s look at the example of X below and break the trade down as if we were trading live. At point A just as X was coming off new highs for the day we were still in a Stage 2 uptrend. At this point you can either stand aside and wait for a buy setup on this timeframe, if you only use one timeframe to trade, or you can take a long on a shorter term time frame at a) Stage 1-3 transition or b) In a Stage 2 uptrend. The latter is my preference as the odds are increased by combining multiple timeframes. Looking back at our example chart we see that a buy setup formed at area B. This would be the perfect time to initiate a new position or add to your existing position as you are still in a Stage 2 uptrend and there is no reason to think otherwise. Your expectation is for X to take out the most recent high and resume its trend. However, at C we get a lower high, which to me signals a red flag. At this point it is wise to take profits or scale your exiting position back to minimize risk. At this point X begins Stage 3 and trading during this phase should be halted or minimized with very specific actions.
In this example the lower high tells me that Supply is greater than Demand and I can make this assessment because the lack of demand failed to push prices higher. So, it’s at that point that my bias begins to favor the short side and I begin to look for Stage 3 Breakdowns and or / Stage 4 downtrends on the smaller time frame.
Further confirmation came when X broke the Pivot low at B and closed below the range. Half the time you will probably miss the market / stock as it’s transitioning, unless you only watch one stock the entire day. But, that’s not to say you have missed the move completely. If you focus on the longer term time frames there is plenty of potential up or down. In this example, you could have waited till the next day after the breakdown occurred to make a really nice trade.
You can see X gapped down on the day of the 14th. X continues to sell off from the prior day, but I am not looking to get short just yet. I need a valid reason to enter. Either a 5 min sell setup at or near the declining moving averages while still in a Stage 4 downtrend on the 5 min chart, or a Stage 3 breakdown on the 5 min chart. As you can see the opportunity comes with the 5 min Sell setup. Textbook management is to exit the trade once the Stage 4 downtrend is broken which comes at point A.
I hope you found this example helpful and you can take something from it to add to your trading plan.
Have a good trading week!
David Guerrero
Trading Journal for: June 14
Just Making Markets
Once you’ve reached a certain level of experience trading the markets, there comes a point where playing quick counter-trend moves can be quite a lucrative strategy. However, you must remain cognizant of the fact that you’re playing against the Tape and set flexible profit expectations unless the Tape begins to confirm your short-term bias while in the trade. This is precisely what happened in a short I executed in RIMM this morning.
RIMM was one of the stocks I had on my watch list. My plan was to short it based on the Gap into Supply (resistance) as labeled by the 60 min chart. I primarily look at the 15-min chart, but for illustration purposes I am demonstrating this trade on the Hourly. I identified the 60.50-ish area as the high end of the resistance zone and was looking for a trigger on the smaller time frame to get me short. I was willing to scale into this trade with multiple lots all the way up to 60.50.
As you see from the 1-min chart below my entry trigger was hit and I shorted 3 lots at 60.29. My first target was the 8 ma, which was right around the “fig” at 60.00. RIMM actually traded down to 60.00 and bounced very quickly off the level. When RIMM made a second attempt down to 60.00, I covered half my position in the low 60.00’s. Then RIMM bounced again and I exited the rest of my position at 60.08.
I was through with RIMM for the moment and proceeded to trade some of the other stocks on my watch list. I took a long in QCOM around the 35.50 level and sold in the mid 35.70’s, for about a .25-cent gain. I was also nibbling on JPM around the 37.50 level, anticipating the Demand level to hold. I bought some shares in the low 37.40’s, but clearly was a little early in the play. I ended up exiting this trade for about a .04-cent gain as my focus was back on RIMM.
I noticed RIMM was back at 60.30 and ticking up to 60.40, staying in a .10-cent range. This was also the level from where I shorted the stock at the open. So, my thinking was “Trap”! If RIMM could break out of the early morning range, it could be poised for a move higher. So I watched the Tape closely. When I saw the amount of volume done on the Bid at 60.30, I hit the offer to get long at 60.38 for 3 lots. My entry was not the greatest, but nonetheless I was long some RIMM. I then watched the highs get taken out and it was “GO Time”, as RIMM pulled in some. When 60.40 held the Bid, I hammered the Offer at 60.48, as I had more confirmation for a greater up-move. From that point forward, it was off to the races. I took profits on the way up with the last few lots at 61.20 based off the 50% wipeout as seen on the 1-min chart below.
As you can see from the 15-min chart below — RIMM had been in a multi-day uptrend with the Higher Lows more prominent then the Higher Highs. For some traders, this is not a viable strategy because you are going against the trend – And that’s ok. Your odds for success and longevity in this business are trading with the trend. But, as I said before once you have acquired some trading experience and have a solid plan, taking counter-trend moves with reasonable expectations is just part of making markets.
I hope you have enjoyed this lesson/journal of my trading from this morning…
Best
David Guerrero
Trading Journal for Thursday June 10
This trading journal is for Thursday. I wasn’t able to post it yesterday, but here it is. I will be posing my trading journal for today (Friday) later this evening.
As I was going through my morning routine to identify the levels in the stocks I was going to focus on, I came across my two favorite stocks – RIMM and X. In looking at the 15-min chart of RIMM, I identified the 57.25 to 57.50-ish level as my targeted buy zone. But, because we were gapping closer to Resistance (Supply), I was not interested in buying RIMM at the open. I either needed to see RIMM blast through the Supply area and then pullback and give me a Buy Set-up, or it needed to come down to my price of 57.25 – 57.50.
As you can see from the charts, RIMM did in fact sell off at the open from the Supply area I highlighted, into the Demand level. So, I began my position with 3 lots at 57.45. RIMM continued to trade lower and I Bidded for 2 more lots at 57.32, which I was able to get filled on. This brought my average cost down to 57.40. My first target was a 50% retracement of the morning down move, which was right around 58.00. I sold a 1/4 at 57.92 and another 1/4 at 57.98. I wanted to hold the back half to 58.50 – the Supply area, but trailed out at 57.81 based on what I was observing on the tape. Nonetheless, a nice chop!!!
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X on the other hand was a little bit more of an advanced play, due to the risk involved. If you look at the 15-min chart above, you will notice I drew in my demand level (green dotted line). This was basically the area from where X began its self-off the prior day, so I was anticipating that level to become a new Support (demand) level. “A change in Polarity if you follow Steve Nison”. Therefore, I placed some bids in the .60’s and got filled as you can see from my trade manager. As X began to bounce off the level, I proceeded to hit the offer pretty aggressively on the way up. Knowing 43.00 was going to be a focal area; I began to offer some lots at 42.97 -42.96 and began to hit the bid at .94 down to .88, when I noticed the offer was holding at the whole number. I kept about 1/3 of my position and exited in the low 43’s.
My target on this trade was much higher. I was looking at 43.25 and it was one of the reasons I was hitting it aggressively. But in trading we have to constantly make decisions that may or may not change the scenario for the given trade.
As another week goes into the record books. I am very pleased with my trading this week. I have had really nice trades, which have increased my confidence in my trading quite a bit. My plan for next week is to keep my *confidence in check* and not allow it to get the best of my. I will also take a few more trades before increasing my average share size to further capitalize on my strategy.
Good Trading
David Guerrero
Active Trader 2011 – July Issue
Click the image below for my December 2009 Interview
