Thoughts on a Monday holiday - 30 May 2011

The US and London stock markets are closed for a holiday on Monday. As of current posting, the German Dax Composite is trading flat and hugging the 50day MA, just like the three US stock indexes. Utmost on my mind is whether the financial sector will be leading the overall stock market higher or will it be bringing the markets down? While the financials looked cheap at this moment, that doesn't mean that it won't go lower. What's a recovery without the financials? The small bounce in the financial stocks might mean that it could be a "short the rally" on any move up to the overhead supply.

Personally, i felt that the banks might be stuck in a trading range as the other sectors come down to play catch up. Opinions are often wrong in the market so one should stay nimble and flexible as we await the breakout move. I am currently bearish on the markets.

Enjoy the holiday.

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Dead Cat Bounce or Not ? 27 May 2011 (Friday)

The Dow Jones Index bounced back up for the past 3 days to retest its resistance after dropping huge on Monday this week. My bias is to the downside though as many stocks are exhibiting topping patterns. My interpretation of the general market sentiment is that this should be a dead cat bounce and we should see more downside coming in the weeks ahead. Of course, do take my forecast with a pinch of salt should the markets rally even higher.


Dow Jones Index

 

Nasdaq Composite

Las Vegas Sands

Caterpillar Inc.

(Repost) Anatomy of a Short Sale - William J. O'Neil

Again, given the sentiment of the overall market condition, I thought its an appropriate time to read up on this earlier post of mine on "Anatomy of a Short Sale" (Click to read).

Good Day!

Construction & Agricultural Machinery Industry

Caterpillar Inc. (CAT), one of the Dow Jones component, is breaking down with a topish looking chart along with Deere & Co. (DE). Many sectors are all pointing downwards contrary to what the media reports are trying to apint. Price actions on the charts are what matters most. I could sense more pain coming in the next few weeks with short-sellers out for blood..

Caterpillar Inc.

Deere & Co.

Go into cash position!

Coal Industry

The coal industry is known to be one of the most closely watched leading indicator for the health of the economy. Coal is just behind oil in the supply of global energy with coal essential in the production of steel and generation of electricity. Price action for coal companies seemed to be breaking down and starting a new trend downwards. Many stocks of coal companies are coming off Head & Shoulder top reversal formations. Watch out below! (Click on charts to enlarge)

Market Vectors - Coal ETF

Massey Energy Co.

Arch Coal Incorporation

Go Defensive - Protect your capital

Dear Readers, the winds are changing in the stock market. Cash is king and do play defensive to ensure your survival in the financial market. Many stocks are showing topish signals and there is a high possibility that we could see some serious selling taking place. I have an earlier post here last week (click to read) on the "not-too-good" market sentiment. Meanwhile, let's take a look at this week's charts.

The Dow Jones Index and Nasdaq Composite are forming descending triangle formations. Market Indexes are made up of many index stocks and may take time to break down as the individual stock fall sick one by one. Meanwhile, many index stocks are already breaking down and undergoing distribution even as the general market has yet to top out. (Click on charts to enlarge)

 

Apple Inc. was rejected at the 50day MA which is a sign of weakness as many short sellers piled in at the low risk entry point. Apple Inc. is a market leader and many eyes are on it as leaders are known to lead the markets lower.

Financials are weak and are currently trending down as they broke downwards out of bases. It will take some time for the financials to build their bases and long set-ups. If you only go long, you will have to be patient. Stocks on down-trending have the tendency to bounce up and then be shorted down again by sellers at resistance.

Take a good look at FAZ (Inverse bear ETF for financials) as the ETF looks like its building a firm base for a push upwards. The financials did not took part in this commodities driven rally and being the backbone of the economy, we'll need the financial to take the lead. Currently everything seems to indicate that all is not well with the economy. Keep an eye on the financials. Meanwhile, we are also seeing a lot of such bases being formed in other inverse ETFs as well.

I have a short position in Alcoa and it is acting well. In this case, i will have to be patient as the stock makes its move down, hopefully. Nonetheless, my stop loss will take me out of the trade if the stock bounce above the 50day MA. The Head & Shoulder top pattern have shifted the odds towards the short side for sellers.

With the sentiment in the general market not looking good, i shifted my attention to Chipotle Mexican Grill (CMG). This stock had gained almost 200% since the beginning of 2010. I believe many short-sellers are watching this particular stock as well as it seemed to form a potential H&S top pattern. A break of the neckline would see more selling. Stalking this stock.

Play defensive and trim your long exposure in the market. Have a good weekend.

Updates on Dow, Nasdaq and Alcoa (AA)

In what was the biggest signs that the bears were making their presence felt, the Dow plunged almost -160pts before clawing back to close at -68pts. For sure, volatility is the in-thing in the market now and both the bulls and bears are now entangled in a intense tug-of-war. We could even see more congested days ahead before the market will show its hand. See chart of Dow Jones Index and the Nasdaq Composite.

Meanwhile, let's take a look at one of the Dow's component stock, Alcoa (AA). The aluminum company had a big volume down day as the bears broke their way down on what looks like the neckline of a head & shoulder pattern. I covered AA almost extensively as it is one of my favorite stocks which i trade in and out of many times.

Prepare for volatility.

With reference to my earlier two posts on Wyckoff's method of technical analysis on BAC, i realised that on hindsight, the level indicated on the chart below could not be the "last point of support" as the stock price was supposed to bounce off the level instead of hugging it. I have indicated the correct LPS on the chart as well for comparison..

Reference to earlier posts:

Wyckoff Method of Technical Anaylsis - BAC


Wyckoff Method of Technical Anaylsis - BAC (part 2)

Anatomy of a Short Sale (Repost)

I thought its an appropriate time to read up on this earlier post of mine on "Anatomy of a Short Sale" (Click to read).

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Possible trend change in the making

The charts looked topish and leaders such as Apple Inc. and JP Morgan are breaking down. As Livermore said: "As the leader goes, so goes the entire market". Leaders are supposed to lead the market and if the trend of the market is down, the leaders stocks are supposed to lead the overall market lower. This is precisely why they are called "leaders".   The winds are changing and one should get defensive and tighten your stops or moved to cash position. Aggressive shorts-sellers are already in the thick of action! Let's take a look my watch list.

Apple Inc. (AAPL) - Broke below its 50day MA.

Alcoa (AA) - Head & Shoulder reversal formation forming. A break of the neckline will definitely see more selling. Topish looking chart. Definitely a short-selling candidate.  I have a post on AA too a few days back.

JP Morgan (JPM) - Broke and closed below the neckline of the double top formation. We might see more selling in coming week.Not looking good.

Citigroup (C) - Gap down on Thurs and broke the low of the hammer reversal candlestick and effectively rendering the reversal useless. Citigroup might look cheap now but as Jesse Livermore once said: "what's low does not mean it will not go lower" !

Bank of America (BAC) - Closed below $12 and dropped out of its consolidating trading range signaling weakness.If the selling is intensive, we might even see BAC retesting the $11 mark.

Direxion Financial Daily Bull (FAS) - Dropped out of its symmetrical formation. Not looking good..

Lastly, Dow Jones Index is consolidating for a breakout move. Check out this post on "Anatomy of a Short Sale". It is increasing looking like a late stage failure (as depicted in the post above) if the Dow do not move any higher or breakdown. My bias is now to the downside. Nonetheless, please wait for the market to show its hand before making your move! Traders would also be placing sell stops below the descending triangle.

Cash is king, for now!

Financials - Chart patterns still intact

I felt like a school kid waiting for my exam results, especially when it comes to waiting for the bank stocks to move. Chart patterns for FAS is intact while BAC held its $12 support on Tuesday. GS has a bullish engulfment candlestick pattern on its chart. While the overall market sentiment is already up huge over the past few months, the Financial sector is probably just waiting for its ferry at the harbour... and i thought i saw the ferry coming from a distance through the fog?

Energy stocks - Short-selling opportunity

Dear readers, I am seeing more and more short selling opportunity for stocks in the energy sectors. Below are two stocks on my short-sell watchlist. I will be averaging in my short entry with stop loss just above the red Kijun Ichimoku line.

Chesapeake Energy Corp broke out of its decending triangle last week on high volume and its a short opportunity now as it retest its resistance at the neckline.

Stone Energy Corp (SGY) is currently hugging the 50day MA and had closed below the 50day MA for 2 days. Any signs of weakness today towards the closing on Maday will see me initiating a short position on this stock.

Always trade with stop loss and the correct position sizing !

Aluminium Sector & Dow Jones/S&P500 Index

Commodities prices are on a downward spiral and that includes prices of aluminum and steel as well. Let's take a look at our aluminum stocks of Aloca and Century Aluminum.

Aloca (AA) - Looking increasingly like it is in the midst of forming a H&S formation. A break of the neckline will confirm the formation and the start of a new downtrend. If you are long, i would suggest that you go to the sideline with your cash.

Century Aluminum (CENX) - Was that a double top formation? CENX gap down on huge volume 3 days back. CENX will be more volatile than AA as it is a small cap stock and is more prone to extreme price movement.

Finally a look at our Dow Jones and S&P 500 Index. It went up to as high as 155 points on Friday but it failed to hold on to its gain and gave back almost 100 points after an impressive job report. What does that tells you?

Financials - Updates

Bank stocks slipped along with the general overall market when the Dow shed -139pts on Thursday. I am in full cash position now and will buy back the financial stocks if they exhibit strength.

Direxion Financial Bull (FAS)

Bank of America (BAC)

Silver - Technical Analysis

Silver dropped more than 30% from its high of $48.35 on huge volume indicating possible selling by big institutional players. Any relief rally should be sold as i think many investors caught in the sell-off who did not react in time will be anxious to sell off their holdings. Who knows, we could have possibly seen the high of Silver already. You have to be very flexible here as Silver is a high volatility trade, not for the fainted heart.

Have a good weekend!

Energy sector - Topish Signals

Dear Readers, while the markets seemed to go on and on higher without pausing to catch its breath, a correction looks imminent for the energy sector as topish signals are showing on charts of the Russell 1000 energy index and energy leader Exxon Mobil Corp (XOM). All news seemed rosy now but do remember that the market is a forward looking indicator and we should take note of these clues which Mr Market is dishing out. If you are long on the energy sector, it would be wise to go into cash to see how the markets react. One can always buy back the shares if it really does go higher but losses are harder to make back.

Russell 1000 Energy index

Exxon Mobi Corp (XOM) - A break of the double top would break the bearish spell.

Finally, a look at Transocean (RIG). Its chart is already exhibiting weakness with a head and shoulder reversal top formation already formed.

Go into cash position.

Silver - First wave of selling

Dear readers,

Price of silver is currently feeling the heat as the first wave of sell-off begans.

If you are on the sidelines now and waiting to go long, i would suggest that you wait for a bounce on the daily charts at the support indicated on the chart above. However, you would have to be very flexible here if you are going long on Silver as this could be a top in the making. Note the doji on the weekly charts.

If  you are looking to go short on silver and are currently on the sidelines, i would suggest that you wait and see if Silver would bounce off support and re-test its near term high of $48.35. Any rally and failure to hit $48.35 would be a double top signal.

Where are the market players?
At this point in time, trend traders would be on the sidelines and waiting for a break of the neckline before igniting any short postitions while fade traders (traders who buy or sell reversal) would have already ignited their short  trades at $47.50 or waiting to enter long at the bounce at support or enter short at any subsequent failed rally to test the near term high of $48.35 to execute their trades.

Fade traders have the highest reward ratio than trend traders but of course the risk are higher. Catching the top dollar pays you well but it could be very expensive if it is not executed properly.

For me, i'll be on the side lines stalking silver to see how it would react on its support and its next attempt rally, if any.

BAC - Technical Analysis

Which way, BAC? Symmetrical triangle forming on BAC's daily chart. If Wyckoff's method of technical analysis is correct, we should be moving up. Let's wait and see. I have put on a huge position with a tight stop loss. Good risk to reward ratio, in my opinion.

Price action to look out for at major support for long trades

Typically, if you are looking to go long and enter a trade for your stock at its major support (50day MA or 200day MA), you would want to see the stock bouncing off the support rather than the price action hugging the support line. If you are looking to act on such setups and the price action is not acting right, you might want to snap a mental time stop on your trade or just scratch the trade and move on. Remember, we can always put a trade back on but losses are hard to make up.

 An example of a trade not acting right at significant moving average:

 

 Example of a stock acting right at significant moving average: