Waiting game for signs of capitulation

Dear readers, it does not take a genius to tell that the stock market is dropping literally like a falling rock. And i mean its literally plunging on a straight line move. If you are a long only investor, we should be looking at signs of capitulation. Capitulation is defined in Wikipedia as:

" Market capitulation refers to the threshold reached after a severe fall in the market, when large numbers of investors can no longer tolerate the financial losses incurred.These investors then capitulate (give up) and sell in panic, or find that their pre-set sell stops have been triggered, thereby automatically liquidating their holdings in a given stock. This may trigger a further decline in the stock's price, if not already anticipated by the market. The contrarians consider a capitulation a sign of a possible bottom in prices. This is because almost everyone who wanted (or was forced) to sell stock has already done so, leaving the buyers in the market, and they are expected to drive the prices up.The peak in volume may precede an actual bottom."

Let's take a look at one cyclical stock, United Steel (X), which is more prone to the mood and swing of the economy. Note the gradient of the drop. It is almost strikingly similar to the one back in Mar '09.

United Steel (X) Weekly chart

Now, let's take a look at the daily chart. Again, note the gradient of the drop from a gradual move down to a plunging one. So now, we wait.
 
United Steel (X) Daily chart

Sitting on my hands, for now.

Golden Buying Opportunity or Market Meltdown?

Seriously, I had thought that the resulting aftermath of "that big sell-off" would resulted in a huge short-covering as well but what we are seeing now is a series of test on the long term weekly 200day support of the S&P500. The intensity of the drop indicates to me that it is more like a case of panicky selling more thatn anything else.This drop could either be an imminent market meltdown or a HUGE buying opportunity. And I am more inclined to the latter. We should see the market moving higher from here.

My take is that the market goes higher from here. If the market is meant to break this 200 day long term support on the S&P500 weekly chart of 1155pts, it would have bounced right off this level on the daily chart and then hit towards resistance before resuming the drop and eventually breaking the 1155 support. Instead, what we are seeing now is a consolidation of positive reversal candlestick on the daily chart which leads me to believe that the market might have formed a long term bottom here and thus creating a tremendous buying opportunity to load up stocks at this cheap levels.
 

This is my hypothesis, of course. I will only know on hindsight if I am correct on the markets. Meanwhile, my strategy is to go long at this level with stop loss and to add more if the market goes higher or bounce off any double bottom formation. For more conservative investors, one could buy only upon a successfully retest of the 1155 support. Of course, I am not oblivious toi the fact that the ride up will be choppy due to the huge overhead resistance. 

Good luck and have a great week ahead!

Market thoughts - 7 Aug 2011

Dear Readers, its like deja vu all over again just like back in the 2008 financial crisis. The S&P500 lost almost 7% last week. Utmost on everybody's mind now is that whether the markets will rebound from its current oversold situation. Almost every traders are expecting a bounce of sorts for the coming trading week. And just before the close of trading on Friday, rating agency S&P downgraded the credit rating of the US government. Question is: Is this downgrade already been baked into the current beaten stock prices? I, for one, think we'll see the market holding the low of the long hammer reversal candlestick formed on the Friday.

Not the time to be long but one should sell the short term bounce into resistance if / when the bounce comes. You can bet that investors who were not able to get out when the market plunged last week will dumped their shares on any spike in share prices when shorts cover and longs who sense bargain buys. There are signs that the hammer close on Friday on high volume might be a a sign of capitulation where investors dumped their last stocks holdings and no more sellers are to be found. We'll see. At this point in time though, cash is king in this environment.

On a separate note, I have come to know that the Baltic Dry Index (BDI) has been on a spiral downward trend and had not recovered since the financial crash back in 2008. The Baltic Dry Index provides an assessment of the price of moving the major raw materials by sea and is known to be one of the purest form of economic indicator in the sense that only member companies who have actual cargo/ships are allowed to trade in this index with no speculative players involved at all.

This brings us to this particular company Dryships Inc (DRYS), an operator of drybulk carriers who pegged its rates to the BDI. In other words, buying into DRYS is the exact of buying into the BDI. No rates go down forever. This would be a pure contrarian play and dead money while waiting for the index to recover. This might be a multi-bagger when the economy recovers. For all the contrarians out there, i present DRYS. See chart.

Weekend Updates - 1 Sep 2011

Here's a look at the daily chart of the S&P500. It will be the third time since mid-June that the crucial 200day MA will be tested. Will the overall market bounce off or break the support? Financial stocks are still in the dumps but there might be signs that they have formed a bottom as long as the lows of the reversal candlestick patterns hold.

There have been lots of talks that the financial sector needs to wake up in order for the overall market to move higher. Personally, I subscribe to this idea. The next most important point is to determine if the market has factor in the debt crisis for the financial sector? As we all know, stocks do have the ability to forecast the future and perhaps the reason why this particular sector have been stuck in a trading range since the 2008 financial crash could be due to the ongoing reported debt crisis. If this is the case, if this crisis is already priced in (which i am assuming it is - see my point above), we should see the financial sector moving higher soon since markets are forward looking. Anyone agree with me? Let's see.

Financials(Weekly charts)

Stocks at important pivot point - AIG & Alcoa

American International Group (AIG) and Alcoa (AA) are two stocks i spotted which are at their crucial pivot point. At their pivot point, one can see the congested area of moving averages. AIG had formed what appears to be a double bottom formation. It looks more like a buy than a short sale potential in our case. The bias is also to the upside for Alcoa as the aluminum producer is trapped in a symmetrical triangle spanning a few months.

AIG

Alcoa

My bias is to the upside for the stock market currently.

Stocks looks ripe for further upside

Dear readers, no matter how bad the headlines may seemed at this moment, the charts are hinting at further upside for stocks as beaten down financial stocks are now bouncing off long term support with signs that longer term players are stepping in to purchase the stocks at these levels. These behaviors exhibited by the financials are very positive indication that the financial stocks have bottomed. Let's check out the weekly charts for stocks in this post (click on charts to enlarge).

Bank of America (weekly)

Citigroup (weekly)

Casino stocks are also breaking their immediate resistance level and are now free to move higher. The weekly  charts indicates that Las Vegas Sands (LVS) has broken out of the Ichimoku Clouds and is starting a new trend.

Solar stocks did not took part in any upside moves at all ever since the European debt crisis was reported in 2010. This sector is severely beaten down. We could see solar counters moving higher soon as oil prices looks to resume their uptrend and the fact that many of these solar stocks have bounced off long term support. It would be good risk to reward to initiate your long positions at these beaten down bargain prices.

Yingli Green Energy (weekly)

Renesola (weekly)

Do keep an eye on the financial stocks as i believe that we could see them finally waking up and leading the charge for the overall market in moving higher! Have a great week ahead.

Caribou Coffee Company (CBOU)

CBOU looks to be a buy as the stock broke out of its trading range in mid June on high volume. It made a pullback to the $13 region. This could be the next monster stock for all we know. If you are an avid fan of William J O'Neil's CANSLIM method, you will find this particular setup to your liking! Stuck in a range for most of the year, and then suddenly bang, the stock made a move up on high volume. Swing traders would also have taken note of this setup by now by buying this pullback.

Good opportunity to load up! Buy buy buy!

Dear readers, the news on the Greece default and that the world markets reacting on a sell-off had dominated headlines around the world this week. Despite how gloomy the news are currently, let's just focus on the price action. Interestingly, the charts are telling us to buy the dips. We should see higher stock prices to come in the weeks ahead. Solar and the financial stocks looks beaten down and could possibly have formed a bottom. Good time to load up. Gaming stocks are also on a roll.

S&P500

Las Vegas Sands

GT Solar

Yingli Green Energy

US Steel

American International Group (AIG)

Market Initiating New Uptrend - Buy on Dips!

Dear Readers, the recent market slump looks to be over as many cyclical stocks are breaking out of their downtrend and initiating new breakout. It is now a buy the dips market with the market breaking resistance. We could see further upside in the stock market. Perhaps the bull market has yet to end after all. The majestic rise from 2 weeks ago had forced the bears to run for cover. For all we know, the recent slump last month could just be an intermediate correction of a bull run. The market is indeed very dynamic whereby opinions doesn't matter. I was bearish and now i am bullish. Concentrate only on price action. Stay flexibility in your bias.

AIG - Looks to be coming up from a properly formed base. A stock in accumulation.

BAC - Possibly the weakest of the bank stocks, it looks like its trying to break its $11 resistance.

Citigroup - Looks to be in some sort of bullish continuation pattern at its resistance area instead of failing at the resistance. Citigroup is now a buy on dips to the support area.

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US Steel - Another cyclical stocks with a change in trend detected in late June. Stock has now broken through its resistance and is now a buy on dips to the support area.

Aloca - Broke out of its sloping downtrend line this week. Currently forming a bullish continuation candlestick pattern.We could see higher prices soon.

Market updates - Week of 4th July 2011

All short bets are off now as the markets' powerful upthrust off the 200 day MA had short sellers scrambling to cover. Either this is is bull trap or the recent market plunge is only an intermediate bull market correction. If the latter proved to be correct, then the markets look poised to break new high as buyers come in to buy at dips.

Personally, i have switched from being bearish to neutral. I will be looking to buy if / when the stocks retreat back to retest the support area. For bullish continuation patterns, we should be looking for stocks to consolidate around the resistance area instead of seeing price action making lower lows and highs. Below are charts for S&P500 and LVS.

S&P500

Las Vegas Sands

AIG - Stock under accumulation

American International Group - AIG looks to be under accumulation by big players. Any break above the ascending triangle will cause the price action to spring up due to the huge number of buy stops placed at the breakout region just above the triangle by traders (see chart below). AIG, however, remains a short term buy trade due to the huge amount of overhead supply. There will be another low risk opportunity for you to purchase the shares on a secondary test of support. Perfect stock for "buy-and-hold" investor to load up, IMHO.

More downside risk in the weeks ahead

These are gloomy times for the markets and investors but not so for traders as good money is being made as the markets appeared to be trending lower. Rallies to resistance were pounced on by new short-sellers and desperate investors wanting to dump their stock holdings. Many stocks from different sectors are already at favourable level to initiate low risk shorts. I have an earlier post here last week (click to read) whereby i had discussed on the failing energy sector as oil prices look like they are ready to drop as dark clouds loomed over the weak economy. This is a 'short the rally' market. Any bounce in prices are good opportunities to offload your holdings if you are still not in cash position. Do not fight the downtrend.


ERY Drexion Daily Energy Bear 3X

LVS - Las Vegas Sands

APKT - Acme Packet Inc.

CAT - Caterpillar

GE - General Electric; widely know as the bellwether stock of the economy was seen leading the charge down through the 200day MA. Definitely a sign of bad times to come.

Prices for precious metals are also breaking down as the Greece fiasco played out in the media. The markets are forward looking and I believe they are already pricing in for a higher US dollar environment. I have no idea what it will mean for Greece though but the markets apparently doesn't think its good !

Gold

Silver

The financial sector looks beaten down. However i wouldn't touch them yet. I am keeping a close watch on the financial stocks for any signs of life as they should be the sector that will lead the economy out of this bearish market.

Good weekend to all.

Dow Jones and S&P500 - Updates

The Dow Jones Index was down 200 plus points and then managed to craw back 150points to close at -59pts on 23 June 2011. Even so, we are still in bearish territory. While the market's huge reaction to the initial sell-off was huge in the final hour where it pare most its losses for the day, we need to see a follow-through higher in order to confirm that the market is indeed displaying strength and rebounding.

Dow Jones Index

S&P500

Overall, I remain bearish on the markets.

American International Group - Good Buy at Current Levels for long term investors

American International Group (AIG) looks to be a good buy at current levels! In my opinion, this would be a good time to be a position trader for this particular stock. The confirmation to buy AIG would be when it breaks out of its triangle and closed above the red Kijun line on my Ichimoku overlay. One could nibble a little bit at this stock and then add more as it goes higher when it breaks out of a proper base.

Keeping AIG on my watchlist.

Lower pump prices to come - Energy sector next to drop

Dear Readers, I saw many topish patterns two months back and have actually called a top to the stock market in my many subsequent posts. Please click to read: "Go Defensive, protect your capital" & "Possible trend change in the making". According to the charts, the energy sector looks like the next to drop as the topish patterns are setting up for more lower prices to come, in my opinion. For investors with long positions in the energy sector, my advice is to sell, sell, sell !!

A few days back, pump operators had actually jack up the retail price of petrol. I can't fathom the rationale behind the raising of the prices. It doesn't make any sense at all. Perhaps the last draw of the blood from the general public? I foresee cheaper pump prices to come. One just need to take a look at the charts below to understand. A top takes many months to form and the energy sector now finds itself at the edge of the cliff whereby a little nudge would start the free-fall.

Direxion Daily Energy Bear 3X shares (ERY) has an inverted Head & Shoulder patterns formed over many months. Look at the volume for the past few weeks. Goodness me.... I repeat: investors who are long energy sector, SELL !!

For those of you who are not comfortable with shorting the market, please go into cash position. Good weekend to all.

 

Art of Trading - Flexibility, Discipline & Patience

Trading is very dynamic. Traders who adopt a wishy-washy mindset are those who who really excel and stay in the game. Nothing is cast in stone in the world of trading and perhaps this is one of the reasons why many people do not embrace the finer art of technical analysis and trading. They give up practicing technical analysis or even trading altogether after setbacks. Many are too fixated in their long or short bias that they forget the most important goal of all; which is as traders, they are supposed to follow the way of the market instead of arguing with the tape / charts !!

Adopting a strict discipline mentally will allow a trader to overcome his fear of the market taking away his paper profit by adhering to his sell rules as dictated by his trading system or style. Jumping at early profits would only compromise the "letting your profits run" rule. It takes discipline to sit on your hands and wait for the desired move to end before closing your trade. The right patience is also required to make the big money as the market takes its time to play out the move. More often that not, we may be right in our interpretation of the movement of stocks but we beat ourselves by failing to sit tight. This was rightly pointed out by Jesse Livermore in one of his many famous quotes: “It never was my thinking that made the big money for me. It always was my sitting."

Whether you like it or not, there will be times whereby your favourite trading setups will fail. One should be flexible enough to change course or even scratch (fold) your trade if your stock is not acting the way you think it should be. Staying in cash and doing nothing at all while waiting patiently for your setups is also a strategy which many of us failed to fully appreciate. It is only after one experience the painful losses when market whipsaw that one will learn to appreciate the rationale behind this strategy.

Without a doubt, trading is one of the most challenging game ever. Let's embrace uncertainly, fear and greed. Never give up.

Silver lining beneath the dark clouds - AIG

The market is now clearly in a down trend as many stocks are breaking down. However, there appeared to be one silver lining beneath the dark clouds. AIG had plunged from a high of $52 to $27 since the beginning of the year.

American International Group (AIG) looks good for a bounce trade now. It is the first week since the beginning of the year that we finally saw a potential reversal candlestick being formed. I will be looking to nibble a little bit at AIG. The fact that the reversal candlestick pattern being formed so close at the base of the Ichimoku cloud on the weekly chart will only add weight to the fact that selling has more or less subsided, for now. I will buy AIG here with a stop loss at $26.94.

AIG weekly chart

On Friday, the Dow Jones Index plunged and closed at more than -170pts. One closely watched sector, the Financials, managed to buck the trend by eking out a small gain. Looking at the chart of FAS below, one can interpret that a bounce might be coming soon. Look at the volume. At this current climate, any bounce should be sold if price action FAILED to breach the huge supply of overhead resistance. Investors would be dying to dump their shares when price action bounce.

Direxion Financial Bull (FAS)

Bank of America (BAC) displayed abnormal price action along with the rest of the banking stocks. Selling might have subsided for now. The financials lead the overall market lower and should rightly be the sector to lead the bounce as well. Do note that I am under no illusion that this is the right time to go long. We have to wait for a successful retest of its low before employing the 'buy-and-hold' strategy.

One have to be nimble and flexible when counter-trending against the down trend of the market. A worst case scenario is that the financial stocks might even be too weak to bounce at all. Trading is very dynamic and traders should employ their risk management strategies (position sizing etc) accordingly. Overall, I am bearish on the market.

Trade well, my friends.

Market updates - 7 June 2011

Dear Readers, i have not been posting as regularly as i would have loved to due to a change in my working environment. Once i have settled down, i will be looking to post more stock charts and analysis of the overall general market sentiment.

Meanwhile, let's take a look at the S&P500 chart. Do note that trading is still on at the time of this post.

Overall market sentiment is breaking down and moving lower. This has indeed become a "short the rally" market as many investors would be anxious to dump their holdings if the market does ever rally. The market is weak and might not move that high up at this moment. If you are a long trader and have no position at this moment, i would suggest that you be patient and wait for proper stock base to form before jumping in. Protect your capital is everything in trading.

If you are short selling the market, congratulations! I am sure you are making huge profit by now. The market appears to be trending lower and in my opinion, the best strategy to employ for this market would be trend-trading. Do note to trail your stop behind your profit at important level accordingly to lock in your profit. Trend traders never sell at the bottom. Instead, we milk the meat of the move.

And remember what Jesse Livermore used to say: "It never was my thinking that made the big money for me. It always was my sitting." Stocks never move up or down in one straight line. It always zig zag up or down. Have the conviction to stay with your trade and refrain from being shake out by the small fluctuation in stock price.

Not the time to be long, in my opinion. Sell into the rally!