Trading Tips

Various tips and ideas for regarding trading and investing such as placing orders, using stops, etc… These tips are included within the content of the posts listed below.

Oct 132014
 

Here’s a couple of questions that I received over the weekend regarding when to act on a buy/sell signal and how to recognize divergences on a chart:

Q:  I have found your comments and advice to be extremely helpful. While reading your column this weekend, I noticed you talked about 6/10 monthly EMA long term signal for SPX. Do you have to wait till the end of the month for this signal to be valid or can one act on it any time when 6 ema crosses 10 ema, say in the middle of a month. Or does it even matter. I am always confused on this. Thanks for your help.

A:  I’ve found that waiting for a print on a close of the period of the chart of whatever signal I am using will greatly reduce the chance of a whipsaw or false signal. On that 6/10 monthly ema, yes, waiting for the 6 ema to close below the 10 ema on the last trading day of the month would be best. The same holds true for breakouts and breakdowns using candlesticks. E.g.- On my weekly charts, I’ll usually wait for a candlestick close on the end of day Friday since intraweek breakdowns are fairly common, only to see prices move back up above the support level by the end of the week. Waiting for prices to print a close above support/resistance on the time frame you are trading even works well with breakouts on intraday charts such as 15 or 60 minute charts (wait for a 15 or 60 minute close above/below the pattern that you are watching). Also keep in that the 6/10 monthly ema pair defines bull & bear markets and those signals typically last over a year once triggered. Therefore, it’s more of a confirmation of the primary trend than a timing signal, more useful for helping to align your trades with the primary trend than a “time to get short” signal as the market will already be well off the highs by the time that it triggers.

Sometimes I will jump the gun and take a breakout before we get a closing print above the pattern. I’ll do that if I have a lot of supporting technical evidence that it will play out and I feel strong about the trade. Right now might be a good time to get an early jump on short trades with most short & intermediate-term signals in the broad market currently bearish. Really it’s just a matter of preference: Aggressive traders might opt to position on any break of support/resistance or on the first crossover of a moving average pair while more conservative or conventional traders, typically those with longer-term time frames, might opt to wait for a solid close below/above the pattern on the time frame that they are trading.


Q: Nice job on the short call. Just curious to whether or not you think a short position should be initiated on FISV. Also, do you use a specific set of rules when drawing Divergence lines? It seems when I’m drawing my own Divergence lines, sometimes I can draw the lines to suite the trade I’m entering(if that makes sense).

A: Absolutely. I’m personally short FISV and plan to highlight it as one of the more promising short trade ideas at this time. FISV just recently broke below the daily uptrend which also defined the weekly ascending channel so it still offers a very nice R/R if shorted around current levels. With that being said, even the most promising trades don’t always play out so always use stops & never get married to any trade.

Regarding divergence, the rules are pretty straight-forward: Using negative divergence, the price of the securities needs to have made a higher high against the indicators or oscillators that you are using (MACD, RSI, CMF, etc..) making a lower low. I will say that although I’ve never read this anywhere, when using the MACD, I consider divergence as only “potential” until we get a bearish cross-over on the MACD while prices made a higher high. In other words, if prices are making a higher high and the MACD has yet to move above its previous reaction high and is still below it, the potential for divergence does exist but it is also possible that the stock keeps moving higher as does the MACD with the MACD eventually moving above the previous reaction high & thereby, negating or eliminating the potential divergence (which tends to happen in strong uptrends). From my experience, if you wait to see the bearish crossover on the MACD (fast line moving below the slow line) at a point that is below the previous reaction high, then the odds of a correction are very high at that point. As far as positive (bullish) divergences, everything that I said above holds true but in reverse (prices making a lower low against the indicators making a higher low).

Sep 242014
 

Early today I had pointed out the Ascending Broadening Top pattern on the SPY 120 minute chart. The video below discusses a very low risk, potentially high return strategy for trading what’s referred to as a partial rise within these potential topping formations. For those who do not have the time or inclination to watch the video, this strategy essentially entails establishing a short position on a partial rise off of the last (likely) tag of the bottom of an Ascending Broadening Top pattern. While a more aggressive trader might opt to begin shorting or scaling in short around the 38.2% retracement (where the SPY is currently trading), adding up to around the 61.8% retracement, with a stop not too far above, the more conventional, lower risk strategy would be to wait for prices to start to roll over before reaching the top. If it looks like the SPY has reversed and might be headed back down towards the bottom of the pattern, one could establish a short position at that point, with a stop slightly above that last reaction high.

The video below discusses the methodology behind this trading strategy as well as the reasoning for expecting a downside break of the pattern vs. an upside breakout at this time. I have also included an updated 60 minute chart on the SPY illustrating the strategy as well as an actual example of a very successful partial rise short on GDX posted here back in early 2012 (that chart along with the entire post can be viewed here).

 

Aug 142014
 

FFIN (First Financial Bankshares) is just one more in a long list of attractive short candidates in the regional banking sector. In fact, the chart pattern on FFIN looks very similar to the HIBB Active Short Trade with a similar topping pattern above a well-defined support shelf with a substantial thin zone below which is likely to be filled quickly once/if prices break support (as they did on HIBB).  FFIN will trigger a short entry below the 28.25 horizontal support level with a suggested stop above 29.10. The sole profit target at this time is 24.84, which would provide a 12% gain if hit, although this trade has the potential to morph into a much longer-term swing short trade with an ultimate downside target around the 18.70 level, depending on how both FFIN & the broad markets trade going forward.

 

I’ve included a 2-year, daily chart as well as a 4-year, 2-day period chart from TC2000 along with both the normal (adjusted) and unadjusted 2-year daily charts from stockcharts.com to help illustrate the shortcomings of the stockcharts.com charting platform. Stockcharts.com uses a default of plotting all historical stock prices adjusted for dividend payments instead of using the actual levels where trades took place in the past. The result is an inaccurate representation of historical prices when viewing the charts of dividend paying stocks. These distortions become more pronounced the longer the time period viewed and/or the higher the yield (past dividend payments) on the stock or ETF that you are viewing. The go-around solution for this issue is to add an underscore (“_”) before the ticker symbol which will render a chart showing the “unadjusted” price history of the security. This works fine unless the stock has split during the time period you are viewing as stockcharts does not “unadjust” for the change in price following the stock split.

TC2000, along with the free version, freestockcharts.com, by default will show stock price history that is unadjusted for dividend payments but adjusted for stock splits, which results in a true picture of the past trading history of the security… which is the basis for technical analysis & essential when trading IMO. FFIV is a good example of that difference as the TC2000 chart shows an extremely well-defined horizontal support level with numerous reactions while the default stockcharts.com chart shows a slightly up-sloping (dashed) support line over the same period of time. There are several reasons that I subscribe to both charting services with one of those reasons is the ability to provide users of Right Side of the Chart links to the live, annotated charts, a feature that stockcharts.com provides while TC2000 does not. Each of these charting platforms has their own pros and cons but when trading and especially setting trendline alerts, I will use TC2000 along with several other streaming real-time platforms from some of the various brokers that I use.

Aug 082014
 

The SPY hit my downside target originally posted here just over 3 weeks ago within pennies before reversing. I’ve included that original chart from July 17th in which I stated “T2 is my preferred target, which is the bottom of the 5/27 gap as well as the 50% Fib retracement level.” The bottom of the 5/27 (Tuesday) gap was the 5/23 (Friday) high of 190.48 , following a 3-day holiday weekend. The SPY kissed a low of 190.55 just before the close yesterday while putting a divergent (bullish) low on the intraday time frames (15-120 minute charts)… a mere 7 cents above the bottom of the gap and a good example of how stocks, sectors & indices often reverse just above or below the actually support level (hence the reasoning for placing my buy-to-cover orders on short trades slightly above the actual support level, although I wasn’t trading the SPY in this case).

That brings me to a point that I have discussed here before which is what I consider to be a major shortcoming of the stockcharts.com charting platform: The inability to display the correct (true) price history of any dividend paying security on an intraday time frame. When viewing daily or weekly time frames, Stockcharts.com does allow for the viewing of the price history stocks and ETFs “unadjusted” for dividend payments (which I feel is a very important feature when using past price history to help determine future price direction… i.e.- technical analysis). However, the ability to view actual, i.e.- unadjusted, stock price history on intraday charts is not an option with Stockcharts.com. I have address this issue with them in the past, to no avail, and the main reason that I continue to use Stockcharts.com is the ability to provide RSOTC followers the ability to view the live charts via hyperlinks (a feature not available in the overall superior TC2000/freestockcharts.com charting platform).

As mentioned above, in this July 17th post, along with a static & live link to my 60 minute SPY chart from stockcharts.com, I had stated the target which has now been hit on the SPY. Below is the previous 60 minute chart from July 17th followed by a screenshot of today’s 60 minute chart from Stockcharts.com, in which it appears prices fell well short of the bottom of that 5/23-5/27 gap. However, in viewing today’s 60 minute chart from TC2000, one can easily see the almost perfect kiss of the bottom of that gap before prices reversed. Again, I have discussed this shortcoming of stockcharts.com in the past & don’t want to beat a dead horse but I feel that this is an important issue for those who trade using sc.com to be aware of, especially as sc.com is one of the more popular charting platforms in use today.

 

On the TC2000 60 minute chart above, I’ve also listed what I believe to be the two most likely scenarios for the SPY: Prices reversing at the former T1 level (now labeled R1 for 1st resistance level) OR prices continuing up to the R2 level (194.30ish) before reversing and kicking off the next major wave of selling. I’d have to give equal odds to either scenario at this time while a move above the 194.50 area would have near-term & possibly intermediate-term bullish implications.

Moving on to the bigger picture, earlier this week, the $SPX (S&P 500 Index) made a fairly solid intraweek breakdown below the uptrend line & is currently backtesting it from below. A solid close & follow-up move back inside the wedge next week would dampen the bearish scenario while a rejection off the trendline (on Monday) would likely trigger the next wave of selling & a move towards the 1750 area in the coming weeks. Should the $SPX fail to regain this key uptrend or even regain it into next week only to once again break below soon afterwards (a likely possibility), that would most likely lead to a breakdown of the $OEX (S&P 100 Index) below this critical bull market uptrend line generated off of the 2009 lows. As always, when trading off of the weekly time frames, it is the weekly close (end of Friday) that matters as intraweek dips below support are a fairly common occurrence and often prove to be whipsaw signals.

 

Jul 242014
 

The CSGP (Costar Group) short trade has been stopped out today, exceeding the previously suggested stop of 153.85 shortly after the open following an earnings induced gap. As mentioned recently, each trader must decided whether on not to hold or close a position before they report their quarterly earning results. A link to the Briefing.com Earnings Calendar is available under the Tools of the Trade area on the right side of the home page.

Gaps are unavoidable events with any type of trading other than day trading (where all positions are closed out by the end of each day).  Sometimes they go they way of your trade, sometimes against you.  My preference on any gap that goes against a short position is to wait until the order imbalances at the open moderate and then place a stop just above the peak high in the stock.  Sometimes the stock will power higher after the initial thrust, taking out your stop, but very often the opening gap proves to be an over-reaction with the stock moving lower afterwards.  Essentially a trader has two choices when caught on the wrong side of a gap:  1) Immediately close the position, thereby guaranteeing a loss or large give-back of any imbedded gains or 2) Set a stop above the initial reaction high, which will result in either a slightly larger loss (or give-back) or the gap is faded and the trade continues to play out, allowing for a better exit price and in some cases, the original profit target to be hit.

In the case of CSGP, the stock gapped to open at 148.08, below the suggested stop of 153.85, but quickly moved higher, exceeding the stop within the first minute of trading. The opening order imbalances continued to push the stock sharply higher for the first 20 minutes of trading until peaking at 165.83 before falling back nearly 9 points. Therefore, a trader that did not have a standing GTC stop-loss order that was taken out around 153.85 today & still happens to be short this one might consider a stop just above this morning’s peak reaction high of 165.83. However, as the 153.85 level was taken out shortly after the open, CSGP will now be moved from the Active Trades category to the Completed Trades category as a stopped out trade.

Jul 222014
 

First off, I just wanted to point out that the next few trading sessions are likely to be marked with increased volatility and above average chances for some fairly sizable opening gaps in either direction. The largest component of both the Nasdaq 100 & the S&P 500, AAPL (Apple), is scheduled to report earnings after the close today as well as another top component of both leading indices, MSFT (Microsoft). FB (Facebook) reports after the close tomorrow with AMZN (Amazon.com), another market leader, on deck for Thursday after the closing bell.

As far as how to or even whether or not to trade around earnings is completely up to each trader. Long-term investors shouldn’t be overly concerned with a companies quarterly earnings release other than maybe to time entries or exits on a position that they were already considering buying or selling. In other words, if one had a fat profit in a position of AAPL that they have been holding since the lows last year and they were already considering selling the stock as their profit target has been met or exceeded, why not step aside now vs. gambling on a possible 10%+ gap against their position tomorrow, should AAPL miss expectations or give less than stellar guidance?

In regards to swing trading, whether or not to hold a specific position into earnings or even to hold any positions during a period of such potential market moving releases as mentioned above is an important decision that each trader will have to make for him or her self. Some traders will always close positions before an earning release as part of their trading rules as to avoid Continue reading »

Jun 052014
 

With both GDX (Gold Miners ETF) & SIL (Silver Miners ETF) now solidly inside the thin zones, the chances for a continued move higher towards their respective targets is good. SIL gapped just above the top of the R1 downtrend line at the open today and hasn’t looked back. With prices solidly inside the thin zone, a continued move towards the top of the zone in the coming days is likely. Any pullbacks to the R2 level Continue reading »

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