Monthly Archives: January 2011

Execute Smarter trades by utilizing market internals and core sectors.

Posted by Investing Freak on January 10, 2011
General / Comments Off on Execute Smarter trades by utilizing market internals and core sectors.

The following is meant to serve as a guide on how to use market internals to gauge the market when day trading. That being said, the core sectors mentioned below can be used on longer timeframes such as Daily and Weekly to gauge the market direction for the main sectors of the market. As always, keep in mind that what works for one trader (me) might not work for you.

Update: As of July 2011 Brad is back at shadowtrader after taking a break so go listen to him daily if you have thinkorswim.
I initially came to learn about these core sectors and market internals while on ShadowTrader chat that was moderated by Brad Augunas before he was replaced.  The ShadowTrader core index can be accessed to those of you that have a thinkorswim account and have the desktop software installed. Once that is taken care of you can click on “Market Watch” tab, then click on “Watch” and finally Scroll through the “Public” section until you reach “ShadowTrader Core Sectors”. If you have done it correctly you should see a screen like the one below.

Before I move on to the core sectors I want to point out the top right corner of the screen above. This is where the Advancing and Declining sectors are summarized.  So far I have only used this for the benefits of intraday but I will test out the theory that it can also help with long term market prediction. How Brad would summarize this is “The Sectors are 12-4 negative”

The volume shows how much volume goes into the advancing sectors and how much is going into declining sectors. 12,567,261 shares were going into Advancing sectors and 158,799,054 were going into declining sectors. With some quick division we are “12.6 to 1 negative” meaning 12.6 times more volume is going to the downside.

Finally the capital flow is also fairly important in seeing where the money is flowing and when, here we have $37,931,394 on the Advancing issues and $367,886,885 on the Declining issues, therefore another quick division leads us to the “9.7 to 1 negative” which means almost 10x more money is going to the downside.

By gauging these internals you wouldn’t want to get in front of the Bear train unless you saw a change in internals right? Here is an example in the chart below.

As you can see from 1:30-4pm the Sectors moved from 12-4 (or 3-1) negative to neutral (1-1), the volume went from 12.6 negative to 7.3 negative (an improvement) and the capital flow which was almost 10-1 for the bears dropped to about 2.5-1 negative (more money was being thrown to the upside) so if you were day trading it would have been wise to reverse or exit your short positions.

At 12:45pm on Friday there was the most picture perfect Bull Hammer Candlestick pattern which should have been plenty to signal a trend reversal, but the internals helped confirm it.

If you don’t have access to thinkorswim I cannot find another way for you to gouge the market internals but I will link the16 core sectors chosen by ShadowTrader. They can be used intraday to gauge the strong or weak sectors or they can be used to view the long term direction of a certain sector by being graphed into daily or weekly charts.  All the links below point to StockCharts.com

  1. $DJUSHB (Dow Jones US Home Construction Index)
  2. $DJUSIT (Dow Jones US Industrial Transportation Index)
  3. $DJUSNS (Dow Jones US Internet Index)
  4. $DJUSSW (Dow Jones US Software Index)
  5. $BKX (Bank Index – Philadelphia)
  6. $BTK (Biotechnology Index)
  7. $DRG (Pharmaceutical Index)
  8. $GOX (CBOE Gold Index)
  9. $HCX (S&P Healthcare Index)
  10. $IUX (S&P Insurance Index)
  11. $OSX (Oil Services Index – Philadelphia)
  12. $RLX (S&P Retail Index)
  13. $SOX (Semiconductor Index – Philadelphia)
  14. $UTY (Utility Index – Philadelphia)
  15. $XBD (Broker/Dealer Index – AMEX)
  16. $XOI (Oil Index – AMEX)

I am attaching a final chart here which includes all 16 minicharts and I hope you don’t get too dizzy staring at it. Click the Image to Enlarge.

I wish you all the best in using these indicators and I always welcome questions and new ideas so don’t be shy to plop them down on the comment box below.

Happy & Profitable Trading,

-K

Tags: , ,

The Freak’ing Market Nears The Top ($SPX, $SPY, $USD, $UUP)

Posted by Investing Freak on January 07, 2011
Market Analysis / Comments Off on The Freak’ing Market Nears The Top ($SPX, $SPY, $USD, $UUP)

Every day we see the market swing higher and higher and higher and then one day it swings lower we tend to get fooled into the belief that the market has topped. If you have never felt that way you either must work for Gold in Sachs (they seem to have a golden goose) or are some genius and my hats off to you!

The charts I will be presenting to you further down I have kept a close eye on for months (yeah months!) but only recently has there been an urge to share the potential move that’s coming. Weekly charts will be used because I am not timing the market by the minute but merely where its heading based on my observations. There is no one way to play the market or so use this in conjunction with your own research and observations. An old saying comes to mind:  “Ask 7 or 8 opinions but make your own decision.”

To keep me motivated into watching the following charts I decided to purchase an UUP option call expiring January 2012 with a strike of 23 a good while back. That position is up more than 30% but having it on my position screen has kept me aware on moves that the dollar has made.

In the UUP weekly chart there seems to be a Descending Triangle Pattern in the works which is a bearish formation. That being said this is the weekly chart so I don’t expect UUP to break below $22 range for months and years to come. Short Term UUP has resistance at the 50 week moving average (23.43) and if it is able to break through it has a better chance for a swing to the expected 25 area.
(Click Chart to Enlarge)

Wait! So does this mean the dollar is destined for doomsday in a few years due to this pattern? I will not give an answer to that mainly because on this next chart of the US Dollar Index ($USD) the opposite pattern seems to emerge. The Ascending Triangle is a bullish formation and this points to a break to the upside (suggesting dollar appreciates more in few years). One thing to keep in mind while reading this blog is that lines are drawn differently by different people and if a daily, monthly or yearly chart was used the patterns might point elsewhere but weekly is my choice. As with the UUP short term view, $USD also is stuck just below its 50 week moving average of 80.42 and a break and hold (of the weekly) over that resistance would put the dollar index on a better position of heading back to the top of the pattern which is around 88 area.
(Click Chart to Enlarge)

So far I’ve talked about the dollar and yet the title claimed to be calling a market top. I will not disappoint my fellow readers that easily. On the last of the trio charts I have drawn plenty of lines and will attempt to describe with words what dollar strength and breaking over its resistance would mean for the market ($SPX).

The top part of the chart has $USD again showing its price performance (irrelevant since I’m just looking at the pattern). The top red line has been drawn to indicate an important area where when the USD breaks below (weakens) it tends to send the market into “party” mode and when the opposite is true things go into “doomsday” mode (for the most part).  The top green lines are a more reserved prediction just in case the red line acts as resistance and dollar would go sideways for some time but eventually break up since the pattern is the aforementioned Ascending Triangle bullish pattern.  If we break out of the resistance zone more rapidly (blue dashed line) then I call a market top late January-February 2011. It could come at the current highs or the market could make one last push for $1300 (since the moves aren’t 100% mirrors of each other).
(Click Chart to Enlarge)

So there you have it! I have called a Freak’ing Market top 700 words and 3 charts later (and many months of patiently observing the weeklies). My conservative guess if I was forced to make one would be a correction to 1030-1075 area.  That’s around 16-19% correction from the current highs.

There you have it! I hope you all had a Happy New Year and enjoyed reading this post and many others before it (although they’ve been sparse due to realities of the busy life).

Remember to chant the InvestingFreak phrase whenever in doubt “See it, Call it, Trade it, Buy it” 😀

Happy trading and money making!

-K

Tags: ,

S&P 500 SPDR ($SPY) weekly puts trade completed.

Posted by Investing Freak on January 07, 2011
Market Analysis / Comments Off on S&P 500 SPDR ($SPY) weekly puts trade completed.

For those new to options, a call is a bet that a certain stock will go up and a put is a bet that it will go down. So by buying a put option in this post I was looking for a move lower.

At the time of this writing I have taken a 56% profit after commission on some weekly SPY 127 puts that expire today. Entered in at 0.16/contract and exited at 0.28.

As you will see in the chart included, I have placed my entry and exits with yellow stars and my ideal target exit with a green star. The yellow dots in between some of the candles are times where I created an order to exit the trade and cancelled. I wanted to exit twice when I had generated 20% profit and once when I had over 25% loss.

(Click Chart to Enlarge)

My Entry (first yellow star) was just where I wanted it (below the daily pivot). I am still working on my exit execution and controlling of emotions. I usually write out how I feel about the market action or trade via either sharing with another trader via text, chat, twitter etc. When those aren’t my preferred choice I write it down on a notebook. It’s not foolproof but it helps me personally stick to my strategy and most of the time a trade.

I will provide more info about the chart for the curious ones… The purple dots represent the daily pivot point. The red dots represent resistance levels and the grey dots are support levels. The two red lines represent yesterday’s highs and lows so I would have an idea when that tight trend that developed yesterday would be broken. Also the chart is 5 minute to show the entries better but I prefer to use 15 minutes when day trading.

This is mainly on here for me to reflect on as an online public journal, they say when you publicly share something you are more committed to keeping it (in this case sticking to my strategy that works for me and just working on getting better at exits and emotions).

Update: As of 11:35AM Eastern it looks like my ideal exit has been hit and the put options were worth 0.49 a contract. Had I executed that the profits would have been 187% after commission but that’s in an ideal world. Another influencer in my premature exit (pun intended) was that Obama was set to speak around 11:35AM and I wanted to avoid any spikes that would ruin my trade.

As of 12:50PM SPY hit lower than the second support line in my chart.  Emotions got the best of me and I did exit too early indeed (would have been 400% since my entry). Its hard to think of it that way. If i had exited at -25% loss (as mentioned earlier) I would be devastated for the day.

As the new InvestingFreak tag says:  See it, Call it, Trade it, Bank it.
I Saw the potential for a down day, Called it by texting a fellow trader (will work on tweeting realtime to share ideas), Traded it, and well… Banked it.

Make some moneyyy!! 😀

-K