Why I gave up predictions and bowed to the markets

There’s been a metamorphosis of sorts that has happened to my trading style over the past several months. Most of it gradual, and well thought out.  But alas, the transformation is now complete.

It takes a long time to reshape one’s beliefs and thought process.

I have watched and traded every market open going back to 2010. Day in day out, taking upwards of 10 trades per day slowly forming habits and figuring out how to trade along the way. My trading style was such that I was almost always entering as the market moved against me. That is, buying pullbacks, selling over extensions, and just a general mean reversion style of trading with the occasional trend trade sprinkled in.

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market breakdown confirmed – caution ahead

$SPY in last weeks recap, divergences accelerate as growth stocks tumble, I outlined the growing significance of this nearly 2 month range in the SPY spanning from 184.50 to 189. After a sneaky bull rally immediately following the FOMC minutes was given entirely back the following day we were setup for a break of this multi month support.  This was a quick move and it was easy to stay caught up on Wednesdays rally and not get rid of positions if you were not prepared and realizing what was happening. Take a look at the past two weeks and look how bears have been quietly ramping up their activities for the first time since early February of this year. Now that we have a freshly confirmed breakdown of this range I think it’s time to start laying out some potential targets on the downside. The first very realistic one I am looking for comes in about 177 or nearly 4.5 pts lower from where we closed on Friday. But as always we should consider both the bull and bear side regardless of our own thoughts or opinions. The bulls need to reverse this action fast if they are to prevent further bleeding. Reclaiming the breakdown level at 184.50 would be big and ultimately getting back above Wednesdays fake-out highs of 187 would really negate the breakdown in my eyes. The longer we stay below the breakdown level with all that heavy overhead supply above us the more trouble the bulls have in the short/intermediate term. It’s time to play some defense for you swing and long term holders. It’s also a great time to shorten those timeframes and look for intraday trading opportunities amongst this elevated volatility. I encourage you to check out my real time trade alert service for trade ideas and daily cash flow opportunities which had a very profitable week despite the tricky action.

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divergences accelerate as growth stocks tumble

$SPY so in last Sunday’s recap bear raid on growth names, rotation or exit? I talked about the sell off in growth names across the board and I made the point for the second week in a row not to over complicate the analysis on the intermediate/long term view of the indices right now. Take a look at this pattern on a 30 minute chart of the SPY and tell me what changed? We tried to make a run on the highs and breakout this week piecing above 189 resistance off the unemployment number on Friday but ultimately failed and rejected back into the 6 week long trading range. But is that the whole story? Let’s be sure to understand the big picture of what’s been going on the past month. While the SPY has been living a relatively balanced life for the past 6 weeks there been a growing divergence between it’s QQQ counterpart and that divergence has accelerated over the past two weeks. Again I ask the question, is money leaving the market or is it rotating it’s way to the less cool sectors right now? IE the utilities which managed to close this week at new 6 year highs. Regardless of the answer to that question, in periods of rotation you don’t want to see a flee for the exit door all at once like we are witnessing in a number of names right now ($NFLX $FB $AMZN $GOOG $YELP $FEYE) just to name a few. Those are some big names to be experiencing this kind of multi week intense selling pressure. So it’s safe to say there’s definitely alot going on under the market hood that this innocent looking $SPY chart is not leading on right now. Whether or not the growth name sell off will spill into the other sectors of the market has yet to really be seen. As far as the SPY goes, the levels are clearly defined for you. 189 as resistance is absolutely the mark to watch now that we saw such a strong reaction at that level and on the downside we have the ever important 184.50 that is acting as our high level support. Keep an eye on these levels next week along with the $QQQ for clues on whether or not this market is just getting started to correct or if the worst is behind us. 

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bear raid on growth names, rotation or exit?

$SPY so after a week of high beta growth names getting pulverized here the $SPY stands holding above 184 support and last weeks lows. Thats impressive in itself that many of the momo leaders suffered 5%+ sell offs across the board yet the indices remain resilient above upper level horizontal support (so far). While the prior leaders may be in short/intermediate term downtrends the way the indices are acting does lend itself to the idea that money seems to be rotating, namely to utility names, energy plays, etc. and not fleeing the equity markets in general. And I am sure others would make the argument that the sell off in growth names is a pre-cursor to what is to follow for the rest of the market. I tend not to put much weight towards these lines of thoughts and rather just objectively follow price. If we turn our attention to the charts we can see that price is still respecting 184 support. This is the same exact chart I posted last Sunday for the $SPY and I really don’t think anything has changed. This is still a potential topping pattern as much as it is a continuation pattern and until we see some real resolve above 187 or below 184 I think its anybody’s guess. I do believe the stakes at this 184 support level have greatly increased from last week to now and I think that is the most important level to have on your radar next week. As I suggested last week, don’t over analyze this choppy market and its advisable not to have large positions one way or the other. For my own swing account I do have some light longs on with small position size, but overall i’m pretty neutral in the here and now.

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market top? or market rip ?

$SPY first things first lets keep in mind the SPY chart appears more bearish than it really is because of Friday’s ex-dividend skewing the price some 83 cents to the downside. If we objectively assess the price action this week we can pretty easily agree the bears DID choke per my post from last week, bears take the spotlight, now don’t choke. BUT, they’re not out of the game yet, we still have a two way market that remains relatively rangebound between 184 and 189 with a slight upward bias and long term trend support. I have also outlined the potential head and shoulders pattern that has developed on the 30 minute time frame where we would need to see a confirmed break below 184.50 to really get the bear ball rolling downhill. I don’t think it does much good to over analyze this market beyond what I have already laid out. We trade within a high level base, range bound market, that remains in breakout mode to the down or upside. Expect whipsaw action and head-fakes until we get a definitive close outside of this range. This past week the action stopped me out of my SPY puts for a small gain, and I remain relatively flat in my swing account at this time.

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bears take the spotlight, now don’t choke

Admittedly, while the markets continue to remain extremely resilient, especially in light of the recent global headlines, I do have a slightly increased level of bullish unease at these new highs. Leadership, breadth, some of the market internals that I pay attention to have some warning signs flashing. Does that mean i’m running out and turning into an uber bear? absolutely not. My opinion means nothing if the market clearly exhibits strong up-trending tendency’s. What it does mean is that I have lowered my long positions considerably, and I am more interested in just seeing how the market acts at these new highs for a few days before I add any new positions.  I think price is fairly vulnerable up here, and if we lose 187.50 support we could sink back into the previous range pretty quickly, perhaps this upper level range is a bull trap?

$SPY that was taken straight from my market overview from last sundays review, can this resilient market continue its grind? The fact that the market did breakdown from short term support this past week is not anything I am trying to boast about because it could have just as easily done the opposite. They key is to never stubbornly fight the market based entirely on your own opinion. Always allow the market to objectively confirm your ideas. On friday there was no real reason to have bearish bets beyond complete speculation or as a hedge. This Friday, things are a bit different. While Wednesday’s gap down was impressively met with some eager buyers they would ultimately turn into underwater bulls just one day later if they were not quick enough to exit or use some tight stops. Thursday the market opened with a small follow through gap to the upside and the bears capitalized on it and sold all day long slicing through 186.8 support and ultimately wednesdays lows. You can see we just about settled in on some intermediate support in the low 184s on Fridays session. This 184 level becomes pretty important because there’s really not a whole of strong support underneath us if that gives way. Of course we are still in a long term uptrend on the larger time frame charts but for the short to intermediate term we definitely could see some pressure here if bears continue to press and ultimately challenge those longer term rising trend line support. On the flip side it’s also possible this 184 level can ultimately hold as support and offer the next launch pad to higher prices. Time will tell, but for next week we really need to keep an eye on Fridays lows and this near term resistance the market was respecting on Friday ~185.80. Because I was eagerly waiting to put on my bear suit last Sunday I was fortunate enough to react quick enough to catch much of this downside action on Thursday/Friday and I continue to hold a speculative SPY april 187 put position in my swing account over the weekend with 0 longs. Short term bearish trends within the context of long/intermediate term uptrends are always tricky to capitalize on and typically require a bit more precision and flexibility as apposed to trades that have all timeframes aligned in the same direction. Keep patient and build up a watchlist of stocks to own or add too if you rather just wait for the return of the bull. Charts below have all been expanded to 60 minute timeframes to better show some of the more intermediate term support levels.

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can this resilient market continue its grind?

$SPY i always like to start off my analysis referencing last weeks review, the bull & bear cases at all time highs, so readers can relate to the analysis laid out the week before and compare it what actually took place. This past Monday we were welcomed with a ~1.5% gap down on the the Russian/Ukraine actions that were unfolding over last weekend. Nevertheless, 4 days later, everything was recovered, and then some. We made new all time highs this week and chopped around in a new near term base between 187.50 and 189. We laid out the bull and bear cases for the markets last week and I still believe all of those bullet points hold up one week later. Admittedly, while the markets continue to remain extremely resilient, especially in light of the recent global headlines, I do have a slightly increased level of bullish unease at these new highs. Leadership, breadth, some of the market internals that I pay attention to have some warning signs flashing. Does that mean i’m running out and turning into an uber bear? absolutely not. My opinion means nothing if the market clearly exhibits strong up-trending tendency’s. What it does mean is that I have lowered my long positions considerably, and I am more interested in just seeing how the market acts at these new highs for a few days before I add any new positions.  I think price is fairly vulnerable up here, and if we lose 187.50 support we could sink back into the previous range pretty quickly, perhaps this upper level range is a bull trap? Again, I don’t want to predict price, rather just keep an open mind. If we chop around here and firm up, and then continue higher then so be it, I’ll add some more long exposure at that point. Keep an eye on this upper level range going into next week.

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the trade management mindset

A traders mindset and overall perception of the markets is so influential to their trading success. I have found some of my greatest improvements as a trader have come more from studying the psychology of the business and less from the actual technical side of markets. There are lots of different topics to address when discussing the trading mindset but in this article I want to focus on a trader’s thought process during trade management.

Rigid trade management rules are going to differ from trader to trader depending on their specific system. Some might be scalping, some might be riding trends, others picking reversal points, so on and so forth. But I believe this concept of trade management that I am going to discuss applies to all strategies. How many times have you heard the old cliché, cut your losers quickly and let your profits run, probably one of the most commonly cited trading axioms there is, and for good reason. I want to take those words of wisdom one step further and not only paint a clear picture as to why that is so important but also help show you how to actually practice it. I will describe two trains of thought a trader should have while managing a trade. The first is the proper thought process of managing a position that is currently a loser and the second is managing a position that is currently in the green.

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the bull & bear cases at all time highs

$SPY ding ding ding new all time highs. If you’ve been following my weekly posts this shouldn’t have come as too much of a surprise as we’ve been on top of this bullish bias grind type action (last week: february bulls banging against all time highs) in the broader markets. So let’s take an objective look at where we are now that we have broken above the December/January all time highs in the S&P.

THE BEAR CASE: we aren’t exactly effortlessly trending higher as of the past two weeks. The leadership overall has been a little more narrow and the overall  volume on this February rally has been much lighter than the January pullback we experienced to start off the year. The overlapping back and forth type grind action demonstrates the indecision and significance of these price levels as a possible inflection[turning] point. Fridays final 1 hour candle goes to show you how ‘on edge’ the market appears to be when the bears chomped off almost 2 SPY points before the bulls stepped up and bounced it higher.

THE BULL CASE: first and most importantly, we’re at all time highs. Any objective analysis should realize the importance of a market at an all time high. Second, while we may have just slogged through two weeks of grinding type action we have literally V-shape-snap-back-rallied the January pullback in 18 days with 0 consecutive back to back down days. There has been no pullback to speak of since we reversed higher at SPY 174 on February 5th and I am willing to bet the majority of bulls have missed this snap back OR are not as invested as they may otherwise want to be.

Taking both sides into account I find it hard to be an objective bear at this given time. That’s not to say i’m suggesting being stubbornly long because I DO think there is a very real chance the bears can come out of the woodwork and hit this market (as demonstrated on fridays close) especially on some well timed headlines (hmm Ukraine?). The point is the market is STILL acting well, it’s still grinding the wall of worry higher. I remain with 6 longs and a SPY put position on as a hedge. Until the market starts breaking support and acting crazy I will remain long.

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february bulls banging against all time highs

$SPY last week in my recap, bulls driving higher on cruise control I talked about the likelihood we continue in motion higher to tag all time highs set at 184.94 and if that happened we should carefully asses the markets reaction around those levels. It took until Wednesday when we traded 1 penny above those all time highs before getting violently rejected for the remainder of the day. That was a bearish event, however. Thursday we completely reversed all of that downside action and fell just shy of tagging those highs for a third time before pulling back again. Overall I consider this relatively constructive action for the bulls, but for a true second wind of momentum they really need a definitive break above 185. Until we see that we have immediate risk all the way down to Wednesday’s lows at 182.60ish. The bulls really want to put in a higher pivot low above 182.60 to keep the pressure on the bears and keep banging against these all time highs. Meanwhile the bears really don’t want to see the bulls test 185 again, the more tests, the more likelihood of an eventual break. The bulls still have the ball at this point and it’s not going to change until the bears prove themselves and take it away. If you are bearish then you want to see a breakdown with authority come sooner than later. I added one more long to my swing portfolio this week and I covered my two shorts. I’m about 60% long right here.

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