Today's Trade: EWZ

I bought 200 shares of EWZ, the Brazil ETF, at $91.61.

Setup: Bullish Flag post Breakout-Breakout Pullback. The stock pulled back to the top of the breakout level, which is also where it broke resistance. Recent volume pattern is strong and obv has increased as stock has pulled back from breakout. As a plus, all things Brazil have been on fire.

Risk: My initial target is the old high around $95. I will either take full or partial profits at this level. If I feel the stock is ready to breakout to another new high, I'll keep a position. My stop is just under price support and the 20 day moving average, in the $88-89 range. This only gives me an intial risk of about 1:1 reward to risk, but I feel the probability of the setup is strong. Also note this is the "initial risk". If I decide to stay in for a breakout of $95, my target will be higher.

Concerns: Stochastic not yet oversold, but still is under 50. U.S market could pull down strong region like Brazil. Still, Brazil has great relative strenght compared to S&P 500.

Breakouts with Strong Volume Trends

Friday's nightly breakout scan listed just over 100 stocks. An easy way to trim the fat and find good setups to trade is to sort breakouts by obv ranking. This will find breakout stocks with strong volume patterns. Here are Friday's top 25:

Today's Entry: CSX, DZZ and MTL

I bought 100 shares of MTL at $143.46. The strong broke out over $140 yesterday on strong volume. It's one of the strongest stocks in a strong sector showing loads of accumulation. I may be a bit early on entry (I usually don't enter at overbought stochastic levels), as the stock could pullback to $140. That's why I went with a small position size and may buy more at $140.



I bought 300 shares of CSX at $56.10. Another strong stock from a strong sector at the bottom of a high tight flag pattern.



I bought 500 shares of DZZ at $26.55. This ETF is 2X short gold. Gold has setup nicely as a broken momo that is retracing weekly to resistance levels.

Homebuilders are Hard to Ignore

It's tough to ignore the strong move in residential construction, aka, homebuilders. While my head tells me to stay away, the charts tell me otherwise. For months I have been using bounces in the sector to reload shorts, but not this time. There is something different about this bounce.

Take a look at the chart of Toll Brothers. A few things jump out at me:

1. The stock is no longer trending down. Rather, we see a range bound price movements with resistance around 24.

2. RSI is improved. The mid level is acting as support, which is what happens in strong stocks.

3. OBV is improving. Volume patterns seem to be shifting from sell to buy.



I would not buy here. In a range bound market, I like to make buys at the bottom of the range or on breakout. A patient well timed entry could lead to nice profits in TOL.

Do I Have the Guts to Buy Financials?

I'm scared as hell to buy a financial, even with a small position size. However, if I didn't know the name of the company behind this chart (Morgain Stanley), I would be buying. We have price breakout over the 50 day moving average after the stock printed a bottoming long tail on heavy volume a few days ago. RSI is breaking out. Stochastics show strength. OBV is improving. This is damn near a text book reversal play.

I may enter on a small position later today.

The Best Indicator is . . .

Way back in November I asked readers to submit questions for a Q & A session. The response was much more than I anticipated, and even after setting time each week to answer questions, I still have not finished answering half of them. So, rather than answer them all in one post, I am going to start posting my answers one at a time.

Jim asks:
What do you believe is the best overall technical indicator to use in trading a stock?

Market Speculator:
Wow, one indicator huh? That's a tough one, although I do like the Zen-like approach of using as few indicators as possible. As the saying goes, keep it simple stupid (kiss). I am a firm believer in simplicity, in all walks of life.

When I first started trading, I was a slave to indicators and probably have dabbled in just about every one imaginable. I have tested some extremely complex systems with mixed results. My breakthough came when I stopped focusing on indicators and zoned in on price and volume patterns, along with support and resistance levels.

These days I only look at stochastic and obv (on balance volume). To tell you the truth, I don't even need them, but they can be helpful in quickly identifying oversold and overbought stocks, along with spotting divergences.

I do pay attention to the following key moving averages: 10, 20, 50 and 200. This is in line with my strategy of watching key support levels, both in price action and moving averages.

I know I still haven't given you an answer yet, Jim. Gun to my head, I would pick OBV, since it is one of the better expressions of volume.

Chart Request: CMI

In the comments of the last post, Raj asked:

What do you think of CMI? It has pulled back well to previous support levels.

CMI is pulling back towards a strong area of support after a nice breakout. Where you enter depends on your strategy. If you are a stickler for entering as close to support as possible, you may want to wait to see if the stock can pullback $125-126 in low volume. An entry now, at the current levels would still give you a good reward to risk ratio, if using the recent high as your target. This allows you to enter with adequate risk parameters and without fear of missing the next leg up. This was my strategy with today's FWLT trade.

Technically, OBV and stochastics are both rising and forming higher lows, which is the sign of a strong, trending stock. My only concern is that accumulation is not as strong as some of the other momentum players. While OBV has been rising, up days have only slightly out-measured the volume on down days. Compare CMI to the chart of FWLT in the last post, and you'll notice the difference in accumulation. That's why I prefer FWLT to CMI, although I do think gains can be had from CMI.