Speculative GOOG Short

While GOOG is on the bullish focus list and I am high on the setup on pullback, it is very overbought. The two period RSI is off the charts extreme. I took a small speculative short position.

My stop is at $526. Target is $510. This gives me 2:1 risk ratio.

Keep in mind that GOOG's earnings announcement is October 15.

Another SPY Chart

The RSI Effect

As long as the lows hold, the bottoming thesis is in effect. I have focused on more short term 3-6 month charts lately, but here is a two year chart showing the power of the oversold RSI, even in a longer term down trending "topping" market.

Why Do You Like DUG

Here is an e-mail I received today:

MS,
Why do you like DUG so much? It looks to me like you are trying to pick a top in oils, just like you are trying to pick a bottom in SSO. Don't fight the trend man. SSO is going lower and DUG is too.

Before I get to the DUG trade, let me reiterate that I am not picking a bottom in the S&P 500. I am only playing for a bounce while using tightly monitored risk management. If I'm wrong, I'll lose a little and move on. If I'm right, I'll make a nice chunk of change.

Here's why I like DUG:

1. Nice looking bottoming pattern.
2. RSI breaking out.
3. Excellent volume pattern during the bottoming formation.
4. Good reward to risk ratio.

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.

Breakout Chart: XOM

Exxon Mobil Corp. (XOM) broke out to new highs on above average volume. A low volume pullback to the prior highs, just under $79, would normally provide a good entry point.

While the breakout is bullish, there are some concerns for this stock. Notice the negative divergences in both RSI and stochastics. One would expect new highs in RSI and stochastics when price hits new highs, but here the two indicators are trending down. While this is not bullish, I would not short until confirmation of the divergence. If price pulls back below the old high, we might see a quick short opportunity.

Playing armchair quarterback, it's easy to see a missed opportunity for entry at $76. Here we had atextbook breakout from a "W" bottom formation.

New High Failure Trade and AAPL

One of my favorite short plays is the "new high failure" trade. There are three elements to this trade:

1) That stock makes a new high
2) RSI peaks at a lower level than the previous high
3) Take a short position if and only if the stock dip below the previous high

The recent failure of AAPL is a good example of this setup. The stock broke out to new highs in January. Many breakout traders saw this as a sign to jump on the Apple bandwagon. However, the fact that RSI peaked at a lower level than the November high was a warning sign. While not a signal to short, it was a warning that the stock should go on the "new high failure" watchlist. The optimal entry was few days later, when th stock gapped down below the old highs.


With so many stocks way below old highs, there are not many "new high failure" plays setting up right now. However, there are a number of stocks bouncing up to the old high resistance level. I will be watching this level for short entries. Maybe we can call this a "double" or "bounce" failure. For example, AAPL is inching up to the old high level on declining volume. If the stock fails at this level, which is likely, we could see another leg down.