Chart of the day is EA: Keep it simple stupid!

Sometimes swing trading is easier than we make it. In the trading game it literally pays to keep it simple.

Our stock of the day, EA is a great example of the KISS method. When do you buy EA?

That's easy. When it pulls back to the 50 dma or when stochastics near oversold levels. It's a slam dunk trade that would have given us 7 profitable trades over the past year.

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For entry I will wait for a slight pullback from this level to attempt to get better value.

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How to overcome the fear of entering market pullbacks

Salvador Dali

Have no fear of perfection, you will never reach it - Salvador Dali 

As swing traders we all know that a market pullback is our friend. If we go back and look at any market index chart, we will see that the best time to enter the market was on a pullback after and extended run. Take a look at this short one minute video that illustrates the power of doing nothing more than entering pullbacks in the S&P 500. In the past year, entering on a deep pullback was profitable 7 out of 8 times. That win rate is hard to beat.

Watch this 2 minute video showing the power of entering on market pullbacks.

   http://youtu.be/gMWEIDamlKA

So intellectually we know the right thing to do. Entering on pullbacks is a slam dunk trade. So why don't we do it more often?

It all goes back to the mental game. Fear is quite possibly the most powerful emotion. Fear stifles us and leads to indecisiveness and bad decisions. To be a successful winning trader, you must overcome fear. How do we overcome this fear?

Here are 4 methods for overcoming the fear of buying dips:

1. Trade small. Make sure you are risking an amount that won't cause you pain if you take a small loss. This way, even if you take a loss on the trade, it's no big deal.

2. Trust your methodology. You have done the research. You know that historically the way to make money in the market is buying dips.

3. Shut off social media and CNBC. Becoming a stock news junkie is a guaranteed method for increasing your fear levels.

4. Go to war with yourself.

Conquer your fear, buy on dips and become a profitable trader. It's that simple.

If you would like to learn more about how I trade, receive my nightly focus list with market analysis,setups and trade alerts, sign up for a 14 day free trial at BullsonWallStreet.com.  

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P.S.S. If you like this article, share it, comment on it or let me know.

Trade Entry: ACI (short)

I am short ACI at $28.05 based on the extreme overbought readings in stochastic, along with extended price action. This coal setup was featured in the Trade Report last night, for short on strength at the open.

Today's Trades: CBI and PNRA

CBI: 200 shares at $11.00

This stock, as with most of my trades, was mentioned in the Trade Report last night. It's holding above both the well formed trading range and the 50 day moving average, providing a low risk, easily managed traded. Stochastics are oversold and turning up.

Risk: My stop is under the 50 day moving average (10.50) and my intitial target is near the recent high in the 13-14 range. This gives me a 5:1 reward to risk ratio.



I also went short 200 shares of PNRA at $47.83. I will post a chart later today.

Trade: GLD

As noted in yesterday's Trade Report, I went short GLD @90. My stop is around $93 with an initial target in the $84-86 range.

The chart I posted Sunday night details the strategy for this trade. GLD has provided an excellent reversal trade the last 11 times stochastics have hit extreme levels.

Trade Entry: NOV

I bought 350 shares of NOV at an average price of $60.54 (trade posted on blog Friday morning).

The Setup: Oversold Bounce. Extremely oversold stock within bearish downtrend. Stochastics extremely oversold in the 7-10 range. Price is at February-March support levels. While the lows have not been reached yet (50), the stock is so oversold that I expect some type of relief bounce soon.

Risk: Stop is in the $57-58 range. This is percentage stop, as price support at this level is loose and drops all the way down to $50. Initial target is $65, with the remaining share target at $70 and stop moved up to entry level.

The Commodity Trade

Commodities are extremely oversold. This sets up one of my favorite trades, the oversold bounce trade. I will likely go long a commodity or two if we get more weakness tomorrow. These will be short term setups. The downtrend is still down, and a few days of bounce would setup short plays again.

Keep an eye on commodity stocks like ACI, MON, POT and X for oversold bounce setups.

Trade Entry: POT

In last night's Trade Report, I highlighted commodities as an oversold bounce setup. I used POT as my primary example and entered today based on last night's analysis.

I bought 300 shares of POT at the open at $176.31.

Setup: Oversold bounce setup, within a longer term topping pattern. Stochastics are oversold and the stock bounced off strong support.

Risk: My intial stop is under the 200 day moving average. My target is not as precise. The intial target is $195, just under the breakdown bar. However, we could see a move up to $215, around the 50 day moving average. I will likely take partial profits as each target is hit and move my stop up.

Concerns: Downtrending stock and sector. Volume could have been higher today.

Trade Update: JRCC

I took a small short position today in JRCC. The stock has been in a strong topping downtrend and has pulled back up to the 50 day MA. Stochastics are near overbought levels and volume has been average on the pullback. This is a low risk entry with stop placed just above the 50 day MA.

Overbought Sectors

Here is a list of sectors with the highest stochastic readings. I use this information for three setups:

1. To find sectors with good chart patterns and await a pullback for entry

2. Find sectors with bad chart patterns that are bouncing to resistance and ready to short.

3. Find topping patterns in overheated sectors.

Today's Entry: APA

I bought 100 shares of APA at $133.34.

Setup: Trend Pullback. The stock has pulled back to the 50 day moving average, where it found support the last two times it reached this level. Stochastics are oversold and OBV remains stong.

Risk: My intial target is the recent high at $150. I would likely take partial profits, move my stop up to my buy price, and hold the rest into new highs. My stop is just under the 50 day moving average, which makes this a very low risk trade.

Concerns: While OBV remains strong, individual volume bars are all over the place. We have some stong bars, and some negative bars on high volume. It's also worth noting that this pullback came off a negative RSI divergence.

So why take this trade with these concerns? Stochastics have been good entries the last 7 times the stock has reached oversold levels. I am playing this stochastic trend.

Trade: CYBS

I bought CYBS four days ago, after the stock had pulled back from the breakout point and stochastics crossed over from oversold territory.

Since I did not post it here I won't include it in my performance stats, assuming I ever get around to updating them (you can click on the trade label after trade related posts to view trades I have made).

The reason I did not post that trade is, as I discussed before, I've noticed that some of you are piggybacking my trades (some with much bigger position sizes than me). Since this stock usually trades at a lower volume level, I didn't feel comfortable posting the trade. I do now since it's not at an ideal entry point.

Note the upsurge in positive volume of late, along with the a fantastic breakout-pullback pattern.

Trade: Gold's Sell Signal

Over the past few months overbought stochastics readings have given reliable short term sell/short signals. We are just about there right now. I used today's strength to short gold via DZZ (300 shares at $29.22), which is a leveraged gold short.

Here is the GLD chart. Pay attention to the stochastic reading.

MOS Chart

Long time readers know one of my mantras is to keep on doing it until it ceases to work. Once I see a pattern emerge, I will continually go after it.

Let's take a look at the MOS chart to illustrate this point. Over the past 6 months, buying the stock when the stochastic indicator became oversold and hit a price pivot point, then selling once it reached overbought levels has netted some lofty gains. We're talking 10,20 or 30 point gain each time this has happened.

We have reached that point again. The stock is at oversold levels and price is nearing support levels.

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.

Trade Update: SPY, ICLR, DECK

I bought 200 shares of SSO at $65.84. For those that didn't read last night's post, this trade is based on the oversold stochastic strategy. Not sure if I am in too early, as the read line is still above 20. However, the black line, which I focus on, is at 14. I used SSO instead of SPY for the added volatility, as it is 2 times long the S&P 500.



I bought 200 shares of ICLR at $67.35. This is an earnings breakout-pullback play.



I covered half my DECK short position (100 shares) at $103.14 (entry at $118.04) for a $1409 (+12.6%). I still am short 100 shares.

Trading SPY and Stochastics in a Bear Market

If recent history is any indication, the next time the stochastic indicator hits an extreme oversold reading of less than 20, it will be time to buy the S&P 500. Since October the SPY has hit this level 6 times and made at least a three point gain in 5 of those trades. That amounts to an 83 percent win rate. Not bad.

Study the chart below and device an entry plan. Blue arrows show winning entries and the orange arrow points to the sole loss. Note that this chart is from from Friday's close. Today's stochastic reading is 32.68, which is still way to early for entry.

I will likely enter on an extremely low reading, and use a 1.5 point stop. My target will likely be three points. This is how I play longs during bear markets. I become more precise with my entries (something I've advocated against in the past) and take quick profits.

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.

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.