Oil is Setting Up for an Oversold Bounce Trade

Oil is reaching extreme oversold status. If USO (the oil ETF) drops a few points tomorrow morning, or within the next few days, it will provide a low risk long entry. Note that these oversold bounce plays require short hold times and a tight, logical stop. I would place a stop under the 200 day moving average.

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.

The Line

I could not have imagined the QLD trade working better than it has. I took partial profits at $72.88 today (entered at $67.88, as noted in the free trial of the Trade Report) for a $1250 gain (+7.3%). I've moved my stop on the remaining position up to my entry point, and have had thoughts about moving it up to $70.

The key level is the $78-79 range. That is the first major area of resistance for this bounce to bump up against. This level has been important over the past year. Notice on the chart below how price moves along this line. The April breakout did not mount this level until it pulled back first.

The "line" is where I will likely reverse from long to short. It's a great short entry, where a logical stop could be placed either just above the "line" or above the 50 day MA. This assumes volume patterns play out. If I see true accumulation, I doubt I'll short.

It's Time

Things are looking ugly and the sentiment seems to be quite negative out there. I bought SSO at $59.96 and PBR at $70.15.

Note to anybody playing a short term bounce. You must be willing to take a small loss. I do not make these types of trades without a low risk stop on place.

Trades and Thoughts

All of my oversold bounce indicators are now flashing buy signals. However, I do have some concerns and am not taking on any huge positions here. While I have made some trades to the long side to try and capitalize on a bounce, they are all average or small in position size. Why am I not trusting my usually trustworthy indicators?

The reason is the bounce play hasn't passed the "gut check" test. Basically, I have not got to the point where I just feel sick to my stomach about the markets. I haven't sensed any fear yet. In fact, what has caused me fear in my bounce positions is the fact that everybody is expecting a relief bounce.

As I stated earlier today, I made one index play, one ag and one energy play. I also entered TRLG and EWZ yesterday, and both are still above stop levels.

As I stated earlier this week, POT was due for a pullback, and we are now at a good entry position.



SSO (short S$P) is testing lows and is extremely oversold. The fact that we are close to the support/breakdown level provides a low risk entry. I will lose little if I get stopped out, but could make a nice gain.



SWN is still riding above support. This is either a topping formation or a pullback that will continue the trend. If it is a topping formation, I will lose very little.



Off Topic:
I'm a diehard Timberwolves fan and can't believe Kevin Mchale did not screw up the Wolves pick in tonights draft. I am ecstatic that the they picked OJ Mayo. He is going to be a star, and a perfect compliment to Al Jefferson (who at 23 is already better offensively than KG).

For the first time in years, I actually see hope for the Wolves!

Trade Entry: EWZ Bounce Play

I bought 500 shares of EWZ at $90.06.

Setup: Oversold bounce setup. I had a buy stop set above $90. Volume was great today, and the highs held, unlike that of the Dow.

Risk: My stop is set under the recent lows. Target is the $94-95 range. I chose the Brazilian ETF over the US markets for obvious reasons. EWZ is technically more sound and has reacted better as a bounce play.

Concerns: The 50 day moving average provides overhead resistance.

Stalking for the Bounce

I use 6 indicators for deciding when to play an oversold bounce. Today four of them are giving buy signals. If we get a good amount of weakness tomorrow, the fifth indicator will likely give a buy signal as well.

For the time being, I am ignoring my watchlist. I am only playing the indexes waiting for the buy signal to make a big, but low risk SPY or Q trade.

Note that my bounce play will likely be short term, and I may reverse it and go short at resistance levels.

Bespoke's Short Covering Statistics and Market Notes

Read this excellent post from Bespoke showing that the biggest gains yesterday came from stocks with high short interest.

This, coupled with the average volume of the rise, leads me to believe we have not bottomed and are still in a bear market. However, we still may have a playable bounce that could be used for quickielong trades and to re-establish short positions.

Remember, true capitulation that leads to the end of a downtrend usually requires a panic day that closes up on tremendous volume.

Market Notes and a Trade

There has been some confusion that I would like to clear up. Some of you think that I am bullish on the market because I am making long play on the S&P 500. Nothing could be further from the truth. This is a short term bounce play within a downtrending market. Until the indexes can break resistance, I am a bear who is willing to play situational longs.

This is the time to play a few bounces and get ready to reload shorts. For short plays, I am looking for broken stocks on my short list (stocks that have topped and now downtrending) that are making feeble bounce attempts.

This morning I added some to my DECK short, 50 shares at $107.35. If we continue to bounce on low volume tomorrow, you can bet I will add some more shorts.

Weekly Spy Chart

Analysis of the weekly SPY chart leads me to believe the market still has room for a bounce before the next downturn.

Key factors in support of bounce:
1. Bounce at major price support
2. Stochastic oversold crossover developing
3. More room to move until resistance reached.

Note that each time stochastic has reached oversold levels and crossed we've seen a decent sized bounce.

Key factors in support of continued downtrend post bounce:
1. Topping price action pattern
2. Major volume distribution
3. Major resistance

If volume stays low, I will likely unload long positions once resistance is reached and deploy some shorts.

Another Trade Update

I have decided to take on two more small long positions, BVN and HWAY. Both have handled the bad market well. HWAY is in the medical lab sector, which has been somewhat of a safe haven in recent times.

While badly beaten stocks are usually the best short term bounce plays, I don't have the stomach to go after these types of stocks at the moment. Therefore, I've decided to play the bounce thesis with two strong stocks and one index play (QLD). All are small position sizes with logical stops that wouldn't lose me more than about $800 combined if the market continues to tank. Unless you have supreme confidence, I would not make any big bets at the moment.

This Bounce and Trade Update

I have received a few e-mails asking whether the bounce is over. I honestly don't know. However, in my mind, it's not officially over unless we breach 1378 on the S&P chart. There is still a ways to go down before that happens.

I think what we are seeing today is based on: some skittishness about the financials and exits/profit taking at the first sign of strength. Bounces rarely go straight up. As Rob Hanna points out, reversals usually pullback before making there move up.



Trade Update: I went short DSX (another shipper) at $26 and am still holding my few longs until they hit there stops or targets.