Today's Entry: DIG

I entered DIG today. The stock has broke out over a W formation and the 50 day moving average. Another positive is the positive RSI divergence.

An entry here around $34.80, with a stop at $33.80 (under suppport) and target at the old high around $38 offers a nice 3:1 reward to risk ratio.

The stock is a bit overbought. Ideal entry is on a little more of a pullback.

Apple is a Tough Read

If it were any other stock, I'd take a stab at shorting AAPL right here, right now. Technically, it shows signs of losing steam and is a good "pioneer short trade."

We see negative divergences in both RSI and Stochastics. Price is making new highs while the two indicators are not. On top of that, volume has been declining as price floats up to new highs, rather than decisively showing strong price breakouts and accumulation.

I love this setup. Not only does it offer a good edge, it also offers a good reward to risk ratio. You can set a stop just above the highs and place a target at support.

So why am I hesitant? One, the market has been resiliant and bucking many technical signals. Also, AAPL has been doing the same.

I'll probably spend the rest of the day thinking long and hard about shoring AAPL. I'll update you if I pull the trigger.

The Short Apple Setup

AAPL is showing a negative divergence and is extremely extended at new highs. I am short with a tight stop.

Trade: USD

I took a position in USD today. Price has held up well and is at a strong support level. Notice the positive divergence in OBV compared to price.

Chart: DIG

There's a lot to like about the DIG chart:

1.   Postive RSI divergence

2.  Successful test of bottom support

3.  Long tail price bar at support

4.  Oversold stochastic turning up

5.  Strong obv and volume action

Holding the Lows

The lows are holding. My game plan is to hold my current positions with stops in place below the lows. As long as the lows hold, we are still within the "bottoming range" formation and just experiencing a retest.

The chart below is not annotated, but note the RSI divergence.

DUG Divergence

Take a look at the DUG chart below. Notice that RSI has made a higher low while price action has made a lower low. The ETF, which is short oil and gas, is also extremely oversold. I took a small position this morning.

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.

Are Steel Stocks Ready to Rollover?

It has not been wise betting against steel stocks, but there may be a low risk short setup forming. Let's take a look at the chart of AKS, which is representative of many steel stocks (MTL, ZEUS, X).

The first thing that concerns me is that RSI has made a lower high while price reached new highs. This is a negative divergence.

While the obv indicator is still strong, volume has printed a couple of distribution days, which are high volume days of negative price action. Also, postive volume has not outpaced the negative days.

Finally, stochastics point to an overbought market.
























I am not saying the long steel trade is dead. No major resistance points have broke. I do think steel is ready to at least pullback, which could provide a short term, low risk short opportunity. Low risk in that you can place your stop just above the recent high, keeping the loss at about 3 percent.

Note that I am not taking this trade and am only pointing out a scenario that I am watching. I am about 65 percent short right now and don't feel like increasing that number.

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.

Saturday Review: Shorting Momentum Stocks

This post from August 2007 offers some timely advice on shorting momentum stocks:


Those of you familiar with my trading style know I rarely short high flying stocks. While it seems logical to go against a stock that is overextended, this type of trade generally takes on too much risk. Stocks tend to trend longer than they "should" due to market psychology and short squeezes.

However, there is one contrarian setup that I do use on momentum stocks. A stock that reaches it's high, without RSI and OBV confirming the move, gets my attention as a short play.

Take a look at the GRMN chart. During the last high, OBV and RSI levels were higher than they are now. This "negative divergence" is a sign that the stock is not ready to rocket to new highs.

A negative divergence is not enough to jump in. We also need to see a failure at the old high level. We've got that here with GRMN. The stock stopped right at $105 and has pulled back.

The last piece of the puzzle is volume. Volume patterns in this stock are not bullish. We've seen more volume on the downside than upside. This was enough to get me in as a short today.

I went short 100 shares of GRMN at $102.65.

Note that I am not making a big bet here. I took a small position and my stop is above the old high at $105.50. I am risking less than $300. It's never a good idea to make big bets against the trend.

A Low Risk, Risky S&P Trade

I bought 300 shares of SSO at $62.23. SSO is 2X long the S&P 500.

You may be wondering why I would go long an index in a downtrend, which I rarely do. The answer is quite simple. I am getting a low risk entry on a risky trade. Huh?

What I mean by low risk entry is I have an edge and an easy place to put my stop.

The edge is a postive divergence in both RSI and OBV. Both are signicantly higher now than they were at the preceding January low which we are currently hitting.

The stop can be placed just under the low. I am going to place mine somewhere in the $59-60 range. That caps my potential loss at about 4 percent and around $750.

So while the action itself is risky--picking a bottom or bounce in a downtrending index--the trade is not. It's the defination of low risk.



Important Update: Thanks to a reader with info on DCR, I exited 500 shares at $9.18 (entry at $8.64) for a $270 gain (+6.25). It's a bit complicated to write up here, but I do not feel it is a good way to short oil.

A Bullish Divergence in AAPL?

Frequent e-mailer and one of my most loyal readers, Hal B., asked about a bullish divergence setup in AAPL. I don't have annotation capabilities from my current locale, so bear with me as I explain the chart.

I do see a slight divergence that might be used for an extremely short term play. We measure the divergence by taking a look at the two february lows, both of which printed long tail candles. If you measure both RSI and Stochastic readings at those levels, you will see a "higher low" readings. This creates a bullish divergence.

While the divergence could be used for a short term play, the overall trend in both price and volume is still down. OBV stinks. Volume is not diverging with RSI and Stochastics. Today's nice up move was not on "bottoming" type volume.

Thus, until AAPL mounts a major resistance level and has an uptick in upside volume, I'll stay out of the divergence trade.

Is the Market Speculator Really Long a Homebuilder?

I've been very busy, so I haven't had a chance to update my trades. As stated in the comments section this morning, I unloaded a bunch of shorts and entered a few longs. I would like to add some more shorts on bounce.

My bias is still to the down side, but I don't want to give up the big gains I've already made. I am keeping a few shorts in case we go down more before we bounce.


A lot of you have e-mailed in shock over my long position in HOV (posted entry in comments section), a homebuilder. Todd S. asked a question is representative of most of the emails I received: WTF are you short a homie when you have been shorting the shit out of the sector over the past year?

Good question Todd. Fundamentally, and longer term, I still don't like the sector. I agree with most that credit and housing problems aren't going away any time soon. However, as a technician who lives and dies by trading accumulation and distribution patterns, I cannot ignore what is going on in the sector. Take a look at the HOV chart:



Key points:
1. Strong breakout over downtrend line and 50 day moving average.

2. Distribution pattern shows accumulation during run up, with strong volume on up days and low volume on pullback.

3. RSI divergence (see orange dotted line on price and RSI) shows strong relative momentum.

These three factors lead me to believe we have a short term reversal in play. I expect to see a retest of the recent high. Not sure if we'll get a breakout at the high, but retesting the high alone would give us a 30 percent gain.

Some have pointed out that I may have entered early. The 50 day moving average is at 7.63, so I do understand the criticism. Maybe I could have waited for more of a pullback. Normally I would. The reason I did not is that I am expecting a bit of a market bounce in the coming days. Lately homies have been leading the market bounces, so it makes sense to enter now. I have a decent risk to reward at 2:1.

Chart: TOL

As noted in the previous post, I took a position in TOL today. Those familiar with my trading style know I don't tend to buy downtrending stocks. However, I noticed some mean looking divergences that lead me to believe their might be some institutional buying at the current levels. At the least, I'd expect a small bounce that's good for 2 points.

Take a look at the vertical box I placed on the chart. This area highlights the bottoming formation. Note that both RSI and OBV show positive divergence. Now compare volume in the vertical box to that in the horizontal box that highlights volume from March to July. Notice that during the downtrend, volume was typically higher on down days than up days. Now we are seeing the opposite volume trend. Volume is higher on up days.

While I've made a pretty good short term bullish argument, it's still tough trying to pick a bottom. The fact that we are talking about the housing sector, where negative news can come on a moments notice, only increases the degree of difficulty.

The great thing about this trade is we have a clear support zone at $20. If this zone is pierced, we'll likely see another leg down. By placing a stop under $20, I am only risking a little over $1.00. My target is the 50 day moving average, which makes my potential gain almost $3.00. This gives me an acceptable 3:1 reward to risk ratio.

Shorting Momentum Stocks: the GRMN Trade

Those of you familiar with my trading style know I rarely short high flying stocks. While it seems logical to go against a stock that is overextended, this type of trade generally takes on too much risk. Stocks tend to trend longer than they "should" due to market psychology and short squeezes.

However, there is one contrarian setup that I do use on momentum stocks. A stock that reaches it's high, without RSI and OBV confirming the move, gets my attention as a short play.

Take a look at the GRMN chart. During the last high, OBV and RSI levels were higher than they are now. This "negative divergence" is a sign that the stock is not ready to rocket to new highs.

A negative divergence is not enough to jump in. We also need to see a failure at the old high level. We've got that here with GRMN. The stock stopped right at $105 and has pulled back.

The last piece of the puzzle is volume. Volume patterns in this stock are not bullish. We've seen more volume on the downside than upside. This was enough to get me in as a short today.

I went short 100 shares of GRMN at $102.65.

Note that I am not making a big bet here. I took a small position and my stop is above the old high at $105.50. I am risking less than $300. It's never a good idea to make big bets against the trend.

Google Forming a Negative Divergence

While GOOGLE (GOOG) made my long position trading watchlist (entry at 50 day moving average), I could not help but notice the startling RSI, OBV and stochastic divergences that have formed at the current new highs.

For those who don't know, a negative divergence forms when price increases while the indicators decrease. As you can see from the chart below, that is precisely what is happening to Google.

While it is tempting to short a stock at the moment a divergence is spotted, only aggressive traders willing to take on high risk or use a very tight stop should go short now. The more prudent way to play this divergence is to wait for the stock to break below the old high before going short. Here we would short on a break below $535, with a stop above the old high and a target near the 50 day moving average, approximately $520.

While the stock is on my very short term "short" watchlist, it is also on my longer term postion trading "long" watchlist. I would enter long on a pullback to the 50 day moving average. In an ideal world, I'd be able to short down to the moving average, then reverse and go long.

Today's Trades: GMRK, EWZ and AAPL

Yesterday, I sold 200 shares of AAPL at $108.25 (entry at $101.25) for a $1400 (+6.9%). I had moved my trailing stop when the stock hit $110. I have a feeling a long tail is going to print today, followed by another move up. I hope I didn't sell too early using too tight of a stop.

I sold 250 shares of EWZ at $56.47 (entry at $52.78) for a $922 gain (+7.1%). The reason for getting out is stochastics, RSI and OBV are printing divergences (lower highs) at the new high.

I bought 400 shares of GMRK at $49.76. We have a low volume pullback of a trending stock from the recent high of $54. These types of pullbacks have held strong during the trend, and I'm betting that this one will be no different. I haven't decided whether to place my stop under the 50 day moving average ($46.72) or under recent congestion at $48.

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.

Deja Vu

EWO, an Austrian ETF, is looking eerily similar to the way it looked at this time last year.

The stock had broke out of a base in late '05, pulled back to the breakout point, and made a move in early '06 that measured 6 points from breakout. A negative RSI divergence formed and the stock took a nose dive over the summer.

The stock recovered at support in late '06, forming the same pattern we saw last year: A breakout in late '06 accompanied by a pullback to support, followed by a parabolic 6 point rise. We even have the the same RSI divergence.

Here's another doozy. Just as last time, we are around 3 points away from the 50 day moving average.

I will likely enter a short position if we see more strength in EWO. However, I will not trade the stock in the short term account I use for this blog. Shorter term, we still could see some upside. Any entry will be a position trade (I have a separate account for my intermediate term position trades) which I may hold for a few months, with a wider stop and target.