Is the Gold Breakout for Real?

Gold ETF GLD recently broke out over $100, an area that has provided major "round number resistance" the past two times GLD tried to breakout.

When a "major" ETF or market leader breaks out over a number like $100 after basing around that area for a significant amount of time, I consider it an automatic buy. Thus, I'll be entering GLD (or one of the leveraged gold ETFs) on a pullback.

However, there is a concern that could lead to a "failed breakout". Notice that RSI on the 3 year weekly chart shows a negative divergence. On a strong breakout, we want to see RSI breaking out to new highs along with price. Here, we see that RSI was much stronger back in early 2008, the first time GLD attempted to break $100.

Because of this I will not take a big position. I'll take an average size position on a pullback to around $101-102, with my stop under $100. If the breakout does fail, I'll be ready to reverse course and short GLD. Failed breakouts often lead to big gains as short entries.

Is DE (John Deere) a Short Setup?

A Trade Report member sent me an email about DE. Here is the e-mail and my response

I think it is great time to short "DE"? RSI, OBV and MACD are all bearish...plus, the Durable good is bad..

While the price pattern is not bearish, I agree in that RSI is showing a slight negative divergence and the stock is overbought. Resistance at $47-48 gives us an easy to manage trade, with a stop just obove that level. Teh $42.50 pivot area gives us an easy targt. Nice reward to risk.

However, keep in mind there is also a loose cup and handle formation and we could see a breakout at resistance. As long as you manage the trade properly and are willing to take a small loss, the trade is acceptable even with that concern.

The Answer is Negative Divergence!

Yesterday I posted a chart of GS and asked what the chart tells us. GS is showing a clear negative divergence right at resistance. This signals a pullback at resistance, or if the R level does break, a pattern failure post breakout.

Short entry can be made under R, or post breakout. As noted to Trade Report members, I went short yesterday under the R level at $149.12.

APPL Buy Point and Negative Divergence

I am thinking about putting a buy stop in place for AAPL just above $190. As you can see from the chart, that would be the logical breakout entry.

A major concern of mine is the RSI divergence that is developing. Last year I did a study of breakouts accompanied by a negative RSI divergence. My findings surprised me. Contrary to popular opinion, the failure rate was about the same as without the divergence. However, and this is key, the rise is not as high. From where I'd have to place my stop, my reward to risk right now would only be 1.5:1.

I probably won't put in a buy stop since I can't monitor the volume with this type of entry. However, if I do so a volume surge I may jump in.

You guys can probably tell I'm conflicted about this trade setup.

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.

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.

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.

Can We Buy CNX's Pullback?

Ronald wants to know if I consider the 3.7% drop in CNX, a stock I highlighted earlier in the week, a buyable pullback.

While I would not buy just yet, the stock is still technically sound. Support has not broke and volume on today's decline was within the stocks normal range. OBV still looks good. Ideally I like to see pullbacks head to support slowly and with small price bars, so I won't buy until I see more evidence that backs the idea that today's decline is nothing to be concerned about.

Another concern for this stock is the negative RSI divergence. This is a sign that momentum is waning. I don't use divergences as a primary tool, but they do go into the overall analysis and let me know that I must exercise caution.

This analysis does not cause me to discard the stock from my watchlist. As long as support holds, it's still a bull candidate. However, it does effect my entry. I enter stocks in one of two ways on pullbacks. When I am supremely confident in a stock, I will enter during the pullback, before a confirmation move like a bullish engulfing or long tail candle at support. My other method, when there are more queston marks, is to wait for confirmation.

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.