Another SPY Chart

Trade: SDS

I entered 400 shares of SDS today when my buy limit order was hit at $88.15. I don't do this often, but I am using two different stops for this trade. Half the position has a stop just above $78, while the other half is above the 50 day moving average.

The market is very oversold, thus this inverse ETF is overbought and near support levels. I expect a market bounce early this week due to overbought conditions.

Today's Trade: DUG

As noted to Trade Report subscribers earlier today, I entered DUG at $21.19.  The inverse oil services ETF is near strong price support and is very oversold (oil is overbought).  I am using this trade to short the oil sector.

Setup: Oversold bounce.  Stockchastics are way oversold.  The last 6 times they reached extreme levels, profitable trades were there for the taking. 

Risk: My stop is in the $19-20.   My initial target is $24-25.  This gives me a 2 or 3:1 reward to risk.

Oil Trade Exits

I exited both of my oil trades today for nice gains. Whereas my entries were based on an extremely oversold oil market, today's exits were based on overbought readings. Price is nearing resistance levels while stochastics are nearing extreme levels.

More strength would provide a good short entry.

Buying and Sellng Extremes: The SKF Trade

My strategy over the past few months has been to be patient and wait for extreme conditions to surface before making both long and short entries. A good example of this type of trade is the SKF position I entered yesterday (detailed in the trade report).

Here are my entry notes with chart:

I took one "low risk speculative" trade today, shorting financials via SKF. The inverse ETF has dipped down to a strong area of support, making it a low risk entry. I bought 100 shares at $103 and have a mental stop under support at $97-98. I will likely take partial profits if it bounces to $110, and then again at $120.

If the market continues to rally, I'll lose a minimal amount. However, if it pulls back, this could be a very profitable trade. For those looking to take this trade, I probably would not enter above $103-104. As price moves higher, risk increases.



I took partial profits today at $111 and moved my stop up to entry level, effectively locking in today's profit. My final target is $120.

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.

Today's Trades: X and K

I just took two small long positions today at current lows.

100 shares of X at $53.46.

100 shares of K at $55.38.

These are small positions with tight stops. I am not risking more than $600 on these trades. The idea is take a small, *expected* loss, with the possibility of a big gain if the market bounces. I don't care about win rate, just the potential for a bounce off unheard of oversold conditions.

*I do not recommend taking these trades unless one has no problem taking a loss*

Trade Entry: POT

I bought 150 shares of POT at $150.62 (trade posted on blog Friday morning).

The Setup: Oversold Bounce. Extremely oversold stock within bearish downtrend (topping formation). Stochastics extremely. Price is at March support levels.

Risk: Stop is now at entry level. Initial target of $160 hit. Target for remaining 75 shares is $170.

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.

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.

Quick Trade Update: QLD and Commodity Shorts

I took partial profits in a few of my commodity related shorts and entered QLD this morning. I mentioned QLD in last night's trade report. As noted in the report, the Nasdaq has recently held up better than the S&P 500.







Recent free trade reports:

July 15

July 14

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.

The Six Indicators

I am getting a lot of questions about the 6 indicators I use to measure market extremes. Most seem to think I am talking about stochastics, TICK, T2108 and a few others. It's not that simple.

I've created the indicator I mentioned, and 4 of them are combinations of some of the indicators many of you use. I have found them to be more accurate under specific conditions. I won't release these indicators, but I will let you know when they are giving buy or sell signals.

Off Topic:
In my last post I was giddy that the Wolves drafted Mayo. Well, a few hours later I found out that they traded him for Kevin Love. I've been asked what I think of the trade. Let's just say I won't be buying season tickets any time soon and think Kevin McHale should be fired.

On the positive side, at least we won't be subjected to any "Gay Love" jokes. For those that don't know, Kevin Love was originally picked by Memphis, and would have been teammates with Rudy Gay.

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.

Sectors Analysis

The 20 most oversold sectors:



The 20 most overbought sectors



How do I use this information? In the overbought sectors, I look for charts where stocks are near highs and wait for a healthy pullback. In oversold sectors, I look for stocks oversold near support that have good risk-reward potential.

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.

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.