Monday's Game Plan and Market Notes

Here is my plan for the market this week. The member only "Trade Report" also included my focus list, consisting of the stocks I plan to trade if we get a pullback.

Market Notes:

As I noted last night, the cup and handle pattern emerging from a bottom formation looks good. While it may not be a true bottom, it at least gives an intermediate term clue. The market is nearing short term overbought, so I do not feel comfortable adding longs here. I am waiting for a dip.

If the market continues to inch higher towards near term resistance, I may enter a quick short trade in anticipation of a pullback. If the pullback does come, I would expect a move to support and then resumption of current trend (higher). Thus, my stop on any short trade would be tight, and target near support.

If we get a pullback before becoming extremely overbought (we are currently only slightly overbought), I'd like to start adding positions once SPY hits the 79-81 range.

If we get extremely overbought, I would add shorts in the 85-86 range, with a stop around $88.

How overbought is this market?

Take a look at the T2108 indicator (stocks above 40 day ma) and the answer is clear: we are nearing extreme overbought levels. A little more bounce would get is near 90, which is where I would look to short.

Game Plan for Friday

Here is the game plan for Friday, taken from today's Trade Report:

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Market Notes:

 

The market drifted up today on decent (but not great) volume, and is nearing the $85 resistance level.  Stochastics are very overbought right now, which leads me to believe a pullback is in order.  From a trading standpoint, I hope there is a pullback.  Entry will be easier once overbought conditions are worked off a bit. 

 

I may consider a short trade if we bounce towards $85 on average volume.  This would be a quick "against the short term trend" trade with a tight stop probably around $87. 

 

 

Increasing the odds of a pullback soon is the fact that the T2108 indicator, which measures the number of stocks above the 40 day moving average, is reaching overbought territory at 75.  I like to see the indicator hit 80+, which should happen if we get another day or two of bounce.

Trade Tracker:

I am still holding SSO and FAS.  I thought about unloading half of my SSO position today, but decided against it since my target has not yet been hit.  I am concerned that FAS has not kept pace, but ill still honor my stop.

 

 

Game Plan:

 

I continue to wait for a pullback for entries.  I also may think about shorting if we get more bounce on average volume.  Any shorts will be quick trades.

 

Focus List:

I continue to wait for pullbacks in focus list stocks.  There were a few good breakouts today (solar stocks like FSLR were on fire), which I'll post over the weekend.  There's no need to post then since it will take a multi-day pullback for entry.

See focus list stocks in Monday report:  http://docs.google.com/Doc?docid=d5z8q8w_842c2357xhj&hl=en

All focus list stocks are over-extended.

If I decide to short strength for a quick trade, I'll use one of the following inverse ETFs: SDS, QID, FAZ or SRS.

Trade: FAZ

While not at extreme levels, the market is starting to get a little overbought. The T2108 reading is above 70 and many individual stocks are posting stochastic readings near 70-80.

While not making any big bets yet, I took a small probing position in FAZ (entry at $35.09), which gives you 3X leverage short financials. Price is near support and stochastics are starting to get oversold. My stop is in place under the price support level.



I also took partial profits in my oil trades, DXO and USO. Stops have been moved up to entry level.

Market Notes: Are We Oversold?

I am still finding this market tough to trade. I have no problem trading in bear markets, but my issue right now is that we are oversold, but not that oversold. So it's tough to initiate longs or shorts. If I do decide to trade, it will most likely be with an even distribution of longs and shorts.

Take a look at the chart below. It shows the percentage of S & P 500 stocks above their 50 day moving averages (I usually use Telechart's T2108 indicator, but I am away from my laptop), and is currently hitting oversold territory at 20. However, the last selloff reached all the way down to around 5. While it might be prudent to take on a few small pilot long positions, I wouldn't make any big plays just yet.

Panic Overwhelms the Market

Well my friends, panic seems to have set in. I sense there is something different about today's decline. Over the past couple of weeks, dips have been met by underlying strength, and the general mood was that they were to be bought. No fear whatsoever. That's not the case today. Buyers were not willing to stop the pain. There were a few feeble attempts, but they were easily thwarted by sellers.

We all know panic is the best time to buy. However, it's tough to allow the brain to overcome emotion. Not to mention it's tough to time a bottom or bounce. Buying during a panic not only requires courage to place the trade, but also the patience to stick with it (note that to make the trade you must measure risk, positions size and set a logical stop).

Panic is just one of the current bounce signals. The second is seasonality. The week before Thanksgiving tends to be positive, as does the entire holiday season in general.

Another positive is the T2108 indicator, which measures stocks above their 40 day moving average. It is back in oversold territory. Last week, when the indicator first reached oversold levels, I talked of playing for the second bounce. As I predicted, the first bounce failed and we are back at about the same levels as the time of the post. It looks like a nice spot to play some longs.



I placed three long trades today. As noted earlier, I bought MA at $181.04. The stock has one of the better looking charts you'll find. A nice breakout after earnings that has held up well during recent market turmoil.

I also bought QLD at $99.63 and XOM at $84.20.

Better to Play the Second Bounce

It's easier to play the second bounce, as opposed to trying to time the first. If you take a look at the chart above (SPY vs T2108), it is obvious that there is no sure fire method in timing the bottom of a correction.

The T2108 indicator (via telechart) measures stocks above the 40 day moving average. While it can be used in many ways, the most popular is to use it as an overbought/oversold indicator. When it reaches 70/80 or higher, the market is in overbought territory. When 20/30 or lower, and the market is oversold.

Notice that going back to 2006, major bounces and trend resumptions have occurred anywhere from 40 to almost 0. Therefore, it's tough to say one should jump in because the indicator is at 20 and is oversold.

However, I have more confidence in picking entry after the first major bounce. Almost every bounce has pulled back in both price and indicator reading. Assuming history repeats itself, that is when I will take on larger long side positions.