AIG is a Great Low Risk Setup

AIG's volume pattern shows that it is under accumulation. This pullback offers a low risk setup. If entered around $37, with a stop under the 20 day moving average at $34.50 and target near the recent high at $50, we are looking at a 6:1 reward ratio.

If you find enough trades like this, you only need to be correct 1 out of every 5 trades to make decent profits!

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.

Today's Trade: DRYS

1000 shares DRYS at $6.60. DRYS is a focus list stock from the Trade Report I send nightly to subscribers.

Setup: Breakout-pullback. The stock broke out over the 50 day moving average and has consolidated on low volume.

Trade Management: DRYS offers a good risk ratio and trade management. A stop can be placed under the 50 day moving average. I am taking a pilot positions here, and will add more if it dips closer to the moving average. Ideally I will take profits at the top of the breakout bar ($7), and let the rest "ride" by moving stop up to entry.

Concerns: Overall market is overbought. If the market pulls back, it could take DRYS with it.

RIMM Breakout and Pair Trade

Thus far the "pair trade" I outlined yesterday and entered on Friday is a success, as RIMM broke out in a big way today and AMZN (short) hangs out under the "failed breakout" resistance level.

I took a partial profit in RIMM today and moved my stop up to entry level to lock in gains.

Against the Apple Trend

AAPL is on my bullish watchlish. Why wouldn't it be? It has a great price and volume pattern, and has shows relative strength versus the S&P 500.

However, the stock is very overbought. Every one of the measures I use to find "rubber band" setups is off the charts. I will likely short the next move higher.

This is a countertrend trade that is very short term and managed with a tight stop. Remember, I am long on this stock. The short "rubber band" trade is short term and against the trend.

SSO Provides Low Risk Entry

While the "edge" or probability for the trade may be 50 percent or less (accumulation pattern is not what it was a week ago), SSO does provide a low risk entry point that can be easily managed with a stop under the recent lows.

I am willing to take low risk setups even if the probability for success is not what I like, especially when the reward is big. For example, if I entered with 500 shares, the most I would lose is $1000. My potential gain is $7000-10000 if the intial target is hit.

I could lose on this type of trade 6 times in a row and still make money if I hit on the 7th try. Thus, I'd only neeed to be right about 15 percent of the time to make it in the green.

Important Lesson and Free Trade Report

I am posting today's issue of the member only Trade Report. It is the shortest report I have published, and has the smallest focus list ever presented. There are also no charts. However, there is an important lesson that applies to blog readers as well as report membersqau.

http://docs.google.com/View?docid=d5z8q8w_313cgc6qqtr

Final Exit in Pot Trade

update (11:57am): typos fixed. Thanks to those who pointed them out.

I exited what was left of my POT position at $159.89. The final details of the trade.

100 shares of POT bought at $139.22

Exit 50 shares at $150.04
Exit 50 shares at $160.06

Average exit $155 for 11.3% gain.

Total Profit : $1583

Recent POT and commodity related posts:

Commodity Trades and Last Night's Game Plan from the Trade Report

The Only Way I Know to Trade Post-Boom Commodity Bust

Partial Profits in Commodity Bounce Trades

Financials and Banks

Many financial and bank stocks are showing bottoming continuation patterns. However, SKF, the inverse ETF that I use to short the sector, is at a key support level and may be good for a quick trade.

The probability of the trade working is likely not better than 50 percent. However, risk is good. If entered here, around $116.50, stop could be placed around $114.50 (just under the 50 day ma). If your target is yesterday high at $123.50, that would give you a 3.5:1 reward to risk ratio.

SPY Trade Analysis

Last Monday (August 12th) I took a small SPY short position based on a "failed breakout" scenario, above $131 (I actually used SDS--the inverse ETF). It's now trading at $126.69. Below is what I wrote to my trade report members. It explains not only the setup, but the thought process and trade management strategy that went into the trade:

Price action in the SPY crossed a major hurdle by closing above the 50 day moving average today. The key now is to see if this level will hold. I still expect a pullback, and actually went short today at the close. Very small position. There is absolutely no setup that I trade that told me to go short today. I can't remember the last time I took a short position when a stock crossed above the 50 day moving average. This trade was based on a hunch and some "risk strategy".. I have a feeling that the market will not be able to sustain this upmove without a pullback.

Many of you are probably thinking this is a dumb trade. I won't argue with you, but let me explain my reasoning using poker.

This weekend I was at a table with 5 other players. All five players had called a $12 bet, and I was the "big blind". If you don't play poker, don't worry about what that means. All you need to know is I needed to put $6 into a pot that was had already built up to $60. Thus, my pot odds were 10:1.

I did not have a great hand. I was holding pocket 9s (two nines). Considering everybody was playing, at least a few players were likely holding a card higher than 9, and the upcoming community cards would likely have at least one card higher than nine, there was a good chance I would lose the hand. However, there was an eight percent chance that one of the community cards would be a 9. That would give me a set, which is a strong hand that I would likely win. Chances are also good that if a 9 did come on the flop, I could sucker at least one or two players with a higher two pair into betting more money that they would inevitably lose.

Let's say whenever a 9 comes I can figure on winning an average pot of $120. Using the 8 percent chance, I will win $960 every 8 out of 100 times this happens. I will lose a total of $552 total in the other 92 hands for a total gain of $408 over 100 hands with pocket 9s. I know some of the poker buffs will argue with my $120 figure--I'm going by my own experience and ability to read opponents and disguise my own hand.

An aside for the poker fans: What actually happened was a miracle . . .a 9 did come down on the flop, and so did an king (and no flush or straight draws). The guy with the king went all in, $230 and I called. I ended up winning a $300+ pot (excluding my own contributions), based off an initial risk of $6 that allowed me to see the flop.

Now can you see where I'm going with the SPY short trade? There is a good chance I will lose with the trade. I know this going in. Based on my stop placement and position size (200 shares) I am risking very little just to see what happens. I have placed my stop around $132 (I am actually using SDS to short, so $132 and 200 shares are is not exact figures).

Now if we get a failed breakout (SPY breaks back down below the 50 day MA), I think there is a good chance of a retest of lows ($120-122). Let's say I place my target above that at $122. I have risked $230 with the chance to "win" almost $2000. I can get stopped out 9 out of 10 times, as long as one of the trades reaches my target, and still break even.

See the logic? There is a method to my madness. I'll take looking bad for a trade or two (or 8), as long as in the long run it makes me money.



There were a few days that I thought about getting out of the trade (when SPY remounted the 50 day ma), but decided to stick with my original analysis and stop. Spy has now convincingly broke down below the short term trendline and 50 day ma.



This might mark another decent entry point, as I would not be surprised to see more downside near term. Here is what I wrote about SPY in last night's trade report:

The early "failed breakout" short play in SPY that I took on last week is still in play. Price closed just below the 50 day ma, but not enough to get really excited. If SPY closes tomorrow below the trendline in the chart below, I expect we'll see lower prices.

If not already in the SPY short trade, I still feel there are only two places to enter short. Either on a break below the trendline and 50 day ma, or a rise to the 200 day ma (see yesterday's report)



Finally, here is the SPY discussion from Monday's report, which setup the short scenario in more detail:

I noted early last week that the SPY presented a low risk short play. Remember that low risk does not mean high probability. Risk is only a measure of what you could lose versus what you can gain. I also laid out how I take on many low risk trades, lose out on some with small losses, but will have a few big gains that more than make up for the losses.

While SPY the low risk short has not officially turned into a loss yet, it has mounted the 50 day and Friday held up above that support level. The stop is above the recent high of $132, so the possibility of the failed breakout trade working out still exists, but there is not doubt the bottoming pattern is still in play. While I will stay with this trade until the stop is hit, I would not recommend initiating another SPY short just yet.

However, I am not likely to go long either. Volume on this upswinging bottom play is not the type that propels price dynamically higher. This could be a result of options week, but still, I don't like entering longs if volume does not confirm price.

If you are looking at an opportune time to short SPY again, there are two low risk entries.

1) If price again breaks down below the 50 day ma. The low volume makes this a decent possibility.

2) On a low volume rise to the 200 day ma, in the 135-137 range. This presents a great short on two different time frames. We already know the daily like the back of our hands, so let's flip down to the weekly chart.

Daily



Weekly:
The first thing that jumps out is the head and shoulders top formation. During the top formation, RSI has down trended and volume has shown a great amount of distribution (selling). Now, price is pulling back up towards the neckline of the head and shoulders formation, which should act as support. This is a good, low risk area to place a short trade. Add to that that this level is also right around where the downtrending 50 week ma is hoverning (138), and is also the same area where the daily 200 day ma is located (136)--well, talk about a great short setup.



It will take time and patience for this trade to setup, but keep on the lookout. In the meantime, watch for a breakdown of the daily 50 ma, and focus on trading setups.

No new sectors that we have not already discussed jumped out at me, so I'm going to go straight to the watchlist. Lots of stocks setting up. This week we have over 60 that we will focus on.

Whew . . .it's been an exciting trade with many ups and downs. This is a good example of how important it is to stick with your trade until your stop or target is hit.

Why I like to take partial profits

X is a good example of why I like taking partial profits. I would have been inclined to take full profits when I had a decent gain. Instead, I took partial profits, moved my stop up to break even, and now am reaping the benefits of today's huge breakout.



Note: I took small positions in a couple of airlines today and initiated a couple of commodity related shorts (not steel!). More details tonight.

Anatomy of a Trade: WYNN

I shorted 500 shares of WYNN 8 days ago at $85.03 based on a "dirty bear flag" setup. While technically not a bear flag, the stock had broken support on was pulling back up to the resistance point. Volume distribution pattern was bearish, meaning heavy down days with low volume up days.



That same day the stock closed at $79.26. While I was planning a swing trade with my target around $70, the one day drop was too good to pass up. This is where I have evolved as a trader. In the past, the greed factor would have caused me to fear losing my profits and I would have exited with a $2500 gain. To combat this urge, I now allow myself to exit in stages. I know some traders frown on this, but I understand my own psychology, plus feel that locking in profits and managing trade exits is a great strategy.

I took partial profits by exiting half my position at $80.10 for a $1232 gain. I moved my stop to the short entry level to lock in the profit. The rest of the trade was what I like to think of as a free trade. I am bascially guaranteed making $1232 on the trade, but could make much more.

Today my target was hit, so I exited the remaining positon at $70.14 for another $2490 gain. What would have been $2500 if I had given in to my impulses turned into a $3722 trade.

The WYNN trade is why I often preach about trade management. There are three major elements that make a good trader: stock picking, risk and trade management. It's not that difficult to find good trades. However, making the most of those trades is what seperates the "men from the boys".

Odd and Ins:

I will be starting a trading report service shortly. For a free week, e-mail me at SinghJD1@aol.com and title it "Trading Report"

Rob Hanna does some of the best market analysis around. He's one of the few bloggers I read everyday.

Why Do You Like DUG

Here is an e-mail I received today:

MS,
Why do you like DUG so much? It looks to me like you are trying to pick a top in oils, just like you are trying to pick a bottom in SSO. Don't fight the trend man. SSO is going lower and DUG is too.

Before I get to the DUG trade, let me reiterate that I am not picking a bottom in the S&P 500. I am only playing for a bounce while using tightly monitored risk management. If I'm wrong, I'll lose a little and move on. If I'm right, I'll make a nice chunk of change.

Here's why I like DUG:

1. Nice looking bottoming pattern.
2. RSI breaking out.
3. Excellent volume pattern during the bottoming formation.
4. Good reward to risk ratio.