Chart of the day: DIG

Today's swing trade stock chart of the day is DIG.  Energy is showing positive money flow and the sector has broke out over the 50 day moving average. Here we can place a stop under the moving average with a target at the recent February pivot high at $57.

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I will wait for a slight pullback from this level to attempt to get better value, though this is risky as the stock could move from here.

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You need to know this fundamental change in oil's character

Swing Traders focus on two key elements when assessing a stock's trend, volume and price action.  Volume often precedes price action as the big players leave footprints that are tough to hide.

During oil's parabolic downtrend, volume has consistently shown a distribution pattern while basing before it's next leg down.  However, the current volume pattern has changed the character of the oil ETF, USO.

Notice that the current basing range over the past 8 trading sessions, we see increased volume.  Not only has there been an influx of volume, the pattern shows positive accumulation, as upside volume clearly outpaces negative volume.

This often occurs before a strong bounce or change in trend.  When I see this type of clear change in character, I start accumulating.  I already have a position in oil and may look to add some more.

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NFLX Trade

I entered NFLX today at $186.11. Here is what I wrote to trade report members:

My watchlist is rather small right now and there aren't any good entries, so I'm going to take this opportunity to analyze a focus list stock that is not an easy sell as a long or short right now, NFLX.

NFLX has been a 2010 juggernaut momentum stock. It's been the textbook trend pullback trade. In 2010 there have been at least eight good opportunities to enter, and I, along with many of you, have traded the stock successfully. There is another pullback that normally would be a good entry, however there is a key difference in this pullback whencompared to the others---volume.

Take a look at the enclosed chart. Each arrow signifies a pullback buying opportunity that was successful. Notice that the volume pattern in each of these instances shows higher gray bars than red bars. This tells us that the stock was being accumulated. The pullbacks were natural profit taking that occurs in all uptrends.

Now take a look at the current pullback. The red bars are nearly as high as the gray bars, and there are more than one. This is a concern. There are signs of distribution. Now this does not mean the stock is definitely going to fall here. However, it needs to be noted. There is a less of an "edge" to entry here. Many times there will be one more boost higher before a big fall. So keep this in mind. If a major support area breaks, be ready for entry.

Because we focus on risk/reward ratios, it's still okay to enter long. If we take a small loss, that's fine as long as we continually take 2:1 or 3:1 trades. When I see distribution starting to settle in, I like to get closer to 3:1 because the probability of a successful trade decreases.

If entering here, around $185-186, the natural target and stops based on support and resistance would be 179 and 205. That gives us the 3:1 risk reward we need for this setup.

I just entered at $186.11. Remember, you have to be willing to embrace a small loss here. We are looking at long term gain, not the result of one trade or the short term win/loss record.

Today's Entry: STP

I entered STP today on weakness. The stock has shown strong strength in relation to the market, and shows a strong volulme pattern on the recent move up. My target is the September high.

VPRT Showing Signs of Cracking

Notice the negative volume pattern during recent consolidation period.

The Apple Short Trade Continues

The AAPL short trade is turning into a textbook example of the overbought and evening star candle setup. So what do we do from here?

Support may be found at the old pivot high, around $135. This would be a good area to exit shorts and possibily enter long.

However, longs should be wary of the distribution pattern that is forming. Take note of the tremendous pick up of volume during this downswing. I would not be surprised to see a small bounce or a retest of the recent high, creating a "double top", followed by a strong down move.

Distribution Showing Up In Brazil ETF (EWZ)

EWZ, along with the other BRIC countries, has been on fire of late. However, the recent consolidation has the look of a short term top, with the volume pattern suggesting distribution.

Note the high volume down days during the recent consolidation.

Today's Trades: SKF and SRS

I used today's strength to enter two bearish focus list stocks today, SKF (financials) and SRS (real estate). Both are inverse shorts. Note that strong volume pattern during the price consolidation range.

There is still room to pullback, so I used small position size.

300 shares SKF at $44.11

400 shares SRS at average price of $20.91.

Stops are place below recent lows.

Strategy Session: Using Distribution Patterns to Predict Trends and Trend Failure

The second most important aspect of my trading strategy (behind support and resistance) is using volume to classify stocks that are under accumulation and distribution.

Distribution is under way when, over a period of time, stocks show higher volume on down days and lower volume on up days. In a bullish trend, this predicts the trend will pullback or fail. In a bearish trend, expect the trend to continue until the distribution pattern is reversed.

Take a look at GME. This stock shows classic distribution. During the recent uptrend, positive volume was putrid. Trend failure was easily predicted. Currently, the distribution pattern is continuing. This suggests a retest of recent lows.

I will likely short this stock soon.

Volume and Bottom Formation

Notice that volume during the second leg of the "W" formation is less than that of the first leg. If a bottom formation is in the works, this is a good sign.

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.

A Crappy Picture That Clarifies the Ideal Volume Pattern

This picture I created ain't pretty, but it does a good job of showing the type of volume pattern I look for during bottom formations:

China's Chart Give's a Clear Answer

The FXI weekly chart is quite illuminating and a good example of the importance of volume. What does the current volume pattern tell us? Compare to the previous volume patterns during the top and bear run, and the answer is clear . . .

Trade Update: JRCC

I took a small short position today in JRCC. The stock has been in a strong topping downtrend and has pulled back up to the 50 day MA. Stochastics are near overbought levels and volume has been average on the pullback. This is a low risk entry with stop placed just above the 50 day MA.

GLD Entry and Trade Report

In the Monday morning edition of the Trade Report, I mentioned that I was bullish on the gold sector and was waiting for a pullback. A few readers wanted to know at what levels I would consider entering.

Let's take a look at the GLD chart. When looking for support and resistance levels, I want them to jump out at me. The first thing that jumps out at me is the two failed attempts to really past $94, followed by the current gap up over that level. This is where I define the new support level. If we get a nice orderly pullback into the $94-95 range, I will enter. However, if the pullback is on a large bar and many of the gold related stocks are declining on heavy volume, I will skip the trade.



Trade Report:

In the free Wednesday edition of the Trade Report, I discuss:

My QLD entry, this crazy market and relative strength

A few recent positions, X, ILMN and JOYG

Bearish engulfing and flag setups

The Weekly Watchlist

Diversification by way of setups.

Tuesday Report

Monday Report

RBN Exit

I exited my position in RBN at $51.50 (entry on Friday at $47.46) for a $1010 gain (+9.2%).

I would have liked to see a pullback to the breakout point in order to build my position, but I'm not going to complain too much with a 9 percent one day gain. I will look to re-enter on a pullback.



Trading Report
If you haven't already, take a peek at the first issue of the my new Trading Report. I'll have another one available before the market open tomorrow morning.

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.

USO

USO is starting to look interesting as a buy, but not at the current level. I have set my buypoint in the $95-96 range. The 50 day moving average should provide support for at least a bounce, and possibly a continuation of the upmove.

The buy is contingent on volume contracting on the rest of the pullback. If I see more high volume down days, I will not enter.

Trade: CYBS

I bought CYBS four days ago, after the stock had pulled back from the breakout point and stochastics crossed over from oversold territory.

Since I did not post it here I won't include it in my performance stats, assuming I ever get around to updating them (you can click on the trade label after trade related posts to view trades I have made).

The reason I did not post that trade is, as I discussed before, I've noticed that some of you are piggybacking my trades (some with much bigger position sizes than me). Since this stock usually trades at a lower volume level, I didn't feel comfortable posting the trade. I do now since it's not at an ideal entry point.

Note the upsurge in positive volume of late, along with the a fantastic breakout-pullback pattern.