CHARTS you need to know

Today we broke out - as seen on SPY and QQQQ below (click chart to expand).
SPY


QQQQ


This market is wildly overbought, not to sound like a broken record. The market has made it quite clear though that it is in bull mode for the moment and not even 8.5% unemployment can stop it.

The market should not be able to run above 87/88 before a much, much needed pullback, perhaps that will be brought on by earnings season (even though expectations are in the loo). I think the green line is the next likely price target before retracing to 81 or even 77.


Notice in the next two graphs how the 2000-2003 bear market interacted with its 50 & 200 day MAs. Compare that to now. In 2000 the 50/200 MA crossover would have pretty much kept you out of the woods. And notice how many times price climbed all the way to its 200 day MA only to be rejected. In this bear market, we haven't even seen the light from the 200 day MA. More or less the light from any 50/200 MA crossover.
2000-2003 Bear Market

Current Bear Market


This doesn't mean we don't run up to SPX 1070 before seeing new lows. The timing of this, as always, is the hard part. I still have to think that if you are getting long now, the market cannot reward you - you missed the move - you are dumb money. Regardless, upon continued strength, here are a couple of examples of breakout stocks worth looking at, that have low risk entries:
MA

USD


With regards to GS. It did in fact close above its 200 day MA but as long as it is overbought and within its channel, I feel okay holding onto my puts. Plus, I bought OTM puts = small delta, so I'm not risking too much, to let out a little line on this one. The lack of strength in XLF gives me further confidence of a pullback. This will be a day-to-day decision.
GS


XLF


Final thing to watch:
VIX

Printing Money

Financials have been responsible for the bulk of this bear market rally (SPY currently sitting at a 19% return in 9 days). Fundamentally I don't feel that anything has improved, at least with regards to unemployment, housing, growth, earnings, inflation, etc. And even though the market is a leading indicator, I don't see any of these improving in the next 6 months either.

You might think that today was a positive - i.e. printing another $1,000,000,000,000 via injecting liquidity into the economy, via buying up Ts. And in the short term it clearly was positive for the market (granted, there was a fair share of short covering today). But there is nothing positive about an economy in distress adding massive inflation and debt to its list of problems. To be fair though, they have run out of ideas.

Anyhoo, I wanted to delve a little deeper into this financial stock driven rally (since March 6th, the most recent 'bottom').
In the last 9 days the following stocks have returned the following % (approx):
C 217%
BAC 164%
MET 124%
WFC 120%
USB 96%
JPM 81%
AXP 45%
GS 44%
*XLF 60%

That's great! Although smells a bit of short covering and dumb money chasing and doesn't seem sustainable but who cares!

I remain bearish but I won't be stubborn. This market is absolutely capable of going to SPY 105 and I have to be prepared for that. If necessary I will definitely take on some long positions but I don't think it's time yet. Mainly because:
*SPY hasn't conquered this level of price resistance
*Or its 50 day EMA
*Conditions remain insanely overbought.

SPY

Buying Weakness in XLF

XLF recently experienced 5 consecutively lower closes. The following is a look at what happens historically when this weakness is bought and sold x days later:
As long as the trade is short term, consider using XLF to generate your signals and using SKF, UYG, FAZ, or FAS for the trade.

Covered XLF | SKF on deck

I shorted XLF on Friday and covered today for a nice profit - probably a little prematurely - but it is off 18% in three days and I am in no mood to be on the wrong side of the next short squeeze around the corner. I would rather wait for a small bounce to do it all over again.

Plus, in the last 5 years or more, this is the first time that XLF has had two consecutive days where the high has been less than the low of the previous day (2 big down gaps). So I'm not real interested in gambling on how that will play out.

For those following the SKF short strategy, it is not yet time to short but it could be triggered as early as tomorrow.

Banks going lower

Trading the banks these days isn't my idea of stress free, nonetheless, over the last 18 months it has been rather profitable to short them every time (actually only 80% of the time) they get overbought. Eventually all the banks will be trading at zero so naturally this trade cannot last forever but I think it still has some room to run. I mean, BAC is still at 3.95! That is an insult to your intelligence.

Shorting strength in names like XLF, KBE, UYG, and even in some of the individual names like JPM and GS has performed nicely.

KBE


Unless you have done your homework, I don't recommend the inverse - buying oversold dips - as long as the banks are under their 300 day MA.

Trading Range

Had an opportunity to pick up an extra 4% on XLF this morning but instead chose to get stopped out for an even trade (actually gained $0.01/share). Unfortunately I was unable to negotiate the 9.37% swing today, from the low (8.54) to the high (9.34) - much of which took place in the span of an hour.

I still like XLF to the downside but do believe that people will start, all else equal, buying up C and BAC, for example, just because they are perceived to be 'cheap' at these levels. Plus, who knows when the next stupid announcement comes out about buying toxic assets or manipulating accounting standards. I may look to play overbought opportunities in financials via GS (getting tired), or if XLF/UYG makes a respectable bounce and/or the news quiets down.

With regards to the overall market, 1Option summed it up nicely:
A trading range from SPY 80 - 92 has been established. There is choppy trading around the midpoint. Buyers are willing to pull out their wallets when the market reaches the low-end of the range. However, they are not willing to chase stocks and they do not feel that they will miss the next big rally. Sellers know that they have the long-term trend in their favor and the bad news keeps on coming. They are very comfortable selling stocks at the upper end of the range. Consequently, the market will continue to trade in this range until new information forces a breakout or a breakdown.
SPY

Covering XLF

I plan to cover XLF on tomorrow's open for another small gain - but will wait until the open to place the order, just in case it looks to head lower and break support at 8.87. Regardless of what tomorrow brings, XLF will be covered before the weekend.

Even though this system has been successful, I'm starting to have doubts of its future profitability; with some of the XLF components trading south of $5. People might be more and more willing to step in and buy BAC at 4 bucks, for example, just because their downside risk is so limited. To be determined.

Naughty Banks

With regards to the creation of a 'bad bank', people are starting to question the effectiveness of this dumb idea, the undue burden it will place on all taxpayers for generations to come, the decision making abilities of our govt, etc. It actually took the likes of Soros, Whitney, and most notably, myself, to bring some realistic expectations to this horrendous idea.

In case there is any confusion, the asininity of the notion of creating said 'bad bank' is the worst idea ever thought of, ever. And somebody should be physically punished for mentioning it outloud.

Given the uncertaintly of this inevitable debacle, the wise thing to do would be to not trade/speculate on this sector (XLF) at all. On the other hand, it does remain overbought and thus it continues to be, all else equal, a great short candidate in the near term (1-15 days).

XLF continued

I remain short this market via the XLF; however, with the current government sponsored Tom Foolery, I feel less comfortable about it. What does bring me comfort in this trade is knowing the following:
1) Selling strength (i.e. overbought) while XLF trades below its 200 day MA has been extremely profitable.
2) Every other attempt at 'manipulating' financials (bailouts, banning short selling, etc) has not worked and at best has presented great shorting opportunities.
3) There continues to be a ton of overhead resistance.

What sucks:
1) There's a chance that eventually one of these 'manipulation' strategies from your elected government officials could work - this might be the one.
2) Financials have been rallying after earnings for the last 4 quarters. Investors/traders realize that the end of the world isn't here so they buy. This euphoric buying usually dies down pretty quick ...this time it might continue.


In conclusion, I'm just trying to sort out these thoughts for my own psychological peace but will ultimately do what my system tells me to do, as it has been exhaustively tested. I came across a good quote the other day to the effect of: When I'm designing and testing my system, I am a NASA engineer. When I'm trading the system, I'm just a space monkey doing what I'm told. Easier said than done.

Shorting XLF

It has been a very profitable trade lately to sell strength in the financial sector. It was a nice surprise to be able to do so after XLFs 3% pop this morning. Stop at 10.42 - plenty of resistance all the way up.

SPX

SPX - next stop 850, but be aware of a likely oversold bounce.


I will remain short this market via the XLF with an extremely tight stop. I chose to override my system which suggested I cover at the open. But since XLF was trading down pre-market there wasn't a sense of urgency to do so. Current trailing stop: 11.09.

See below for additional setups from 01/09 that still hold - XOM, CVX, SRS, SKF, GLD, etc.

Stay Short

I will remain short the XLF. One of my short signals (essentially on an overbought setup that's too complicated for you to understand) was generated on last Friday's close. (FYI: the signal was also generated on SPY - historical results are similar)

From a non-mechanical stance, you'll also notice below that XLF has been making lower highs and flat lows (perhaps rolling over...or just sideways action?). In the short term I think we might move sideways but intermediately I remain bearish, and will trade accordingly (focus on finding short opportunities), until we are above the 200 day MA.

Of all my backtesting - and this applies to EOD traders, not day traders - the odds considerably favor short sellers when the market is below its 200 day MA and vice versa.

My immediate price target is 11.50 but if XLF gets to that level I will reevaluate. I hope Friday doesn't throw too much of a monkey wrench into my plans.

I imagine by then, my system will politely ask me to cover my shorts; however, I may choose to ignore that, even risk some profit, trade on discretion, and see if 11.50 actually holds.
XLF


SPY

What I'm more interested in...

On a day when the market climbs 11%, I'm a lot more interested in the following:

1) Stocks that couldn't go higher on an 11% up day - (i.e. Goldman Sachs rose < 1%, while XLF rose almost 16%)

2) Stocks that moved more than 11%, after accounting for their respective beta - (i.e. MON has a beta of 1.17 but climbed 17% today)

Other overreactions may include SRS, SKF, and FXP (even though these are ultra shorts, they are down between 25%-35%)

I would like to see several follow through days to bring all stocks back to levels that make sense to get short at again.

For example, it would be very cooperative for AMZN to get back to the low/mid 60s for a great short setup...

Descending Triangles

While going through a number of ETFs today, one pattern kept emerging - descending triangles. Below is a 30 day chart of XLE but you'll find that many look similar (XLF, XLP, XLY, and non-ETFs as well)

For those still looking for a tradable bounce this is good news. Using XLE as an example, it closed near the baseline of its descending triangle pattern...meaning you could go long, set a tight stop under the baseline, and have a low-risk trade setup. That said, descending triangles usually resolve themselves in the current direction of the bigger trend so be quick to take profits.

For an intermediate term trade, or a more conservative trade, wait to get short on a breach of the price pattern's baseline, with a stop above it.