Good Trading,

Joey

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So what the heck does that even mean? Well, in trading, you want to make sure that you are in as much control of a trade as you can be. While it is impossible to control the outcome of a trade, as a trader there are several things you can do to remain in a position of strength in a trade. You want to be in a position where all your outcomes have been thought through in advance, so that you are not having to react on the fly to a stocks movements. Any trader who has been at this a while has certainly been involved in a stock that stops them out, then turns around. As a trader you get angry that you got suckered and chase the stock higher. Once in, it promptly reverses and stops you out again. Now that you have been burned twice, you may get angrier and jump in early trying to preempt the next move, only to have it go against you a third time. This is what reacting to the stock is, or being “driven on the bus” . You want to do as many things as you can on your terms, and not the markets. You want to drive the bus.

One of the most important concepts a trader must understand, is what time frame they are trading. This is critical. Entries, stops, and targets are all relative to the time frame a trader is working in. Are you playing for a day trade, one swing, an intermediate swing, a position trade, etc. ? I tend to trade for a single swing, which means I am trying to get the meat of a move between pivot points. I am not trying to capture a several month move. As such, my entries, stops, and targets are aligned with this time frame.

Once you understand what you are trying to capture, you can focus on the entry. The entry is also critical to trading from a position of strength. Also, the shorter your time frame, the more important your entry becomes. If you have a bad entry, then you will be at the mercy of the stock even during routine retracements. While the fear of missing out on a trade is understandable, chasing a stock is a losing strategy. One way I force myself to have a good entry is to always focus on a narrow range to base my setup off, or sticking close to pivot highs or lows.

Once you are in a stock, make sure to take profits on strength. By locking in profits, you maintain your position of strength. When the stock pulls back, you have the comfort of profits and the option of adding the shares you scaled out back. It sucks to have a trade be well in the money only to have it reverse back and end up in a loss. My buddy @jfahmy refers to the concept of “mental capital” all the time. Trading is psychologically very difficult, and all traders go through periods where they feel like they have lost it. You want to keep as much of your confidence as possible and reducing exposure on your terms is a great way to stay in control of your bus.

Another important aspect is to understand the environment. Is the market in an uptrend, downtrend or range bound? Are there any important announcements coming up? Is it earnings season? While you can’t control the outcome of any of these, you can make the appropriate adjustments so that you control everything you can control.

One last point to make. Every once in a while, someone will try and usurp you and take control of your bus. This can come in the form of a gap, or surprise news event. Having a strong methodology where you have a solid entry, scaled out profits, and protective stop will allow you to reduce the damage of an event as much as can be controlled. At that point you simply get out of the trade, or step out of the bus so to speak, and wait for the next one.

Good Trading (or bus driving),

Joey

follow me on stocktwits and twitter for more analysis on stocks

Good Trading,

Joey

follow me on stocktwits and twitter for more analysis on stocks

I’m sharing one of my setups for this week to show what types of trades I am focusing on. While I am always thinking of risk first, the current environment actually has me a little more careful than usual. First and foremost, we are still in earnings season, so traders need to be constantly aware of when a company reports. Second, because everything has been moving, many stocks are too extended to offer a good risk versus reward. I am focusing on stocks with a narrow range, whether it be several weeks long, or just a few days. This allows me to keep a tight stop and minimize my risk in a market pullback. One key point I will make is that if you are playing with a tight stop, you should be aggressive in locking up some profits. Tight stops are more prone to be triggered on shakeouts, so it is important to match the stop at least a partial target.

Triangle Capital Corporation  (Public, NYSE:TCAP) ($TCAP) is an example of a setup I am looking at. It has been trading very tightly just under all time highs for a few weeks. I would be interested in a move above Thursdays highs because it could lead to a test of all time highs. I would set a stop just under the past few days lows because I am attempting to catch a breakout and if the stock dropped under those lows it would signal that it may need more time. Again, because I am aiming for a breakout, I don’t want to be in the stock if it needs more time to consolidate. The target would be a test of all time highs near $21, which is easily within reach on a true breakout. I am leaving the second target open ended in case of a runaway move, but with the market’s being overbought, I would trail this with a very tight stop as well.

Good Trading,

Joey

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Below is an example of a topping tail in Sherwin-Williams Company (Public, NYSE:SHW). In fact, there are two good example of topping tails. One occurred during a late October breakout and of course the one that occurred today. As is obvious in looking at the prior tail in $SHW, the pattern does not always signify a major change in trend. It is simply a candle that reveals exhaustive behavior. A stock could recover shortly thereafter, or the topping tail could be the start of a more serious decline. However, more often than not, prices are flat to lower at least temporarily soon after the pattern.

With so many topping tails appearing in charts combined with the lackluster close in the indexes, I would be shocked if the general markets didn’t come back to fill the open gaps left behind today. If the markets can drift back and constructively build more support, then we may be on to something.

Good Trading,

Joey

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Looking back, the markets basically traded in two distinct ranges. In looking at $SPY as a market proxy, notice how the markets traded in a consolidation that proved to be a top the first half of the year. Volatility increased in May, flashing a clear warning sign. The ridiculous moves that ensued the rest of the year is what threw many traders off. While many braced for a meltdown, the markets ripped shorts apart in October and then chopped around. In the end, two distinct bases have formed, separated by the $125-$127 level (basically 1250-1270 on SP500). $SPY is wedged right up against this level and it really could head in either direction at this point.

Drilling down in the daily time frame, there are some positives to consider. $SPY has been setting progressively higher lows and recently reclaimed its 200-day moving average after struggling with this level for several weeks. It also reversed impressively at the end of the year as it pulled back to fill an open gap near $120. That being said, it really needs to clear the $127.50-$128 area to set that higher high and possibly establish an uptrend. With the bipolar tendencies this market has displayed, one can not rule out a gap up reversal that takes the markets back down either. Breaking under the $120 level looks like the clear area where things would be going wrong for market bulls in the near term.

I don’t know if the markets are going to break higher or lower, and judging by the wide range of bullish and bearish tweets, posts, and comments so far this weekend, it seems opinions are widely split.

What I do feel confident in is that the character of the market has not changed yet, and chasing any move in any direction is likely to get punished. That has been the clear message for months, and nothing has occurred to dispel that notion. I am slightly positioned long for now, but overall the amount of individual charts that look good to me has dwindled dramatically. Until this changes, it is hard to get behind a breakout.

Good Trading,

Joey

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After I reviewed the charts for $GOOG, I looked through recent tweets on Stocktwits for community thoughts on $GOOG and maybe to find some good articles or posts on the stock. I was pleased to see that Howard Lindzon has been getting excited about $GOOG as well. He mentioned it on Monday’s Momentum Monday show and also on a recent post about Stocks in 2012. Because I am excited more so in the long term charts rather than the near term daily charts (which don’t look shabby either), I find it comforting that Howard is thinking about this stock from a “story” perspective which would lend itself to a longer term play.

Looking more closely at the charts, $GOOG is really not too far from its all time highs after spending several years consolidating. $GOOG is definitely not the exciting startup it once was, and it takes much more to move the stock than it used to. That being said, overall the consolidation of the past couple of years has been very orderly when looked at from this perspective. $630-$640 has been a clear level of contention, and would be the key area to focus on.

Drilling down towards the weekly chart, it is clear how the $630′s have sparked some sharp reversals. However, $GOOG has been setting progressively higher lows and returned to the top of the base very quickly after being rebuffed in November. Once again, the consolidation has been very orderly when looked at from this longer term perspective.

The daily chart is where $GOOG starts to get a little messy, although the overall pattern remains quite constructive. There are a lot of gaps and without the context of the longer term charts, it would appear that $GOOG was not making any progress. My initial guess would be that $GOOG still needs a little more time before it could seriously assault its long term resistance, and I would actually prefer a pullback as I would rather buy longer term positions after short term weakness.  The $560 level is an area of potential support should it weaken considerably, but the $590-$600 area may also be an area to watch. The 50-day moving average would be in this area and it also coincides with an unfilled gap left a couple of weeks ago. Buying breakouts in this market has not been very reliable, but it would be hard to ignore any sustained strength above $630. This may signal a multi year breakout that could lead to much higher prices.

I have no position in $GOOG but will certainly be monitoring it more closely in the coming weeks.

Good Trading,

Joey

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If you are an inexperienced trader, you should really be thinking twice about trading in this market. It takes experiencing (and surviving) a few market cycles to truly respect the power of a runaway decline. There is a lot of noise during these market periods, and shakeouts in both directions are common. If you don’t have confidence (and sound strategy) you will get chopped up or worse. Many traders that are reasonably profitable end up blowing up in these environments by getting faked out and then holding on to losses for fear of getting faked out yet again. If you were not profitable during the past month, you should really think twice about whether to wait a few weeks before wading back in. The market is not going anywhere.

I’m putting a chart of $SPY below to illustrate how I’ve been seeing the recent market. I think the past month has been rather straightforward, although certainly complicated by overnight gaps. After the sharp decline in August, the markets traded in a channel that resembled a bear flag before finally breaking down. This hasn’t been an easy market to trade for sure, but for experienced traders there has actually been a lot of short term opportunities. After the August decline, volatility expanded and all of the indexes have seen a sharp increase in their ATR. $SPY for instance, had its ATR more than double. Anyone playing mean reversion within the channel likely had a good month with many sharp moves. Now comes the difficult part, as the markets are oversold and threatening to breakdown further.

The reason its difficult is that it’s too early to realistically play a bounce, yet we are likely past where shorting is a low risk trade. My course of action is to watch the next day or two for either this sell off to accelerate, or a bounce attempt to materialize. Once I get either, I will get look to initiate a few more positions.

Good Trading,

Joey

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$NFLX did indeed gap higher on Monday on news of new streaming deals putting me at a decent profit. It even cleared its premarket highs in the first few minutes of trading which is a positive. Everything still pointed to higher prices, so I did not entertain taking profits. However, $NFLX was under distribution all day and has been unable to hold above the $133 level for the past few sessions. Selling was not even very subtle on the tape, underscoring the fact that institutions are still getting out of the stock. I still didn’t sell, because I didn’t want to ignore the positives I noticed on Friday, and it did end up higher. $NFLX gapped higher again this morning and once again failed to hold any of the gap. When the market started moving higher mid-morning, $NFLX did not participate and instead turned lower later in the morning.

Gap Higher + Positive News + Strong Market SHOULD = Higher Prices

I didn’t bother sticking around, especially in a market I don’t trust. I see people (ie. Cramer) getting trashed all the time for flip flopping on a stock, but being flexible is a huge part of being a trader. $NFLX looked like it was going higher, but the tape revealed that there is still too much selling in it, so I got out. I still believe it will squeeze higher soon, but I have faith that my trading skills will let me know when the next opportunity presents itself. I have no problem flip flopping on a stock if the markets give me more information. I did this several times on $MCP over the past few weeks with no shame. There is often a very fine line between which direction a stock will take and false moves are a real part of the current environment.

It makes no sense to stick around when the tape is not confirming my thesis. If you got caught in this afternoons reversal, honestly assess the stock you are in and decide where you draw the line.

Good Trading,

Joey

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In the movie Old School, Vince Vaughn’s character (Beanie) would often tell his son to “ear muff it” before he would say something inappropriate. While this is obviously meant to be funny, more often than not, a trader is best served by “ear muffing it” and just blocking out the noise. It seems that the past few weeks, the markets are gapping in opposite directions almost daily, and with the volatile moves comes all form of noise trumpeting everything from the end of the world to the buying opportunity of a life time. Just “ear muff it” and pay attention to price action.

After the sudden drop in August, the markets have been basically trading in a well defined range. Sure, it has been quite volatile from day to day; but in general, the markets have been confined to a channel in the lower half of the decline. The channel is sloping upwards resembling a bear flag, although it is still to early to know if that scenario will play out. We are actually in an interesting crossroads. The markets retraced about 2/3′s of the rally off last July’s lows, and as any Fibonacci expert knows, if the markets push back past the 61.8% retrace level, it would imply a full 100% correction. 

While this chart paints a possibly bottoming picture, the markets have also already retraced about 1/2 of the recent declines.  This paints more of a bearish picture on the intermediate term. Maybe they will rally through the full 61.8% retrace towards 126 on $SPY in the near term, but the point is that until we break out of this range to either side, the likely scenario is more chopping around.

So while every sharp move or shocking data point will suggest otherwise, just put your ear muffs on and watch what market participants are doing. Soon enough the market will reveal what its true intentions are.

Good Trading,

Joey

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