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Ideal trades

Today is developing like sideways days with fairly decent range. So far, around 12:00, we are at 340 points and I would like to show you how ideal trades today should have looked like.

First trade, I took this one, was at 9:15 and it was break above opening range. Entry was above 29410 (point 1). That was break of mid point between pivot and R1. Market quickly relied to R1 and made high of the day at 29600 (point 2). Close could be in that region, so potential profit of 180 points was on cards. Let’s be honest and say it was 150 points with slippage and brokerage.

Second trade, if you are more aggressive, could have been around 29540 on 9:55 bar, with stop loss above high of the day, with risk of 60 points (point 3); or if you are less aggressive 10:20 bar where we closed below 20 exponential moving average (point 4). Market slowly ticked down and tested 50 exponential moving average. You can see how volume increased at that point. Marked did close below once, but just for following bar to close above (point 5). One could have closed position there, but at that point we didn’t know if market will drop further. After that, market bounced back and tested 10/20 exponential moving averages, which was followed with drop again, but on much smaller volume than what the case was on first test of 50 exponential moving average. At 11:10 market traded below 50 ema, to close above it (point 6). This was back test of low made at 10:50, but on much smaller volume. Ideal place to close that short was break of high of that doji, around 29400. So, that could have been possible profit of 140 or 80 points, which is a very nice profit.

That very same point was nice place to go long and that long would still hold, with stop being close below 10 and 20 exponential moving average. In meantime ALSI tested R1 again so that long could earn you some 200 points.

I made first trade, marked with arrows. Then, I made second trade of less aggressive type, but I’ve missed that clear bottom and I’ve closed trade for 20 points loss. Not being focused to spot that low caused me to lose about 100 points on short side and I’ve missed opportunity to be long for some 140 points so far.

Someone could say that it is easy to see in hindsight, but those clues were on chart, as market developed.

Trade with trend!

Thursday Reading

Bespoke:

Homeownership Rate at Lowest Level in Over 10 Years

CXO:

Stock Market and the Super Bowl

Globetrader:

As sharp as it gets!

Nothing to add…

Quantifiable Edges:

Recent 1st Day of Month has been Especially Strong

The Big Picture:

Naive Science and the Nature of Financial Markets

How U.S. Income Groups Get Squeezed By Food Prices

Wall Street Pay Hits Record Highs (and . . . ?)

Fun!

Inflation Rates vs Your Birth Year

Trading the Odds:

February’s Seasonalities

Top40 30 minutes chart one more time

We will review once again J200 (Top40) 30 minutes chart to see what the possible outcomes are.

J200 broke trend line few days ago and did back test it on January 27th, making at the same time first lower high. After making that high J200 plunged and lost 1100 points as of yesterday around 11:00. Around that time it tested low that was made on December 10th of the last year, breaking and closing below it for one bar, just to close above it immediately on the next one. From there on J200 bounced back to test 20 exponential moving average and it was stopped there and closed below 10 ema.

Very important level to watch is that low from December and yesterday. If that is broken there is very little support all the way down to 27000/27100 zone.

On the upside, close above 50 exponential average coupled with making higher high will bring bulls in control.

Trade with trend!

Top40 30minutes chart for January 24th

Quick update for Top40 30minutes chart.

Rising wedge was broken on Thursday and break was retested on Friday and again this morning. Together with break 50 exponential moving average (blue line) was tested and proved to be a strong resistance. Market dived after initial strength this morning and it is currently some 350 points off the high.

There is another less sloped trend line on the chart, exactly where Top40 got stopped. Bellow that line is horizontal support around 28200 and if that is broken we will have very little support all the way down to 27100.

Dow theory is still pointing towards bull run, market made only lower high with no lower low yet. That will happen if 28415 is taken.

On the upside watch for close above 50 exponential moving average and new higher high above 28835.

Trade with trend!

Top40 end of the week review

First three days of last week produced some sideways trading, making it five all together with last two days of previous week. Thursday and Friday brought us some direction, one big down day and one solid up day. All together, Top40 closed between 10 and 20 exponential moving averages on Friday, while close on Thursday was below 20 exponential moving average, third occurrence from December 1st.

Stochastic and RSI are more or less in neutral position, staying around 50 and together with MACD are still showing negative divergences. My personal opinion is that Top40 will still go down in short term – next week or two. If you check how last correction happened in second half of November you will see that it started with sideways movement, then down day, then market tried to recover and that failed, which was followed with only last two days being strong down days. Don’t expect that market will drop 2000 or 3000 points without any fight from bulls, as they will try to protect their positions in this market.

Dow Theory is still showing higher high and higher low, so trend is still intact, with 50 exponential moving average around 28200, almost paired with previous low. If those two levels are broken, look for more downside to come. On the upside, free money is coming from overseas and that can always push market higher.

Last week I posted Top40 30minutes chart that painted clear picture of rising wedge and potential targets.

Trade with trend!

Sunday Reading

Bespoke:

Global Unemployment Rates

1% Declines From a 52-Week High

Streak Snapped at 37 Trading Days

Simply amazing!

Picture of the Day: Shanghai in 1990 and 2010

Some great visuals that The Big Picture has collected:

Stocks Oil, Gold, Bonds for the Long Run?

Total Market Cycle

Market Capitalization as a % of Nominal GDP

The Media Universe

Recession Recovery by the Numbers

Trading the Odds:

January Option Expiration Week

Today’s mistake

Most of the traders and bloggers out there will show you how they make 100 or 1000 points every day, just to boost their ego. Completely opposite to that I will post my day’s trade in order to explain my mistakes: In 600 point day with clear trend I managed to finish some 80 points in red. Yes, it amazes me as well!

I missed first hour or so, as I had to go to municipality to do some work, so I was in front of screen from around 10:00.

First trade was short at 28772 around 10:20 (entries are marked with big arrows, exits with small arrows). Exit was 3 bars later at 28719 and the reason for close was red bar on high volume (stopping bar), which usually marks end of the trend. Profit 53 points

Second trade was at 28820 around 11:40 with very tight stop loss. ALSI tested previous high (from 9:50) and volume was not supporting move upwards, so it was ideal place to short. Unfortunately, I could not get full size and I had to go with my son to swimming lesson, so I had to close at 28780 for 40 points profit, but effectively it was only about 13 points, because it was only one third of the size. Ideally, this short trade should have been closed much later in the day. Easy close would be 14:00 at 28700 when we closed above 10 and 20 exponential moving average.

Later in the day I tried to go long, trying to find a bottom at 15:55 and later at 16:45 and both trades closed as losses. Loss for those two together was around 140 points, so day was closed with 80 points loss.

As I’ve analyzed chart tonight I realized that instead of trying to find bottom around 15:55, much easier and better trade was to go short at exactly the same time with very tight stop loss of around 30 points. That short could have easily gone all the way till the end of the day and it would have pocketed anything between 200 and 300 points.

So, today’s two good trades were short 28820 around 11:40 with 30 points stop loss and with close at 28700 for 120 points profit and second one was short 28700 around 15:55 with 30 points stop loss and with close for 100 points profit (to be modest). That would make you 220 points profit on the day when daily range was 610 points or 36% of daily range.

So, two lessons to learn from today’s experience:

- Don’t try to catch tops and bottoms, especially when market is up or down 500 points;

- Patiently wait for good setup, as it will happen at least once a day and can easily make your day.

Our job as a trader is to make money, not to trade. If you can make your daily target in one trade, relax and enjoy.

Trade with trend!

Top40 30minutes chart

Today market is dropping so far, it is 260 points down as of 10:00, so let’s take a look of 30 minutes J200 chart to see what is telling us.

From September 2009 nice trend developed and it was not penetrated even once. It was tested three times. As of 10:00 trend line is around 28700 or some 50 points away. It is easy to notice rising wedge with top line connecting 4-5 recent tops.

Target for wedge if trend line breaks is around 26600 (red line on chart) and that is exactly where last break out happened. Top40 was stuck between 26500/600 zone and it broke above in October, after that it tested break out point few times and continued higher.

Levels to watch on downside are 28200 and that was last major low. Bounce can come from around that level. If that is taken, then 27100 is next target.

Trade with trend!

Intraday trading part II

Over last several days I’ve got few e-mails from people asking when to exit their positions and this blog post is going to address that important issue.

I’ve tried to explain in post titled Trending or range day what one side of the medial is and how to distinguish between trending day and range bound day. Today I will take a look at daily range distribution and see what it is telling us.

First chart shows daily range distribution for ALSI from just before December 1st, 2008.

Second chart is from May 4^th, 2009, date on which, I would say, our market changed. Volatility evaporated, market changed from follow through to mean reverting and trend following systems started to struggle, while profits on some of them got halved form 2008 to 2009 and then dropped again significantly in 2010. 

In this sample, there are 431 trading days and one can see that only 23 days or 3% were with daily range above 700. Most of the days were in the range from 200-500 points.

So, why are we publishing all these numbers and charts?

I would like to couple this information with the goal that was made in post titled How to become intraday trader. Stated goal was to get 10% of the trading range in the first three months of trading. To get 10% of daily range one must make at least 40 points in a day. So, answer to readers who emailed asking about exits is a very simple one: If you enter position and it went in your favour 50 points I would recommend to close it and wait for next signal. This will be good example to practice your discipline. As we grow as intraday traders will shift this boundary and will try to start taking more points when they are available, as final goal is to trade only when there is reason to trade.

And to finish off, I would like to quote one blogger: “Success doesn’t come easy, especially in trading. But if you can focus on your game and not dream of the million dollar carrot on the horizon, I am sure you will succeed.”

Trade with trend!

Top40 end of the week chart

Second week of trading in 2011 was very nice, especially sessions on Tuesday and Wednesday. After four days of weakness market bounced nicely and on Wednesday J200 broke year to date high, making one more on Thursday. Finally, on Friday J200 showed weakness in the first part of the day, but bounced strongly towards the end of the day, with ALSI futures making fresh year to date high after cash market closed.

Currently J200 is trading above all major moving averages - 10, 20 and 50 and, so far, trend is very much intact. Close on Friday was at 29226 and that is 2167 points or 7.4% away from all time high at 31393. I’m of the firm belief that we are going to see new all time high and most probably that is going to happen sooner rather than later, as too much free money around the world is looking for home and emerging markets are favourite number 1.

Having said in mind, I just want to point that chart is showing some serious negative divergences on RSI and MACD. Negative divergences are not selling signal by itself, but triple negative (or positive) divergence could be a warning signal. One trend line is around 28500 together with 50 ema and the second one is way down around 25000. If/when those negative divergences play out market will correct very sharply and strongly. If one holds long term position, good place to close is close below 50 ema, but be ready to jump in long again quickly. Dow theory short will be close below 28194.

At the end, just want to conclude by adding that I don’t think this bull market is in any danger. For as long as interest rates in major countries are at zero or close to it, that is not going to change.

Trade with trend!

Friday reading

Interesting article!

Why Chinese Mothers Are Superior

SMB:

Delisting Stress

The Big Picture:

Inflation’s Impact on S&P Price Return (1871-2010)

Can You Get Fear “Wrong” ?

The Talent Code:

Have You Had Your Vitamin S Today?

Not much, but it is end of the week, so it is time to go home.

Trending or range day

The biggest question every intraday trader must have in the morning is what kind of the day market will present.

If market is trending during the day one could use moving averages and if market is stuck in the range one could use support/resistance trading paired with Stochastic oscillator. Problem is to know well in advance what is going to happen on that particular day. Obviously, nobody has crystal ball to tell us around 8:30am what is going to happen later in the session.

As an example let’s take a look on yesterday’s trading day and let’s see if we can spot anything that can tell us what to do?

First picture is screen shot from the first part of the day from open till around 13:00. As we can see market started slightly lower than it closed on Tuesday, ran up to drop for few bars and around 9:20 it broke opening range. This should be your entry to long, especially because we had very strong Tuesday and continuation is more probable than change of the trend.

After this break ALSI was running on 10 ema (green line) until around 12:00 when it closed below 10 ema for the first time. We were entering quiet period of the day in that stage (from 12:00 to 15:00), so you could assume that trend is running out of steam. Second warning signal should be close below 20ema (red line) and there about one should have closed long for potential profit of about 170 points.

So, now let’s see second part of the day from around 13:00 till end of trading day.

As you can see on this chart market was stuck in the range from 28120 to about 28220 for the rest of the day, not counting last surge after cash market closed.

As we can see on that chart, it is obvious that market was bouncing around 10 and 20ema. In this case one can use one of two options: One is to determine range border and wait for any of them to be broken, or to short top side of the range and go long bottom side of the range. Also, maybe the best option for me was to take rest of the day off because you made enough that morning.

So, trending day or range day?

If market is closing above and below important moving average (10 exponential and 20 exponential), where those two moving averages are close to each other and crossing each other all the time then one should use techniques to trade range.

If market is riding one of important moving averages, then it is time to sit and relax and enjoy your ride. In this case don’t be tempted to take 50 or 100 points profit because days like this can easily turn into 200-300 points day. Close your trade only when there is reason to close it, not because you made “enough” points.

Trade with trend!

How to become intraday trader

In Thursday’s post I questioned if it is not maybe better to start with intraday trading. (Under intraday I mean trading with no overnight position as positions will be held only during the day.)

I am a swing trader and I was a swing trader for last 7-8 years and such transition will be a new challenge, but I’m looking forward to it. In other words, I’m becoming old and having position overnight, being glued to Bloomberg or Stockcharts is simply not for me.

How would I approach this transition?

Firstly, one must have systematic approach for entries and exits. Many intraday traders are using pivot points and that would be main trading strategy. To spice everything up I will add some moving averages - 10 and 20 exponential and 54 volume weighted moving average. Entry points will be at failed pivot points, short or long depending on market bias and exit will be on the test of significant moving averages or other pivot point. Main issue with trading intraday is to have tight stop loss and to be discipline enough not to question it.

Why pivot points as main trading strategy?

Again, I will refer to Thursday’s post in which daily range is outlined to be around 400 points. Over last 18 months average distance between pivot point and R1 was 51% or some 200 points per day. Distance between pivot and S1 over same time was 49%, so approximately 200 points again. This is logical, because if you deduct S1 from R1 you will get daily range.

So, what are the milestones in this process?

First one is to make 10% of average daily range over next 3 months.

Second is to make 12.5% of average daily range over next 3 months.

Third is to make 15% of average daily range over next 3 months.

And last is to make 20% of daily range over next 3 months.

That way at the end of 2011 I will be in position to make about 80 points on average per day, or about 19000 per year.

To make 20% of daily range maybe looks like a big target, but don’t forget that 20% of daily points is not even half of what the difference between pivot point and next major point (S1 or R1) is. And market is not going in straight line from low to high.

Will elaborate further on the topic in days to come.

Trade with trend!

Top40 end of the week chart

First trading week of 2011 was an exciting one: First two days were up days with small range. Market made 52 weeks high on Tuesday at 28947. On Wednesday bears came out and pushed market lower - some 420 points on close. Thursday was again slow green day, which leaves us with Friday when bears were in control again.

Currently Top40 is trading below 10 and 20 exponential moving averages and that can be a warning signal. If you are trader who wants to catch swings lasting for a couple of days, you should be short already. Next line of defence for bulls is 50 exponential moving average that is around 27950, as well as trend line which is around 28100.

Major indicators are pointing towards more downside. Stochastic is at 45, MACD is around 200 and RSI is at 51. All recorded negative divergences from peak on November 15th and one on Tuesday.

Is this change of the trend?

I don’t think so. Market is so close to all time high that it will probably get there. This must be normal correction where market will get rid of access fat (overbought) that was accumulated over holidays. If you are looking to go long or add to long position, this will be good chance, but don’t rush into it and wait for a bit more downside.

Trade with trend!

Sunday Reading

Bespoke:

Bull and Bear Market Lengths

Country Market Caps

Percentage of Stocks Above 50-Day Moving Averages

The Big Picture:

Long Term Stock Market Growth (1871-2010)

Apple the Sovereign

SPX Index Secular Markets (1900-2010)

Trading the Odds:

Will Too Many Bulls Really Make a Bear ?

VIX and More:

The Year in VIX and Volatility (2010)

and better version of the chart is here:

Some interesting stats

Over last couple of days on some Internet chats story about volatility came up again. People are complaining because there in no enough volatility and they can’t make money. Daily range on ALSI is steadily declining and if we take last month into consideration it is well bellow the average.

So, I did some small exercise to find out how many points were available over last four years:

Year      Amount of all points available – Top40          Daily range
2007                   111.395                                               464
2008                   175.971                                               733
2009                   118.814                                               495
2010                    97.297                                                405

Number of points made (as percentage of total points available) by one of our systems is declining slowly from around 17% to 10.2% currently, so we are getting declining monthly returns. Reason for that is most probably lack of follow through over last 18 months or so.

So, question that I want to ask - Isn’t maybe time in South Africa to start considering intraday trading (like in US)? If you can make 20% of daily range every day you will easily beat probably all systems.

Trade with trend!

Gold – daily chart

I was scanning through my charts and GOLD chart popped out as very interesting one.

Gold is in massive bull run, as you can see from this daily chart.

Is that going to continue?

There are some warning signs on that chart. First, market developed three push pattern on October 18th, November 9th and December 7th. Also, next swing high didn’t break previous one, so lower high was made.

Currently gold is trading below 10 and 20 exponential moving averages, but it is still above 50. If gold closes below 50 ema, that is currently just below going price, possibility of testing red line will increase.

If you want to be less aggressive, possible short trade would be close below 1361 low from December 16th.

Trend line is currently around 1263 and is resting exactly where previous major high was. So, some 100 points could be made on this short.

Stop loss is obviously close above 1431, which is previous major high.

Trade with trend!

Mid week reading

Afraid to Trade:

2010 Intermarket Relationship Charts with the SP500

Popped Stops and History Repeating in SPX

Bespoke:

Overbought The Entire Month of December

Final 2010 Global Market Performance

Mark Goulston:

How America Messed Up Its Kids... And How We Can Fix Them

David Fry:

A Look at Base Metals

Derek Hernquist:

2011 Goals

SMB:

Dear readers, this is one great post and great series. Comments are excellent.

My list: some ideas for finding tradable edges

The Big Picture:

What I Expect in 2011

How the World Has Changed from 2000 to 2010

The Talent Code:

Got Passion? The Quiz

Trading the Odds:

Implications of 2010 Year-End Returns

A Perfect (Bullish) Score, if …

Top40 30 minutes chart

Most of the time people trading one time frame get so focused on it that they can’t see what is brewing on other time frames. Best approach it to have global picture and one level lower time frame than yours and, of course, time frame that you trade. Even Dr. Alexander Elder recommends using 5 times bigger time frame to determine trend for time frame you trade. So, for example if you trade 5 minutes time frame one should first check 30 minutes chart to see what is going on.

We are going to do exactly that tonight:

As you can see from chart above, there is nice clear trend on 30 minutes J200 (Top40) chart. It was started on December 13th and it is still intact. Currently trend line is around 28650 and break of that level will signal change of trend. We have to be honest and note that market is not really steaming up, as it is easy to see that new highs are smaller every time they are made, but there are still being made.

There is a rising wedge on that chart, for my liking is too extended, as I prefer to see wedge breaking earlier. This is bearish pattern and there are around 700 points in it if it breaks, of course.

For now, 30 minutes chart does not show any weaknesses, we are solidly above 10 exponential moving average and long trade on your 5 minutes time frame should be taken more aggressively and short trades should be ignored or tight stop loss should be in place.

Trade with trend!

Top40 end of the week charts

After some quiet period Alsi Trader will continue to publish regular updates and will try to progress further together.

Firstly, I would like to wish you Happy Trading in 2011 and to become best trader that you can be.

Let’s start 2011 with weekly and daily charts of Top40:

First chart is weekly and I’ve chosen it for one reason only - Last three years started with market dropping for 3-5 weeks in a row. I am not saying that this will happen again this year. As Mark Douglas says: ”Every moment is unique”, but I would choose to keep an eye on this curious development.

The second chart is daily Top40 chart and it points to extended market, with some visible negative divergences. Negative divergences are not trading signal by itself and certainly not confirming it is time to change trading side, but one must keep an eye on them.

If we continue with trend from previous years and if market goes for correction over first few weeks, levels to watch are 28400 (previous resistance now support paired with 20 exponential moving average around same level); trend line coupled with 50 exponential moving average that is around 27900 currently; further down 26500-26800 area.

On the upside, there are not many resistance levels all the way to all time high at 31393 or some 2640 points away. I have no doubts that Top40 will reach new boarders this year and if I can be brave with my prediction - It will happen in the first three months of the year.

Trade with trend