Short BNI

I Shorted BNI this morning. The rails have been very weak over the past few months but have spiked over the past week. BNI failed at it's declining 10 day moving average and below it's breaout level. It also made an evening doji star formation. I'm watching the SPY closely however. If it shows some strength i'll drop this trade faster than English Comp 101.

SMH is a Mixed Bag

Below is a chart of the SMH, an ETF tracking the Semiconductor industry. It is an example of what we are seeing in a number of other industry groups; conflicting stories.


First we are still in a wicked downtred, evidenced by downtrending 150 day moving average and the distance we are below it. The next thing you'll notice is that we are now in a wedge pattern (lower highs and higher lows). While the green line has provided support over the last couple of months, the blue line has acted as resistance. I've extended the blue line with a red line showing where that downtrend could come into play over the next couple of trading sessions.

We have a momentum divergence, showing that the downtrend has slowed. Until we get a breakout from the wedge that has formed, I would not be too excited about long positions here. And even if we do, our expectations should be tempered because once again we are in a nasty downtrend.

One thing I have been hearing from alot of traders is that we have seen a decline on higher volume. While this is true and volume does give us clues from time to time, we should really be focused on price action. The reason i'm emphisizing this is because we had extremely low volume coming out of the holdiday season. The increased volume from Jan 1 to Jan 20 could have simply been normal volume coming back into the market.

The SMH does look a little more bullish than the rest of the charts, but thats not saying much. We really just have too many conflicting signs on different time frames. Until we get a real break one way or the other all positions (long or short) should be monitored very closely.

Bullish on the Airlines

Over the past few months there have been very few bright spots in the market. The broader market averages look like they are trying to bottom, but it will likely many months ( I'm guessing the second half of this year) before we will see a tradable rally in them. The Airline Industry is one of the few Industry groups however that looks like it wants to rally first. The first thing to look at is it's 150 day moving average. It flattened out over the last couple of months of last year and has started to trend up. Also, the XAL Index has also held up well against the S&P. It''s Relative Strength line is plotted out on the chart below. Higher highs and higher lows over the last few months have also been encouraging.

If we believe the Airline Industry is going to rally before the rest of the market, then the next step is to identify the stocks in this industry that will perform the best. Below is a list of 19 publicly traded airlines, sorted by their 3 month performance.

Out of this list, I found a few individual airlines that look the best.

First is SkyWest (SKYW). The first thing to note about this stock is it's increasing relative strength. It has been increasing since last July and held up well through the downturn in the last half of last year. It looks like made a higher low on the 27th, holding above it's 150 day moving average (which has started to trend up bullishly). Note a strong resistance level around $20, which dates back to 2003. A break above this level would be very bullish.


Airtran (AAI), Continental Airlines (CAL), and Alaska Air (ALK) are all the same story. Improving relative strength, a flattening out of their moving averages, as well as higher highs and lows since last summer.

Airtran (AAI)

Continental Airlines (CAL)



Alaska Air (ALK)

Over the next few months we may find the other Airlines will start to stand out above their peers. I encourage to look into all the Airlines I posted and find the ones you think are the best. The action we are seeing in this Industry group however should give us confidence that some of these names should rally well before the broader market does.

Key level for the SPY

Below is an hourly chart of the SPY showing a gap up above a key resistance level. This move up could cause some short covering. I'll be waiting to see what comes out of the Fed, although they can't really do anything to influence the market. It will manily be their commentary that may make it move. If we do get a positive reaction after the Fed meeting, we could be heading up towards the $93-$94 range.

OIH

The OIH was one of the pest performing industry ETFs today, and has been making a nice basing pattern over the past couple of months. Price closed above it's 50 day moving average and we could see a move up to $89 to test its previous high. The MACD has also been divergent for the past 3 months as well. Although this chart is starting to look a little better, expectations should be tempered until the 150 day moving average comes down a little closer to price. I think that over the next couple of months it will be in a good position to break above the $103 area. Watching the USO can also help us identify whether that breakout will be sooner or later. Until that time it is an interesting ETF to keep an eye on.

Long Term Trades (Part 2)

In this second part of my Long Term Trades post, I decided to look at DNR. As I said in my first post, I'm looking back at some charts to see where I would have gotten in and where I would have exited. Although I usually use much more than what is shown on the chart, it is a good way to demonstrate that simple indicators such as moving averages are one of the most useful indicators.

Like the stock in my last post, DNR consolidated for about a year before breaking out in April of 2007. It broke out above it's downtrending resistance line (green line), as well as it's trading range (orange lines) that had contained the stock's price for previous 9 months. Looking at the moving averages we can see that they flattened out during the consolidation, and actually started to trend down for a few months. On the breakout, the 40 week moving average was flat while the 30 week was starting to trend up. You could have safely entered the trade at $16, with a stop a little below the breakout level.

The moving averges genneraly held the trend over the next year and a half. There were two times over the period that price put in a wick below the 40 week moving average, but a stop a little bit below the the moving average should have kept you in for most of the move. If you were worried about your position on these violations of the moving average, you could have looked at the relative strength and seen that it was still trending up nicely.

In July of 2008 DNR finnaly broke down, closing the week below it's long term moving averages. Exiting the position at a price of $28 a share would have given you about a 75% gain over the holding period.

Bought some FDS today

I got into some FDS today on a pullback. It has a nice horizontal support line at $40 and is also supported by it's 50 day moving average. The stochastic oscillator is also very oversold. If we get a bounce in the market over the next week, like I am expecting, this trade should perform well. I'd like to see this thing get above $46, and I have a stop in below it's 50 day Moving Average.

Good example of Consolidation

Below is a daily chart of CECO. This is a good example of a stock making lower highs and higher lows, forming a triangle. Over the same period you can see the stochastic going form oversold terriroty back towards 50. What this tells us is that some of the buyers are taking profits, but not so much that the price is falling dramatically. When you have the price move essentially flat but the stochastics are trending down, its often a sign that the stock is just making a correction instead of a trend reversal. This would have been a nice short term trade to get in once it broke out of the triangle on a gap up. Unfortunately I was looking at CECO on a longer time frame and failed to recognize the pattern.

Update on USO

Updating my January 7th post, it seems the USO has made a higher swing low above the $28 level. It now looks poised to test it's previous swing high around $39. The MACD is still divergent and we are still seeing heavy volume. One thing to note however is that the declining 50 day moving average could act as resistance on the way up.

Long Term Charts (Part 1)

I was looking over some older charts this weekend, and look for places that I might have entered and might have sold. I looked at these charts using very simple technical analysis. I used 150 and 200 day moving averages, as well as support and resistance lines. I also highlighted Relative Strength in one instance. This is a good demonstration to someone who is new to technical analysis. It shows that even though support, resistance, and moving averages are the most basic of the approach, they are also the most important. Note that when I trade I'm looking at a lot of other things, this is just a demonstration.

The chart below is of CEDC. Notice how after an extended uptrend ( some of which was cut off to the left of the chart) it consolidated for about a year. The moving averages started trending down and price bounced off of it's declining trendline multiple times. Finally in October of 2006 it broke out and ran to about $30. Those who were not convinced about the initial breakout could have waited for a pullback that happened in March of 2007. You could have entered anywhere around $25-$28 range, with a tight stop at $24. This pullback was supported not only by it's previous resistance line, but also it's upward sloping moving averages. You would have easily caught a double over the next year or so. The moving averages started to flatten out around August of 2008, at which point price violated it's moving averages by quite a bit. Even if you didn't get out until price fell to $55, you would still have a nice gain on your hands.

Possible Divergence in the SPY

Below is a chart of the SPY, showing the reasons I was comfortable entering some long positions over the fast few days. First, the SPY halted it's decline right around the lows (excluding the two extreme days in November which for now I consider outliers). Second, the MACD has been trending up while the SPY has been trending down. This tells us that the decline is losing momentum, and possibly setting up for a nice reversal. There is a good chance I could be wrong, which is why I have very tight stops on all of my positions.

CFX

I got into CFX this morning. I really like the daily here. It's been in a nice uptrend since October, and has pulled back here to it's 50 Day MA. It's worked so far today, but we'll see where it goes. I'm still cautious because of the overall market, so I have a pretty tight stop on this thing.

CFX

Tracking Gold

Just an update on Gold. It broke above resistance today pretty convincingly. My DROOY position I highlighted yesterday is looking ok right now, although I would have liked to have seen more volume.

GLD

Looking at a Gold Miner

A couple of weeks ago I made a post stating that I think the price of Gold was heading lower. Gold did break below support, but then quickly rebounded and headed back up towards the high end of it's range. This made me rethink my stance on Gold. It's important to realize when your wrong (or possibly to early). I still think Gold could breakdown below support, which I pointed out on January 7th, but at this point I decided the better play would be to look for some long positions in gold miners. Below is a chart from Finviz (a great site by the way) that shows the performance of Gold related stocks.

They had a nice move up from their November lows, consolidated, and now look poised to move higher. A few of the better are now above their 150 day MA. One of the smaller ones i'm folling is DRD Gold Limited. It has a nice level of resistance that was prior support late last summer. From the middle of November to the middle of December DROOY had a nice move up, then consolidated right under resistance. Look for a breakout on increased volume.

DROOY

Looking at NUE

I ran a scan for Negative Divergences in price and TSV within the S&P, and I came across NUE. (Note: TSV is a technical indicator that measures the money flowing in or out of a stock) Price made the same high in lated December and early January, while TSV made lower highs and lower lows. Price also failed around $48.50, which was prior support going back all the way to 2007. A downward sloping 150 day moving average will also act as resistance.


Nucor (NUE)
Created using TeleChart

Review of Jack D. Schwager's Market Wizards

Another one of my recommended books is Jack D. Schwager's Market Wizards. This book is a collection of interviews with some of the worlds best traders and money managers. The book focuses more on the stories of the traders and their philosophies, and less on techniques.

I found a few things in this book that I think should be noted. First, I found it very interesting how many of these great traders did really dumb things when they first started out. One of the first interviewees had never even engaged in the simple buying or selling of any type of security before he wiped his account out in the matter of weeks. He then went on to round up more capital and eventually became very successful. There were a lot of simple errors they made that I am glad I did not have to learn the hard way. This book can give you a gauge of how successful you have been relative to these great traders at the same point in their career.

There is one topic that is stressed over and over again by all the traders, and that is money management. Many traders had a "life changing" experience where they realized they were taking on too much risk, and all of them have attributed a large part of their success to their money management. Some have hard set rules such as never risking more than 1% of their capital, while others have shut points so they can only lose so much in any one month. Whatever their system is, the important thing is that they all feel it is an essential part of their success.

Just like Stan Weinstein's book, I've included a link to Amazon on my main page if you are thinking about purchasing the book. The link is on the right hand side about half way down the page. I would again urge you to read other peoples reviews, because they are probably better than mine. This book is cheap too, you can buy a used version for under $8.00. I think you'll find that this is one book that is both informative and interesting and will motivate you to be a better trader.

Watch CECO for a Long Term Breakout

I'll be keeping an eye on CECO in the coming days to see if it can breakout of a year long basing pattern. A couple of important things have been happening in this stock. First, the 150 day moving average, which CECO is trading above, has stopped declining and has flattened out. Next, the Relative Strength has been on the rise since about April of 2008. The last thing I noticed was the big increase in volume today. It traded 4.4 million shares today, while the average over the past 4 weeks has been 1.3 million. It is important to wait for a follow through on price and conformation in volume. This stock tried to break out in September 0f 2008 on above average volume, but failed as price did not follow through. If CECO continues to rally through resistance on strong volume I'll be looking to enter a long position.

While I generally just focus on technicals, I will note when a stock's general fundamental story lines up. While none of the basic fundamentals (such as P/E, PEG) look all the great (except for debt levels), the industry that CECO operates in is a good one. The education services industry has been an outperformer over the past year. As employees lose their job, many are motivated to go to technical schools that offer degrees in a short amount of time. This is the exact business that CECO is in.

With both the technicals and fundamentals lining up, I would be a buyer if CECO does follow through on the breakout.

Career Education Corp (CECO)

Watching The Financials

Below is a 30 minute chart of the XLF. As you can see we've been in a trading range for the past month or so. There's a key level of support around $11.50 which it is fastly approaching. It's held around $11.70 today and I thought about getting long there but never did. It looks like this thing want's to break down so i'll be watching it closely the last hour. I think if we can hold the $11.50 area on Monday then it would be a pretty enticing long position. If we break below that level however, then look out below. This thing could easily be at $9.00 in a couple of days.


30 Minute XLF

Review of Sam Weinstein's Book

Sam Weinstein's book Secrets for Profiting in Bull and Bear Markets is probably the best book a beginner could buy. Weinstein outlines the basic price structure of stocks; support, resistance, and moving averages. He also explains in great detail the four stages of a stock; Stage one base, Stage two uptrend, Stage three top, and Stage four decline. These basic principles are essential for a beginning trader to make money in the stock market. He gives multiple examples for everything he talks about and gives charts of many of his past trades.

The two things Sam focuses on the most are how to identify the companies that are poised to breakout, and how to get into and out of the trade. He also discusses in lesser detail some well known chart paterns such as Head and Shoulders, Double Top, etc. While these things can be profitable to trade, it won't matter one bit if you don't under stand what stage a stock is in. The basic priciples that are covered in this book are very important to profiting in the stock market.

The book was written in the late 80's, but these basic priciples still apply today. You will probably notice as you surf through different trading blogs that this book continually appears on people's sites. That is because this book was important to these traders when they were first starting out.

I've included a link to the book on Amazon on my main page. It's on the right hand side about half way down the page. I would urge you to go ahead and read the reviews others have written. You can purchase the book for under $10, so dollar for dollar, this is probably the best book you could buy.

Advance Decline Index shaping Up

I thought this was an interesting thing to think about. The Advance Decline Index has continued to improve over the past few weeks. We haven't seen the index this high since the huge decline in October.

Possible Short Opportunity

The market has had a nice little rally over the past month and a half, and began selling off some yesterday. While looking over some charts I ran into Tesoro, which looks like a pretty good short candidate. The stock has rallied over 100% from it's November lows and has run into some resistance. First, it's trading right around it's declining 150 day moving average. It closed slightly above that level today, but a move back below it would be bearish. More importantly however, is the horizontal resistance line I have drawn on the chart. This resistance was prior support that tested and held in July, August, and September. It finally broke below that level in October, and last Monday was the first time it has been retested. Stochastics show that it is overbought, so I would wait until they cross back below 80. At that point I'd look to short it with a stop in around $15.50. I think this thing could potentially go to 9, so the risk/reward ratio looks like it should be pretty good.

Tesoro Corp (TSO)

Market Recap for January 7th

Pretty much everything was down today. The only ETF's in my watchlist that were up were foreign currencies and LT Treasuries. The pullback shouldn't be a suprise, as we have quietly been puting together a 20%+ rally over the past month and a half. I think a good target for support in the Dow would be 8500.

Dow Jones Industrial Average

The foreign markets lead the US markets at times, so let's look at a couple to give us clues as to where we might go from here. The Chinese market (FXI) gapped lower today and it looks like it is headed towards support of $27.50. Action overseas tonight will dictate where this market is heading.

FTSE XNHUA (FXI)

An interesting market to look at is the Mexican market (EWW). This market has continued to make higher highs and higher lows. Last week it was able to catch support around the 23 day moving average (purple line). The decline stoped around this moving average today, so it will be interesting to see if the EWW bounces tomorrow. If it does, it could be seen as a leading indicator for the US markets.

MSCI Mexico Index (EWW)

Gold

Below is a daily chart of GLD, an etf that tracks the spot price of Gold. Last week we rallied up to a downward sloping resistance line. Some analysts were saying that we were near a breakout point in a long term pennant formation. Since then we have fallen back towards a shorter term support level at $81.75. I am suspect of the recent rally in Gold because of the long term trend and volume. We were in a Gold bear market for all of 2008, and only a break above the resistance line we make me think differently. Second, the 3 month rally we have had in Gold has come on relativly light volume. I think GLD will probably break below support at $81.75, at which point I would think about entering a short position.

GLD Daily

Turning Point for Crude Oil?

Below is a chart of Crude Oil, via the USO. As you probably know Crude has been in a bear market since last July. A couple of interesting things have been happening though over the past few months. First, as crude continued it's slide and made lower lows, the MACD failed to do so. It actually has been increasing since the end of October. The recent swing high failed to make a higher high, which would have been very bullish for it. In order for sentiment to change the USO will need to hold it's ground and make a higher low above $28. The other thing that has happened is a dramatic increase in volume. Daily volume has been almost double it's 50 day average the past week. I would be interested in entering a long position if we can hold above the $28 level in the USO.

USO Daily

Dow Jones Swing Study

Although I feel the recent really will ultimately turn out to be a bear trap, the intermediate trend is up. I used the swing lows to draw an upward trending support line. The past three days we have been trading right around the recent swing high of 9050, which could act as resistance. If we break through that level we could rally up to resistance of 9650. 8500 would be a possible level of support if we fail to break through current resistance. A break below the most recent swing low could signal the market is ready to resume it's downward trend.

Dow Jones Industrial Average

Tracking the Pound

I'll be keeping an eye on the Pound via the FXB. A new low was made at the end of December, yet the MACD has been rising since the middle of November. I would wait and see if we could get a breakout above $150, at which point it would be above it's 10, 20, and 50 day moving averages. I'd wait for a small pullback before entering a long position.

FXB Daily

Head and Shoulders in NYX

NYX looks like it may be forming a reverse head and shoulders. I would look for a volume expansion on the breakout. The height of the formation would give a target somewhere in the 40's.



NYX Daily

Watching the SPY Tomorrow

I'll be watching a few things in the SPY tomorrow. First, the Stochastic crossed below 80 on the hourly timeframe today, so i'll be interested to see if we cross back below the breakout level or if we stay above it. Looking at the 5 minute bars, we made an intra day low of $91.89. I'll be looking to see if the SPY can take that level out if we trade below the breakout level of $92.20. Next is volume. If we make that move down on any kind of volume, i'll be looking to enter a short position. Overall we saw a lot of indecision in the market today so i'm going into tomorrow very cautious.

Harami Cross?

By TD Ameritrade

With the S&P open and close less than 2 points away, we got a doji on the daily. Combined with the white candlestick from yesterday could be viewed as a Harami Cross. This usually signals a trend reversal. This pattern is far from perfect however because the prior candle is not that long and the uptrend could be viewed as simply the past three trading days. I look at this a possible turning point from the rally that started from the November lows. I would look for selling pressure to confirm this formation.

Industry Overview

Here are the percentage change over the past month and past quarter for the ETF's I track in my watchlists.

Watchlists

Watchlists are very important. They allow you to monitor how sectors and industries are performing. Creating a watchlist with ETF's is the easiest approach I have found. I have two seperate watchlists, one breaks up the market into sectors and the other does the same for industries. I can then sort these watchlists by percentage change over any period. This is very helpful for finding parts of the market that are under or outperforming. In my watchlists I also include things such as commodities, currencies, and foreign markets. Below are some ETF's I use in my watchlists.

Sector:

XLB: Materials
XLE: Energy
XLF: Financials
XLI: Industrials
XLK: Technology
XLP: Consumer Staples
XLU: Utilities
XLV: Health Care
XLY: Consumer Discretionary


Industry:

DJP: Commodity Index
FXE: Euro
FXI: China
GDX: Gold Miners
GLD: Gold Spot Price
HHH: Internet XLP:
IAI: Brokers
IAK: Insurance
IAT: Regional Banks
IDU: Utilities
IGN: Networking
IHF: Healthcare Providers
IHI: Medical Devices
IYT: Transportation
IYZ: Telecommunications
KBE: Commercial Banks
MOO: Agri-Business
OIH: Oil Service
PBJ: Food and Beverage
PPA: Aerospace/Defense
PPH: Pharmaceuticals
SLX: Steel Producers
SMH: Semiconductors
SWH: Software
TAN: Solar Energy
USO: Crude Oil
XBI: Biotech
XRT: Retailers
FXY: Yen
FXB: Pound

$XAL: Airlines*

The $XAL is an index, not an ETF. The ticker may vary depending on what software package you are using. If you are interested in finding more ETF's to use, ETF Trends is a good place to look.

Where the Market is Heading

I think that with volume returning we could see a leg down from here. Many traders were on vacation until the "real" start of the new year, and there has been talk that a lack of supply has caused the market to rally. I wouldn't be suprised to see us go down and test the $85.50 level on the SPY. If we do get a follow through on the break through resistance we made last friday, I would look for a pullback to around $92 on the SPY before getting in on the long side. Any long positions I hold however are going to be very short term. The main thing to focus on is that we are still in a primary downtrend The market is below a downward sloping 150 day moving average and still has many resistance levels in front of it. The Chart below is of the SPY on an hourly timeframe. I have drawn possible support and resistance levels going forward.


SPY Hourly

Published by TD Ameritrade