Monday, December 12, 2011

The Gold Triangle

Feb Gold futures $GC_F have been consolidating into a big triangle the last few months since topping in early September. The price action has been less than bullish most of the last month forming a sloppy slanted head and shoulders pattern which should point to a move back down to 155 at the least. Gold tried to get back above the 1800 level--which was just about the 61.8% retracement of the entire decline from early Sept--but failed to attract buyers at that level and quickly auctioned lower.

Today the break of the big triangle is confirming that the gold market is going lower in the short term. The big signal to me was last week when gold ran up to 1760 and stopped on a dime and reversed back down to 1710 that same day to put in a bearish outside reversal candle trapping bulls above 1750-1760. That usually indicates much more than a 1 day move coming.

Looking at the volume profile chart you can see the big supply overhead that put a ceiling in gold and there is some decent support down to 1625 but below that there is a volume pocket down to about 1540, which coincidentally is also where the 61.8% retracement of the entire bull run of 2011 from 1309 low in January to 1923 high in September.

  • Today, the TTM trend turned back to confirmed sell signal with two red bars on the daily.
  • The DMI also is in bear trend mode with the histograms still red, saying the sellers are in control.
  • I dont think gold crashes into the next month but short term the risk is to the downside no doubt and shorting rallies into resistance is a profitable strategy.
  • The 200 EMA on GLD is near 157 and that looks to be tested if today's high (1718) is not regained.
  • I would look to buy January puts or put spreads on any bounce back to the 1680s on the gold futures or about the 163's on GLD.
  • Also for daytrading the gold futures are a great contract to trade for intraday and should provide plenty opportunity going into 2012 as well.
  • Long term I think gold is still alright on the monthly chart and should hold 150 on $GLD during this correction before it starts a new uptrend but not right now, there are just too many trapped bulls who bought the parabolic climb in late summertime and are now providing the fuel on downside as they sell. 

Saturday, November 19, 2011

GOOG Option Trade Review

One of my favorite trade setups for stocks during options expiration week is the "pinning trade" that shows up late in the week or the day of expiration. Long story short, I look at a stocks open interest and if there is considerable OI present at one strike versus all others then I like to then look at the short term trend and momentum of the stock to see if it likely that a move towards that high open interest strike price unfolds. This logic of pinning and why it happens is a whole post for another day but here I just wanted to do a trade review of my put spread trade in GOOG from Friday that I tweeted out live.

GOOG traded between 601-604 in the first hour of the day and I already saw that the 600 strike had the most open interest out of any strikes. It also is a good round number that traders monitor. So while I watched the market chop around slightly higher and tech kind of weaker overall on the day I kept my eye on GOOG and if it traded with any intention of going towards 600. The plan was to buy the slightly in the money 605 puts and look for a move to 600 AND THEN short the 600 puts to be in a vertical spread and expect the stock to pin at 600. Even if the stock tanks below 600 I still make the spread. My max risk on the trade was basically above the high of the day which would have risked about 1.00 on the spread.

Thought Process:

  • Watching the 5 minute chart on the left I took alert when the TTM trend bars closed 2 red candles in a row. At this point I see the stock decisively below the VWAP (red dashed line) and a fresh TTM squeeze setting up as shown at the bottom of chart. I want to buy the 605 puts on a pop back to the VWAP expecting the stock to roll over to new lows.
  • As the arrow shows I scaled into the 605 puts where I marked the blue vertical line. I added to the position a few minutes later as the VWAP held as intraday resistance. 
  • My mental stop was the highs and if GOOG broke down under 600 as planned I would put in a hard stop at breakeven to ensure no risk on the trade.
  • Within 20 minutes GOOG tested the 600 level and I shorted the 600 puts to create a vertical put spread at an average price of 2.25.
  • The TTM squeeze fired off a short signal and GOOG fell all the way to about 594. In hindsight, it would have been nice to simply be long the 605 puts with no spread but I cant trade in hindsight.
  • The max my 605/600 put spread could be worth would be 5.00 since that is the difference in the strikes. That max wouldn't be reached til near the close when the premium evaporated so I was very happy with simply selling for 4.75 if I could instead of being greedy for the last few dimes.
  • By the next hour I was filled for 4.75 on the put spreads after an entry of 2.25. A gain of about 111% or +2.50 per contract.
  • A huge winner for a relatively small move in the stock, percentage-wise. That is the best part about using options and spreads during options expiration when you know the likely strikes that are in play for pins.

Wednesday, November 16, 2011

Dollar Index Wants Higher

As a follow up to my previous Euro post I thought I would look at the dollar index and where it might be headed. The dollar index futures have been in bullish mode for most of November as it bounces off its 13 day EMA and holds the 200 day at 76.79. It has now gotten above and CLOSED above the 61.8% retracement of the down move during October that took the dollar from 80.46 to 74.86. Because of this I think it will bring in more buyers on any dip back to the mean. I think at the least there should be a retest of 80 coming soon and eventually Fibonacci extension targets as shown in the chart point to a move up to 81.94. This fib target would make alot of sense because it matches up with the 52 week high from January at 81.63.

If the move really gets legs in the longer term the second target would be the 161.8% fib extension of 83.87. That would be quite a move and while I doubt we see it that high...the possibility exists.

The TTM wave in the chart is positive saying bulls are in control in this timeframe. Momentum in the squeeze is rising also. If the dollar index continues to rally towards 80 it would make sense the foreign currencies like AUD, CAD, BP, EUR would sell off and all of these daily charts are in bearish trends at the moment so it matches up well.

Wednesday, November 9, 2011

VIX a Sale at 40?

I will be watching the VIX and the 40 level to look at selling volatility in stocks. The main reason is based on the LRC I have on the chart. The linear regression channel I use shows when the market gets too stretched in one direction based on its recent activity. The outer red lines are two standard deviation bands and the LRC channel dynamically updates in real time. The outer band is sitting near 39-40 so this will likely be a tough level for the VIX to sustain above for more than 1-2 days. This is also a very similar concept to using the bollinger bands on the VIX.

  • If/when the VIX tests the 39-40 area it would probably also mean the SPX is testing the 1200-1210 zone of support. A big line in the sand for bulls going into year end.
  • Thanksgiving is in 2 weeks. That means holiday trading mode. It also means theta decay will start to be priced into the options markets in the next few weeks. 
  • It would take a lot of new information from Europe that isn't already somewhat priced in to get the VIX to explode thru 45-50 into the holiday season. Unlikely. Not impossible, but just not probable.

The easiest way to sell vol is to sell put credit spreads into support on strong stocks. Selling SPY iron condors works as well. Or maybe even just buying a calendar spread on the SPY going into the next month (Buying Jan/selling Dec). Expecting price to stay range bound and volatility to come in. Just some ideas here.

Apple Rotting?

AAPL stock has had a tough time attracting buyers above the 400 dollar level since it first got to it back on July 22nd. Since then it has closed above 400 on ONLY 21 days out of 77 trading days. Granted we have been in a pretty strong selling mode since early August but this just shows there is a lack of buyer interest at these high levels.

The earnings gap from mid October left a bearish island reversal top in place at the 426 high and AAPL has been struggling to hold the 400 level once again as it bear flags on top of the 50MA. This could be a pretty big turning point for the stock that has been so loved by Wall Street for so long.

AAPL is breaking hard with the market today and I think it has a date with the 389 open gap from Oct 10th. Below that there is little support at the uptrend line of the larger scale rising wedge near 375. The 200 MA is down at 362 and could be where AAPL is headed if it cannot get its act together and get back above 410 and attack that island gap top.

Looking at the volume profile on AAPL you can see the 1 year VPOC (volume point of control) or where the most volume has traded, is down at 346 so that is huge support if it ever goes there. But the thing to keep in mind is there is a decent volume pocket between 355-385.

Buying Dec puts on bounces is not a bad idea and then selling weekly's against them is a decent way to play a choppy to down move over the intermediate term.

Wednesday, November 2, 2011

Euro Gets Stopped at the 61.8% Retracement

The short covering rally in the EUR/USD since October ran up about 1000 pips and got stopped cold right at the 61.8% retracement of the larger downtrend in place since May 2011. Pretty amazing how these fibonacci levels work in the markets, especially currencies. The 1.4250 level has been a huge level of interest for the past year as this was where the Euro topped out in late 2010 and then found support throughout mid-2011 as the currency made a major top before falling to 1.3145.

Now after the bounce back to resistance it failed and slipped back below the 200 EMA which sits at 1.3955 on the daily. The daily chart has flipped back to a short term sell signal based on the color of my TTM trend bars and if it doesn't recover the 1.4000 zone soon it should continue a multi-month decline. 

This is even more significant based on the fact that the weekly chart is possibly forming the right shoulder of a bearish head and shoulders top with the slanted neckline shown below coming in near 1.3400.

This definitely depends on the direction of the dollar as well but I think in the intermediate term there are more downside risks to the Euro than the US buck. It will be interesting to see where the Euro goes into year end but last week's blowoff top at 1.4250 has all the makings of a important high that we might look back at in 3-6 months. If it does actually breakdown I can see the EUR/USD at 1.25 to 1.2750 very easily as initial targets.

Tuesday, November 1, 2011

Fascinating Similarities Between 2008 and Now

There are some crazy interesting similarities in price action between the present market and the early 2008 patterns of price. So I went back to compare the analog chart between then and now. I trade in the short term but I always have a view of the big picture. Just wanted to point out the possibilities of where the stock market might go in the intermediate term-long term. 

First chart shows the 5 year weekly chart of $SPX from 2006-present with some simple 50 and 200 period SMA's. The highlighted rectangles are what I am focusing on. Notice each top clearly shows a bull trap above previous highs and classic 6 month head and shoulders rounding formations which led to longs being trapped with plenty of supply overhead.

  • 2007-08: The Oct 11th high of 1576 to the March 17th low of 1256 was a decline of 20.3%
  • 2011: The May 2nd high of 1370 to the Oct 4th low of 1074 was a decline of 21.6%

Fairly equal percentage moves right?

Here is where it gets nutty.

  • Each decline from high to low lasted a total duration of 23 weeks.
  • Each decline found support and eventually bounced off the 200 week SMA
  • Both price lows were bear traps which undercut the previously made lows. In 2008 it was the March 17th "Bear Stearns" low.
  • Both of the subsequent rallies up were stopped at resistance at the 200 day SMA. In 2008 at a level of 1440 and 2011 at a level of 1292 SPX.

As the 2nd and 3rd charts show there are a few key differences as well.

  • In 2008 the slope of the 200 day SMA was pointing much sharper down than it currently is. However it is still pointed slightly down in the present 2011 market.
  • The rally back up off the lows was faster and sharper in 2011 than in Spring 2008.

Even so, I think its been interesting to keep an eye on the similarities between this analog chart and the present markets. History repeats itself because human nature is constant. I think this is even more significant because we have just had a 5 wave up bull market for the past 2.5 years and the long term investor sentiment is clearly bullish in the "acceptance" stage.

Remember the technical's move far before the "data" confirms reality because the market is the smartest in the room.

Simply ignore the outside noise and media and focus in on the pure price action. Clearly, it is not 2008. It is 2011. But like in the 1930's when the "great recovery" began, the government interfered and helped welcome the double dip recession of 1937-38. The public is losing confidence in the leaders as shown by the Occupy movement. A lot of the same ingredients are in place at this time so is the market predicting the same fate? We shall see over the next year!

Saturday, June 25, 2011

Trading Grains (Part 4): Managing Risk with ATR

To close out the mini-series of Trading Grain Futures I want to focus a bit on managing risk and how to maximize profit targets. When it comes down to it if you're not managing the risk on a trade you will not be around very long. When trading, my goal right off the bat is to know where I'm getting out in case I am wrong. I obviously take a trade because it shows me a high probability of making money but my focus is always the risk involved.Your job as a trader should be to always manage the risk to an acceptable amount related to your tolerance and account size. The winners then take care of themselves. 

So after discussing some of the ways I trade and analyze corn and the other grains futures in Parts 1-3 of Trading the Grains lets finish out this series with how I use the ATR to manage risk. The ATR is the average true range and I like to watch it on a number of markets and stocks to see how far a move can go. The ATR is a dynamic way to measure volatility in a constantly changing market.

I always use hard stops in the futures markets and usually get into a corn day trade with a fixed stop of 10 ticks or 2.5 points. I try to get into day trades with very precise entry points but still like to give my trades some room to wiggle and develop. Sometimes the volatility is so high you need to have wider stops and targets so how do I quickly decide on this in a fast moving market?

The ATR. I watch the 60 minute chart of corn as pictured below and here was today's action. The ATR was 5.22 which means the average price range of the last 14 candles was 5.22 points. This usually is between 4-6 points on the 60 minute corn chart. So you can either use a stop equal to the ATR or use a more precise entry and have a stop of half the ATR.

With this ATR I like to target a profit of 1 times the ATR on the trade so in this case I would be looking for a profit of 5.25 points in corn or 21 ticks. If you trade more than one lot you can take half off at 1 times the ATR and look for a move of 2 times the ATR on the rest of the position with a breakeven stop once the first target is hit. 

These are just a few of the ways I like to use ATR to manage risk and look for profit targets in the grains futures. And of course you can apply this to any futures contracts or stocks on any timeframes.

Trading Grains (Part 3): The Box Play

In my previous post on grains I talked about limit moves and how to play them. In Part 3 of this series on trading the grains let's take a look at The First Half Hour Range and how to capitalize on this momentum trade using the Box Play.

Between the pit session open at 10:30 am EST and 11am EST alot of volume and activity occurs in the grains futures. Orders come in from all over the place as farmers hedge their production, commodity funds initiate positions, and speculators try to scalp the volatility in price action. The volume calms down after that first half hour but because there was so much activity it means there are plenty of positions that are open. Once the first half hour range breaks either up or down the momentum takes over and carries the market in that direction usually for the remainder of that day.

I've noticed this works best in corn and soybeans and less in wheat, which is a quirky market compared to corn and beans. After 11am EST each day I label the first half hour high and low with a horizontal line on my chart. If the first half hour range is not broken by 1:45 pm EST it usually means its a rare choppy slow day in the grains so I stay away and pass on the trade.

You can enter this trade in a few ways:
  • Either watch for a break of the high or low and take the next trade signal you use in that direction of the breakout/breakdown. This for me would be looking for a TTM Squeeze setup or a wave crossover on the TTM wave.

  • Or just simply place a buy stop above the high and a sell stop below the low of the first half hour range and walk away. If it breaks the highs you are long with an open target and the sell stop now becomes your stop on the trade. You can either target a move the equal distance of the first half hour range or just come back at 2pm EST before the grains close and flatten the position. If you have a wider tolerance for risk this becomes a nice simple way to play the range break or "The Box Play."

Here are a few examples of the Box Play in corn and soybeans.

In this first chart of corn from April 12th you can see the break below 758.25 triggered a big move down very quickly which you could have shorted and netted 9 points before the TTM trend turned back to two blue bars. 

In the 2nd chart we have soybeans on May 3rd. The dashed horizontal lines show the first half hour range. The break below the low at 1369 triggered a flurry of selling that dumped beans 15 points in less than an hour. Even if you waited til the close to cover your short you still would have booked about 7 points from 1369 to 1362. 

Limit Moves in the Grains (Part 2)

We had a sweet limit down move in corn futures today so its a perfect time to highlight limit moves in grains and show you how I traded the action today!

One of the most interesting aspects of the grain futures is the frequency and power of daily limit moves in price. Drier than expected weather in Iowa cornfields can move the price of corn violently. A freak thunderstorm in the plains can make wheat rally hard. Soybeans can tank or rise with the fluctuation of oil prices intra-day. All this and more can make forced liquidation an exciting trading opportunity in the grains futures, both on the way up and down.

As I described in "Part 1" of Trading the Grainscorn, wheat, and soybeans are a true momentum market in which the pit session is open from 10:30 am EST-2:15 pm EST. Here are some of the basic specs of contract months and LIMIT price rules:

  • Corn Futures Months traded: March (H), May (K), July (N), September (U), December (Z).
    • Daily price limit of 40 cents or "points" expanded to 60 cent limit the day after the market closes at limit.
  • Soybeans Futures Months traded: January (F), March (H), May (K), July (N), August (Q), September (U), November (X).
    • Daily price limit of 70 cents or "points" expanded to 105 cent limit the day after the market closes at limit.
  • Wheat Futures Months traded: March (H), May (K), July (N), September (U), December (Z).
    • Daily price limit of 60 cents or "points" expanded to 90 cent limit the day after the market closes at limit.
The important thing to know when trading on volatile days where limit moves are possible is to NEVER fade the trend. Ever. If you do then you risk getting stuck in a limit move that closes locked limit and opens up gapping huge in your face the next day. You could get a margin call, not to mention a sleepless night in which you will quickly develop a close personal relationship with Jesus, praying that the market comes back in your direction, lol.

So how do you trade limit moves?

Let's use corn as an example. The daily price limit is now 40 points these days so if we get a move of 30+ points during the day it becomes a very high probability that corn will test the limit of 40 points. I like to call it the "Magnet trade" because once you get that close to limit you have margin clerks and poor folks on the wrong side of the trade liquidating their longs (if its a limit down move) or their shorts (on a limit up).

Also, when it hits LIMIT and comes off that limit maybe back to only down 30-35 points on the day to consolidate a little, then you almost ALWAYS see that limit retested by the end of the day. So you want to stick with the power of the trend and forced liquidation. Its a true magnet trade!

Finally, here is a 333 tick chart of corn today. I originally planned on taking the day off from trading but then looked at my phone after about 9am PST and saw corn was down 23 handles, lol. So I raced to my computer to see if I can get a piece of the action expecting a possible limit down! The perfect entry on the short side would have been on the break of the "first half hour range" as shown by the white rectangle and arrow below. If I was at my desk I would have shorted corn as the TTM squeeze fired off near 750 and corn tanked 20 points in less than a half hour.

The vertical white line shows when I got to my computer. You can see corn was down about 23 points and so I immediately started looking for a short entry. No squeeze showed up here but with the TTM wave (bottom blue indicator) below zero so I waited for a red TTM trend bar to switch from blue.

I shorted 735.50 and put in a 3 point stop at 738.50. My target was the limit down price of 729.25. Corn started to fall back towards the lows and I got filled about 20 minutes later for +6.25 points or $312.50 per contract.

When limit down was hit there was about 100 contracts on the bid and over 100,000 on the offer panicking to sell at limit down. Its pretty amazing at the power of forced liquidation when it occurs as traders and big funds are literally willing to get OUT at any price.

Trading Grain Futures (Part 1)

I wanna do a series of posts on trading the grains futures; corn, soybeans and wheat. I think the grains offer up the most amount of opportunity than almost any other futures contracts out there. In this post I will highlight the basics you need to know and the specs between the different contracts. Corn and soybeans specifically are the two that I focus on day trading the most for several reasons. And don't worry you wont get delivery of 5000 bushels of corn in your driveway if you trade it.

So why trade corn instead of, say, the ES or other stock index futures?

  • The grains are a true momentum market in which once they pick a direction they trend in that direction for quite a while without many fake outs or bull/bear traps at highs or lows. In other words, you can buy breakouts and sell breakdowns without worrying about trend reversals. The moves made in corn or soybeans are very trendy and smooth, allowing a trader to stay in for the big move that often comes while still being able to manage risk.
  • The pit session is open from 10:30 am EST-2:15 pm EST. So if you don't like long hours then this market is for you! There is also an overnight session that runs until 8:30 am EST each morning then closes for two hours but I just focus on trading the pit session and usually you can count on some great moves occurring in just the first hour or two.
  • The daily ATR (average true range) for corn currently is 22. This means on average it moves 22 points per day, or about 3%. Soybeans have a current daily ATR of 28 or about 2%. Compare this with the ES e-mini contract ATR of 16 points or 1.2% and you can clearly see the added volatility in the grains. And where there is volatility, there is OPPORTUNITY.
  • There is basically one USDA crop report per month. That's it. You don't have to constantly await new economic data coming out and try to anticipate the market's reaction to it. Just trade the trend. The trading is great on these crop report days as you often see limit moves up or down in price. I will get into price limits another time.

The tick increments for corn, wheat and soybeans are $12.50 per quarter point ticks or $50 per point. So the same as the ES mini futures. The intraday and overnight margins are also very low for corn and just a bit higher for beans and wheat. For example, corn has a margin of just over $2,000 per contract and if you have a good futures broker you can get intraday margins of just $500 per contract.

Now that we got some of the basics out of the way let's look at a real trade example from last month to highlight my strategy. My strategy is trend following and follows the concepts I discussed in my previous post you can read here

I usually trade corn off a 233 or 333 tick chart and get my big picture view off the 60 minute chart. So if the 60 minute is bullish and rising then I focus on buy setups to go long and vice versa. I almost never fade the trend of the 60 minute chart in corn and there is a simple reason. Trends in the grains can last longer than you can imagine. That's why daily limit moves in price happen so often.

So in this trade from 3/25 you can see the corn market was trending up and the lower TTM wave is all above the zero line and blue so I am focusing on buying. When the squeeze indicator pops up as shown by the arrow, I already know the trend is up so I am looking for the trend bars to change back to blue to indicate the uptrend is resuming. 

This trade starts at the red vertical line. I go long corn at 690 and within a half hour I sell it at 695 when I see two red trend bars in a row. A net profit of +5 points or $250 per contract. 

Instead of trying to over-think things and attempting to catch tops or bottoms I just let the market price action tell me when the buying or selling pressure is changing. Sometimes that means you get stopped out for breakeven or even a loss, other times it means you catch a nice runner of 10+ points in the grains.

Wednesday, June 1, 2011

How I Trade The Trend

I day trade the grain futures, specifically corn; and I swing trade options on big liquid momo stocks such as AAPL. So what's my trading strategy? I'm a student of price action and market sentiment and work off of that. I like to keep it as simple as possible because complexity breeds confusion. When it comes to indicators there are only a select few I put my money behind and they are the TTM trend, TTM squeeze, and TTM wave indicators developed by John Carter, who I have learned a ton from over the last few years and highly recommend his book Mastering the Trade for anyone trying to make this a career. Anyway, how do I use these indicators to develop a trading strategy?

Simple as 1, 2, 3...

First, the TTM trend is just the color of the candles or bars you see in the charts. Either blue or red. You can see that once the color changes it tends to stay in a decent trend for awhile until things change. Each candle incorporates the close of the previous 6 periods in order to get an idea of what the actual TREND in the market is, which for me is valuable and much more important then the look or close of one candlestick.

Second, the TTM squeeze is the momentum bars with occasional red dots appearing on the midline. When they appear it tells you the stock or market is resting and getting ready for its next move so get ready!

Third, the TTM wave is the bottom indicator that shows two different wave's. A blue wave that shows the longer term momentum and a shorter term red/yellow wave. The blue wave is a filter for me to keep me on the right side of the market. For example, if the long term blue wave is completely positive then I am only looking for long setups and will buy the next time the shorter term yellow wave crosses back above 0.

All of these TTM indicators are available for free on ToS under studies.

Here is a real 60 minute chart example of a trade I took on AAPL about 2 weeks ago. AAPL had been underperforming a strong market that week so on Friday after it gapped up above 350 only to fade and then turn red on the day I was looking to go short.

1. Arrow one shows when AAPL broke 348 support the TTM trend changed to red looking at lower timeframe's like the 15 minute chart I scaled into some in-the-money 355 puts.

2. Arrow two shows the 60 minute squeeze forming on AAPL for several days saying that  move is coming. Once it breaks support at 348 and the TTM trend bars are red I can assume the squeeze will eventually fire off short.

3. Arrow three shows my last confirmation of the TTM wave red bars going negative and then the wave completely below 0. Indicating game on and I added to my 355 puts Friday before the close.

I stayed with the trade until AAPL gapped down on Tuesday morning and opened at 336. I could have waited for two blue bars in a row to show me the change in trend but I covered the AAPL at 336 that morning because 12 points in two trading days is a great move!

I do this on basically any timeframe with any stock or market. Rinse and repeat and follow the trend.