Tuesday, May 04, 2010

Sector Moves - The Wind At Your Back.

A Sector breakout is one of the many opportunities in the market that offer high probability setups. Sector moves weigh heavily on underlying stock moves and therefore looking at sectors and subsectors on a regular basis should be a regular part of traders’ homework. A well rounded trader knows that both top-down and bottom-up approach are necessary to find good probability setups in the markets for day, swing, trend, and longer-term hold time-frames.  This is the wind at your back that raises the probability of success in your trading.

Many sectors have been showing strength since last week, one of which is the retail sector.  The XRTs weekly candle closed very strong and above breakout levels. Furthermore the sector has been basing for the last five months carving a solid base to spring from in either direction (pure TA). This is a trigger to delve into the stocks comprising this sector to confirm the strength. Last week’s blog highlights some of the findings from broken down-trends to overall strength and the opportunity of violent moves that ensue.
Now the XRT has had four weeks in a row of buying pressure and is due for some consolidation in the names that had big moves, but keep this sector on your radar for weeks and months to come as long as the uptrend is intact.

This is just one way to find stocks that are worth trading with high probability and less risk.  “May the wind be ever at your back” with these sector moves.

Peace and profits to all,

Intrinsic Movers

This market reminds me of the time the engine of our boat broke down on the way back from Murion islands.  We had a great day filled with fun and frolicking, but now we are stuck in the middle of the ocean off Ningaloo reef in Western Australia, waiting for help to arrive.  Similarly, 2009 was a fun filled year, you couldn’t pick a stock that didn’t move up.  But now we are stuck possibly a range or a down channel waiting for the big orders to come in and move us in the “right” direction again.  Have the opportunities dried up?  Are there no trades out there to be had for swing and longer holds?    Not really, the market always presents opportunities, you just need to go fishing while you wait to have a little sashimi.

In this type of environment, where there’s no clear wind direction to fill your sails, my style changes a bit.  I go to my “intrinsic movers”.  A favorite in any market really, but proves most useful, with a high probability of success, when many other stocks and indexes are bobbing in the waves.   The pattern that best serves these movers is the long-term down channel (and to a lesser degree the long-term triangle) breakout.  Not the little flags and pennants that everyone looks at after a big move already happened, those will likely fail in this environment, but the ones that took months in the making.  Whether you’re talking about a penny stock or a  hundred dollar stock or ETF this is one of your fishing tools regardless of the circumstances.

Once the down channel breaks its resistance and confirms by closing two days in a row outside of the channel you will see some big moves coming in any tape.  This is due to the nature of the pattern; you have the short-term channel players who shorted at the top of the channel, and the longer-term trend riders who shorted at much higher levels.  They will see the channel dissolving and will want to get out before anyone else does.  Therefore you get a violent initial move that you can ride blissfully with either a trailing stop of a manual/mental stop to get you out before the move is done.

There are many examples I’ve posted over time.  Take sugar ETF SSG for example.  I posted the chart of the breakout back in December when the channel broke to the upside.  A violent move from 65 to 85 in about a month ensued.

Another obvious one is the US Dollar UUP, after a long downtrend that started in March 2009, also broke the channel with such violence that you couldn’t miss the opportunity.  Crowded or not, those labels don’t negate the opportunity these down-channel-breaks present.   I posted this chart many times on
RMD, I posted the chart of this stock back in August with its long down trend, AZO December 9 CQP as well as many others .  All had a strong down trend that caused the price to catapult after the channel break.

This does not mean that we will have an uptrend after the break of the down trend, just a change of the current pattern.  If you are a fundy player who thinks the stock is undervalued, this is your signal to get in as well instead of “averaging down”.   There are other details that entail, but this is the crux of this trading style.
Many of the retail stocks are going through this right now including M and JCP as well as a few others I’ve tweeted about recently.  This is purely a technical play, more of a knee jerk reaction type of move really with a high probability of success.

Add this to your bag of tricks and have fun with it.  There’s always an opportunity in the markets no matter what direction we’re moving, the more patterns and tools you have the better prepared you will be for any market.

Peace and profits to all,