Market Notes:
The market put in a healthy bounce last week, from which we were able to profit. Now we must assess some possible outcomes this week:
1. the pulls back
2. the continues to bounce.
Talk about stating the obvious. From these two possibilities, there are a number of outcomes:
1. a pullback followed by a continuation of uptrend that puts in a bottom
2. a pullback that turns into another bear market leg down.
3. a pullback, followed by a reflex bounce that fails and turns into a a bear market leg down
4. a powerful bounce that bursts through resistance
5. a bounce that stops at resistance and fails.
While we should keep a close eye on which of these outcomes develops, as traders we can make money without predicting the outcomes by being in position for the "swing". We did last week pre-bounce. So how do we position ourselves now? It's a tough call and depends on your risk and trade management tolerance.
The reason it's a tough call is there are multiple levels of resistance for shorting and it's tough to predict which one to use. Friday's candle is what candle officianados call a "doji" candle. Price opened and closed at the same level, with tails in both directions. This indicates indecision. The fact that it occurred on a low volume bounce and stochasctics are overbought tells us that the bounce is weakening and could reverse. Thus, the doji candle is a resistance level.
The second resistance level is price and "round number" resistance at $80. The third is the 50 day moving average at $81.40.
So how do we play the resistance levels? It's really up to your own style. If you are trading on a slightly longer time frame and can take a little more risk with a wider stop, a short entry here in the $75-77 range can be taken with a stop above the 50 day moving average at $82. Now with a $5-7 stop, you also need a target that's at least $5-7 to make this trade worthwhile. Thus the taget needs to be in the $67-70 range. This still only gives you a 1:1 risk ratio.
Another way to trade this setup now is to enter in the same $75-77 range, but use the doji candle as your stop If the stop is at $78, and the target is the same $67-70 range, you are looking at a 3-4:1 risk ratio. While this gives you much better risk parameters, it's much easier to get stopped out.
The final way to play this trade is to wait for price to get closer to $80 and enter. This gets you near a stonger resistance level, keeps risk low, and gives you a bigger target. The problem with this trade is a bounce to $80 may never happen.
All three short entries offer their plusses and minuses. I will likely use a combination of these three trades. For example, I could enter tomorrow at $76.50 and place a stop on half the position at $78 and the rest at $81. I also could get stopped out at $78 and re-enter at $80
Focus List:
The following stocks are setup for "buy the dip" trades: BIG, FCX, RTP, X, SIGM, JOYG, DNR, AKAM, AMZN, USD, TRA, EAT, CTRN, UYG
Shorts: Right now I am using SDS (short spy ETF) and QID(short Nasdaq).
Trade Tracker:
I am still holding partial positions in USD and X, along with Friday's SRS trade (see blogspot). I hope to have updated stats tomorrow.
Disclaimer: All information and opinions expressed in this report are to be used for entertainment purposes only. The author of this report is not an investment adviser and does not give buy, sell or hold recommendations. Trading stocks is a risky undertaking, and due diligence is required before making a trade. Consult an investment professional before making a trade. The information in this report is not verified and may be incorrect. The author of this report may or may not hold a position in stocks mentioned in this report.