Seeing Stars on Indices - SCHN, FSLR

Longs need to be very careful here. The gap up opening was reversed mid-day and the broader indices formed high volume star candles on the dailies. The attempted push up (last 2 days) from recent consolidation could be a head fake at the top of a bear market rally. The market feels heavy and the VIX is finding support.
Stewie (The Impatient Trader) posted a daily chart of SCHN last night calling for a potential BO at the 48 level. I added it to my WL and the first two 15min candles were textbook GapnGO. It quickly exceeded the 62% extension of the OR. I took a partial on first weakness and got a better exit on the second half. Thanks Stewie.


FSLR is WL regular that stood alone today when sorting by %change. Due to the high price and volatility, I traded small and went down to a 10min timeframe to help manage risk. It quickly reached the 62% extension of the OR.

Beware the Chop - Vacationing Traders

I just realized why there is so much chop in market of late. Many/most of the traders at trading blogs I follow are on vacation (including Jamie and Trader-X). Without those market movers, we are left with chop as shown on the SPY chart below. There is nothing remotely resembling a trend day over the last 5 days. The good news is that consolidation is either accumulation or distribution and will eventually lead to a nice expansion move (up/down?).
This morning VRTX hit my scanner based on %change from open and big volume. The daily had broken out above a trendline and the 15min setup a low-risk entry at the 30min ORH. It easily reached the 62% extension of the OR and went beyond. Even when the overall market is in chop mode, a strong setup in an individual stock can lead to a trend day (i.e., opens near the low/high and closes near the high/low).

Technical Picture - USD and Gold

The uptrend of late is still intact in the NASDAQ and S&P. There is a divergence with the NASDAQ closing at a new recent rally high on Friday while the S&P did not. Friday was a light volume day. The McClellan summations are still trending up but with decreasing slope. The McClellan oscillators are tightening above zero.

After a complex consolidation, the US dollar has turned weak in the last several sessions. The inverse correlation drove a rally in gold on Friday. The charts below compare daily charts of several gold stocks including the index ($XAU). I have placed the charts in approximate order of increasing relative strength. Notice that GOLD (Friday scanner hit and trade) was the relative strength leader among the charts shown - look at Friday's opening price and action relative to the 20 SMA and 50 SMA.

Tough Week - Chop and GOLD

Summary of last week's action: Following the gap-down trend-day down on Monday, Tuesday was an offsetting trend-day up with strong volume in the financials. After that bang-bang volatility, the market went into chop mode for the rest of the week. The 30min S&P chart below highlights the choppiness Wed-Fri. A close in the vicinity of the open usually has chop in between.


I had several scratches and stop outs that alerted me to the chop mode. I had decent long trade in GOLD on Friday. It hit my gap + volume scanner and was very strong relative strength-wise compared to most other gold stocks. Gold (in general) was moving up due to weakness in the US dollar. I will elaborate more in a Technical Picture post.

Technical Picture - Reverse of Yesterday

Both the NASDAQ and the S&P bounced off of their 20-day SMA and formed offsetting type bars. However, the NASDAQ volume was noticeably less than yesterday's strong distribution day. The McClellan summations are still trending up but with less slope.

The US dollar formed an inside bar. Overall, gold is moving sideways to consolidate the recent down thrust that carried it decisively below both the 20-day and 50-day SMA.

Good places to be today were pretty much the reverse of yesterday - long financials, short inverse ETFs (yes, you can short inverse funds), and short gold. There is never a secure (I mean dull) moment in the market.

The offsetting/reversing action in the financials was impressive and on higher volume than yesterday's break.

Technical Picture - Break in Financials & Commodities

The financials were hit hard today and led a big down Monday on increasing volume in the NASDAQ and S&P. The S&P closed on its 20-day SMA. The McClellan summation index is flattening in both the NASDAQ and the S&P. A follow thru day tomorrow could turn the McClellan summations down.

The triangular consolidation in commodities (CRB) broke to the downside today. The US dollar is working higher. Gold reacted higher following last week's break down from a daily bear flag.

Some good places to be today were short financials, long the inverse ETFs (FAZ, SKF), and long gold.

Real-Time Scanning Strategy

Using a real-time (RT) scanner seems exciting. The thinking is - out of the thousands of stocks, ETFs, indices, etc., the scanner has just flagged "this one". However, after playing with RT scans for awhile, you find that most scanner settings produce too many hits and don't flag a setup that can be entered immediately. Given a few more seconds/minutes, the scanner will find another trading candidate and then another... This is the case with most canned scanner configurations supplied with the software.

So, when using a RT scanner, the big issue becomes 1) How to sort thru all of the scanner hits to find a solid low-risk entry, and/or 2) How to create custom scans that are much more restrictive (fewer and higher quality hits).

I have been working with custom RT scans (in Trade-Ideas (TI) ) for the past several years. The key for me is to scan for unusual/extreme price action combined with unusually high volume (especially during the opening range (OR) period), and then to monitor for low-risk setups. Although the implementation details will vary depending on the scanner you use, here are the scanning filters I use:
1) Price - eliminate low priced markets by requiring Price > $10.
2) Average volume - eliminate thin markets by requiring Average Volume > 1M shares/day.
3) Relative volume - find unusual volume by requiring Relative Volume > 2 (greater than 2x average volume for the current time of day).
4) Find unusual price action by using one or more of the following:
a) Gappers - gap up/down by 1.5% or more.
b) Impulsive move - change up/down with respect to open of 2.7% or more.
c) Gappers and quick moves - % change up/down of 3% or more.
5) To overcome recent support/resistance - require trading outside of previous day's range.

** NOTE: The thresholds for each option are somewhat arbitary and may be tweaked/changed depending on market conditions and/or the number of hits your desire.

Combined with the above filters, I use a heartbeat alert with a settings of 10 mins. This means that if a stock continues to pass the scanning criteria (filters), it will hit the scanner every 10 mins. The screen shot below shows some canner hits (long on left and short on right) from Friday morning. The last column in each scanner windows displays the Relative Volume.

I add a manageable number (15-25) of the scanner hits (during the OR) to my watchlist (WL) and cycle thru the WL looking for patterns and low-risk entries. I also run a scanner on my WL that alerts on NR7 (narrowest range of the last 7) bars. The concept is that in an active market, range contraction alternates with range expansion. If a NR bar forms at a key sup/res level or within a larger pattern, it may represent a good low-risk entry point.

I would like to alert on inside bars (IB), but TI currently does not offer IB alerts.

Bear Flag Breaks in Gold - AEM

A question was ask in the comments about the following from last night's Technical Picture. "Gold might be forming a bear flag, but overall it is in the context of a larger trading range (TF). "Flags" which form within TRs are always suspect." The gold sector/index chart ($XAU) below shows that the bear flag formed above the trend line and at approximately the same price level as recent congestion.

Since the index bear flag is in a congestion zone and thus more questionable, the best approach is to find an individual gold stock that is weaker than the index. AEM got my attention. Notice the weakness of the AEM daily chart compared to the index above - bear flag is below trend line. It broke quickly and I had to wait for a pause to enter. Sweet exit at 62% Fib extension.

As the market was firming up, SRS (inverse ETF) had a great setup at the ORL and PDL. I covered at 62% extension of OR and left a lot on the table.
EDIT - Beware that longer term chart patterns in leveraged inverse ETFs (like ultra short 2x and 3x ETFs) are not as reliable and behave differently from their unleveraged counterparts. Such inverse funds track the inverse of the underlying index on any given day, but longer term relationships (on a % a basis) become skewed. The greater the volatility, the more skewed a leveraged ETF becomes with respect to its underlying (unleveraged) index.

Technical Picture - Tax Day

Each year around tax day I conclude that I should switch exclusively to trading futures. At tax time, the hassle associated with stock transactions (outside of a retirement account) is many times that of futures. Anyway, I survived.

The rally in stocks in still intact. The trend of the McClellan summation index is up for both the Nasdaq and the S&P. The US dollar is still consolidating sideways. Gold might be forming a bear flag, but overall it is in the context of a larger trading range (TF). "Flags" which form within TRs are always suspect. My bearish slant in gold is based on the break of support in gold futures.

Opportunities Every Day - SNDA

Beware of the negative psychology trap. Great traders (like Jamie and Trader-X) demonstrate that there are good opportunities everyday - you just have to remain focused and find a few of them (at least one).

What are the most common reasons that traders can not find a good setup: 1) they are already in a weak/mediocre trade, 2) they are not clear/certain about what distinguishes a GOOD/GREAT setup, 3) they don't have the tools (resources, scanners, etc.) to locate good setups from all the noise, 4) they don't have the patience to wait for a good setup.

The screen shot below includes a snippet of my long scanner from this morning. Of the 10 or so stocks that were hitting the scanner (tends to repeat every 10 mins), several produced good setups sometime during the day.

SNDA was hitting the scanner all morning and eventually setup a nice range contraction at the 38% retracement of the AM range.

Technical Picture

The broad based advance in stocks continued with a strong up move on Thursday ahead of the 3-day weekend. The 20 MA has crossed the 50 MA in stock indices and in the commodities index (CRB). Although volume appeared strong in the indices, volume in the futures (NQ and ES) may be painting a different picture.

The McClellan summation index continued higher for both the Nasdaq and the S&P. The US dollar is trading sideways and the weakest sectors appear to be gold and drugs.

Currently (Sunday night), the futures are trading down several points from the strong close on Thursday.

Weakness in Gold

The weakness in gold stocks over the past week or so coincides with breaks in support for nearby gold futures. Following a failure at the $1000 price level, both sloped and horizontal support have now been broken in the futures.

Best Setup of the Week (Perhaps) - WYNN

WYNN had a strong 3-4 day upside move on the daily. Yesterday was a gap up that formed a shooting star on big volume. A red candle today could confirm the shooting star and potentially form an evening star on a weak close. What happened? A gap down open that had the potential to leave a 1-day island reversal. Here is the daily chart.


How to trade the gap down? Draw Fib line across the opening range (OR) and read price action in the congestion zone (38-62% Fib levels). Bars 3 and 4 (15min) were narrow range with bar 4 closing weak and just below the congestion zone. The entry was a breakout of bar 4. The 62% extension of the OR is a good profit target (normally). Since the 62% target was achieved so quickly, perhaps I should have targeted 3 WR 15min bars for my first exit. WYNN setup a second entry 'beyond the extension' for a continuation move. In fact, it closed near the low of the day.


Had I set my Fib lines from the PDH to the ORL (classical method), here is where a 62% extension target would have triggered.

Tracking Big Gappers - RIMM

Trader Jamie advocates populating his WL with stocks that have recently experienced a large, high volume gap. Besides being a WL regular, RIMM experienced a big upside gap last Friday after beating estimates. The daily chart is shown below.


On Friday, RIMM was in consolidation mode. Today, the opening range (30min) action demonstrated that RIMM was in a range expansion mode (wide range, full bodied, green candles). Following a breakout of the OR, the 15min chart setup a low risk entry following a doji candle at the ORH. The target was a 62% extension of the OR.

Single Focus - RIMM

Coming into today (Friday), I knew that RIMM had beat estimates and was going to open with a big gap up. Sometimes I choose to focus all of my attention on a single stock if: a) I have limited time due to work, and b) I know that one of my watchlist favorites (such as RIMM) is going to gap big and probably trade huge volume.

Below is a 10min chart of RIMM. The first candle was a doji with long lower wick. The second bar was bearish and closed below the 50% level of the OR. The third 10min candle closed just below the 62% retracement zone and was the narrowest range of the morning. That was the trigger bar.


I could (and should) kick myself because it traded exactly (to the penny) to the 61.8% downside extension of the OR. I was EXPECTING more range and missed the exit. The stop out resulted in less than half of what the target would have generated. Afterwards, I could tell that the indices were in consolidation mode and RIMM was acting similarly. Overall, a fairly choppy Friday.

Path of Least Resistance - Up

With the gap up in the indices on Thursday, longs setups were abundant from both my WL and from gapper scans. Here are a couple of gappers that were also on my WL. Initial setups in both were based on Fib levels drawn with respect to the 30min OR. Both were closed at the 62% extension of the OR.



RIMM (above) beat estimates after the close and was trading up $11+ at $60-61. I always feel cheated when I daytrade a stock (long in this case) and it jumps big after the close. Oh well, I got a piece of the action with small risk.

And Then There Was Silence...

With Jamie (Wall St. Warrior) and Trader-X both on vacation, it is very quiet. Below is what Jamie's trading facility looks like when he is gone. This supports the adage that simpler (trading) is better.


Monday and Tuesday of this week were fairly choppy and good trading setups were elusive. How do you know if a market session is "choppy"? Choppy sessions are characterized by congestion regions with lots of offsetting candles and/or doji like candles with upper and lower tails. Offsetting candles are pairs of candles whose bodies alternate color (green followed by red, or red followed by green). Also, most choppy days have a closing price that is near the opening price.

Look at the 15min QQQQ chart below and notice the congestion regions highlighted on Monday and Tuesday. Also notice where the market closed relative to where it opened. Although the market opened lower today (Wed gap down), there was steady buying pressure throughout the day (with some chop near the close). So, the market opened near the low of the day and closed near the high. These types of days are easier to trade and are where bigger money is made.


Here was my best trade on the long side today. The Fib lines are drawn per the classic gapper rules - from PDL to ORH. The steady buying pressure in the overall market allowed me to hold for the 62% extension of the large Fib range.