1/31/2012 XLF#2

 SPDR Financial Selected Sector Fund (XLF)

The daily chart is the same one from last post. If you read the last XLF post, I mentioned that the break was likely to test the 6 months top @ $14.17 and consolidated for a short period of time. Here you can see the XLF poked through the resistance level for a few time, the price bar opened below the resistance and closed above it for 3 consecutive days but there wasn’t enough buying interest in the financials to fuel the continuation move causing the congestion. I think this is largely due to the uncertainty in Europe, fearing the European banks may let down the US banks’ performance. Nevertheless, with the fact that several major banks bounced off their lows in the last 2 months and better than expected earnings reports, I'm quite confident in the US financials therefore I'm still betting the XLF on the upside. But the risk level at main support/resistance @ $13.31 should not be neglected, know your stop and don’t stay in a losing trade until it’s too late.

In the hourly, the XLF broke the bottom of the up sloping channel (green line) during Monday’s pre-market, since then the XLF has been trading from side to side in a downward channel. The XLF was trying to make another high @ $14.34 in the early morning of January 26^th but ended up in a bull trap, shaking some people out of the uptrend trade. Even so, I think this is just a consolidation of the previous up move rather than a reversal, it should resume to the up move if there isn’t any significant bad news comes out in the near future. For Intra-day trade, I add a few more support/resistance levels that should be good for a few days. If you look over to the left hand side, there is a gap that hasn’t filled yet and the XLF bounced off this level for 3 times, so I mark a support level @ $13.62; and this will be last defense line if I'm wrong in the long trade. The support/resistance level @ $14.08 is more like an inference line. Price flipped around this level, it was a support level early in the down channel then became a resistance later on. As the top of the down channel is going to intersect with this level, a move, whether it’s on the upside or downside, should happen sometimes soon, so watch out and don’t get in the wrong side. Higher up is another resistance level @ $14.23. Remember my interim resistance from the daily chart is set at $14.17, but the resistance level @ $14.23 is a bit more precise since price reversed and bull trap happened at this level. If the XLF is able to clear this level, it should head toward the immediate target level @ $14.62. On the other hand, remember where your risk level is. If the XLF continues in a downward channel, the bottom of it should be where your stop located; and if it moves to the upside, either $14.08 or $14.23 are good levels to locate your stop depends on the price and your risk tolerance. In all cases, you should never let it break through the support level @ $13.62, because it should go right down to the gap bottom @ $13.47.          

In the 15minutes chart, I drop a Fibonacci Retracement study and you can see how price reverses between each level. When price is bouncing between levels, any level that price has a resistance on should be the target and any level that price finds support should be the risk level. So far the 50% level @ $13.99 and 61.8% level @ 13.91 provided pretty good support for the last couple trading days. So here you have 2 more options to decide where you want to locate your risk level. What’s more, the 61.8% level, also known as the “Golden Ratio,” is the best level among all Fib levels, if price breaks below it, I don’t recommend you to take a position because the 78.6% level is not as good as 61.8% in terms of support strength.

You may notice that each Fib level is only few pennies apart, you won’t be able to make any real money if you trade less than 5000 share each lot; if you wish to capitalize gain on a larger movement, the first 2 charts will be a better reference. For high frequency trader or scalper like me, I don’t always trade large move. Instead, I try to gain from pennies’ moves with a large share size. In fact, I find this easier than trying to make a 50 cents move because I usually stay in a trade for a few minutes, or even seconds, then I'm out and re-enter again. The shorter time I'm in a trade, the less I'm emotionally affected and the smaller chance I will make a bad decision.  

I hope this post offers you some insight, thank you for reading and please feel free to give me some feedback.

1/30/2012 SPY#2

S&P 500

Hi guys, I'm supposed to update the SPY and XLF chart once a week but I was on a vacation with my family so I didn’t have time to update them, I do apologize for that.

Now, let’s see where I’m standing in the SPY chart from 2 weeks ago. There wasn’t a lot of change since the last daily chart, the breakout continues on the upside as expected and I'm still aiming for that shoulder top @ $134.69 with my risk at the main support/resistance level @ $127.38. With the presence of the “Golden Cross” (I will show it in the next chart), I’m pretty confident that my target will be reached and you may aim for the high @ $137.18 or even more. When the uptrend line crossovers the main support/resistance level @ $127.38, you can use the uptrend line to locate your stop if you wish to minimize risk.

Furthermore, above is the same daily chart without all the drawings are gone and I set the time frame to 5 years period. Here I want to show you the “Golden Cross,” which happens when the 50-period simple moving average (aka 50 SMA, grey line) crossovers the 200 SMA (green line) from underneath. It happened 2 times in last 5 years and 5 times in last 10 years. I’d say the golden cross is quite accurate because when it happened, 5 out of 5 times the SPY continued the move on the upside and hit a new high for that year. If the golden cross does happen in the near future, I expect the SPY to break the high of 2011 @ $137.18.  

In the hourly chart, there isn’t much happening either. I keep the up sloping channel and the main support/resistance level @ $127.38 from last time. If you are swing trading, you should have gotten out some or at least 1/3 of your long position for profit when the bull trap happened, which the SPY hit a new 30-days high @ $133.4 and immediately retreated back inside the channel in the next bar. I also add a support level @ $130. I don’t have a better reason other than “it’s a whole number” to explain why I put my support level there, but I watched the price action on my platform when it came close to $130 this morning, I have a feeling that everyone sees this level as a good opportunity to get long, so I think $130 should serve a good support level here.

 

In the 15 minutes chart, I think you can see the price action I was talking about a little bit better. In the pre-market, many people were already selling the SPY down because of the gap down, which was largely due to the Greek debt issue. Upon market open, the first bar was a DOJI (price opens and closes at the same price for that price bar period; white bar) with a long tail on the down side, which means for that 15 minutes period people were selling it down but the market still had substantial buying interest to offset the bearish move  

and pushing the price up to where it opened. Then, second bar opened up and did pretty much the same thing except there were more people selling than buying in this 15 minutes period. Noting that even the price was dropping, there were still quite amount of buying interested in the market holding it above $130, therefore I set it as a support level. As I said earlier, the support level @ $130 is largely based on my gut feeling, do take sometimes to think about it, you may find a different view about this.

Now that we have the support level in place, let’s see where the target is. Here I see 2 indications, an inverted head & shoulder bottom pattern and a gap. When I look at charts in short time frame like this one here, I usually look for the gap that has not filled yet. Whether it’s a gap up or down, I will mark the top and bottom of the gap as resistance and support respectively. When price reverts and breaks into the gap area, I use the closer gap level as risk and the farther one as target. Same as this one, the SPY gapped down in the pre-market and rose back into the gap area in the afternoon. Once it rose through the gap bottom @ $131.08, I would expect it to fill the gap by reaching the gap top @ $131.82 in a short period of time, which price will most likely hit the level by tomorrow. If it fails to fill the gap and falls below the gap bottom level, which means it’s a gap fade, price should retreat back to the low of the day @ $130.06 or the pre-market low @ $130.37.      

In addition, I also spot an inverted head & shoulder bottom; if you read my previous post, you should know that I don’t trade the head & shoulder pattern, but here are some information for your reference. According to the book “Getting Started with Chart Pattern” by Thomas Bulkowsk, a head & shoulder bottom acts as a reversal indicator of the prior price trend 90% of the time. You can use the head of the pattern or any other underlying support to be the risk level. To find the target, you can use either the overhead resistance or add the vertical difference between the head and neckline to the highest point of the pattern, which the formula is:

130.96(B) – 130.06(A)+ 131.02(C) = Target @ $131.92

In this case, you should aim for the target @ $131.92 and cut loss @ $130. Please do make sure the risk & reward ratio is worthwhile before you take the trade; I always go for 1-to-2 or at least 1-to-1.5 ratio. You should never take a trade that has higher risk than reward just like you will not pay $10 to make $5, which is not a good deal.

I hope this post offers you some insight, thank you for reading and please feel free to give me some feedback. I'm going to update XLF in the next post and I should have it done by Wednesday, please check back in a few days.

1/19/2012 XLF

SPDR Financial Selected Sector Fund (XLF)

XLF is a financial ETF composed of 81 financial stocks and represents about 14.14% of the S&P 500. The following link has the breakdown of the components and percentage weighted on each component.

http://www.sectorspdr.com/spdr/composition/?symbol=XLF

I have been trading financial stocks since the first day and this is one of the “must have” charts I keep an eye on all day long. For those who trade the financials, I strongly recommend you to have this chart up while you trade.   

Same as the SPY chart, I will include the weekly in this post but I will focus more in the daily and hourly.

In the weekly chart, the XLF has a solid boundary between $10.95 and $17.2. Before the drop in early August 2011, it was trading in an even tighter range from $13.31 to $17.2 for 2 years (August 2009 – August 2011). I highlight these 3 levels in red @ $10.96, $13.31 and $17.2 as the main levels. I also have a support level @ $11.71 because it resembles the bottom of a double bottom pattern (the “W” pattern) if you ignore the 2 tails that broke through the level around October 2011. In near term, I'm expecting price to retest the 6 months top @ $14.17 and consolidate there for a very short period (mostly likely happens in the daily chart) because it is the closest peak since the big drop. If there isn’t any significant bad news that will foreshadow the optimism, it should not be a problem to continue on the upside.

As much as I want to call the diamond area a double bottom pattern, the 2 tails that broke the support level violates the rule. Nevertheless, an incomplete double bottom and a completed diamond bottom are good enough to make me believe the trend is on the upside. To trade the reversal diamond pattern, unlike the continuation diamond I mentioned in the last post, the way that price exit usually mirrors the way it enter and, if you remember, another characteristic of the diamond is the equivalent magnitude on the exit and entry side. Therefore, I'm looking at the price to hit the $15 mark and this should happen in the next bar or the bar after.

In the daily chart, I keep all the drawings from the weekly and add a downtrend line to show that price recently broke and stayed above it, making the up break more legit. If you take a position at current price @ $14.05, the main support/resistance @ $13.31 should be your risk level. If price drops below the $13.31 level and the next bar opens underneath it, that means the pattern is a failure and you should get out of your long position. For target, I set an immediate target @ $14.62 for those who wish to cash out your profit safely. However, I don’t think this is a good trade because it has a less than 1-to-1 reward & risk ratio ($.57 gain vs $.74 risk), which is not a good deal from an economic standpoint. Rather, I suggest using a trailing stop method for profit taking. As I said in the previous paragraph, I'm expecting the price to hit $15. After that, price will most likely consolidate between $15.68 and $14.62. In order to get the most out of the trade, once price goes through $14.62 and opens up another bar above that level, I suggest you to move your stop, or risk level, up to $14.62 to secure the profit. Afterward, for every subsequent peak it makes, you should keep moving the stop up to the bottom of the prior valley (I will show you how to do this in the hourly chart). In this way, you can secure a minimum gain of $.57 per share if price drops back and still have the potential to gain more when price reaches the next resistance @ $15.68 or the range top @ $17.2.

In the hourly chart, I draw an up sloping channel for a better picture of intra-day movement. As you can see, the XLF has been stair stepping up nicely within the boundaries making higher “Highs” (the peaks) and higher “Lows” (the valleys) on the way up. To trade this channel, it is the best to use the trailing stop method. Here is the general idea:

Assume I was quite confident about the uptrend. I wanted to maximize gain without setting a target and, of course, minimize my loss as well. I got in a long position @ $12.6 when the trend started with an initial stop @$ 12.21. At the beginning, I had a $.39 risk. When it made the 1^st peak, I moved my stop to the 1^st valley bottom @ $12.6. Now that I moved up my risk level to the same price I got in, my risk essentially became $0. After the 1^st peak, price retreated but it never hit my stop before it resumed to its up move and formed the 2^nd peak. Just like before, I moved my stop to the 2^nd valley bottom @ $12.91 and I secured a $.31 gain even if the pattern failed. As price stepped higher making the 3^rd, 4^th and 5^th peaks, I kept moving my trailing stop up to the subsequent valleys. And finally, when price made the 5^th peak and fell back, I got stopped out when the tail of the green bar broke through the bottom of the 5^th valley @ $13.6. In this way, I cashed out a profit of $1 per share without breaking a sweat.

I hope I gave you some insight in this post, thank you for reading and please feel free to give me some feedback.

P.S You can always double click the chart to bring up a larger image.                

   

1/12/2012 SPY

SPY

Unlike the previous 2 posts, I keep track of the SPY chart on a daily basis therefore I use the hourly and 15-minutes charts more often. Since this is the first post on the SPY I will use a longer time frame to show the underlying trend and I will do my analysis on a short time frame after this.

In the weekly charts, I found 2 patterns, a continuation diamond and a head & shoulders. First, let’s look at the continuation diamond in the chart. A diamond pattern usually happens after a quick rise or drop and serves as a reversal pattern in most cases. However, what we see here is a continuation rather than a reversal. If this is the case, just remember price exits the diamond in the same direction as it entered, which means if price rises into the diamond, it should exit the pattern on the upside, vice versa. Regardless whether it’s a reversal or continuation pattern, the move that exits the pattern should have similar magnitude as it enters. If you look at the weekly chart, price started to rise in early July, 2009 around the $90 area and entering the pattern around $115 in early 2010, which was about a $25 move. At the end of the diamond, price exited the pattern around the $110 level in early September, 2010 and continued rising until it hit the resistance @ $135, which was also a $25 move. When you are trading the diamond pattern, make sure you make good use of the second characteristic to determine target and risk of the trade.

The second pattern on the weekly is a Head & Shoulders. I personally don’t trade this pattern a lot simply because my mentor is not a big fan of it. Nonetheless, Head & Shoulders is easy to identify. Just like its’ name, the 2^nd peak (the Head) should be higher than the 1^st and 3^rd peaks (the Shoulders) and the shoulders should peak around the same level. Although I don’t trade this pattern much, I do use the shoulders’ peak @ $134.69 as a resistance level. Some people use the 2 valleys (the Neckline) @ $126.2 in the pattern as a resistance/support level as well; however, I don’t find it provides much insight to my trade so I usually ignore it. To what I know, Head & Shoulders is a reversal pattern. In this chart, an ideal trade was to take a short position as price was forming the 3^rd peak (2^nd Shoulder)@ $134.69 and use the top of the 2^nd peak (the Head) @ $137.18 as the risk. Target wise, I aim for the neckline @ $126.2. If you wish to take a larger gain, you can set your target at any underlying support level below the neckline. The next support level I have is @ $111.92. 

The reason I pull the weekly chart up is to give you a brief overview of the Diamond and Head & Shoulders pattern, now let’s move onto the daily chart and hourly.

In the daily chart, you can still clearly see the Head & Shoulders pattern in the early half of 2010. I keep the shoulders’ top @ $134.69 as a resistance since it bounced off that level for several times. You can also see the neckline (in red) @ $126.2 I have from the weekly chart is 1 point off from my main support/resistance level @ $127.38. If I used the Neckline as my resistance, the price would have broken that level for several times already, which is not a good. Comparatively, the $127.38 level is more solid and formed an ascending triangle with the uptrend line, so I see it as a better support/resistance level.

Now that I see price broke out of the ascending triangle on the upside in the first couple days of 2012, how do I trade this? I’m quite confident that this is a breakout rather than a bull trap (happened once in late October, 2011) because price movement was well above the resistance level for the last 6 - 7 trading days and the moving averages indicate that price movement is still going to be on the upside (I will explain more about this later). According to the book “Getting Started with Chart Pattern” by Thomas Bulkowsk, an up break from the ascending triangle usually results in an average of 30% post-breakout rise. However, that would mean to set the target @ $165.59, which is impossible because this price target is a whole 8 points higher than the 10 years high @ $157.52. Therefore, I switch my target to the shoulders’ top @ $134.69 instead. On the other hand, I use a very tight risk level to minimize my loss if I'm wrong on this breakout. My risk is set at the main support/resistance level @ $127.38 because a good resistance level often becomes a support level when price goes through it and vice versa. If you wish to take more risk, you can move your risk down to either the neckline or the uptrend line.

For the hourly chart, it shows a better picture of intra-day price movement and helps me to adjust the entry price. Right now the 5 period simple moving average (the light blue line running along with the price bar trend, aka 5 SMA) is crossing up against all the other periods’ moving averages and the 10 period SMA (in purple color) is making a valley turn as well, indicating the general direction is on the upside. I also throw in a Fib retracement level just to see how far did price give back since it hit the top @ $130.18. Price recently bounced off the 23.6% level @ $127.8, this is also the level where it congested for 3 trading days from last Thursday to Monday; it should serve a fine short term support level. At the end, I lined up a few peaks and valleys showing an up sloping channel, I'm expecting the price to keep trading up within the channel, just be careful when it breaks the bottom of the channel you have your risk level determined and get out of the position decisively.

I hope I gave you some insight in this post, thank you for reading and please feel free to give me some feedback.

1/7/2012 OIL

NYMEX WTI Crude Oil

In the weekly chart, I don’t see any significant pattern forming. I tried to draw an up-trending channel (the grey lines) to find the places where price should reverse, but, as I highlighted, the pattern is busted and the up channel is not a good signal. Then I saw a ranged channel in 2010, where oil price was traded well within the $69.48 – $87.45 range for most of the year until it broke the top channel in Dec 2010 bringing the oil price to a 3 years high @ $114.83. In mid-2011, same area where the busted uptrend was highlighted, oil price made a double bottom @ $75 area. So far this $114.83 - $75 range is still legit; as a long term trade, I think you can use this range to determine when to get in a position as we move onto 2012.     

In the daily chart, you can see the double bottom more clearly, it formed a “W” pattern where I highlighted. Once the 4^th up leg broke the peak in the middle of the “W”, a double bottom is confirmed and you should expect price to go back to where the 1^st leg started to drop. In this chart, I think the run for the double bottom was finished when it first reached the resistance level @ $103.38.

As price exhausted out of the double bottom pattern, another pattern emerged right away. The highlighted area indicated a Right Angle Boardening Formation-Descending (RABFD) pattern, which the formation consists the resistance line @ 103.38 and the bolded yellow downtrend line. According to my experience, more than half of the RABFDs I have seen are bullish, therefore I’m guessing oil price will break to the upside in the near future. Furthermore, I lined up the last 2 valleys on the chart in green dot line spotting an uptrend move. In this case, I will wait until the price bar to close above the resistance and open above it in the following next bar before I take on a position. My target will be the 3 year high @ $114.83 and my risk is the uptrend line; I will get out if a price bar closes below the trend line and the next one opens below it. If you want to be a bit more aggressive, you can push your risk to the support line @ $95.

I hope this post gives you some insight. Thank you for reading and please feel free to give me some feedback. Next post I'm going to talk about the S&P 500 chart.

1/6/2012 GOLD

So here is what I see on the long term gold price. I believe the underlying trend is still on the upside, the down move we are currently experiencing is a retracement of the breakout from mid-July. If you look at the monthly chart, gold price has been steadily rising since 2005. In the weekly chart shown here, gold price made a perfect example for a stair stepping Elliot wave; it bounced to a new high with a less than 50% retracement consolidation whenever it touched or came close to the uptrend line.

Gold price broke out in early-July, remember that was also the time when the US default controversy started, followed by the Greece’s bailout and the Europe crisis we are still trying to solve right now. The Western hemisphere was in distress, any kind of quantitative easing or bond purchasing program would flood the market with money, thus depreciating the value of the currencies . People fled the USD and Euro turning to Gold as a better save heaven. We had a 10 weeks run to the all-time high at 1923.7 since we broke the major resistance at 1546.5.

So that was a very brief review for you to know what was going on and what caused the gold price to shoot up. Enough hindsight trading and let’s move on to what I’m looking at.

The major resistance level (1546.5) in early July will become the major support level, combining the downtrend line, it formed a descending triangle (white space). Normally, 64% of the time a descending triangle breakout downward; however, when price rise into a descending triangle, it’s a 73% chance to breakout upward. Furthermore, when the triangle occurs at the top of the trend, it performs better.

In the daily chart, I dropped in a Fibonacci retracement study from the 52 weeks low to 52 weeks high. If you look at it closely, you will realize each Fib level served a decent support and resistance on its way down from the top. Especially the 61.8% (1543.9) level, which also referred as “the golden ration”, always serve as a solid level and about 70%-80% of times price bounces off it; this is also part of the reason why I marked 1546.5 as a major support here.

On the downside, I found the 2^nd support at 1484.5 and the 3^rd support at 1326.1. I don’t like the 1326.1 level, simply it’s too far away from the current price level, I prefer 1440.6 as a more reasonable 3^rd support level because it formed a double topped pattern from March to April 2011 and it is also a Fib level. Personally, if I bought the contract at current price, 2^nd support (1484.5) is the farthest I would let the price goes against me. But different people have different risk tolerance, just make that you can bear the consequence and act decisively when necessary.

To the upside, I think the short term target is 1751.8. Normally, resistance is found at the downtrend line, but price touched the downtrend line for 4 times already so I would expect a breakout upward as it approaches the end of the descending triangle. If it does break, minor resistance is expected at 1751.8 and heavy resistance at the all-time high 1923.7 and 2000 (it’s a whole number). If price goes right through the 52 weeks high the following formula should help to find the target price:

(Peak of Triangle – Bottom of Triangle) + Breakout price

This formula works 71% of times and if you want to boost up the success rate, divide the height of triangle by 2 before you add to the breakout price, this should bring the success rate up to 90%.   

I hope I am able to provide you some insight here and please let me know if you have question or suggestion to help me improve. Thank you

Thanks for coming to my blog

To all of my families, friends, coworkers and fellow bloggers:

This blog is meant to open up a platform for discussion and share some of the thoughts from my knowledge and experience. In this blog, I will mainly do technical analysis in US stocks and futures since I only have access to those charts. Nonetheless, if you do have technical questions regarding foreign stocks, please give me the symbol and I will try my best to get access to the chart of the corresponding stock.

If you do find this blog helpful, please tell your friends, coworkers or families about this site, I wish to share my knowledge with as many people as I learn from them. If you notice any of the concepts or analysis I mention in here is flawed, please feel free to give me feedback. Individual comments and suggestions are always welcome, however, HATE message/mail will be ignored, so please be POLITE, this is the only thing I ask in return.

Please use this blog with caution, I’m no Warren Buffet or George Soros, I can be wrong too. Before you make any investment decision with reference to the material I mention in this blog, please do consult your financial adviser whether the investment is a good fit for your portfolio in terms of your goal and risk tolerance.

Thank you     

Joe