3/26/2012 OIL #4

Light Sweet Crude Oil Future (/CL)

Since the last post, oil price has been stair stepping up and it looks like it is about to make a move again. From the weekly chart, oil price is on track toward the 52 weeks high @ $114.83, which is also the 3 years high. You can clearly see in the chart, the 1^st leg move started in October 2011 when oil price bounced on the 2012 range bottom @ $75.3. It then came into the consolidation period, highlighted in red, which found a top at $103.75 and broke out about a month ago when it crossed the top. Like I said in some other post, you normally expect the 3^rd leg having the same length as the 1^st; in this case, the 3^rd leg should take the oil price up to the target @ $124.22. However, up in the way, the 52 weeks/ 3years high @ $114.83 will be a heavy resistance level, you may find more sellers coming into the market as it moves closer to the 2012 range top @ $114.32. If the underlying uptrend is strong, I think the oil price will consolidate near the high for a few weeks and breakout again. Even if it doesn’t breakout, I don’t think the future price will experience an immediate drop like the wide range red bar it did in April 2011 given the fact that the economy is recovering and tension in the Middle East has not eased yet, oil consumption will continue to go up while supply is having some frustrations. Most likely, if the future price can’t go any higher, I expect it to stick around the 2012 range top @ $114.32 while investors and institutions accumulate their inventories for another break. If it, unfortunately, does retreat after reaching the high, look forward for a double top formation, which should take the oil price down to at least the consolidation bottom @ $95.1.

In the daily chart, I see a bull flag being formed. The downward channel, where oil price is currently bouncing within, is the flag body while those consecutive green bars to the left of the flag body is the flag pole. The flag is bullish plus there are some good support levels sitting underneath the flag body, I think this is a good long opportunity. Depending on next 2 days’ actions, try to get into your long position as close to the consolidation top @ $103.75 as possible. Risk level in this trade varies. You can either use the bottom bound of the flag body or the 50% fib retracement level @ $102.97 as risk. For the first one, you cut your loss when oil price breaks the bottom of the channel, but notices that as long as price still trades within the downward channel, your risk will move down along with the downtrend line and you will find your risk slowly getting farther away from your original entry. Your second option for risk level locates at the 50% fib retracement @ $102.97. If you take a closer look, you will find the 50 day moving average @ $103.25 is slightly above the 50% fib level. A break of the 50% fib level is also the break of the 50 day moving average; if this happens, I think the oil price will resume its’ range movement in the consolidation range @ $95.1 - $103.75. Target wise, because the bull flag pattern is actually the 1^st and 2^nd legs of a 1-2-3 move, so, to locate your target, you simply add the 1^st leg’s length to the bottom of the 2^nd leg. Assume, the bottom of the 2^nd leg move (the flag body) is at $103.75, the consolidation top:

Target = End of 1^st move – start of 1^st move + lowest point on the 2^nd leg

= $109.95 – $95.84 + $103.75

= $117.86

Same situation we have encountered in the weekly chart, the target is above the 52 weeks high @ $114.83. Try to get some of long position out before the breakout level to have some profit buffers the downside loss. Once the oil price is a confirm breakout, get most of your position out around the 2012 range top @ $114.32, hold on to a small amount and let it runs to the pattern target @ $117.86 or the weekly target @ $124.22. But remember don’t ever let a winning trade turn to a loser; if the breakout doesn’t hit the target levels and retreats, take your profit on the pullback and be ready to re-enter when price declines to your initial entry point.

In the hourly chart, you have a better picture of the flag body. In the lower section, when the flag body began to form, the volume was mostly at average until I see an increasing volume trend recently, this gives a signal of the oil price is about to make a move. If you want to trade this intraday, there is a narrower range play between the consolidation top @ $103.75 and the breakout level @ $110. You want to get long when the oil price comes down to the minor support @ $105.23 and sell at the minor resistance @ $108.72. Your risk is the 1^st pivot support @ 105.19, which is only $.04 cents away; if you don’t want to get shaken out, give it a $.20 - $.30 cents risk. Another thing I want to add is, since the underlying trend is on the upside, you only want to play this on the long side, do not attempt to short until there is a clear down signal.  

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

3/21/2012 XLF #5

SPDR Financial Selected Sector Fund (XLF)

The financials have been leading the market lately. Bank of America, Citigroup, JP Morgan and Wells Fargo…etc. have been making new highs every week (I think this is insane). Like the SPY update I just did, I'm going to re-establish my plan and trade what I see.    

The XLF broke out of the consolidation range @ $14.4 - $14.98 from the last post. If you look at the weekly chart, the move started at the beginning of the year, consolidated for 5 weeks and then broke to the upside on JP Morgan’s positive news last week, which is an exact 1-2-3 measured move. Generally for measured move, you will expect the exit move having the same length as it enters the consolidation range. The 1^st leg was a $ 1.75 run so I'm looking at the move finishes somewhere around $ 16.15 ($ 14.4 + $1.75). However, here is a problem, I see a resistance level @ $15.8. When you look to the left, the XLF topped and bottomed at the $15.8 level several times in a 3 years’ time frame and you will see more when you look at the chart in 5 years’ time frame. If the XLF closes above the $15.8 level with the following bar opens above it, the resistance level will become a support. Once the XLF breaks the resistance, it is free to run up to the major resistance @ $16.76 from the technical stand point. Personally, I doubt if the XLF can make another $1 dollar move up in the next couple weeks especially tax season is underway.

If you go to the daily chart, you can see better how the XLF reversed on the support/resistance level @ $15.8 in the last 3 years. Up ahead, there is also an interim resistance @ $16.23, which locates only $.08 cents away from the measured move target @ $16.15. If the current move continues to push, I expect some sort of consolidation to happen around the resistance level @ $16.23. Furthermore, I see the XLF is currently trading in an up sloping channel but I think the channel is too steep that the uptrend can’t be sustainable for too long, I'm expecting a pullback to happen by next week. A pullback that breaks the channel should find support at the previous consolidation top @ $14.98. But right now, I will continue to trade with this channel until it is a confirmed breakout. Even the XLF is trending up, I don’t recommend to take a long position at current price @ $15.81 since the 3^rd leg measured move is almost over; you don’t want to get stuck in an envy buy area. It is better to wait for some sort of retracement before you go long in this. A side note to this is, as the XLF moving higher volume declines, fewer buyers are willing to buy while more sellers are stepping in, bringing in more volatility to the game. If the XLF quickly rises above the resistance @ $16.23 in the next few bars, I don’t think it’s a bad idea to short the stock with a small stop loss for a quick little pullback.

Another thing I want you to see in the daily chart is the diamond bottom I drew a few posts back. You can see the move started in early August 2011 around $14.98 and when the XLF exits the pattern, it rose to the pattern’s target @ $14.98, the same place where it started. Remember that whenever you see a quick rise or drop that leads into the diamond top or bottom respectively, you want to set your target at the same level where the rise or drop starts, 70% of the time your target will reach when the breakout is triggered.

In the hourly chart, the SPY was stair stepping up until it started to form a bull pennant in the last 2 trading days. As the price bars coming to the edge of the pennant, I'm expecting a breakout or breakdown will happen tomorrow; and since this is a bullish pattern with declining volume, the XLF will most likely break to the upside. Nevertheless, the breakout can’t be confirmed until price actually goes above the temporary resistance @ $15.97; the target for the breakout trade locates at the resistance level @ $16.23. For the downside risk, I think the XLF has pretty decent support sitting underneath its’ current price. With the 50 SMA rising to the 3^rd consolidation range @ $15.63 - $15.75, the bottom of the 3^rd range @ $15.63 will be the risk for the breakout trade. Furthermore, there are 2 levels of pivot support sitting at $15.66 and $15.73, these should provide further downside support for the rest of the week. And if pullback does happen, the 2^nd consolidation range @ $15.32 - $15.45 will provide another level of support before it heads toward the 1^st consolidation top @ $14.94. However, I don’t recommend you to hold a long position from one range to another, once the price drops through the bottoms of either the 3^rd or 2^nd range, you should be out of the long trade already because I don’t see any underlying supports in between the consolidation ranges.    

  

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

3/19/2012 SPY #7

S&P 500 (SPY)

Hi all, first I would like to apologize for the recent delay on the blog updates. I'm currently in an online course for advance trading technique, hoping to put in some more elements in my trades and blogs.

The S&P moved up quite a bit lately, that’s means I can’t regard the up move as an overbought action anymore and I have to get my short bias of the table while reestablishing my mindset on the underlying trend. Remember “trade what you see, not what you think.”

Now let’s take a look at the broad trend from the weekly chart. The S&P pushed to a 2 years high today, last time when it was trading at the current level was in 2007 and 2008, therefore I go all the way back in the weekly chart to look for overhead resistances. I dropped a fibonacci retracement study from the 5 years high @ $157.52 to the 5 years low @ $67.1. Last week, I learned that once a stock retraces more than 61.8% in the fib retracement study, it should be treated as a reversal, or a continuation on the retracement direction. And here it is, the S&P clear the 61.8% fib retracement level @ $122.88 in late 2011 and pierced through the 78.6% fib retracement level @ $137.95, which was also the consolidation top and the 52 weeks high before it broke out. I'm expecting the current move to take the S&P up to the resistance level @ $143.32. If you take a look at late 2007 and mid-2008, the S&P found tops and bottoms at this level respectively, therefore I think moderate resistance will be found here. I also want to remind you guys tax season is coming up, people will try to take some profit out to pay tax, creating some selling pressure, do watch out for a slight pullback as we move forward to early April. Nevertheless, the pullback will be a buying opportunity and it should not go below the 1^st support level@ $134.64.  

In the daily chart, the S&P is still trading above the uptrend line (green color) I drew from my first post on this 2 months ago, therefore I think the pullback will not go any deeper than the green uptrend line. Also, I see the S&P flat based in between the gap top support @ $133.75 and the 1^st support @ $134.64. If you are willing to take a little more risk on the long side, you can set a hard stop at the gap top support @ $133.75, a break on this level should fill the gap bottom @ $132.83. Right now, the S&P looks like it is setting to make a 3^rd leg on the 1-2-3 continuation up move. The 5^th to the last bar is a wide range green bar with decent volume, this is the 1^st move on the 1-2-3 continuation. Followed by that are 3 consolidation bars that move in a narrow range, which is the 2^nd move on the 1-2-3 continuation. Today the S&P broke out of the consolidation range, triggering the 3^rd move. You can go long the current price @ $141.28 with a bottom of the consolidation as risk, which locates at $139.48, while setting your target at the resistance level @ $143.32. However, like I always say, you want to get in a trade with attractive risk & reward ratio. This long trade has a 1-to-1.13 ratio ($1.8 risk vs. $2.03 reward), which is an “okay” trade only; but you can always manage to get the stock at lower price if it retreats before it goes.   

In the hourly chart, price moved back to the up sloping channel previously drawn. And I also find 2 levels of support @ $139.48 and $140.74 sitting underneath it, these levels should be decent for 1 to 2 days. While price most likely trade up in the channel, I would use the minor support level@ $139.48 as a hard stop if I'm long, because I don’t see any underlying support levels until the gap top @ $139.48, which is $1.5 below and the extra risk doesn’t worth to take.    

On the other hand, I see it formed an inverted head & shoulder pattern when it broke down from the channel. The pink trend line in between the gap is the neckline to the inverted H & S pattern, when the S&P break above the pink line, it’s the confirmation of the breakout. The target on this pattern can be found by the standard measure rule,  

Height of pattern (B - A) + breakout price (C)  

= $138.06 - $134.36 + $137.89

= $141.59

The target on the pattern trade is $141.59, which is only $.30 from the current price. I know the run on this is exhausted, but if you follow my blog on a regular basis, you should realize the fact that inverted head & shoulder pattern always hits its’ target calculated with the standard measure rule formula, so keep an eye on this pattern because it works.

I do see some good setups but I'm don’t find a trade with good risk & reward ratio, so I don’t have any trade to write down this time until I see some “good” trades emerge from the water. I am also writing the updates on XLF and OIL, I will try to get these done asap, come check back in a few days.

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

3/11/2012 XLF #4

SPDR Financial Selected Sector Fund (XLF)

The XLF ran into a range consolidation as I expected in the last post. Instead of using $14.62 as the range bottom, the XLF actually flipped around this price level several times. If you look at the XLF in the daily chart, rather than ranging between $14.62 and $15.67, the range is sitting between $14.4 and $14.97. Because the range top @ $14.97 is only $.03 cents away from the whole number level @ $15 and whole number always serves a good support and resistance level, therefore I think the short term range resistance @14.97 will be a decent level. I am also keeping the minor resistance levels @ $15.19 and $15.4 from the consolidation happened 8 months ago, price should reverse on these levels at least once before it goes higher. For the support levels, if the XLF breaks the short term range support @ $14.4, it should head toward the key support level @ $13.95. Yet, the 50 day moving average (50 SMA, grey line) will be another source of underlying support, beware of a bounce on the 50 SMA if you are playing this on the short side. Speaking of moving averages, the rising 50 day moving average crossed above the declining 200 day moving average (200 SMA, white line) forming a bullish golden cross and signals a continuous uptrend.

I am fifty-fifty about the current price trend. The daily chart tells me the trend is bullish while the hourly and 15 minutes charts are showing some weaknesses on the XLF. If you are playing the XLF on the upside, you want to wait until the price gets back to the short term range support @ $14.4 before you jump into a long position. Once you get in, you need to have a hard stop @ $13.9, $ .05 cents away from the key support level@ $13.95 (sometimes the market makes a “peek-a-poo” low just to shake everyone out). Otherwise, you can use the 50 day moving average as your risk level, which is currently sitting at $14.25, or the 200 day moving average, which is sitting at $13.66 and should move above the key support level @ $13.95 in the near future. For target, I suggest getting 30% to 50% of your position out at the range top @ $14.97 to secure some profit first. If the XLF breaks the range top resistance, expect reversal to occur at the minor resistance levels @ $15.19 and $15.4, try to thin out some of your position at these levels and let the rest rides up to the main resistance level @ $15.67.

If you want to play the XLF on the short side, it’s better to play this off the hourly chart. In the hourly chart, I see a half legit double tops pattern. The reason is because, on one hand, the middle valley is far too deep for a legitimate “M” pattern while, on the other hand, price action double topped at the same price level @ $14.97 and it’s at the top of the trend at the same time. Nevertheless, I’m going to regard this as a double tops pattern and play this on the short side since the risk to the upside is small here. The middle valley bounced at the range support @ $14.4, which is also the 61.8% Fib retracement ever since the XLF rose into the range. Consider that the $14.4 price level has massive support, this is where my target locates at. The ideal entry price for the short position will be the short term range resistance @ $14.97 but the current price @ $14.92 is a decent price for entry too since it is only $.05 cents lower. My risk for the short position is tight. At $15, besides it’s a whole number level, it is also the 1^st pivot resistance. I will set my risk @ $15.04 so that the market won’t shake me out if it makes a “peek-a-poo” high and drops back to the range immediately. If you are willing to put on more risk, you can move your stop to the resistance level @ $15.19. Downside to this is doing so will make your risk & reward ratio smaller but, on the upside, you can always average in your position and get a higher short selling price.

Here in the 15 minutes chart, I want you to take a look at the volume of the highlighted areas. Every time when the XLF comes close to the short term range resistance @ $14.97, trading volume declines. Compares to the trading activities at other price levels, no one was trading the XLF at the top of the range. Unless I see an increase in volume near the top of the range, I don’t think an upward breakout will happen for the next several days.

*From now on, I will write down trades as if I'm trading in a live account, some of the trades may trigger when some may not. Doing this can let me better evaluate my performance at the end of each month and see what I am lacking in my trades.*

Trade #1

Position: Sell short @ $14.92     

Target: Buy cover @ $14.4

Stop loss: @ $15.04

         

Trade #2

Position: Buy long @ $14.4

Target: Sell 50% @ $14.97, trailing stop sell 15%@ $15.19, trailing stop sell 15% @ $15.4, sell rest 20% @ $15.67

Stop loss: sell 50% @ the 50 day moving average when it hits and stop the rest 50% @ $13.90. If the 50 day moving average rises above the short term range support level@ $14.4, sell stop 50% @ $14.4 and stop the rest 50% @ $13.9

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

3/5/2012 SPY #6

S&P 500 (SPY)

First of all, I want to let you know that I'm heavily biased to the downside regarding the current market. I simply don’t think the current US economy recovers enough to make another 52 weeks high, therefore I’m expecting the market to get a major reversal in the near future. I will try my best to analyze the stock move from a neutral stand point. If you don’t agree with what I say, I hope you can use this post as a reference and find something out of it.   

In the hourly chart, I see several bearish signals in the S&P. first, I see the S&P broke the uptrend channel and started to go side way, signaling the end of the uptrend yet this does not necessarily mean the up move is over; it can always consolidate for a while then continues on the upside again. Second, if you look at the peaks and valleys, each subsequent peak and valley is higher than the previous ones (P3>P2>P1, V4>V3>V2>V1) except peak #4. If the S&P is continuously trading higher, peak #4 should locate higher than peak #3 to complete the trend (usually called higher highs), instead Peak #4 unable to push higher and ended at the same level @ $138.2, where Peak #3 ended. This is only half of the picture though, the S&P needs to form a peak #5 that is lower than peak #4 (lower highs) and a valley #5 that is lower than valley #4 (lower lows) to confirm the trend reversal. Third, I also see a double tops pattern has been developing since last week. This “M” shaped pattern is a bearish signal especially at the top of the trend. If the S&P can’t make another higher peak #5, the signal of this bearish pattern is even more significant and a breakout to the downside will confirm when price drops below the confirmation level @ $136.16.    

The S&P is currently sitting at $136.94. Since bearish signals are seen here, I’m playing this from the short side. I think the best target for the double tops pattern is the 1^st support @ $135.52; unless you are willing to wait, you can push your target down to the shoulder tops support @ $134.69 (from the head & shoulders pattern few posts ago). The risk levels are quite straight forward as well. Most of the time when you trade a double tops, the top of the “M” pattern is the risk to your short selling position, that means $138.2 is your risk here. I also find a resistance level @ $137.29 from previous weeks’ price movements, this can be another option for the stop loss level too. The only question is where is the entry? If you wait the pattern confirms @$ 136.16 until you get it, you can only make $.64 cents at most and you will have at least a $1.13 dollars risk if you set your stop loss at the support/resistance level@ $137.29. This will give you a trade with a 2-to-1 risk & reward ratio, which is not good because you are risking $.02 cents for every $.01 that you trying to make. Rather, I’d prefer to sell short at the current price @ $136.94. In this way, you have a $1.42 potential gain from target and a minimum risk of $.35 cents, which has a 1-to-3 risk & reward ratio.

In the 15 minutes chart, I want to show you the diamond pattern. I would call this a diamond bottom pattern, which is bullish; however, if I put the bearish signals from previous chart into consideration, this should be a continuation diamond pattern to the downside. If you want to look at this as a diamond bottom, you will expect the S&P breaking the diamond frame on the upside. The diamond bottom pattern is like putting a mirror in the middle of it, the way it exits should reflect the way it enters. If you long the S&P right at the pattern breakout, you can set the target at the pattern begin point @ $137.75, otherwise, any overhead resistance such as the pivot levels @ $137.4 and $137.79, or the declining 200 periods moving average will be decent targets too.

In another case, if the S&P breaks the diamond to the downside, you should expect this to be a continuation diamond pattern. The measured move to the downside target should have the similar length to the move that leads into the pattern ($137.75 - $136.86), that is, you are looking for a $.89 cents move to the downside. However, a $.89 cents down move from current price @ $136.94 is just right pass the double tops confirmation; I suggest using the intra-day support @ $135.79 as target or sticking with the target from the hourly chart, which is the 1^st support level @ $135.52, in order to maximize gain on the down move.

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

3/4/2012 GOLD #3

Gold Future (/GC)

In the daily chart, gold price tried to push through the 50% Fib extension level @ $1766 but the breakout on low volume didn’t allow the move to continue higher, leading gold price to drop back to the same price level @ $1693.7, where it broke out from the descending triangle in January, 2012. Notice that gold price bounced on the rising 50 day moving average (50 SMA, grey line) and, at the same time, the rising 200 day moving average (200 SMA, white line) is only about 30 points away at around $1675; with these 2 moving averages closely sitting below the current price @ $1712, I believe heavy support should be found somewhere between $1670 and $1690. The rising 200 day moving average will be the ultimate risk for any long trade I mention in the rest of this post, make sure do not let any price bar closes below it because if this happens, it is a signal of downward break out.

On the other hand, I see a broadening tops pattern. Broadening tops is neither a bullish nor bearish pattern, you always want to trade this pattern with the underlying trend movement when it is forming. To trade this pattern aggressively, buy the gold future when price bounces off the lower trend line and sell when it reverses at the upper trend line. If you prefer to take this trade safely, you want to wait until the future price reverses on either of the trend line before you get in a position and expect a breakout to happen; that means if you get long at the lower trend line, you expect gold price breaks out of the upper trend line and vice versa. Both trading styles aim for different purposes, the conservative trade profits from the pattern breakout while the aggressive one gets in from side to side in order to profit from the price swing. The later one requires good risk management to constantly adjust the price target and stop loss level with regard to price actions while the earlier one simply requires a trader to set a price target and stop loss level and let price runs to either level. 

I think the broadening tops pattern offers a good trade base on the risk & reward ratio. If you get long at the current price level @ $1712.4, your risk is either the lower trend line or the 200 day moving average. Putting this in number, the risk level will at most be at $1670, which is 42 points downside risk. To the upside, if you use the upper trend line as target, I expect the next touch will at least be above $1800, which is an 88 points move. The risk & reward ratio here is about 1-to-2.1. Nevertheless, if you wish to gain more by trading the breakout, target can either set at the next overhead resistance @ $1817.8, which is the 61.8% Fib extension level, or you can apply the standard measure rule formula:

Height of pattern (A - B) + breakout price

= $1792.7 - $1688.4 + breakout price

= $104.3 + breakout price

According to the book “Getting Started in Chart Pattern” by Thomas N. Bulkowski, this formula works 60% of time. If I use the result calculated above and assume the breakout happens at $1800, target will locate at $1904.3, which is only 20 points from the all-time high @ $1923.7. Reaching this price target is not impossible but it will definitely take a much longer time to do so, therefore I prefer dividing the height by 2 before adding to the breakout price in order to get a price target at $1852.15.

In the hourly chart, gold price is forming an ascending triangle pattern. Ascending triangle is a non-directional pattern, therefore it is not recommended to trade it before a breakout happens. However, when the upsloping price trend is at the bottom, you normally assume an upward breakout to happen. Since the price movement is coming to the end of the pattern, I'm expecting a breakout to occur sometimes soon and this breakout trade should last about 2 to 3 days until the move exhausts. If gold price breaks the flat top @ $1726.6 on the upside, the standard measure rule used in the last paragraph works 75% of the time. The upward breakout target will locate at:

Height of pattern (A - B) + Breakout price

= ($1726.6 - $1688.4) + $1726.6

= $1764.8

On the other hand, if price broke below the upsloping trend line, the standard measure rule works 68% of the time. In downward breakout, you should sell short the gold future when price closes below the upsloping trendline and the price target will be at:

Breakout price - Height of pattern (A - B) 

= $1726.6 - ($1726.6 - $1688.4)

= $1688.4

For the upward breakout trade, the upsloping trend line of the ascending triangle is going to be your risk level, which also means that the closer to the end of the pattern, the lesser risk you will have. And for the downward breakout trade, your risk will be the flat top resistance level @ $1726.6. Considering the risk & reward ratio, I think the upward breakout trade is a better one to take.

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