Goldman Sachs Triangle Throwback Trade

Jan 15, 2008: 7:55 PM CST

Goldman Sachs (GS) recently formed a consolidation coil or triangle, and recently set up a classic “throw-back” or second chance high probability entry.

Notice the absolutely clear triangle consolidation from November until early January, and the subsequent break in mid-December.

I posted previously about the triangle break as a potential opportunity to trade GS short (or sell any long position you were holding).

Triangle breaks are often susceptible to what’s known as “throw-backs” which mean that, instead of trending sharply downward at the direct break, price meanders back in a retracement swing to retest the breakout point or, more commonly, the apex or peak of the triangle that formed.

Breakouts are actually lower probability trades than throw-back trades. Throw-back trades often offer higher probability opportunities to enter a position.

Throw-backs also tell us why it’s generally unsafe to trade with ultra-conservative stops (those that are far too close to your trade entry price). A stop for the consolidation break should actually be on the opposite side of the triangle, which may be too much risk for some traders to handle.

A break at $210 should have been accompanied by a stop around $225 that decreased either as the trade moved in your favor, or with the upper declining line of the triangle pattern.

Notice how the stop is much tighter and more logical (and more conservative) than the initial break-out.

The “Throw-back” trade called for entry near $215 with a stop above $220. Initial targeting would have been the distance from the height of the triangle, or about $45 (the distance between approximately $200 to $245 or $250).

See for yourself if you would like to learn more about this trade, and potentially incorporate it into your growing trading arsenal.

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Bearish Indications from Sector Rotation. Recession?

Jan 15, 2008: 10:32 AM CST

The Sector Rotation Theory is again showing majorly bearish money flow patterns into the most defensive sectors possible.

The Utilities, which offer attractive dividends and who also perform well in conditions of falling interest rates, have increased 15% in the last 65 days as the market has turned bearish. Utilities greatly outperforms all other of the nine major US Stock Market sectors.

There is a three-way tie (which sounds similar to the US Presidential Primaries) for second in the Energy, Consumer Staples, and Healthcare sectors.

Rising Energy (oil, gas, etc) prices are bearish because they serve as a virtual tax on businesses and consumers.

Rising Consumer Staples stocks are bearish because large funds and traders are moving their money into the security that these stocks provide. Even in recessions, we must still buy toothpaste, food, tobacco (for those who do), home cleaning supplies, etc. When Consumer Staples (up 9.58%) significantly outperform Consumer Discretionary (down 9.35%), this is an extremely bearish omen. Consumer Discretionary stocks include gaming, hotels, luxury goods, travel, automobiles, etc. The idea is that, in bad times, we can reduce spending on these items while we cannot do so on necessities.

According to one view of the Sector Rotation Model, where are we in the current rotation of funds?


We are likely somewhere in the teal (light blue) box, and I have drawn the solid vertical blue line to indicate where I think we might be as well. Utilities are starting to outperform, while Energy, Consumer Staples, and Healthcare Services have been doing well for some time now.

This would indicate that the Stock Market is in a bear market, and the US Economy (green arch) is beginning Early Recession. This would match well with the TV pundits that are pondering whether or not we’re already in a Recession.

These charts are courtesy StockCharts.com founded by John Murphy. Murphy frequently discusses Sector Rotation insights as well as education on Inter-market analysis, and I am providing an example of a video presentation from INO.com TV (discussed briefly in my earlier post):


This presentation, and many other videos are available to you there (membership page). It’s actually $12 per month for unlimited access, or $8 per month with a full-year membership. I am very much enjoying my membership so far and the vast number of presentations available to me there. I only wish I had more time to watch additional videos!

I strongly encourage you learn more about the potential forecasting value of Sector Rotation Theory, as it served to me as one of those “lightbulb” educational moments when was first introduced to the concept of money flow and institutional movements into and out of key sectors at definitive points in the business cycle and economy.

Sector Rotation Theory can be of benefit primarily to the longer-term investor, but also is is extremely applicable to swing traders and even day traders who hone in on key stocks in key sectors that they expect to move in the next few days.

Whatever the resolution, we’re in for some interesting times ahead!

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Apple Shows Classic Gap Fade

Jan 15, 2008: 9:54 AM CST

I love it when trades work out as close to perfect as possible. Apple Inc (AAPL) exhibited a classic 1,2,3 Gap Fade play this morning that allowed for major profits for aggressive traders:

The 1,2,3 Gap Play is as follows:

1.
First trade with a gap is to FADE the gap and play for yesterday’s close. Generally, it’s best to give a few minutes of shake-out and enter when price begins to close the gap. Aggressive traders can enter to fade a gap immediately, but placing stops can be difficult

2.
Gap Fill (first trade exit with profit) and reverse trade to play the initial impulse, which was a down impulse. This is based on the principle “Momentum Precedes Price” in that the initial gap is a large momentum impulse and the ‘fade’ is the retracement. Once the gap is filled, this sets up the classic “Impulse Sell” (or “Impulse Buy”) trade. The target can be the original intraday price low, or often just beyond that. New momentum lows (indicated by the blue oscillator) mean that odds favor that new price lows are yet to come

3.
Impulse Sell exit with profit. The new momentum low reading correctly forecast lower prices, and did so rapidly, so nimble traders were able to take advantage of most of the move. The “3″ signifies the Impulse Sell trade’s exit with profit. No more trades can be made based on the 1,2,3 pattern.

 

 

Gap plays need to be traded aggressively and with confidence, and realize that if the first trade is stopped out, odds switch to favor continued price movement in the original direction of the impulse, and that the price action for the day will be that of a “Trend Day” structure.

Also, realize that gap fades require no indicators at all, other than price itself. Complex indicators can degrade the edge present in this simple strategy.

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154 Expert Traders Right On Your Own Computer Anytime

Jan 14, 2008: 7:29 PM CST

A fellow blogger referred me to the Video Education and Classroom section at INO.com, which contains video and audio lessons complete with workbooks and PDF file lesson hand-outs for over 500 videos available to you On-Demand.

I also recently joined the site, so I will possibly be reviewing some of the videos I watch and giving brief commentary on the site and its services.

From what I can find with my initial look-over, INO TV currently offers fifteen “channels” from the Beginner (channel 1) to advanced trading systems (channel 11) with channels for options traders, currency FOREX traders, futures, stock, and day traders. INO also addresses psychology and money management.

On-Demand content is offered at your convenience 24/7 from a host of popular educators including Lawrence McMillan, Linda Raschke, Mark Douglas (Trading in the Zone) Larry Williams, Adrienne Toghraie, and many others. I haven’t completely looked at the whole list but there are a few educators whom I have met and hold in highest respect and I look forward to watching those videos and refreshing my knowledge and learning new techniques.

Most videos contain an audio MP3 file you can download permanently and listen to on the go with any portable music device (iPod, iPhone, Zune, etc).

The people at INO.com provide two PDF booklet bonuses when you sign up and it’s an extremely affordable service for what you get.

There are two plans, one being a quarterly price of $50, and the other being a full-year membership at $100 total, which saves $100.

Further information is provided via their “What You Get” page.

As an updated disclosure, I have become a commissioned affiliate of Market Club.

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Trend Day Up – Market is a Broken Record in Reverse

Jan 14, 2008: 6:37 PM CST

I wonder when this market will ever gets its head on straight again or regain its footing, whether up or down.

Typically, trend day ups do not follow a trend day down. Often, following any sort of trend day, price consolidates or can even trend a second day in the same direction. Rarely do you have the pattern we just experienced in the US Stock market.

Nevertheless, today was another classic trend day, but in the upwards direction:

Recall that early indicators of a trend day include increased volume, increased range expansion (especially of the first fifteen minute bar in relation to the previous 7 days’ opening 15 minute bar), gap or impulse, high breadth readings, etc.

Today, following a pronounced momentum divergence on the 5-minute charts, we saw a large impulse gap in the US Indexes.

#1 The first “trade” or play is to Fade the Gap and try to short the market to play the reaction against the initial impulse. Usually, the gap (also known as “windows” in Eastern circles) closes at least 50% and more than not, will close 100% (retrace all the way to yesterday’s close).

I always try to fad any Index gap that is less than 100 Dow Points. If I am stopped out, or the trade falters at the 50% retracement, I know that we have a true momentum impulse on hand and the odds then shift majorly that price will continue to trade/trend in the direction of the original gap.

That happened flawlessly today.

When you expect a trend day, put on a core position and buy pullbacks to key moving averages. NEVER FADE A TREND DAY.

I have circled key trades you could have made within the structure of the 20 and 50 period moving averages.

When you detect a trend day early, be courageous and bold and use a bit of leverage if need be. Often, you’ll make the most money for your month if you aggressively trade trend days.

Conversely, you’ll lose perhaps weeks worth of profits if you continuously fade a trend day. Do you see any opportunities to ‘get short’ other than the initial opening gap? There are some, but they’re extremely risky and offer very little reward.

Your timing would need to be virtually perfect and your reflexes intensely sharp, given that this is the 5-minute chart.

Why not trade simply and effortlessly in the direction of the trend? That way, even if you’re initially wrong (price trades against you), the odds still favor higher prices yet to come, and in this case, they do.

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