The first thing I did yesterday was close out all of my shorts at the open. By 9:40AM, I was in 100% cash. How's that for perfect timing? If you missed it, you can go through my tweets. I was up +3.8 entirely from day trading select names, such as CAR, AGM, VVTV, and DTG. Heck, even Jake followed my trades. If you joined me, you came out with free money in your pockets.
The market is in a precarious position right now. I suspect that a wide-ranged consolidation will continue, therefore, I will refrain from swing trading and go exclusively with day trading. Neutral consolidations are hazardous to swing trades and benefits day traders the most. Conversely, trending markets favor the swing traders, leaving the day traders in the dust.
This bear market has lasted for 20.5 months so far. We are still down 41.2% from the October 07 peak, but up 36% from the March 09 low. I still maintain a bearish stance, but believe it is not time to short yet.
Let's talk about the exit timing of my short positions. How did I know the market was going to rally? I didn't. The only reason why I covered was because I did not get a gap down to at least 890, which was the main criteria for me. In addition, the magical lines that I use showed me immediately that there was strength in the market, prior to the spike higher. I used my "Connect-the-Dots" strategy (the "dots" can be seen on the 2-month/60-min chart). Sounds simple, right? This will have to be an entirely new educational article.
Finally, I broke down the major SPDR select sectors (XLV, XLB, XLK, XLI, XLP, XLU, XLY, XLF, XLE) and added the patterns, ratings, and technical notes:
I expect continued consolidation primary between the 895-910 area on the SPX. I am short 10 names with 5% allocated per position for a total of 50%. The names are as follows: PCU, TTI, WTI, HLX, TC, JRCC, HOC, TSO, SD, CRZO. I see that futures are up +1%. I made a good +1.73% yesterday, so I am willing to sacrifice all of those gains if the market breaks out of the range today.
Today's action depends entirely on the FOMC's announcement. The market will spike up or down intra-day and you will have only minutes, if not seconds, to act. It is imperative that you have your watch lists (long and short) prepared and ready to go.
I am still leaning towards the bearish side, despite the fact that I remain in 100% cash. I took a poll a few hours ago asking traders how the market will act today, and here are the results:
As a group, this only means one thing: indecision. It will be obvious which side will win. Personally, the best option is to remain in cash until a clear direction is determined.
The SPX finds primary intra-day 10-pt support between 880-890 and 10-pt resistance between 920-930. There is also overhead resistance at 910.
Once again, I drew blank boxes for the remainder of June and all of July. Use your own imagination. I also included a weekly 7-year chart to put things in perspective:
Here are the COMP and RUT, both in precarious positions and threatening to further develop the head & shoulders pattern:
Finally, I look to the European indices (DAX, CAC, FTSE) for guidance due to the fact that they have broken down further than the US indices. Currently, Asia in the best shape.
Imperial Grey Knight Terminators fighting the Chaos forces of Khorne at the tainted Basilica of St. Mariel
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I expect a doji inside day today. The locations of these inside days are important on every major index. For the SPX, I expect the range to be around the 900 level (50-day/200-day) continuously. For the DJIA, I expect it to be around 8377-8550, or between the 50-day and 200-day MA's. The COMP's range should be around the 1775+ level. The RUT's range should sit above the 50-day MA at 494+.
Intraday, a rising wedge would be ideal and a break of the wedge would be an entry point for shorts. I am focusing on the materials and industrials to make up the majority of the campaign. If you are looking at dollar stocks to short, stop. Short positions should be higher priced.
Looking at each of the sectors (XLV, XLB, XLK, XLI, XLY, XLP, XLF, XLE, XLU), the materials, industrials, consumer discretionary, financials, and energy are leading the decline, therefore, using the SPX as the leading index.
Ultramarines Space Marine Chapter preparing for the First Battle of Armageddon
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This article will attempt to explain what I look for, the best setups to short, how to short using MAs and other technical basics dealing with short selling. Short selling is for intermediate and expert traders and I do not encourage beginners to jump into shorting stocks, especially if you are the type that likes to hold onto losing positions. Treat this only as an educational article since I am not providing any legal or financial advice.
There are numerous patterns that one can search, however, I focus on 7 primary setups for shorts (If you read my article on long patterns, there were also 7 patterns). The patterns are as follows:
---Patterns---
1) Double Top:
The double top formation takes several weeks or months to develop. It's a reversal pattern that stops an extended uptrend. The 2nd top is unable to make a new high and threatens to breakdown from the neckline, which is the nearest support for both peaks. The idea short entry is either early on the breakdown or on the flag (if develops at the neckline). There are several secondary entry points in case you miss the first.
2) Descending Triangle:
The descending triangle is an easy pattern to find. This triangle holds horizontal support, but continues to make lower lows, creating a downtrend. The ideal entry is to enter before the triangle breaks since the breakdown is usually a gap down or a powerful intraday breakdown. I always take the risk to short as the triangle develops.
3) Initial Breakdown + Flag Combo:
The initial breakdown + flag combination is 2-part. Part I consists of a major breakdown (usually the largest red candle present in the entire uptrend) on massive above average volume (typically the largest volume present on the chart). Part II consists of a flag that indicates that the stock is in a reactionary rally and the volume must be low. The ideal time to short is not on the initial breakdown, but on the flag.
4) Head and Shoulders:
The H&S is a popular pattern. The most important part of the pattern is the right shoulder since a lower high is necessary to confirm that the uptrend is ending. Like the double top, you have the option to short on the breakdown or on any flag that develops on or near the neckline. Typically, there are several short entry points following the initial move lower.
5) Rising Wedges:
Rising wedges would be difficult patterns to determine if it weren't for volume. The wedge is a uptrending trading range that will become more and more narrow as it reaches the apex. Volume must get lighter and lighter as the pattern progresses. You may enter the wedge before a breakdown, but I like to short in the breakdown (which should be accompanied by volume expansion) for confirmation.
6) Parabolic Moves Up:
These are stocks that jump 100%, 200% or more in a span of several days. The top of the pattern is marked by buying exhaustion and the best way to determine the exact top is to look out for the following candlestick patterns: doji, gravestone doji, long-legged doji, shooting stars, dark could covers, and bearish engulfings. All patterns are typically accompanied by the highest volume bar on the entire chart. Entering on the topping day may provide more profit, but it is riskier. The next day is considered the confirmation day in which the stock breaks down. The 2nd option for entry (less risk) is to enter at the very beginning of the breakdown.
7) Bear Flags/Pennants:
Bear flags/pennants are the most common short patterns. They mark continuations in a downtrend and are highly reliable (similar to bull flags). The idea time is to obviously get in before the breakdown, and you may only have 1-2 days to do so. The volume must be light on the flag, and the volume should increase singificantly on the breakdown. Think of this pattern as an inverted flagpole /w flag.
---Moving Averages---
In addition to the patterns themselves, moving averages play an important role. I use the 20-, 50-, 100-, and 200-day MA's for long and short setups, but I also incorporate the 10- and 15-day MAs because a stock declines much faster, thus you will need a much shorter-term MA. Find the right MA that guides the stock because not all stocks follow the same MA.
I categorize moving averages in two ways: MA's acting as resistance and MA's for churning. Moving averages act as magnets and they are just as reliable as the setups they guide. When we went long, we used the various MA's as support which acted as springboards to propel the stock higher. Think opposite of that now. MA's for churning simple means that a stock flags either immediately above, on, or under a stock. Usually, the stock cannot make a higher higher and/or a 2nd MA is looking to catch up to the stock.
---Books---
Recommended books on short-selling:
1) How to Make Money Selling Stocks Short by William O'Neil (Wiley, 2005) - [Technical, Swing & Position Trading] 2) Sell & Sell Short by Dr. Alexander Elder (Wiley, 2008) - [Technical, Day Trading] 3) The Art of Short Selling by Kathryn Staley (Wiley, 1997) - [Fundamental] 4) Sold Short by Manuel Asensio (Wiley, 2001) - [Fundamental] 5) Sell Short: A Simpler, Safer Way to Profit When Stocks Go Down by Michael Shulman (Wiley 2009) - [Macro]
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The best way to become an effective short seller is by making it a habit of studying hundreds and even thousands of charts every week. Train your eye to see the setups, the accompanying volume, how the MA's line up, etc. The only way to do this is with practice. Short-selling can become very profitable due to the simple fact that stocks drop faster than they rise (in most cases) and for me, it typically only takes about 1-3 days to make a decent profit of 10% or more.
Trade only the best setups to increase your odds. I do recommend the use of stop losses above key resistance areas due to the fact that losing short positions can cause serious damage if left unattended.
---Short Setups---
Here are some POTENTIAL short setup that I found over the weekend:
