Advice From Some Top Technicians

It’s the last week of summer and we’re not really expecting much. The final August work week is usually a snooze-fest. I hope I’m wrong, but probably won’t be. It’s just that time of year. So let’s not force anything if it isn’t there. As Ted Williams said, the most important thing is to get a good pitch to hit. Not mechanics. In other words, be patient and let it come to you. He also said that a good hitter can hit a pitch in a good spot three times better than a great hitter can hit a ball in a questionable spot. Think about that for a minute.

And with that, here are a few words of advice that some top technical traders have given us over the years:

They (traders) would rather lose money than admit they’re wrong…  I became a winning trader when I was able to say, “To hell with my ego, making money is more important” – Marty Schwartz

 

To succeed as a trader, one needs complete commitment… Those seeking shortcuts are doomed to failure.  And even if you do everything right, you should still expect to, lose money during the first five years…  These are cold, hard facts that many would-be traders prefer not to hear or believe, but ignoring them doesn’t change the reality. Mark D. Cook

 

The key to trading success is emotional discipline.  Making money has nothing to do with intelligence.  To be a successful trader, you have to be able to admit mistakes.  People who are very bright don’t make very many mistakes.  Besides trading, there is probably no other profession where you have to admit when you’re wrong.  In trading, you can’t hide your failures. Victor Sperandeo

 

There are old traders and there are bold traders, but there are very few old, bold traders. Ed Seykota

 

Everything’s tested in historical markets.  The past is a pretty good predictor of the future.  It’s not perfect.  But human beings drive markets, and human beings don’t change their stripes overnight.  So to the extent that one can understand the past, there’s a good likelihood you’ll have some insight into the future. James Simons

 

You have to know what you are, and not try to be what you’re not.  If you are a day trader, day trade.  If you are an investor, then be an investor.  It’s like a comedian who gets up onstage and starts singing.  What’s he singing for?  He’s a comedian. Steven Cohen

 

Don’t be a hero.  Don’t have an ego.  Always question yourself and your ability.  Don’t ever feel that you are very good.  The second you do, you are dead… my guiding philosophy is playing great defense.  If you make a good trade, don’t think it is because you have some uncanny foresight.  Always maintain your sense of confidence, but keep it in check. Paul Tudor Jones II

 

Thanks guys!

 

Sources:

The Science of Hitting (Ted Williams)

Top 7 Technical Analysts of all time Share Secrets (ETFHQ)

Buying This Dip Historically Makes Sense

On Election years, the stock market tends to behave in a certain way. We come into years like this expecting a rally early on, correction in the Spring, new highs through the summer with a rollover that bottoms out in October and finally a year end rally that goes out at the highs.

So far, 2012 has followed this path perfectly. And it looks like that typical correction after the summer got going this Tuesday. Here is the chart showing what Election Years historically look like:

And as we can see, this dip is usually the one we want to buy. Not sure how low we can go for stocks, so we’re going to be patient. I think the action this summer has been constructive for some of the more aggressive areas. Defensive areas like Utilities, Staples, and Healthcare look scary here and I would want to touch them. I think this sort of action is solid and that helps with our longer-term bullish views. But we’re not there yet for equities. Like I said on Tuesday, there are other asset classes out there with better direction. And like I first mentioned on August 14th, Silver and other precious metals appear to be one of those. Go check out those charts both on an absolute basis and also relative to equities.

Don’t be shy to take the Dollar out of the equation

 

Source:

Can It Really Be That Easy? (Bespoke)

Tags: $SLV $GLD $SPY

Treasury Yields Taking a Break

That was a pretty big move in yields that we just saw. The gain was a quick 14% after crossing the 50-day moving average on a gap higher (see here). In total we witnessed a 30%+ move in less than a month. But then came the dreaded downward-sloping 200 day moving average putting a halt on the whole advance. At least for now.

In addition to the resistance from the slope of the longer-term smoothing mechanism, we also have to remember that key support from December through February right here at the levels. How could we not acknowledge that all of that former support should add to the supply right here? I think it would be naive for us not to recognize that some time is needed for both the moving average to at least flatten out and for some sellers to do their thing. And that’s OK.

It looks like after some time has passed, yields should continue higher and get up to the next resistance levels near 2.40%. That represents close to a 40% move from current levels. But I don’t think we’re there yet. I would wait for yields to chill out a bit, gather some composure and get ready for the next move higher. But not expecting much before Labor Day.

We’ll be looking for a move back above last week’s highs to signal that another major move is coming. But that should take some time. And again, that’s OK.

 

Tags: $TNX $TLT $IEF $ZN_F

Technical Analysis Humor

A Technical Analyst and a Fundamental Analyst are chatting about the markets in the kitchen.

Accidentally one of them knocks a kitchen knife off the table landing right in the fundamental analyst’s foot!

The fundamental analyst yells at the technician, asking him why he didn’t catch the knife?

“You know Technicians don’t catch falling knives!” , the technician responded.

He in turn asks the fundamental analyst why he didn’t move his foot out of the way?

The Fundamental analyst responds, “ I didn’t think it could go that low”.

 

hat tip JC

Tuesday Was Ugly: Short-term Caution Advised

Big time reversals today at important levels. And that’s a problem. At least for the short-term. Now, I don’t think that this changes the bigger picture, which still looks positive to me. But this could be trouble, at least for the rest of the month. I’d be careful here:

The S&P500 reversed lower at key resistance:

Same thing with the Dow Industrials:

Same in the Nasdaq100:

I can keep going but I think you get the point. Now look at the other side. Treasuries reversed higher:

The $VIX reversed higher at former support from March:

I would be very careful here in US Equities. We had a great run (12.5% from the June lows), but I think it would be irresponsible of us not to accept that there is clearly supply at these levels. There are other trending assets out there. Look around.

So how long should we be cautious in the US Equities markets? I think the answer may come from America’s favorite stock. Ever since the “Instagram Top” in $AAPL, it hadn’t made new highs until this past week. That means it took over 4 months before retesting those all-time highs. Granted, this week $AAPL took those highs out and all the rage was about how it became the most valuable company of all time. These are the sort of headlines that scare the heck out of me, especially when they show up in the freakin’ USA Today. Not what you want to see as an $AAPL Bull. Mainstream newspapers getting into the mix is that last thing you want.

Now, if $AAPL can hold on to these new highs without rolling over, this should be a temporary pullback/consolidation for the stock and probably US Equities as a group. But if those new highs were just temporary and $AAPL rolls over leaving those fresh buyers out there high and dry, look out below.

Just my two cents.

Sorry if this comes off as a bit scary, but it should be. This isn’t a game. Risk management is Job #1. And days like this at such key levels raise red flags. Listen, I’ve been as bullish as anyone, but we want to check our ego at the door and try to keep an open mind. We’re choosing to be extra careful here.

 

Tags: $DJIA $SPX $QQQ $TLT $VIX

Polarity is Apparent in Semiconductors

It’s been a big August for US Stocks and other risk assets. So not really a coincidence that it’s also been an extremely productive month for semiconductors. You see, we look to semi’s as a leading indicator for tech as well as an overall gauge for risk appetite. Back in early July we mentioned that Semi’s were dancing around these declining trendlines, but that since momentum had just turned positive, a breakout was imminent. Sure enough, the 390 level in the Philadelphia Semiconductor Index ($SOX) was taken out at the beginning of August and the stock market was off to the races.

Today we want to take a look at the Semiconductor ETF because there has been some serious polarity for all of 2012. In fact, these support/resistance levels can be seen all the way back to last June, but let’s stick with just this year for now. The key levels are around 32.50-33, but it’s really an even tighter range than that. Let’s remember Polarity = Former Support turns into Resistance, and former Resistance turns into Support. This is what they teach us in Technical Analysis Kindergarten.

And here it is in action:

As we can see in the chart, $SMH is now back above this important polarity zone. Any tests of this support (formerly resistance) should meet buyers accumulating shares. More importantly, the measured move that we achieve after the breakout takes us to around $35.50 (32.50-29.50 = 3 + 32.50). This level also represents the highs for the year where we should expect to find some supply.

This move of just a few bucks may not seem like a big deal at first glance. But the impact that a 6%+ move in semi’s from here would have on US Stocks and other risk assets is no joke. Higher beta individual names would do much better, but this also signals that the Nasdaq, even at 52-week highs, could have further room to run.

Not shown in the chart (but mentioned here), momentum in the Relative Strength Index turned positive in early June. This is what gave us a heads up that a breakout was probable. Price then confirmed it three weeks ago. Also, we have upward-sloping 50 and 200 day simple moving averages (not shown). This also tells us that we should continue to give the bulls the benefit of the doubt here.

The point of the post was to show how important this polarity has been, not just for Semiconductor stocks but also the impact that it has on everything else. If we include the positive momentum, rising smoothing mechanisms, and higher measured move targets, we should expect to see higher prices for semi’s in the near future.

Good stuff guys. Stay tuned….

 

Tags: $SMH $SOX $XSD $SOXX $USD $SOXS $QQQ

Rotation Rotation Rotation

In bull markets, sectors tend to rotate. Like throwing a Perfect Game in baseball these days – everyone gets a turn (It didn’t used to be that way). But in stock markets, this is normal. When equities as a group corrected this Spring, who were the relative leaders? Defense: Utilities, Staples, and healthcare. And now that S&Ps and Dow Industrials are at or near multi-year highs? We see Technology, Energy and the Industrial names leading the way.

Take a look at this relative performance chart that I put together of each of the S&P SPDR Sectors over the past month. Each of the 9 lines show the relative performance vs the S&P500. Who did the worst? You guessed it – Staples, Healthcare, Utilities: (Click Chart to Embiggen)

This is normal and what we should expect to see in a bull market. Rotation is key.

But we do need to see this trend continue in order for equities as a group to keep heading higher. And some of these names also need to start making new 52-week highs, which they haven’t yet. The good folks over at Bespoke Investment Group did a nice job yesterday showing the lack of new highs in the individual names while the index itself is already doing so. This chart shows exactly why the old cliché, “It’s a market of stocks and not a stock market”, is anything but:

We do indeed need to see the trend of decreasing new highs come to an end and confirm the multi-year highs that we’re seeing in some of the major averages. That’s probably the only thing out there that I can think of that the bears have left. Every other argument has been proven wrong by Mr. Market, who could care less about Europe and your precious fiscal cliffs. And that lack of volume thing we’ve been forced to listen to for 3 years? My friend Ryan Detrick does a nice job of dismissing that.

I’m up in the Adirondack mountains for the weekend enjoying some of the most beautiful weather and scenery that I’ve ever seen. So I’m in a great mood hanging out with friends and family and want to keep this positive. Things look good out there, the $VIX is at 5 year lows, the bears are more confused than ever, and the averages are making new highs in the face of “bad news”. But we want to see some more participation from the large population of stocks that haven’t been confirming these new highs. If the indexes manage to rollover before net new highs confirm, and we begin to see some relative strength from defensive areas again, caution in equities would be advised.

But as of right now? Risk assets are in charge.

 

Source:

Wanted: More New Highs (Bespoke)

Tags: $XLP $XLV $XLU $XLE $XLI $XLB $XLK $XLF $XLY $SPY $DJIA

What’s Up With John Deere?

This thing was a monster off the October lows. Deere & Co rallied over 50% in just 4 months. This sort of action needs to correct, or consolidate somehow before it can keep rocking. This is especially the case when the long-term 200 day moving average still has a downward slope.

The low for this correction came in early June at a standard 61.8% Fibonacci retracement from the previous up move. Very normal and healthy. Meanwhile, this gave the 200-day moving average enough time to flatten out and begin to move higher. The price action has been constructive as well. Higher lows for 2 1/2 months running.

I was over at Bloomberg on Tuesday afternoon talking technicals in this particular name. The other guys interviewed weren’t big fans of the stock. I think the important thing here is to accept the positive correlation that Deere has with Equities. You have to like the market if you want to be involved. And we still like stocks here. Check out the video:

 
I think based on all of the information that we have, we still need to give the bulls the benefit of the doubt. If the uptrend line from the October lows starts to break, then we’ll have to reevaluate our positive stance. But a breakout above 83 would get me even more excited about Deere. Here’s the chart:

 

Source:

John Deere 3Q Earnings Out Tomorrow (Bloomberg)

Tags: $DE $SPY

Yes, the Action in Silver is Constructive

It’s been a while since we talked about Silver. And I don’t hear anyone else talking about it. So that tells me that maybe we should look a little closer and see what’s going on.

I think the recent action has been constructive and is looking US Steel-ish. A few weeks ago I went on Bloomberg TV and said that I liked the US Steel even though others hated it. Both of these have some similar characteristics: Good risk reward, both somewhat forgotten about, positive momentum divergences, and flattening long-term moving averages.

Let’s take a look (I know I’m sorry about all these lines and colors, but I think they’re all relevant):

First of all, there is longer-term support right around this 25.60-25.70 level in $SLV. This support held in December and rallied hard earlier this year. We went on record loving precious metals back then and we like it here at this price once again.

Also, when $SLV made new lows at the end of June, the Relative Strength Index was already putting in higher lows (just like $X was doing 2 weeks ago). This bullish divergence gives us a heads up not too fully trust that new low – especially when it comes at key support levels.

Trendlines have been broken. From the highs in late February you can draw an aggressive trendline, or a more conservative trendline from the next lower high – no matter, both have now been broken.

The moving averages have flattened out. This is one of the reasons that I liked $X. The breakout attempts earlier in the year ran into declining 200 day moving averages that just weren’t ready. This consolidation (in both $X & $SLV) allowed the smoothing mechanisms to flatten out, making it much easier to break out from. The 50 day moving average in $SLV has helped as well, now flat.

So this is why I like the recent action in Silver. But the most important thing is the risk/reward (always). We’re a buck and half above key support, with a ton of upside (at least mid-to high 30s). That’s the sort of proposition that we’re constantly looking for.

What do you guys think?

 

Tags: $SLV $SI_F $X

This Rally Is More Broad Based Than You Think

The most hated stock market rally I’ve ever seen continues to defy gravity. I’m not going to list all of the factors that the non-believers will bring up to justify their lack of participation. But one thing that stands out as an excuse is the lack of broad stock participation. I’m hearing and reading throughout the media that the cyclicals aren’t cooperating and this is just a defensive rally.

Well I’m not sure if we’re watching the same stock market, but I see Energy dramatically outperforming everyone else this past month while retailers ($RTH) are just pennies away from all-time highs. But forget about that for a minute. Take a look at the recent breakout in S&P500 stocks trading above their 200-day moving average:

Typically the bulls are in charge when this percentage remains above the 50% mark. And after a brief breakdown in early June, the indicator consolidated nicely for a couple of months and just broke out to new highs last week. This signals to us that participation in this stock market advance is broadening. And that’s obviously a good thing.

So be careful where you get your information. This indicator tells me that the market is moving higher together and not just in some of the more defensive areas.

 

Tags: $RTH $XLE $SPY