Tuesday, February 3, 2004
Issue Contents:
| 07:22 | Good Morning The day ahead. |
| 07:26 | Initiating a Swing Trade Intraday Swing trading principles. |
| 09:30 | Market Internals The new panel. |
| 09:55 | Major Stock Indices Daily chart update. |
| 11:59 | Daily Swing Trade $INDU and $SPX strategy. |
| 16:12 | Economic Data Summary of key releases. |
| 16:16 | Active Trader Transcript Real time forum log. |
Sanity has been restored as our city's major cable operator resuscitated their high speed internet service after being out during market hours yesterday.
The U.S. Economic calendar is full today with data coming out fast and furious. Cisco Systems is expected to announce quarterly earnings after the close.
Today is going to be an educational day as we publish Initiating a Swing Trade Intraday. For the remainder of the day, I will be working on one more educational piece called Proactive Management of Sector Index Investments with Exchange Traded Funds.
NOTE: There are a few Technical Trading Handbooks left, the last time we offer it in its entirety before the contents are disbursed into various Knowledge Base articles and ebooks.
We'll be back on the stock picks overnight.
Initiating a Swing Trade Intraday
by Teresa Lo
BRCM was one of Monday's picks, with a suggested intraday entry for the swing trade. Let's use this as a study case as to how traders can reduce initial risk by using an intraday timeframe to initiate a swing trade.
BRCM had only a small initial downside target because it was so close to the 20-day EMA below in the 39.35 area, so I thought it was better to try to catch it intraday. One of our real-time traders nailed this one and I think she used our usual technique. We also use a similar approach when a swing trade setup gaps open past the buy or sell trigger -- we zoom in using the 10- or 15-minute intraday chart. I've always preferred the 10-minute chart, and I'm happy to report that TrendVue Swing Charts now supports this timeframe.
The idea here is that most swing traders are going to use really obvious spots as triggers: the previous day's high or low. Of course, everyone else also knows this, including market makers and specialists who can see all the orders line up: sell orders at or just below the previous day's low; buy orders at or just above the previous day's high.
We want to avoid these points, since "stop running" is very nasty and expensive for those who don't know about this phenomenon. Nothing is worse than that sucked in feeling one gets after selling on break of the previous day's low and then watch it bounce right back up or buying on break of the previous day's high only to see the "breakout" fail. Using stop orders without a limit often produces terrible fills that add insult to injury.
We can almost argue that all swing trades should be initiated intraday with stop-limit orders to avoid potential whipsaw action. We use a stop-limit order to initiate a new trade. There are two parts to it. The "stop" part refers to what is called the "stop election price" where the order goes live. The "limit" part is the worst fill price that we will accept. At times, we will not be filled using this type of order to initiate a trade, but then again, I would rather not be filled if I can't get a decent price. We use a stop (with NO limit) order for our trailing stop loss.
Set Alarms
We start by setting alarms for the swing trade triggers. For short sale setups, we set the alarm at the previous day's low. For buy setups, we set the alarm at the previous day's high.
Once the alarm goes off, we have several methods to enter a swing trade intraday. Since BRCM was a short sale setup, we would be looking for sell setups.
Option 1: The Caboose
Using this method, we basically watch as the previous day's low gets broken and then try to hitch a ride after the smoke from the stop running clears.
In this diagram, we have marked the previous day's low with a red horizontal dotted line. All we really know about this point is that buyers showed up here before, and therefore, we want to know if they will buy again, after the sell stops have been taken out.
You can see that in the first ten minutes of trading, the previous day's low was breached on good volume. Quite often, if there is going to be a trend day, the stock will most likely collapse from this point, when the buyers that were there the day before fail to show up while sellers go out the exit door.
By initiating the short sale with a stop-limit order (SELL STOP WITH A LIMIT) at the low of this first ten minute bar, we hope avoid the potential stop run whipsaw while going short if the move down continues for a second bar.
The trailing stop loss order should be based on an intraday benchmark using the same timeframe as the one used for the entry. In the case of a short sale, we prefer to adjust our stop loss order (BUY STOP) using the upper 5-period weighted moving average band plus a penny or two. In TrendVue Swing Charts, click CHART > WEIGHTED MA BANDS to plot the 5-period weighted moving average bands. For short positions, use the pink dots that represent the upper band as trailing stop loss points.
After each bar is completed, we move the stop loss downward. My goal is to take profits after a couple of bars OR be in position to have my stop loss at better than breakeven if I want to hold the trade.
Option 2: The Pause
Quite often, an inside bar (higher low/lower high than the bar before, colored yellow) or an inside bar plus a tiny up bar (higher high/higher low than the bar before, colored green) will form after the previous day's low is taken out. Volume contracts big time as the participants pause to digest. Again, if the buyers fail to show up while sellers go out the exit door, this is a brief pause before another downside push.
In this diagram, we point to the inside bar that formed after the bar that took out the previous day's low. To set up for a short sale, we take the low of the yellow inside bar less a penny to calculate the short sale price and enter a sell stop with limit order. The stop election price should be no lower than the low of the day so far.
Variation: Where there is an inside bar/small up bar combination, the trader will move the sell stop up a tiny bit to just under the small up bar. The bottom line is that this has to be a bounce so small that it's just basically pausing after the previous day's low is taken out. If the trader is filled on the short sale, the initial stop loss will be placed at the high of the up bar.
The initial stop loss should be placed at the high of the inside bar, plus a penny. Again, my goal is to take profits after a couple of bars OR be in position to have my stop loss at better than breakeven if I want to hold the trade.
Option 3: Retracement to Overhead Resistance
The classic way to enter is to watch for the first bounce that forms under the previous day's low. The trader is looking for a small one-swing bullflag that does not exceed four bars.
We can see this three-bar bounce back to test the previous day's low on the 10-minute BRCM chart. Volume should decrease on the bounce with every new bar. Traders follow the bounce with a trailing stop-limit sell order placed a penny under the low of each green bar as it finishes forming. After trailing a four bar bounce, we cancel the sell stop if it has not been elected after the fifth bar of the bounce.
We can qualify "small bounce" by using a "fibo" ruler set to mark out a 25-40% retracement of the previous downswing. We call this the sweet spot. You can see how the top of the third bar of the bounce exceeded the 40% threshold, and therefore, we know that the bounce is a little too big to our liking. The bigger the bounce, the higher the probability that a new low will not be made.
This is the button on TrendVue Swing Charts.
The initial stop loss should be no higher than the highest point of the bounce indicated by the yellow arrow. This is because everyone else will place their stop loss just above it, and since this also happens to be the previous day's low as well, it's a doubly bad point to close out a trade. In the diagram above, you can see that the downswing got precisely one bar before it started to creep back up again.
As the price came back to the last swing high, which was also around the previous day's low, we could see a blast of volume as short positions covered at the same time some buyers emerged.
That's all for now. Remember, the rules for buy setups are simply the reverse of sell short, and these concepts also work well when there is a gap open that takes the price past the trigger point.
As discussed, I was inspired to put to together a new panel of market internals last weekend.
The chart is interesting since we can see that 52-week new highs and lows plus the total CBOE puts and calls. In fact, the last expiration of options was made on the largest volume I could see going back in time. Now isn't that something!
Of course, there is now also a glaring divergence in the 52-week new highs in that the NYSE was unable to register a number over 600 on this last move up...
It's been a while since we looked at the weekly $VIX and $VXN charts. What's interesting is the fact that the divergence between the 5-period RSI and both $VIX/$VXN has not gone away. In fact, they've registered another warning in the form of an uphook from under the 30 line. We discussed this a long time ago, how divergences are like a series of warning bells, rather than a concrete "ding" to buy and sell. After a number of alarms, we have to pay attention.
Well, this is it folks. We've seen a spike top, a reversal and now, we can draw the neckline on the Dow Industrials and the S&P 500 index in case we need it.
We have to be aware that the market is potentially setting up a big break below the neckline that targets the January 13 swing low for the $INDU and $SPX. If this area cannot hold, then we're looking at the 50-day MA below as the second downside target.
Remember that as analysts we have to see both sides of the coin. What do we know about the January 13 swing low? We know that is where buyers came out before, so if the area between there and the neckline is tested and it holds, that means that the $INDU and $SPX are either building a bigger pattern, OR the entire pattern is morphing into some triangular congestion pattern.
The bottom line is that traders who are looking to exit DO NOT USE the breaking of the neckline to do it. We either get out on any potential right shoulder by trailing a sell stop below this small upswing OR we wait for the first pause under the neckline to position.
This morning, we discussed the potential head and shoulders top that might be forming on the daily charts of the S&P 500 and the Dow Industrials.
I just made this new panel of charts, and the volume that is being plotted is from the associated ETF. For example, the volume for $INDU is from DIA, while $SPX.X is from SPY and $NDX.X is from QQQ. I think this gives us a pretty good picture of volume.
As discussed, for the Dow Industrials and the S&P 500, the only way to stalk a move down to break a potential neckline below is to have sell stops here on this tiny upswing. The place to put it on a swing trade basis is under yesterday's low with the initial stop loss just below yesterday's high. Again, you can use the intraday entry if you like. Another strategy is to trade S&P futures intraday to capture bits and pieces of any move, since it offers higher leverage to compensate for the smaller timeframe.
It's going to be a little tricky today, since we do have some more earnings coming, notably from CSCO after the close, but that's what we've got to work with.
ICSC-UBS Store Sales -1.3%
(Econoday.com) - Sales at general merchandise retailers did not extend their prior week rebound, according to the International Council of Shopping Centers/UBS report. Week-on-week sales for Jan. 31 fell 1.3 percent, marking four of five negative weeks and more than reversing the prior week's 1.1 percent gain. The report blamed cold weather for the results, noting a national mean temperature of 30.5 degrees (Fahrenheit). Despite the softness, year-on-year sales are up a healthy 4.0 percent.
Redbook
(Econoday.com) - Redbook, like the ICSC-UBS report, indicates that consumer spending is being crimped by cold weather. Sales at discount and department store rose only 0.3 percent in January vs. December. The year-on-year pace of growth for the Jan. 31 week was a healthier 3.9 percent, very close to the 4.0 percent pace reported by ICSC-UBS. Other than snacks for the Super Bowl, U.S. consumers are not shopping much, perhaps only a temporary pause that may build pent-up demand.
Challenger Job-Cut Report 117,556
(Econoday.com) - According to the Challenger report, 117,556 job cuts were announced in January, a 26.4 percent increase over the December level, although layoff announcements were 11.1 percent below year ago levels. The largest job-cut announcements were in the consumer products sector, followed by financial, retail, food, industrial goods, and telecommunications industries. In December, the largest layoff announcements were in industrial goods and computer industries. Keep in mind that these data are not adjusted for seasonal variation.
4-Week Bill Treasury Rate 0.895%
(Econoday.com) - Tuesday's auction of 4-week U.S. Treasury bills were awarded at 0.895 percent, 3.5 basis points above last week's auction, which took place before the Fed's statement on Wednesday. Tuesday's award rate is the highest in two months. Higher rates or not, demand was strong as the bid-to-cover rose to 2.66 vs. 2.29 last week despite the larger size of the auction ($19 billion vs. $14 billion).
Auto Sales 5.3M
Light Truck Sales 7.8M
(Econoday.com) - Domestic cars were sold at nearly a 5.3 million unit rate in January, down from the 5.7 million unit rate recorded in December, and less than the 5.6 million unit rate expected by market players. Sales were down from a year ago as well, when domestic cars were sold at a 5.8 million unit rate. Among the major automakers, GM, Ford and Chrysler were down from a year ago (and last month). However, Honda, Nissan, Toyota and Mazda were up significantly from a year ago. Even though these foreign makes are produced in the U.S., profits go back overseas. Thus, domestic auto makers are showing a poorer performance on the profit front with respect to cars.
Light trucks were sold at just under a 7.8 million unit rate, down from the December pace of 8.8 million units, but higher than last January's 7 million unit rate. Ford sales are roughly on par with a year ago, but GM and Chrysler light truck sales are higher than last January. Honda, Nissan and Toyota also posted healthy year over year gains in the light truck market.
All in all, domestic motor vehicle sales were lower than expected in January. This should be negative for the equity market, particularly the domestic auto sector. The news may be more friendly for the bond market since bond investors don't want to see a strong economy since it will bring Fed tightening (eventually).
Real time forum log.
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