When All Else Fails...Fresh Tactics
Tuesday, January 29, 2008 at 09:42AM It appears as though most of the "easy money" stocks and industry groups are becoming a little more difficult to trade, according to "financial media". For example, shorting the homebuilders, buying tech stocks, shorting the banks, etc not as easy as it used to be. Everyday I stumble across someone that talks about buying banking stocks at these lows, a possible reversal in homebuilders, buying beaten down retails stocks because they are early cycle stocks; whatever. It seems that the marketplace is genuinely confused as to whether or not these groups are seeing bottoms yet. The reason I make these claims is based on the newspapers, magazine covers, evening news, CNBC, etc and volatility that is being generated on these recent rallies...
$BKX...the ATR is making new relative highs
QQQQ- Same thing with tech stocks
The same scenario applies to many of the groups I have written about/traded over the last several months. A lot of the stocks that have provided easy trades, such as buying puts on banks, homebuilders, retails stocks, etc have sustained their trends for so long, they are likely due for some consolidation-- hence the volatility.
I guess what I am trying to get at here is that instead of focusing on the overdone trends to the upside or downside, looking for easy money that might no longer be available you might want to start looking at trading trend reversals or trading newly established trends. Basically, start watching the stocks that lagged the market or overall sector performance for strength or weakness that do not have the "overdone trends."
As an example...take a look at ISRG...
ISRG was a relative strength candidate back when the overall market started into a tailspin. From Oct-Nov while the S&P was getting crushed, ISRG was making new highs. It help up relatively well against most stocks and was a great trade to the upside. However, all good things come to an end eventually, and not even ISRG was immune to a bear market. The first sign of weakness was the confirmation of a lower high in late Dec (circled in red) followed by a break of trend support in early Jan (circles in green). As you can see, ISRG is not an "overdone trend." If the downward pressure of teh market continues, ISRG could have a lot of downside potential. Since the break of support, the stock is only off 18%; while most stocks have been beaten much worse. Through the recent rally that most stocks have endured over the last week, ISRG has traded sideways (highlighted in blue).
These are the types of things to try and pay attention to. If I am bearish; which I am, I want stocks that are just starting to look weak, and that haven't already been beaten to death by the market. Based on your outlook, look for stocks that are just starting to confirm trend reversal patterns; i.e. double or triple tops/bottoms or head & shoulder formations...or look for stocks that have already confirmed these patterns, but haven't traded too far in opposition of the primary trend. Pay attention to stocks like ISRG, who didn't participate in the recent rallies, and if you are looking at stocks that have rallied, make sure that volume lacked any real substance during these swings.
If the market prepares to make the next leg lower and test recent lows, then these will be the stocks that will offer the best moves; unlike buying the same old puts on homebuilders (which are now all nearly 10$-20$ per share) for itty bitty gain potential.
In closing, if you are bullish on the market, you might get the best reactions by buying up the beaten down stocks confirming trend reversals, or stocks in the early stages of a new uptrend. If you are bearish on the market, you might get some nice moves to the downside by looking at relatively strong stocks (like ISRG) that have held up recently and that are just starting to change trend, or that have or are in the process of confirming trend reversal patterns.
That's all I had on my mind today. As you were...
Reader Comments (112)
I stand by my original stance...ignore the media, heed Kohlers advice, look at what the charts tell you, and for crying out loud...be nice to Artys Grandma, FFS...
Mind explaining the ATR? I'm familiar with the MACD, the Slow Stoc, Money Index, %R, but not the ATR :D Yes, I know I can read about it somewhere, but the best explanations are from those that use it every day, not necessarily from a site or text.
Scratch that. Average True Range, posted on Dec. 21, 2006. Thanks for the search feature hah!
Jorge,
I am impressed. You should come to me for answers more often :)
short AEO ? would you jump in? Thanks for your comment.
Jeff,
Are you saying try new tactics like the Warriors bringing back C-Webb?
Cheers,
Arty
short AEO ? would you jump in? Thanks for your comment.
Forgive me, I lack comprehension skills today due to a frozen brain. It is 49 below here today....
Are we supposed to be watching stocks like these for a break down?
(I feel dumb even asking this question....)
dc,
I think you will find that we all have different favorite patterns. If you are looking for some information on the percentage of price patterns reaching their price target, you can find that on www.thepatternsite.com. It is free.
Short AEO..based on.....???
Jeff,
Are you saying you're looking for the reversal patterns that have confirmed to fail?
Raimo,
short AEO based on 2yr daily chart downward trendline resistance.
thanks
Jeff,
I love it when you post something that confirms my own thoughts about market tactics! It encourages me to keep thinking for myself.
I could see MAYBE shorting AEO at about 22.85 because that was massive resistance. But now if I read my Investools and OA quick reference manual that is now massive support. So shorting here I think there are better trades.
Cheers,
Arty
Why am I thinking that Mr. Kohler - after that fine posting - has gotten some positions in ISRG prior to the earnings announcement on Thursday for an anticipated run-up .. which is pretty consistent with ISRG?
Inquiring minds might go ...'ummmmmm!'
AMGN pulling back on low volume and bouncing off horizontal support looks nice.
Jeff,
Sticking to your try something different notion, how bout playing something like - Buy way OTM calls on WFMI (Massive short position and low IV) and if the Fed responds with a cut of .50 or more and the shorts squeeze - wella! Any thoughts?
Cheers,
Arty
Bill T.
I am tyring to get you to anlayze what you see..
What is your target, and do you see any areas of resistance that make the trade a good R/R candidate...??
Or others...
I'm with Jodi. A little confused on ISRG. Expecting a breakdown?
Arty,
I tried to find a way to insert CWebb into todays post, but as always, I lack direction and supervision.
I like the WFMI idea...but it is a gamble.
Jeff,
I have read your post several times, because the first time through I wasn't sure if you were saying that ISRG was showing relative strength or weakness. You mentioned that it was showing relative strength in Oct-Nov, but then it succumbed to the bear market when it broke support in early January. I see all of that.
Here's where I'm confused: it has only fallen 18%, while other stocks have fallen much more. Since your topic is about keeping an eye out for reversal patterns, I'm assuming that you are saying it probably has further to drop since it hasn't fallen as much as other stocks. Please explain why the fact that it has fallen less than other stocks is not a sign of relative strength (or at least, less relative weakness). I certainly wouldn't be a buyer without seeing higher highs and higher lows, but I wouldn't have thought to look for an opportunity to short it either.
Thanks for your insightful posts. I have a lot to learn, so I don't doubt that what you're saying will pan out, I'm just trying to understand it and make it my own for the next time I see this situation.
Andrea
I updated my non-sensical ramblings.
I was "writing under the influence..."
got it. thanks
Jeff,
Thanks for clarifying in your post. I see what you are saying now.
Andrea
Jeff,
What happened to the chit chat forum?
Even I can understand it now........thanks Jeff! Makes great sense.
Oh un directing and non supervising one,
Regardless of you position of irresponsibility, I must know your thoughts on the C-Webb acquisition (I used the "Acquisition" term to camouflage the sports talk).
On the WFMI idea I am just looking for some low risk insurance against my strongly Bearish position.
Do tell - Arty
Jeff:
Thank you for the re-write. I understand your intent much better now.
Oh and a Matter of thanks Kohler,
Since I can only sit around and skim the E minis waiting for the Fed to take action, I re read your posts on day trading the e minis (search tool) and it has been very relaxing adding funds the account - THANK YOU
Cheers,
Arty
I took this post as...if this market continues lower, isrg is a good bear opportunity since it has room to run with low(er) IV. am I correct?
ZBob,
?
What do you mean by IV? Did I mention IV?
I'm sorry... i read your article and didn't realize it had been updated... i was trying to respond to andrea's question...after the post I realized that my assumption was correct. as for the IV, i was assuming that ISRG hasn't gone crazy like the other sectors... am i totally off?
Hey Jeff,
Great words. Love to get your thoughts on two trades:
MDR -- I'm short this. Looks like a reversal pattern retesting the neckline. What do you think -- still look good?
AKS -- I'm short this as well. It's pushing on me, but I think if it closes around it's open today I'm going to hang with it.
Tim
I think maybe Z Bob is confusing IV and Avg Tru Range?????
Art
Jeff..
Is chit chat dead and buried??
Jeff,
ISRG - I take it you use the ATR for fairness to all on this blog. Hands-down the ISRG has been showing MS (MarketSent) weekness since mid-nov and the MFC Intermediate line is trending down. ISRG is at a cross-roads at the 51% line. My take, earnings will tell the story. How am I doing on this read?
GIS retesting
well, i was saying that since all of those other sectors have already moved a significant amount, their volatility is relatively higher as compared to isrg, not allowing for a as much potential reward...
Arty,
That was the confusion, my fault.
Raimo,
I was thinking about consolidating everything into one chat room. Since my service allows subheadings, anyne can post whatever they want, and readers can shoose which topic to participate in.
What are the thoughts on this matter?
Can I write poems in there and hammer Arty? and Sean? Even poke at Jodi? then I am all in....
Yes, it will be a "catch all" for chat of any type. No restrictions.
OK...
Where is the clarification post on ISRG?
who's posting using raimo's name?
Jeff, or anyone who cares to take a swing. Regarding reversals - would you consier SPW a symetrical triangle breakout with retest? Or am I fishin
Kelly:
Jeff re-wrote the original post about 30 min ago,
Jeff,
If that is in a separate area from your daily thread, sounds good...nothin to lose by trying..
Raimo,
If you think you have the game, bring it on......but we will wait for the new format.
Can you tell Raimo and I are just waiting for the Fed - record number of "during market hours" posts.
Cheers,
Arty
SHLD
In honor of Jeff's post I present this ticker as a early bullish trend reversal. However, I'm sitting on my hands until the bald man speaks.