February 2009 Archives

The banks and other financial stocks continued to lead the broader market lower. Today the BKX broke to a new all-time(!!) low by dropping below the 1993 low of 24.69. There's really not much more to say besides "all-time lows" and "the trend is your friend".

The XLF also made a new all-time low today, as it's been doing since last July. The volume here caught my eye though because it's lighter than it was at the January and November lows. I'd certainly be suspect of new highs on lighter volume so I must be equally suspect of these new lows on lighter volume.

*Somehow* the Dow closed just 31 cents above its November closing low. Darn those technical traders... Note the same volume non-confirmation here in the Dow as in the XLF.

The way the indices are positioned now reminds me of last September when the S&P and Nasdaq had taken out their July lows but the Russell 2000 was still hanging tough. Back then I wondered if the small caps would be able to withstand the broader market's weakness or not. It turned out that we didn't (couldn't?) get a bounce until all the major indices were dragged to new lows. Now I'm wondering if we can bounce without the S&P 500 and Nasdaq joining the Dow at the November lows. The S&P is 5% above its November low and the Nasdaq is about 11% above its low.

All down once again

I think (and hope) we're getting to the point where the market will no longer be focused on TARP & stimulus announcements from the government. On Friday both the S&P 500 and Nasdaq traded at prices they traded at on October 10th, the first major reaction low in autumn. So one could argue that we've been in a holding pattern for four months now. That's a good sized base which should lead to a solid move out of that base whenever the right impetus comes along. I think the odds of a breakdown are sightly higher than a breakout because of the 200 and 50-day moving averages and that the triangles being built are usually continuation patterns.

no changes

Cameron just left a question for me in the comments to last night's recap. He asked:

I'm looking at your way of thinking about the market. One of the biggest questions I have, though, is regarding your stops.

You said you set your stop at just .20 over your short dollar amount. With all of the intra-day fluctuations, how can you know that it wouldn't have gone up, say, .25 and then nose-dived? It's a perfectly plausible situation.

Said another way, I can place a buy order with a stop, but we easily have 1% swings in a day. If a swing occurs, I have automatically sold for a lower price, only to see the market go back up. Therefore, I'm encouraged to set much broader stops. You set yours for only .20 over the buy price, though, which is why I'm confused.

I often get asked variations of this question, so I thought I'd put my answer in its own post. This was my response:

I couldn't have known that the stock wouldn't have shaken me out. But I also wouldn't have known if I'd have been shaken out if my stop was 50 cents or even a dollar higher. That narrow range candle just provided me with a tight stop. I like tight stops b/c they give me a better opportunity to get high R-multiple winners.

But to your point, how tight of a stop is too tight and will practically guarantee being stopped out? It's hard to answer that question but I generally shy away from any stop that's less than 0.5% of the stock price. I normally like my stops to be about 1% of the stock price. In general, I'm more comfortable with somewhat tighter stops on the QQQQ b/c of how liquid it is and b/c it's less volatile than an "in play" stock would be.

Also, note that I didn't pick a 20 cent stop out of thin air. I went with what the previous candle told me was resistance.

The key thing to remember is that I'm on the hunt for high R-Multiple winners. Because of the way I size my positions (the percent risk model), the tighter my stops the higher the potential reward. In other words if I think a stock has potential to move $2 I'd rather have a 20 cent stop than a $1 stop. Risking 20 cents to make 200 cents ($2) would give me a 10R winner vs only a 2R winner if I had risked $1. (If R was 1% of my equity that would be a 10% gain vs a 2% gain.) For a real example of this see the DGX trades I posted on my Narrow Range Bars post.

So there' a trade-off at work here between stop size and risk/reward multiples. The tighter the stop, the better chance you have of getting a high R winner but you also have a better chance of getting stopped out. Your win ratio is likely to be inversely proportional to how tight your stops are -- looser stops should lead to a higher win rate but also fewer high R-multiple winners.

It's also key that you don't pick your stops willy-nilly. I always use the support/resistance levels that the charts dictate to me.

Well the plan I laid out last night worked pretty well today. I said I was going to focus on the S&P 500 but I ended up shorting the QQQQ instead. Like I said yesterday, I wanted to wait until after Geithner started speaking at 11 AM before I did anything. Luckily the indices traded in a tight range between 10:30 and 11:00 which gave me a narrow candle to execute against. I jumped in QQQQ at 11:04:55 at $31.17 with a stop at $31.37. The bottom fell out within minutes and I just covered at the end of the day for just under a 4R gain.

It seems to me that today's selling was more than just "sell the news" but actually a bit of disappointment with the lack of specifics in the plan. Volume on the S&P 500 was the highest since November but the index is still above recent support. So as usual in this market we're stuck waiting for some follow-through.

The Nasdaq fell back below its 50-day moving average on a volume spike.

There was a lot of damage in the financial stocks again. XLF was dragged down 10% thanks to moves like the 19% drop in BAC. This sector continues to teeter on the edge of the abyss.

lots of downgrades today

There's not much to do now except wait for the market's reaction to what Obama has to say tonight and what Geithner reveals tomorrow at 11 AM. I almost don't want to mention the technicals given that we should be driven by the news everybody's been waiting for. But I do see many setups (NR7s, spinning tops, harami...) that I'd normally be licking my chops to short. If I do enter any shorts tomorrow it won't be until after Geithner starts speaking and then only if we trade below today's lows. I show a couple of setups on the indices below. Normally I prefer to trade the Nasdaq (QQQQ) over the S&P but for a short here I like the S&P (SPY) much better. It's got worse relative strength, is bumping up against its 50-day moving average and would likely suffer more due to a bad reaction to the government's plans since it's composed of so many financial stocks. I'll also be locked in on XLF.

It's also worth noting that the Nasdaq is at its upper Bollinger Band (not shown).

no changes

The market had a promising reversal today after a weak open. Even better, the strength came on one of the highest volume days we've had in months. Despite those and other positive technical developments, we still need to see some follow through. Tomorrow's big bad jobs report could provide the needed spark or it could take the market right back down.

The Nasdaq actually broke its 50-day moving average and its January downtrend today. I'm surprised that I'm saying this but it looks like it's ready to breakout. It's certainly in a good position for some good (better than expected?) news to give it a pop.

The S&P 500 doesn't look quite as good as the Nasdaq and it's no wonder with all the financials weighing it down. Let's see what the news flow bring us...

The QQQQ is actually up for the year. It's worth taking a look at how the sector ETFs have done year-to-date as a reminder that there's actually some strength in this market. Could we possibly be back to the good old days of tech leading the market higher?

no changes

Today's early rally hit the wall right at resistance levels. I suspect the indices will continue to chop around at least through Friday's jobs report and possibly until whenever the government reveals the stimulus/bad-bank/"bailout 2" plan.

The Nasdaq poked its head above both its 50-day moving average and its downward sloping January trendline but sellers pushed it back below both lines. So it remains inside the triangle/coil it's been building.

The S&P popped above the well-watched 850 level before falling back.

Here's yet another look at Bank of America (BAC). It slid to a new 18 year low today on extremely high volume. It sure seems like it wants to go to zero...

The XLF has resisted following BAC to its January lows and beyond... so far. It looks like it's ready to fail but I guess sellers aren't willing to sell all the financials off ahead of the announcement of the gubbermint's rescue plan (or whatever it's called). But do we get a "sell the news" reaction once that plan's been announced?

no changes

It was a positive day for all the major indices today but the technical picture is largely the same as it was last night, despite the minor improvements in the trend table below. As the charts show, the Nasdaq and S&P 500 still seem to be building triangles. The biggest technical development was the Nasdaq touching its 50-day moving average. It needs to break through that line as well as its January downtrend in order to get me thinking that it could actually be headed somewhere besides sideways.

Some minor improvements today...

We had a mixed day for a change today with the Nasdaq & Russell 2,000 up, S&P 500 flat and the Dow down. It's tough to get excited about the strength in tech and small caps since so many stocks are just stuck in ranges. I saw a lot of bullish reversal candlesticks when I ran through my scans tonight but almost every one of those stocks was in the middle of congestion. Good risk/reward swing trades are hard to some by right now, at least for the type of setups I like.

I feel the same way about the indices. They seem to be coiling (building triangles) right now. The Nasdaq has to get through its 50-day moving average before it can get a whiff of the potential resistance at the top of the triangle. I don't see much to do with this index until it's free of the top of the triangle or below the January lows.

The S&P is a bit further away from its 50-day moving average but otherwise it's the same story as the Nasdaq.

Howard Lindzon's new book, "The Wallstrip Edge: Using Trends to Make Money -- Find Them, Ride Them, and Get Off" is out this month. If you are a fan of the WallStrip show and/or trend following you should check it out. I haven't read it yet but here's the product description from Amazon:

It's been often observed that anyone who invests in the stock market needs to have a very strong sense of humor....indeed; no truer words were ever spoken.

And the truth is, Howard Lindzon took that observation quite literally. Indeed, Howard's creation -- Wallstrip.com -- has become just that - a total melding of humor and investing, or as the New York Times observed about Wallstrip - "It's Squawk Box meets Saturday Night Live." Wallstrip.com pulls in between 5 and 7 million visitors a year, and the show's rabid following includes stock market enthusiasts, venture capitalists, traders, and others who tune in to hear, see, and talk about what's happening in the markets.

If you haven't been to Wallstrip.com, well, you're in for a real treat. Lindzon's parodies are priceless. And in THE WALLSTRIP EDGE, Howard captures his most unusual (but very smart) approach to how he picks winners, and you can too.

In THE WALLSTRIP EDGE, Howard Lindzon shows readers how to profit from his straightforward investment philosophy -- a unique trend watching philosophy that makes Wallstrip.com such an amazing phenomenon, including how to look at trends from a different perspective, knowing when to buy a certain stock, how to hold it, and of course when to sell. It's all done using the power of the Internet and your own instincts. It's a surprisingly simple (and fun) strategy that works, and best of all, you don't need to be a financial genius to make it work for you.

The banks and other financial stocks continued to lead the broader market lower. Today the BKX broke to a new all-time(!!) low by dropping below the 1993 low of 24.69. There's really not much more to say besides "all-time lows" and "the trend is your friend".

The XLF also made a new all-time low today, as it's been doing since last July. The volume here caught my eye though because it's lighter than it was at the January and November lows. I'd certainly be suspect of new highs on lighter volume so I must be equally suspect of these new lows on lighter volume.

*Somehow* the Dow closed just 31 cents above its November closing low. Darn those technical traders... Note the same volume non-confirmation here in the Dow as in the XLF.

The way the indices are positioned now reminds me of last September when the S&P and Nasdaq had taken out their July lows but the Russell 2000 was still hanging tough. Back then I wondered if the small caps would be able to withstand the broader market's weakness or not. It turned out that we didn't (couldn't?) get a bounce until all the major indices were dragged to new lows. Now I'm wondering if we can bounce without the S&P 500 and Nasdaq joining the Dow at the November lows. The S&P is 5% above its November low and the Nasdaq is about 11% above its low.

All down once again

I think (and hope) we're getting to the point where the market will no longer be focused on TARP & stimulus announcements from the government. On Friday both the S&P 500 and Nasdaq traded at prices they traded at on October 10th, the first major reaction low in autumn. So one could argue that we've been in a holding pattern for four months now. That's a good sized base which should lead to a solid move out of that base whenever the right impetus comes along. I think the odds of a breakdown are sightly higher than a breakout because of the 200 and 50-day moving averages and that the triangles being built are usually continuation patterns.

no changes

Cameron just left a question for me in the comments to last night's recap. He asked:

I'm looking at your way of thinking about the market. One of the biggest questions I have, though, is regarding your stops.

You said you set your stop at just .20 over your short dollar amount. With all of the intra-day fluctuations, how can you know that it wouldn't have gone up, say, .25 and then nose-dived? It's a perfectly plausible situation.

Said another way, I can place a buy order with a stop, but we easily have 1% swings in a day. If a swing occurs, I have automatically sold for a lower price, only to see the market go back up. Therefore, I'm encouraged to set much broader stops. You set yours for only .20 over the buy price, though, which is why I'm confused.

I often get asked variations of this question, so I thought I'd put my answer in its own post. This was my response:

I couldn't have known that the stock wouldn't have shaken me out. But I also wouldn't have known if I'd have been shaken out if my stop was 50 cents or even a dollar higher. That narrow range candle just provided me with a tight stop. I like tight stops b/c they give me a better opportunity to get high R-multiple winners.

But to your point, how tight of a stop is too tight and will practically guarantee being stopped out? It's hard to answer that question but I generally shy away from any stop that's less than 0.5% of the stock price. I normally like my stops to be about 1% of the stock price. In general, I'm more comfortable with somewhat tighter stops on the QQQQ b/c of how liquid it is and b/c it's less volatile than an "in play" stock would be.

Also, note that I didn't pick a 20 cent stop out of thin air. I went with what the previous candle told me was resistance.

The key thing to remember is that I'm on the hunt for high R-Multiple winners. Because of the way I size my positions (the percent risk model), the tighter my stops the higher the potential reward. In other words if I think a stock has potential to move $2 I'd rather have a 20 cent stop than a $1 stop. Risking 20 cents to make 200 cents ($2) would give me a 10R winner vs only a 2R winner if I had risked $1. (If R was 1% of my equity that would be a 10% gain vs a 2% gain.) For a real example of this see the DGX trades I posted on my Narrow Range Bars post.

So there' a trade-off at work here between stop size and risk/reward multiples. The tighter the stop, the better chance you have of getting a high R winner but you also have a better chance of getting stopped out. Your win ratio is likely to be inversely proportional to how tight your stops are -- looser stops should lead to a higher win rate but also fewer high R-multiple winners.

It's also key that you don't pick your stops willy-nilly. I always use the support/resistance levels that the charts dictate to me.

Well the plan I laid out last night worked pretty well today. I said I was going to focus on the S&P 500 but I ended up shorting the QQQQ instead. Like I said yesterday, I wanted to wait until after Geithner started speaking at 11 AM before I did anything. Luckily the indices traded in a tight range between 10:30 and 11:00 which gave me a narrow candle to execute against. I jumped in QQQQ at 11:04:55 at $31.17 with a stop at $31.37. The bottom fell out within minutes and I just covered at the end of the day for just under a 4R gain.

It seems to me that today's selling was more than just "sell the news" but actually a bit of disappointment with the lack of specifics in the plan. Volume on the S&P 500 was the highest since November but the index is still above recent support. So as usual in this market we're stuck waiting for some follow-through.

The Nasdaq fell back below its 50-day moving average on a volume spike.

There was a lot of damage in the financial stocks again. XLF was dragged down 10% thanks to moves like the 19% drop in BAC. This sector continues to teeter on the edge of the abyss.

lots of downgrades today

There's not much to do now except wait for the market's reaction to what Obama has to say tonight and what Geithner reveals tomorrow at 11 AM. I almost don't want to mention the technicals given that we should be driven by the news everybody's been waiting for. But I do see many setups (NR7s, spinning tops, harami...) that I'd normally be licking my chops to short. If I do enter any shorts tomorrow it won't be until after Geithner starts speaking and then only if we trade below today's lows. I show a couple of setups on the indices below. Normally I prefer to trade the Nasdaq (QQQQ) over the S&P but for a short here I like the S&P (SPY) much better. It's got worse relative strength, is bumping up against its 50-day moving average and would likely suffer more due to a bad reaction to the government's plans since it's composed of so many financial stocks. I'll also be locked in on XLF.

It's also worth noting that the Nasdaq is at its upper Bollinger Band (not shown).

no changes

The market had a promising reversal today after a weak open. Even better, the strength came on one of the highest volume days we've had in months. Despite those and other positive technical developments, we still need to see some follow through. Tomorrow's big bad jobs report could provide the needed spark or it could take the market right back down.

The Nasdaq actually broke its 50-day moving average and its January downtrend today. I'm surprised that I'm saying this but it looks like it's ready to breakout. It's certainly in a good position for some good (better than expected?) news to give it a pop.

The S&P 500 doesn't look quite as good as the Nasdaq and it's no wonder with all the financials weighing it down. Let's see what the news flow bring us...

The QQQQ is actually up for the year. It's worth taking a look at how the sector ETFs have done year-to-date as a reminder that there's actually some strength in this market. Could we possibly be back to the good old days of tech leading the market higher?

no changes

Today's early rally hit the wall right at resistance levels. I suspect the indices will continue to chop around at least through Friday's jobs report and possibly until whenever the government reveals the stimulus/bad-bank/"bailout 2" plan.

The Nasdaq poked its head above both its 50-day moving average and its downward sloping January trendline but sellers pushed it back below both lines. So it remains inside the triangle/coil it's been building.

The S&P popped above the well-watched 850 level before falling back.

Here's yet another look at Bank of America (BAC). It slid to a new 18 year low today on extremely high volume. It sure seems like it wants to go to zero...

The XLF has resisted following BAC to its January lows and beyond... so far. It looks like it's ready to fail but I guess sellers aren't willing to sell all the financials off ahead of the announcement of the gubbermint's rescue plan (or whatever it's called). But do we get a "sell the news" reaction once that plan's been announced?

no changes

It was a positive day for all the major indices today but the technical picture is largely the same as it was last night, despite the minor improvements in the trend table below. As the charts show, the Nasdaq and S&P 500 still seem to be building triangles. The biggest technical development was the Nasdaq touching its 50-day moving average. It needs to break through that line as well as its January downtrend in order to get me thinking that it could actually be headed somewhere besides sideways.

Some minor improvements today...

We had a mixed day for a change today with the Nasdaq & Russell 2,000 up, S&P 500 flat and the Dow down. It's tough to get excited about the strength in tech and small caps since so many stocks are just stuck in ranges. I saw a lot of bullish reversal candlesticks when I ran through my scans tonight but almost every one of those stocks was in the middle of congestion. Good risk/reward swing trades are hard to some by right now, at least for the type of setups I like.

I feel the same way about the indices. They seem to be coiling (building triangles) right now. The Nasdaq has to get through its 50-day moving average before it can get a whiff of the potential resistance at the top of the triangle. I don't see much to do with this index until it's free of the top of the triangle or below the January lows.

The S&P is a bit further away from its 50-day moving average but otherwise it's the same story as the Nasdaq.

Howard Lindzon's new book, "The Wallstrip Edge: Using Trends to Make Money -- Find Them, Ride Them, and Get Off" is out this month. If you are a fan of the WallStrip show and/or trend following you should check it out. I haven't read it yet but here's the product description from Amazon:

It's been often observed that anyone who invests in the stock market needs to have a very strong sense of humor....indeed; no truer words were ever spoken.

And the truth is, Howard Lindzon took that observation quite literally. Indeed, Howard's creation -- Wallstrip.com -- has become just that - a total melding of humor and investing, or as the New York Times observed about Wallstrip - "It's Squawk Box meets Saturday Night Live." Wallstrip.com pulls in between 5 and 7 million visitors a year, and the show's rabid following includes stock market enthusiasts, venture capitalists, traders, and others who tune in to hear, see, and talk about what's happening in the markets.

If you haven't been to Wallstrip.com, well, you're in for a real treat. Lindzon's parodies are priceless. And in THE WALLSTRIP EDGE, Howard captures his most unusual (but very smart) approach to how he picks winners, and you can too.

In THE WALLSTRIP EDGE, Howard Lindzon shows readers how to profit from his straightforward investment philosophy -- a unique trend watching philosophy that makes Wallstrip.com such an amazing phenomenon, including how to look at trends from a different perspective, knowing when to buy a certain stock, how to hold it, and of course when to sell. It's all done using the power of the Internet and your own instincts. It's a surprisingly simple (and fun) strategy that works, and best of all, you don't need to be a financial genius to make it work for you.

The banks and other financial stocks continued to lead the broader market lower. Today the BKX broke to a new all-time(!!) low by dropping below the 1993 low of 24.69. There's really not much more to say besides "all-time lows" and "the trend is your friend".

The XLF also made a new all-time low today, as it's been doing since last July. The volume here caught my eye though because it's lighter than it was at the January and November lows. I'd certainly be suspect of new highs on lighter volume so I must be equally suspect of these new lows on lighter volume.

*Somehow* the Dow closed just 31 cents above its November closing low. Darn those technical traders... Note the same volume non-confirmation here in the Dow as in the XLF.

The way the indices are positioned now reminds me of last September when the S&P and Nasdaq had taken out their July lows but the Russell 2000 was still hanging tough. Back then I wondered if the small caps would be able to withstand the broader market's weakness or not. It turned out that we didn't (couldn't?) get a bounce until all the major indices were dragged to new lows. Now I'm wondering if we can bounce without the S&P 500 and Nasdaq joining the Dow at the November lows. The S&P is 5% above its November low and the Nasdaq is about 11% above its low.

All down once again

I think (and hope) we're getting to the point where the market will no longer be focused on TARP & stimulus announcements from the government. On Friday both the S&P 500 and Nasdaq traded at prices they traded at on October 10th, the first major reaction low in autumn. So one could argue that we've been in a holding pattern for four months now. That's a good sized base which should lead to a solid move out of that base whenever the right impetus comes along. I think the odds of a breakdown are sightly higher than a breakout because of the 200 and 50-day moving averages and that the triangles being built are usually continuation patterns.

no changes

Cameron just left a question for me in the comments to last night's recap. He asked:

I'm looking at your way of thinking about the market. One of the biggest questions I have, though, is regarding your stops.

You said you set your stop at just .20 over your short dollar amount. With all of the intra-day fluctuations, how can you know that it wouldn't have gone up, say, .25 and then nose-dived? It's a perfectly plausible situation.

Said another way, I can place a buy order with a stop, but we easily have 1% swings in a day. If a swing occurs, I have automatically sold for a lower price, only to see the market go back up. Therefore, I'm encouraged to set much broader stops. You set yours for only .20 over the buy price, though, which is why I'm confused.

I often get asked variations of this question, so I thought I'd put my answer in its own post. This was my response:

I couldn't have known that the stock wouldn't have shaken me out. But I also wouldn't have known if I'd have been shaken out if my stop was 50 cents or even a dollar higher. That narrow range candle just provided me with a tight stop. I like tight stops b/c they give me a better opportunity to get high R-multiple winners.

But to your point, how tight of a stop is too tight and will practically guarantee being stopped out? It's hard to answer that question but I generally shy away from any stop that's less than 0.5% of the stock price. I normally like my stops to be about 1% of the stock price. In general, I'm more comfortable with somewhat tighter stops on the QQQQ b/c of how liquid it is and b/c it's less volatile than an "in play" stock would be.

Also, note that I didn't pick a 20 cent stop out of thin air. I went with what the previous candle told me was resistance.

The key thing to remember is that I'm on the hunt for high R-Multiple winners. Because of the way I size my positions (the percent risk model), the tighter my stops the higher the potential reward. In other words if I think a stock has potential to move $2 I'd rather have a 20 cent stop than a $1 stop. Risking 20 cents to make 200 cents ($2) would give me a 10R winner vs only a 2R winner if I had risked $1. (If R was 1% of my equity that would be a 10% gain vs a 2% gain.) For a real example of this see the DGX trades I posted on my Narrow Range Bars post.

So there' a trade-off at work here between stop size and risk/reward multiples. The tighter the stop, the better chance you have of getting a high R winner but you also have a better chance of getting stopped out. Your win ratio is likely to be inversely proportional to how tight your stops are -- looser stops should lead to a higher win rate but also fewer high R-multiple winners.

It's also key that you don't pick your stops willy-nilly. I always use the support/resistance levels that the charts dictate to me.

Well the plan I laid out last night worked pretty well today. I said I was going to focus on the S&P 500 but I ended up shorting the QQQQ instead. Like I said yesterday, I wanted to wait until after Geithner started speaking at 11 AM before I did anything. Luckily the indices traded in a tight range between 10:30 and 11:00 which gave me a narrow candle to execute against. I jumped in QQQQ at 11:04:55 at $31.17 with a stop at $31.37. The bottom fell out within minutes and I just covered at the end of the day for just under a 4R gain.

It seems to me that today's selling was more than just "sell the news" but actually a bit of disappointment with the lack of specifics in the plan. Volume on the S&P 500 was the highest since November but the index is still above recent support. So as usual in this market we're stuck waiting for some follow-through.

The Nasdaq fell back below its 50-day moving average on a volume spike.

There was a lot of damage in the financial stocks again. XLF was dragged down 10% thanks to moves like the 19% drop in BAC. This sector continues to teeter on the edge of the abyss.

lots of downgrades today

There's not much to do now except wait for the market's reaction to what Obama has to say tonight and what Geithner reveals tomorrow at 11 AM. I almost don't want to mention the technicals given that we should be driven by the news everybody's been waiting for. But I do see many setups (NR7s, spinning tops, harami...) that I'd normally be licking my chops to short. If I do enter any shorts tomorrow it won't be until after Geithner starts speaking and then only if we trade below today's lows. I show a couple of setups on the indices below. Normally I prefer to trade the Nasdaq (QQQQ) over the S&P but for a short here I like the S&P (SPY) much better. It's got worse relative strength, is bumping up against its 50-day moving average and would likely suffer more due to a bad reaction to the government's plans since it's composed of so many financial stocks. I'll also be locked in on XLF.

It's also worth noting that the Nasdaq is at its upper Bollinger Band (not shown).

no changes

The market had a promising reversal today after a weak open. Even better, the strength came on one of the highest volume days we've had in months. Despite those and other positive technical developments, we still need to see some follow through. Tomorrow's big bad jobs report could provide the needed spark or it could take the market right back down.

The Nasdaq actually broke its 50-day moving average and its January downtrend today. I'm surprised that I'm saying this but it looks like it's ready to breakout. It's certainly in a good position for some good (better than expected?) news to give it a pop.

The S&P 500 doesn't look quite as good as the Nasdaq and it's no wonder with all the financials weighing it down. Let's see what the news flow bring us...

The QQQQ is actually up for the year. It's worth taking a look at how the sector ETFs have done year-to-date as a reminder that there's actually some strength in this market. Could we possibly be back to the good old days of tech leading the market higher?

no changes

Today's early rally hit the wall right at resistance levels. I suspect the indices will continue to chop around at least through Friday's jobs report and possibly until whenever the government reveals the stimulus/bad-bank/"bailout 2" plan.

The Nasdaq poked its head above both its 50-day moving average and its downward sloping January trendline but sellers pushed it back below both lines. So it remains inside the triangle/coil it's been building.

The S&P popped above the well-watched 850 level before falling back.

Here's yet another look at Bank of America (BAC). It slid to a new 18 year low today on extremely high volume. It sure seems like it wants to go to zero...

The XLF has resisted following BAC to its January lows and beyond... so far. It looks like it's ready to fail but I guess sellers aren't willing to sell all the financials off ahead of the announcement of the gubbermint's rescue plan (or whatever it's called). But do we get a "sell the news" reaction once that plan's been announced?

no changes

It was a positive day for all the major indices today but the technical picture is largely the same as it was last night, despite the minor improvements in the trend table below. As the charts show, the Nasdaq and S&P 500 still seem to be building triangles. The biggest technical development was the Nasdaq touching its 50-day moving average. It needs to break through that line as well as its January downtrend in order to get me thinking that it could actually be headed somewhere besides sideways.

Some minor improvements today...

We had a mixed day for a change today with the Nasdaq & Russell 2,000 up, S&P 500 flat and the Dow down. It's tough to get excited about the strength in tech and small caps since so many stocks are just stuck in ranges. I saw a lot of bullish reversal candlesticks when I ran through my scans tonight but almost every one of those stocks was in the middle of congestion. Good risk/reward swing trades are hard to some by right now, at least for the type of setups I like.

I feel the same way about the indices. They seem to be coiling (building triangles) right now. The Nasdaq has to get through its 50-day moving average before it can get a whiff of the potential resistance at the top of the triangle. I don't see much to do with this index until it's free of the top of the triangle or below the January lows.

The S&P is a bit further away from its 50-day moving average but otherwise it's the same story as the Nasdaq.

Howard Lindzon's new book, "The Wallstrip Edge: Using Trends to Make Money -- Find Them, Ride Them, and Get Off" is out this month. If you are a fan of the WallStrip show and/or trend following you should check it out. I haven't read it yet but here's the product description from Amazon:

It's been often observed that anyone who invests in the stock market needs to have a very strong sense of humor....indeed; no truer words were ever spoken.

And the truth is, Howard Lindzon took that observation quite literally. Indeed, Howard's creation -- Wallstrip.com -- has become just that - a total melding of humor and investing, or as the New York Times observed about Wallstrip - "It's Squawk Box meets Saturday Night Live." Wallstrip.com pulls in between 5 and 7 million visitors a year, and the show's rabid following includes stock market enthusiasts, venture capitalists, traders, and others who tune in to hear, see, and talk about what's happening in the markets.

If you haven't been to Wallstrip.com, well, you're in for a real treat. Lindzon's parodies are priceless. And in THE WALLSTRIP EDGE, Howard captures his most unusual (but very smart) approach to how he picks winners, and you can too.

In THE WALLSTRIP EDGE, Howard Lindzon shows readers how to profit from his straightforward investment philosophy -- a unique trend watching philosophy that makes Wallstrip.com such an amazing phenomenon, including how to look at trends from a different perspective, knowing when to buy a certain stock, how to hold it, and of course when to sell. It's all done using the power of the Internet and your own instincts. It's a surprisingly simple (and fun) strategy that works, and best of all, you don't need to be a financial genius to make it work for you.

The banks and other financial stocks continued to lead the broader market lower. Today the BKX broke to a new all-time(!!) low by dropping below the 1993 low of 24.69. There's really not much more to say besides "all-time lows" and "the trend is your friend".

The XLF also made a new all-time low today, as it's been doing since last July. The volume here caught my eye though because it's lighter than it was at the January and November lows. I'd certainly be suspect of new highs on lighter volume so I must be equally suspect of these new lows on lighter volume.

*Somehow* the Dow closed just 31 cents above its November closing low. Darn those technical traders... Note the same volume non-confirmation here in the Dow as in the XLF.

The way the indices are positioned now reminds me of last September when the S&P and Nasdaq had taken out their July lows but the Russell 2000 was still hanging tough. Back then I wondered if the small caps would be able to withstand the broader market's weakness or not. It turned out that we didn't (couldn't?) get a bounce until all the major indices were dragged to new lows. Now I'm wondering if we can bounce without the S&P 500 and Nasdaq joining the Dow at the November lows. The S&P is 5% above its November low and the Nasdaq is about 11% above its low.

All down once again

I think (and hope) we're getting to the point where the market will no longer be focused on TARP & stimulus announcements from the government. On Friday both the S&P 500 and Nasdaq traded at prices they traded at on October 10th, the first major reaction low in autumn. So one could argue that we've been in a holding pattern for four months now. That's a good sized base which should lead to a solid move out of that base whenever the right impetus comes along. I think the odds of a breakdown are sightly higher than a breakout because of the 200 and 50-day moving averages and that the triangles being built are usually continuation patterns.

no changes

Cameron just left a question for me in the comments to last night's recap. He asked:

I'm looking at your way of thinking about the market. One of the biggest questions I have, though, is regarding your stops.

You said you set your stop at just .20 over your short dollar amount. With all of the intra-day fluctuations, how can you know that it wouldn't have gone up, say, .25 and then nose-dived? It's a perfectly plausible situation.

Said another way, I can place a buy order with a stop, but we easily have 1% swings in a day. If a swing occurs, I have automatically sold for a lower price, only to see the market go back up. Therefore, I'm encouraged to set much broader stops. You set yours for only .20 over the buy price, though, which is why I'm confused.

I often get asked variations of this question, so I thought I'd put my answer in its own post. This was my response:

I couldn't have known that the stock wouldn't have shaken me out. But I also wouldn't have known if I'd have been shaken out if my stop was 50 cents or even a dollar higher. That narrow range candle just provided me with a tight stop. I like tight stops b/c they give me a better opportunity to get high R-multiple winners.

But to your point, how tight of a stop is too tight and will practically guarantee being stopped out? It's hard to answer that question but I generally shy away from any stop that's less than 0.5% of the stock price. I normally like my stops to be about 1% of the stock price. In general, I'm more comfortable with somewhat tighter stops on the QQQQ b/c of how liquid it is and b/c it's less volatile than an "in play" stock would be.

Also, note that I didn't pick a 20 cent stop out of thin air. I went with what the previous candle told me was resistance.

The key thing to remember is that I'm on the hunt for high R-Multiple winners. Because of the way I size my positions (the percent risk model), the tighter my stops the higher the potential reward. In other words if I think a stock has potential to move $2 I'd rather have a 20 cent stop than a $1 stop. Risking 20 cents to make 200 cents ($2) would give me a 10R winner vs only a 2R winner if I had risked $1. (If R was 1% of my equity that would be a 10% gain vs a 2% gain.) For a real example of this see the DGX trades I posted on my Narrow Range Bars post.

So there' a trade-off at work here between stop size and risk/reward multiples. The tighter the stop, the better chance you have of getting a high R winner but you also have a better chance of getting stopped out. Your win ratio is likely to be inversely proportional to how tight your stops are -- looser stops should lead to a higher win rate but also fewer high R-multiple winners.

It's also key that you don't pick your stops willy-nilly. I always use the support/resistance levels that the charts dictate to me.

Well the plan I laid out last night worked pretty well today. I said I was going to focus on the S&P 500 but I ended up shorting the QQQQ instead. Like I said yesterday, I wanted to wait until after Geithner started speaking at 11 AM before I did anything. Luckily the indices traded in a tight range between 10:30 and 11:00 which gave me a narrow candle to execute against. I jumped in QQQQ at 11:04:55 at $31.17 with a stop at $31.37. The bottom fell out within minutes and I just covered at the end of the day for just under a 4R gain.

It seems to me that today's selling was more than just "sell the news" but actually a bit of disappointment with the lack of specifics in the plan. Volume on the S&P 500 was the highest since November but the index is still above recent support. So as usual in this market we're stuck waiting for some follow-through.

The Nasdaq fell back below its 50-day moving average on a volume spike.

There was a lot of damage in the financial stocks again. XLF was dragged down 10% thanks to moves like the 19% drop in BAC. This sector continues to teeter on the edge of the abyss.

lots of downgrades today

There's not much to do now except wait for the market's reaction to what Obama has to say tonight and what Geithner reveals tomorrow at 11 AM. I almost don't want to mention the technicals given that we should be driven by the news everybody's been waiting for. But I do see many setups (NR7s, spinning tops, harami...) that I'd normally be licking my chops to short. If I do enter any shorts tomorrow it won't be until after Geithner starts speaking and then only if we trade below today's lows. I show a couple of setups on the indices below. Normally I prefer to trade the Nasdaq (QQQQ) over the S&P but for a short here I like the S&P (SPY) much better. It's got worse relative strength, is bumping up against its 50-day moving average and would likely suffer more due to a bad reaction to the government's plans since it's composed of so many financial stocks. I'll also be locked in on XLF.

It's also worth noting that the Nasdaq is at its upper Bollinger Band (not shown).

no changes

The market had a promising reversal today after a weak open. Even better, the strength came on one of the highest volume days we've had in months. Despite those and other positive technical developments, we still need to see some follow through. Tomorrow's big bad jobs report could provide the needed spark or it could take the market right back down.

The Nasdaq actually broke its 50-day moving average and its January downtrend today. I'm surprised that I'm saying this but it looks like it's ready to breakout. It's certainly in a good position for some good (better than expected?) news to give it a pop.

The S&P 500 doesn't look quite as good as the Nasdaq and it's no wonder with all the financials weighing it down. Let's see what the news flow bring us...

The QQQQ is actually up for the year. It's worth taking a look at how the sector ETFs have done year-to-date as a reminder that there's actually some strength in this market. Could we possibly be back to the good old days of tech leading the market higher?

no changes

Today's early rally hit the wall right at resistance levels. I suspect the indices will continue to chop around at least through Friday's jobs report and possibly until whenever the government reveals the stimulus/bad-bank/"bailout 2" plan.

The Nasdaq poked its head above both its 50-day moving average and its downward sloping January trendline but sellers pushed it back below both lines. So it remains inside the triangle/coil it's been building.

The S&P popped above the well-watched 850 level before falling back.

Here's yet another look at Bank of America (BAC). It slid to a new 18 year low today on extremely high volume. It sure seems like it wants to go to zero...

The XLF has resisted following BAC to its January lows and beyond... so far. It looks like it's ready to fail but I guess sellers aren't willing to sell all the financials off ahead of the announcement of the gubbermint's rescue plan (or whatever it's called). But do we get a "sell the news" reaction once that plan's been announced?

no changes

It was a positive day for all the major indices today but the technical picture is largely the same as it was last night, despite the minor improvements in the trend table below. As the charts show, the Nasdaq and S&P 500 still seem to be building triangles. The biggest technical development was the Nasdaq touching its 50-day moving average. It needs to break through that line as well as its January downtrend in order to get me thinking that it could actually be headed somewhere besides sideways.

Some minor improvements today...

We had a mixed day for a change today with the Nasdaq & Russell 2,000 up, S&P 500 flat and the Dow down. It's tough to get excited about the strength in tech and small caps since so many stocks are just stuck in ranges. I saw a lot of bullish reversal candlesticks when I ran through my scans tonight but almost every one of those stocks was in the middle of congestion. Good risk/reward swing trades are hard to some by right now, at least for the type of setups I like.

I feel the same way about the indices. They seem to be coiling (building triangles) right now. The Nasdaq has to get through its 50-day moving average before it can get a whiff of the potential resistance at the top of the triangle. I don't see much to do with this index until it's free of the top of the triangle or below the January lows.

The S&P is a bit further away from its 50-day moving average but otherwise it's the same story as the Nasdaq.

Howard Lindzon's new book, "The Wallstrip Edge: Using Trends to Make Money -- Find Them, Ride Them, and Get Off" is out this month. If you are a fan of the WallStrip show and/or trend following you should check it out. I haven't read it yet but here's the product description from Amazon:

It's been often observed that anyone who invests in the stock market needs to have a very strong sense of humor....indeed; no truer words were ever spoken.

And the truth is, Howard Lindzon took that observation quite literally. Indeed, Howard's creation -- Wallstrip.com -- has become just that - a total melding of humor and investing, or as the New York Times observed about Wallstrip - "It's Squawk Box meets Saturday Night Live." Wallstrip.com pulls in between 5 and 7 million visitors a year, and the show's rabid following includes stock market enthusiasts, venture capitalists, traders, and others who tune in to hear, see, and talk about what's happening in the markets.

If you haven't been to Wallstrip.com, well, you're in for a real treat. Lindzon's parodies are priceless. And in THE WALLSTRIP EDGE, Howard captures his most unusual (but very smart) approach to how he picks winners, and you can too.

In THE WALLSTRIP EDGE, Howard Lindzon shows readers how to profit from his straightforward investment philosophy -- a unique trend watching philosophy that makes Wallstrip.com such an amazing phenomenon, including how to look at trends from a different perspective, knowing when to buy a certain stock, how to hold it, and of course when to sell. It's all done using the power of the Internet and your own instincts. It's a surprisingly simple (and fun) strategy that works, and best of all, you don't need to be a financial genius to make it work for you.

The banks and other financial stocks continued to lead the broader market lower. Today the BKX broke to a new all-time(!!) low by dropping below the 1993 low of 24.69. There's really not much more to say besides "all-time lows" and "the trend is your friend".

The XLF also made a new all-time low today, as it's been doing since last July. The volume here caught my eye though because it's lighter than it was at the January and November lows. I'd certainly be suspect of new highs on lighter volume so I must be equally suspect of these new lows on lighter volume.

*Somehow* the Dow closed just 31 cents above its November closing low. Darn those technical traders... Note the same volume non-confirmation here in the Dow as in the XLF.

The way the indices are positioned now reminds me of last September when the S&P and Nasdaq had taken out their July lows but the Russell 2000 was still hanging tough. Back then I wondered if the small caps would be able to withstand the broader market's weakness or not. It turned out that we didn't (couldn't?) get a bounce until all the major indices were dragged to new lows. Now I'm wondering if we can bounce without the S&P 500 and Nasdaq joining the Dow at the November lows. The S&P is 5% above its November low and the Nasdaq is about 11% above its low.

All down once again

I think (and hope) we're getting to the point where the market will no longer be focused on TARP & stimulus announcements from the government. On Friday both the S&P 500 and Nasdaq traded at prices they traded at on October 10th, the first major reaction low in autumn. So one could argue that we've been in a holding pattern for four months now. That's a good sized base which should lead to a solid move out of that base whenever the right impetus comes along. I think the odds of a breakdown are sightly higher than a breakout because of the 200 and 50-day moving averages and that the triangles being built are usually continuation patterns.

no changes

Cameron just left a question for me in the comments to last night's recap. He asked:

I'm looking at your way of thinking about the market. One of the biggest questions I have, though, is regarding your stops.

You said you set your stop at just .20 over your short dollar amount. With all of the intra-day fluctuations, how can you know that it wouldn't have gone up, say, .25 and then nose-dived? It's a perfectly plausible situation.

Said another way, I can place a buy order with a stop, but we easily have 1% swings in a day. If a swing occurs, I have automatically sold for a lower price, only to see the market go back up. Therefore, I'm encouraged to set much broader stops. You set yours for only .20 over the buy price, though, which is why I'm confused.

I often get asked variations of this question, so I thought I'd put my answer in its own post. This was my response:

I couldn't have known that the stock wouldn't have shaken me out. But I also wouldn't have known if I'd have been shaken out if my stop was 50 cents or even a dollar higher. That narrow range candle just provided me with a tight stop. I like tight stops b/c they give me a better opportunity to get high R-multiple winners.

But to your point, how tight of a stop is too tight and will practically guarantee being stopped out? It's hard to answer that question but I generally shy away from any stop that's less than 0.5% of the stock price. I normally like my stops to be about 1% of the stock price. In general, I'm more comfortable with somewhat tighter stops on the QQQQ b/c of how liquid it is and b/c it's less volatile than an "in play" stock would be.

Also, note that I didn't pick a 20 cent stop out of thin air. I went with what the previous candle told me was resistance.

The key thing to remember is that I'm on the hunt for high R-Multiple winners. Because of the way I size my positions (the percent risk model), the tighter my stops the higher the potential reward. In other words if I think a stock has potential to move $2 I'd rather have a 20 cent stop than a $1 stop. Risking 20 cents to make 200 cents ($2) would give me a 10R winner vs only a 2R winner if I had risked $1. (If R was 1% of my equity that would be a 10% gain vs a 2% gain.) For a real example of this see the DGX trades I posted on my Narrow Range Bars post.

So there' a trade-off at work here between stop size and risk/reward multiples. The tighter the stop, the better chance you have of getting a high R winner but you also have a better chance of getting stopped out. Your win ratio is likely to be inversely proportional to how tight your stops are -- looser stops should lead to a higher win rate but also fewer high R-multiple winners.

It's also key that you don't pick your stops willy-nilly. I always use the support/resistance levels that the charts dictate to me.

Well the plan I laid out last night worked pretty well today. I said I was going to focus on the S&P 500 but I ended up shorting the QQQQ instead. Like I said yesterday, I wanted to wait until after Geithner started speaking at 11 AM before I did anything. Luckily the indices traded in a tight range between 10:30 and 11:00 which gave me a narrow candle to execute against. I jumped in QQQQ at 11:04:55 at $31.17 with a stop at $31.37. The bottom fell out within minutes and I just covered at the end of the day for just under a 4R gain.

It seems to me that today's selling was more than just "sell the news" but actually a bit of disappointment with the lack of specifics in the plan. Volume on the S&P 500 was the highest since November but the index is still above recent support. So as usual in this market we're stuck waiting for some follow-through.

The Nasdaq fell back below its 50-day moving average on a volume spike.

There was a lot of damage in the financial stocks again. XLF was dragged down 10% thanks to moves like the 19% drop in BAC. This sector continues to teeter on the edge of the abyss.

lots of downgrades today

There's not much to do now except wait for the market's reaction to what Obama has to say tonight and what Geithner reveals tomorrow at 11 AM. I almost don't want to mention the technicals given that we should be driven by the news everybody's been waiting for. But I do see many setups (NR7s, spinning tops, harami...) that I'd normally be licking my chops to short. If I do enter any shorts tomorrow it won't be until after Geithner starts speaking and then only if we trade below today's lows. I show a couple of setups on the indices below. Normally I prefer to trade the Nasdaq (QQQQ) over the S&P but for a short here I like the S&P (SPY) much better. It's got worse relative strength, is bumping up against its 50-day moving average and would likely suffer more due to a bad reaction to the government's plans since it's composed of so many financial stocks. I'll also be locked in on XLF.

It's also worth noting that the Nasdaq is at its upper Bollinger Band (not shown).

no changes

The market had a promising reversal today after a weak open. Even better, the strength came on one of the highest volume days we've had in months. Despite those and other positive technical developments, we still need to see some follow through. Tomorrow's big bad jobs report could provide the needed spark or it could take the market right back down.

The Nasdaq actually broke its 50-day moving average and its January downtrend today. I'm surprised that I'm saying this but it looks like it's ready to breakout. It's certainly in a good position for some good (better than expected?) news to give it a pop.

The S&P 500 doesn't look quite as good as the Nasdaq and it's no wonder with all the financials weighing it down. Let's see what the news flow bring us...

The QQQQ is actually up for the year. It's worth taking a look at how the sector ETFs have done year-to-date as a reminder that there's actually some strength in this market. Could we possibly be back to the good old days of tech leading the market higher?

no changes

Today's early rally hit the wall right at resistance levels. I suspect the indices will continue to chop around at least through Friday's jobs report and possibly until whenever the government reveals the stimulus/bad-bank/"bailout 2" plan.

The Nasdaq poked its head above both its 50-day moving average and its downward sloping January trendline but sellers pushed it back below both lines. So it remains inside the triangle/coil it's been building.

The S&P popped above the well-watched 850 level before falling back.

Here's yet another look at Bank of America (BAC). It slid to a new 18 year low today on extremely high volume. It sure seems like it wants to go to zero...

The XLF has resisted following BAC to its January lows and beyond... so far. It looks like it's ready to fail but I guess sellers aren't willing to sell all the financials off ahead of the announcement of the gubbermint's rescue plan (or whatever it's called). But do we get a "sell the news" reaction once that plan's been announced?

no changes

It was a positive day for all the major indices today but the technical picture is largely the same as it was last night, despite the minor improvements in the trend table below. As the charts show, the Nasdaq and S&P 500 still seem to be building triangles. The biggest technical development was the Nasdaq touching its 50-day moving average. It needs to break through that line as well as its January downtrend in order to get me thinking that it could actually be headed somewhere besides sideways.

Some minor improvements today...

We had a mixed day for a change today with the Nasdaq & Russell 2,000 up, S&P 500 flat and the Dow down. It's tough to get excited about the strength in tech and small caps since so many stocks are just stuck in ranges. I saw a lot of bullish reversal candlesticks when I ran through my scans tonight but almost every one of those stocks was in the middle of congestion. Good risk/reward swing trades are hard to some by right now, at least for the type of setups I like.

I feel the same way about the indices. They seem to be coiling (building triangles) right now. The Nasdaq has to get through its 50-day moving average before it can get a whiff of the potential resistance at the top of the triangle. I don't see much to do with this index until it's free of the top of the triangle or below the January lows.

The S&P is a bit further away from its 50-day moving average but otherwise it's the same story as the Nasdaq.

Howard Lindzon's new book, "The Wallstrip Edge: Using Trends to Make Money -- Find Them, Ride Them, and Get Off" is out this month. If you are a fan of the WallStrip show and/or trend following you should check it out. I haven't read it yet but here's the product description from Amazon:

It's been often observed that anyone who invests in the stock market needs to have a very strong sense of humor....indeed; no truer words were ever spoken.

And the truth is, Howard Lindzon took that observation quite literally. Indeed, Howard's creation -- Wallstrip.com -- has become just that - a total melding of humor and investing, or as the New York Times observed about Wallstrip - "It's Squawk Box meets Saturday Night Live." Wallstrip.com pulls in between 5 and 7 million visitors a year, and the show's rabid following includes stock market enthusiasts, venture capitalists, traders, and others who tune in to hear, see, and talk about what's happening in the markets.

If you haven't been to Wallstrip.com, well, you're in for a real treat. Lindzon's parodies are priceless. And in THE WALLSTRIP EDGE, Howard captures his most unusual (but very smart) approach to how he picks winners, and you can too.

In THE WALLSTRIP EDGE, Howard Lindzon shows readers how to profit from his straightforward investment philosophy -- a unique trend watching philosophy that makes Wallstrip.com such an amazing phenomenon, including how to look at trends from a different perspective, knowing when to buy a certain stock, how to hold it, and of course when to sell. It's all done using the power of the Internet and your own instincts. It's a surprisingly simple (and fun) strategy that works, and best of all, you don't need to be a financial genius to make it work for you.

The banks and other financial stocks continued to lead the broader market lower. Today the BKX broke to a new all-time(!!) low by dropping below the 1993 low of 24.69. There's really not much more to say besides "all-time lows" and "the trend is your friend".

The XLF also made a new all-time low today, as it's been doing since last July. The volume here caught my eye though because it's lighter than it was at the January and November lows. I'd certainly be suspect of new highs on lighter volume so I must be equally suspect of these new lows on lighter volume.

*Somehow* the Dow closed just 31 cents above its November closing low. Darn those technical traders... Note the same volume non-confirmation here in the Dow as in the XLF.

The way the indices are positioned now reminds me of last September when the S&P and Nasdaq had taken out their July lows but the Russell 2000 was still hanging tough. Back then I wondered if the small caps would be able to withstand the broader market's weakness or not. It turned out that we didn't (couldn't?) get a bounce until all the major indices were dragged to new lows. Now I'm wondering if we can bounce without the S&P 500 and Nasdaq joining the Dow at the November lows. The S&P is 5% above its November low and the Nasdaq is about 11% above its low.

All down once again

I think (and hope) we're getting to the point where the market will no longer be focused on TARP & stimulus announcements from the government. On Friday both the S&P 500 and Nasdaq traded at prices they traded at on October 10th, the first major reaction low in autumn. So one could argue that we've been in a holding pattern for four months now. That's a good sized base which should lead to a solid move out of that base whenever the right impetus comes along. I think the odds of a breakdown are sightly higher than a breakout because of the 200 and 50-day moving averages and that the triangles being built are usually continuation patterns.

no changes

Cameron just left a question for me in the comments to last night's recap. He asked:

I'm looking at your way of thinking about the market. One of the biggest questions I have, though, is regarding your stops.

You said you set your stop at just .20 over your short dollar amount. With all of the intra-day fluctuations, how can you know that it wouldn't have gone up, say, .25 and then nose-dived? It's a perfectly plausible situation.

Said another way, I can place a buy order with a stop, but we easily have 1% swings in a day. If a swing occurs, I have automatically sold for a lower price, only to see the market go back up. Therefore, I'm encouraged to set much broader stops. You set yours for only .20 over the buy price, though, which is why I'm confused.

I often get asked variations of this question, so I thought I'd put my answer in its own post. This was my response:

I couldn't have known that the stock wouldn't have shaken me out. But I also wouldn't have known if I'd have been shaken out if my stop was 50 cents or even a dollar higher. That narrow range candle just provided me with a tight stop. I like tight stops b/c they give me a better opportunity to get high R-multiple winners.

But to your point, how tight of a stop is too tight and will practically guarantee being stopped out? It's hard to answer that question but I generally shy away from any stop that's less than 0.5% of the stock price. I normally like my stops to be about 1% of the stock price. In general, I'm more comfortable with somewhat tighter stops on the QQQQ b/c of how liquid it is and b/c it's less volatile than an "in play" stock would be.

Also, note that I didn't pick a 20 cent stop out of thin air. I went with what the previous candle told me was resistance.

The key thing to remember is that I'm on the hunt for high R-Multiple winners. Because of the way I size my positions (the percent risk model), the tighter my stops the higher the potential reward. In other words if I think a stock has potential to move $2 I'd rather have a 20 cent stop than a $1 stop. Risking 20 cents to make 200 cents ($2) would give me a 10R winner vs only a 2R winner if I had risked $1. (If R was 1% of my equity that would be a 10% gain vs a 2% gain.) For a real example of this see the DGX trades I posted on my Narrow Range Bars post.

So there' a trade-off at work here between stop size and risk/reward multiples. The tighter the stop, the better chance you have of getting a high R winner but you also have a better chance of getting stopped out. Your win ratio is likely to be inversely proportional to how tight your stops are -- looser stops should lead to a higher win rate but also fewer high R-multiple winners.

It's also key that you don't pick your stops willy-nilly. I always use the support/resistance levels that the charts dictate to me.

Well the plan I laid out last night worked pretty well today. I said I was going to focus on the S&P 500 but I ended up shorting the QQQQ instead. Like I said yesterday, I wanted to wait until after Geithner started speaking at 11 AM before I did anything. Luckily the indices traded in a tight range between 10:30 and 11:00 which gave me a narrow candle to execute against. I jumped in QQQQ at 11:04:55 at $31.17 with a stop at $31.37. The bottom fell out within minutes and I just covered at the end of the day for just under a 4R gain.

It seems to me that today's selling was more than just "sell the news" but actually a bit of disappointment with the lack of specifics in the plan. Volume on the S&P 500 was the highest since November but the index is still above recent support. So as usual in this market we're stuck waiting for some follow-through.

The Nasdaq fell back below its 50-day moving average on a volume spike.

There was a lot of damage in the financial stocks again. XLF was dragged down 10% thanks to moves like the 19% drop in BAC. This sector continues to teeter on the edge of the abyss.

lots of downgrades today

There's not much to do now except wait for the market's reaction to what Obama has to say tonight and what Geithner reveals tomorrow at 11 AM. I almost don't want to mention the technicals given that we should be driven by the news everybody's been waiting for. But I do see many setups (NR7s, spinning tops, harami...) that I'd normally be licking my chops to short. If I do enter any shorts tomorrow it won't be until after Geithner starts speaking and then only if we trade below today's lows. I show a couple of setups on the indices below. Normally I prefer to trade the Nasdaq (QQQQ) over the S&P but for a short here I like the S&P (SPY) much better. It's got worse relative strength, is bumping up against its 50-day moving average and would likely suffer more due to a bad reaction to the government's plans since it's composed of so many financial stocks. I'll also be locked in on XLF.

It's also worth noting that the Nasdaq is at its upper Bollinger Band (not shown).

no changes

The market had a promising reversal today after a weak open. Even better, the strength came on one of the highest volume days we've had in months. Despite those and other positive technical developments, we still need to see some follow through. Tomorrow's big bad jobs report could provide the needed spark or it could take the market right back down.

The Nasdaq actually broke its 50-day moving average and its January downtrend today. I'm surprised that I'm saying this but it looks like it's ready to breakout. It's certainly in a good position for some good (better than expected?) news to give it a pop.

The S&P 500 doesn't look quite as good as the Nasdaq and it's no wonder with all the financials weighing it down. Let's see what the news flow bring us...

The QQQQ is actually up for the year. It's worth taking a look at how the sector ETFs have done year-to-date as a reminder that there's actually some strength in this market. Could we possibly be back to the good old days of tech leading the market higher?

no changes

Today's early rally hit the wall right at resistance levels. I suspect the indices will continue to chop around at least through Friday's jobs report and possibly until whenever the government reveals the stimulus/bad-bank/"bailout 2" plan.

The Nasdaq poked its head above both its 50-day moving average and its downward sloping January trendline but sellers pushed it back below both lines. So it remains inside the triangle/coil it's been building.

The S&P popped above the well-watched 850 level before falling back.

Here's yet another look at Bank of America (BAC). It slid to a new 18 year low today on extremely high volume. It sure seems like it wants to go to zero...

The XLF has resisted following BAC to its January lows and beyond... so far. It looks like it's ready to fail but I guess sellers aren't willing to sell all the financials off ahead of the announcement of the gubbermint's rescue plan (or whatever it's called). But do we get a "sell the news" reaction once that plan's been announced?

no changes

It was a positive day for all the major indices today but the technical picture is largely the same as it was last night, despite the minor improvements in the trend table below. As the charts show, the Nasdaq and S&P 500 still seem to be building triangles. The biggest technical development was the Nasdaq touching its 50-day moving average. It needs to break through that line as well as its January downtrend in order to get me thinking that it could actually be headed somewhere besides sideways.

Some minor improvements today...

We had a mixed day for a change today with the Nasdaq & Russell 2,000 up, S&P 500 flat and the Dow down. It's tough to get excited about the strength in tech and small caps since so many stocks are just stuck in ranges. I saw a lot of bullish reversal candlesticks when I ran through my scans tonight but almost every one of those stocks was in the middle of congestion. Good risk/reward swing trades are hard to some by right now, at least for the type of setups I like.

I feel the same way about the indices. They seem to be coiling (building triangles) right now. The Nasdaq has to get through its 50-day moving average before it can get a whiff of the potential resistance at the top of the triangle. I don't see much to do with this index until it's free of the top of the triangle or below the January lows.

The S&P is a bit further away from its 50-day moving average but otherwise it's the same story as the Nasdaq.

Howard Lindzon's new book, "The Wallstrip Edge: Using Trends to Make Money -- Find Them, Ride Them, and Get Off" is out this month. If you are a fan of the WallStrip show and/or trend following you should check it out. I haven't read it yet but here's the product description from Amazon:

It's been often observed that anyone who invests in the stock market needs to have a very strong sense of humor....indeed; no truer words were ever spoken.

And the truth is, Howard Lindzon took that observation quite literally. Indeed, Howard's creation -- Wallstrip.com -- has become just that - a total melding of humor and investing, or as the New York Times observed about Wallstrip - "It's Squawk Box meets Saturday Night Live." Wallstrip.com pulls in between 5 and 7 million visitors a year, and the show's rabid following includes stock market enthusiasts, venture capitalists, traders, and others who tune in to hear, see, and talk about what's happening in the markets.

If you haven't been to Wallstrip.com, well, you're in for a real treat. Lindzon's parodies are priceless. And in THE WALLSTRIP EDGE, Howard captures his most unusual (but very smart) approach to how he picks winners, and you can too.

In THE WALLSTRIP EDGE, Howard Lindzon shows readers how to profit from his straightforward investment philosophy -- a unique trend watching philosophy that makes Wallstrip.com such an amazing phenomenon, including how to look at trends from a different perspective, knowing when to buy a certain stock, how to hold it, and of course when to sell. It's all done using the power of the Internet and your own instincts. It's a surprisingly simple (and fun) strategy that works, and best of all, you don't need to be a financial genius to make it work for you.

The banks and other financial stocks continued to lead the broader market lower. Today the BKX broke to a new all-time(!!) low by dropping below the 1993 low of 24.69. There's really not much more to say besides "all-time lows" and "the trend is your friend".

The XLF also made a new all-time low today, as it's been doing since last July. The volume here caught my eye though because it's lighter than it was at the January and November lows. I'd certainly be suspect of new highs on lighter volume so I must be equally suspect of these new lows on lighter volume.

*Somehow* the Dow closed just 31 cents above its November closing low. Darn those technical traders... Note the same volume non-confirmation here in the Dow as in the XLF.

The way the indices are positioned now reminds me of last September when the S&P and Nasdaq had taken out their July lows but the Russell 2000 was still hanging tough. Back then I wondered if the small caps would be able to withstand the broader market's weakness or not. It turned out that we didn't (couldn't?) get a bounce until all the major indices were dragged to new lows. Now I'm wondering if we can bounce without the S&P 500 and Nasdaq joining the Dow at the November lows. The S&P is 5% above its November low and the Nasdaq is about 11% above its low.

All down once again

I think (and hope) we're getting to the point where the market will no longer be focused on TARP & stimulus announcements from the government. On Friday both the S&P 500 and Nasdaq traded at prices they traded at on October 10th, the first major reaction low in autumn. So one could argue that we've been in a holding pattern for four months now. That's a good sized base which should lead to a solid move out of that base whenever the right impetus comes along. I think the odds of a breakdown are sightly higher than a breakout because of the 200 and 50-day moving averages and that the triangles being built are usually continuation patterns.

no changes

Cameron just left a question for me in the comments to last night's recap. He asked:

I'm looking at your way of thinking about the market. One of the biggest questions I have, though, is regarding your stops.

You said you set your stop at just .20 over your short dollar amount. With all of the intra-day fluctuations, how can you know that it wouldn't have gone up, say, .25 and then nose-dived? It's a perfectly plausible situation.

Said another way, I can place a buy order with a stop, but we easily have 1% swings in a day. If a swing occurs, I have automatically sold for a lower price, only to see the market go back up. Therefore, I'm encouraged to set much broader stops. You set yours for only .20 over the buy price, though, which is why I'm confused.

I often get asked variations of this question, so I thought I'd put my answer in its own post. This was my response:

I couldn't have known that the stock wouldn't have shaken me out. But I also wouldn't have known if I'd have been shaken out if my stop was 50 cents or even a dollar higher. That narrow range candle just provided me with a tight stop. I like tight stops b/c they give me a better opportunity to get high R-multiple winners.

But to your point, how tight of a stop is too tight and will practically guarantee being stopped out? It's hard to answer that question but I generally shy away from any stop that's less than 0.5% of the stock price. I normally like my stops to be about 1% of the stock price. In general, I'm more comfortable with somewhat tighter stops on the QQQQ b/c of how liquid it is and b/c it's less volatile than an "in play" stock would be.

Also, note that I didn't pick a 20 cent stop out of thin air. I went with what the previous candle told me was resistance.

The key thing to remember is that I'm on the hunt for high R-Multiple winners. Because of the way I size my positions (the percent risk model), the tighter my stops the higher the potential reward. In other words if I think a stock has potential to move $2 I'd rather have a 20 cent stop than a $1 stop. Risking 20 cents to make 200 cents ($2) would give me a 10R winner vs only a 2R winner if I had risked $1. (If R was 1% of my equity that would be a 10% gain vs a 2% gain.) For a real example of this see the DGX trades I posted on my Narrow Range Bars post.

So there' a trade-off at work here between stop size and risk/reward multiples. The tighter the stop, the better chance you have of getting a high R winner but you also have a better chance of getting stopped out. Your win ratio is likely to be inversely proportional to how tight your stops are -- looser stops should lead to a higher win rate but also fewer high R-multiple winners.

It's also key that you don't pick your stops willy-nilly. I always use the support/resistance levels that the charts dictate to me.

Well the plan I laid out last night worked pretty well today. I said I was going to focus on the S&P 500 but I ended up shorting the QQQQ instead. Like I said yesterday, I wanted to wait until after Geithner started speaking at 11 AM before I did anything. Luckily the indices traded in a tight range between 10:30 and 11:00 which gave me a narrow candle to execute against. I jumped in QQQQ at 11:04:55 at $31.17 with a stop at $31.37. The bottom fell out within minutes and I just covered at the end of the day for just under a 4R gain.

It seems to me that today's selling was more than just "sell the news" but actually a bit of disappointment with the lack of specifics in the plan. Volume on the S&P 500 was the highest since November but the index is still above recent support. So as usual in this market we're stuck waiting for some follow-through.

The Nasdaq fell back below its 50-day moving average on a volume spike.

There was a lot of damage in the financial stocks again. XLF was dragged down 10% thanks to moves like the 19% drop in BAC. This sector continues to teeter on the edge of the abyss.

lots of downgrades today

There's not much to do now except wait for the market's reaction to what Obama has to say tonight and what Geithner reveals tomorrow at 11 AM. I almost don't want to mention the technicals given that we should be driven by the news everybody's been waiting for. But I do see many setups (NR7s, spinning tops, harami...) that I'd normally be licking my chops to short. If I do enter any shorts tomorrow it won't be until after Geithner starts speaking and then only if we trade below today's lows. I show a couple of setups on the indices below. Normally I prefer to trade the Nasdaq (QQQQ) over the S&P but for a short here I like the S&P (SPY) much better. It's got worse relative strength, is bumping up against its 50-day moving average and would likely suffer more due to a bad reaction to the government's plans since it's composed of so many financial stocks. I'll also be locked in on XLF.

It's also worth noting that the Nasdaq is at its upper Bollinger Band (not shown).

no changes

The market had a promising reversal today after a weak open. Even better, the strength came on one of the highest volume days we've had in months. Despite those and other positive technical developments, we still need to see some follow through. Tomorrow's big bad jobs report could provide the needed spark or it could take the market right back down.

The Nasdaq actually broke its 50-day moving average and its January downtrend today. I'm surprised that I'm saying this but it looks like it's ready to breakout. It's certainly in a good position for some good (better than expected?) news to give it a pop.

The S&P 500 doesn't look quite as good as the Nasdaq and it's no wonder with all the financials weighing it down. Let's see what the news flow bring us...

The QQQQ is actually up for the year. It's worth taking a look at how the sector ETFs have done year-to-date as a reminder that there's actually some strength in this market. Could we possibly be back to the good old days of tech leading the market higher?

no changes

Today's early rally hit the wall right at resistance levels. I suspect the indices will continue to chop around at least through Friday's jobs report and possibly until whenever the government reveals the stimulus/bad-bank/"bailout 2" plan.

The Nasdaq poked its head above both its 50-day moving average and its downward sloping January trendline but sellers pushed it back below both lines. So it remains inside the triangle/coil it's been building.

The S&P popped above the well-watched 850 level before falling back.

Here's yet another look at Bank of America (BAC). It slid to a new 18 year low today on extremely high volume. It sure seems like it wants to go to zero...

The XLF has resisted following BAC to its January lows and beyond... so far. It looks like it's ready to fail but I guess sellers aren't willing to sell all the financials off ahead of the announcement of the gubbermint's rescue plan (or whatever it's called). But do we get a "sell the news" reaction once that plan's been announced?

no changes

It was a positive day for all the major indices today but the technical picture is largely the same as it was last night, despite the minor improvements in the trend table below. As the charts show, the Nasdaq and S&P 500 still seem to be building triangles. The biggest technical development was the Nasdaq touching its 50-day moving average. It needs to break through that line as well as its January downtrend in order to get me thinking that it could actually be headed somewhere besides sideways.

Some minor improvements today...

We had a mixed day for a change today with the Nasdaq & Russell 2,000 up, S&P 500 flat and the Dow down. It's tough to get excited about the strength in tech and small caps since so many stocks are just stuck in ranges. I saw a lot of bullish reversal candlesticks when I ran through my scans tonight but almost every one of those stocks was in the middle of congestion. Good risk/reward swing trades are hard to some by right now, at least for the type of setups I like.

I feel the same way about the indices. They seem to be coiling (building triangles) right now. The Nasdaq has to get through its 50-day moving average before it can get a whiff of the potential resistance at the top of the triangle. I don't see much to do with this index until it's free of the top of the triangle or below the January lows.

The S&P is a bit further away from its 50-day moving average but otherwise it's the same story as the Nasdaq.

Howard Lindzon's new book, "The Wallstrip Edge: Using Trends to Make Money -- Find Them, Ride Them, and Get Off" is out this month. If you are a fan of the WallStrip show and/or trend following you should check it out. I haven't read it yet but here's the product description from Amazon:

It's been often observed that anyone who invests in the stock market needs to have a very strong sense of humor....indeed; no truer words were ever spoken.

And the truth is, Howard Lindzon took that observation quite literally. Indeed, Howard's creation -- Wallstrip.com -- has become just that - a total melding of humor and investing, or as the New York Times observed about Wallstrip - "It's Squawk Box meets Saturday Night Live." Wallstrip.com pulls in between 5 and 7 million visitors a year, and the show's rabid following includes stock market enthusiasts, venture capitalists, traders, and others who tune in to hear, see, and talk about what's happening in the markets.

If you haven't been to Wallstrip.com, well, you're in for a real treat. Lindzon's parodies are priceless. And in THE WALLSTRIP EDGE, Howard captures his most unusual (but very smart) approach to how he picks winners, and you can too.

In THE WALLSTRIP EDGE, Howard Lindzon shows readers how to profit from his straightforward investment philosophy -- a unique trend watching philosophy that makes Wallstrip.com such an amazing phenomenon, including how to look at trends from a different perspective, knowing when to buy a certain stock, how to hold it, and of course when to sell. It's all done using the power of the Internet and your own instincts. It's a surprisingly simple (and fun) strategy that works, and best of all, you don't need to be a financial genius to make it work for you.

The banks and other financial stocks continued to lead the broader market lower. Today the BKX broke to a new all-time(!!) low by dropping below the 1993 low of 24.69. There's really not much more to say besides "all-time lows" and "the trend is your friend".

The XLF also made a new all-time low today, as it's been doing since last July. The volume here caught my eye though because it's lighter than it was at the January and November lows. I'd certainly be suspect of new highs on lighter volume so I must be equally suspect of these new lows on lighter volume.

*Somehow* the Dow closed just 31 cents above its November closing low. Darn those technical traders... Note the same volume non-confirmation here in the Dow as in the XLF.

The way the indices are positioned now reminds me of last September when the S&P and Nasdaq had taken out their July lows but the Russell 2000 was still hanging tough. Back then I wondered if the small caps would be able to withstand the broader market's weakness or not. It turned out that we didn't (couldn't?) get a bounce until all the major indices were dragged to new lows. Now I'm wondering if we can bounce without the S&P 500 and Nasdaq joining the Dow at the November lows. The S&P is 5% above its November low and the Nasdaq is about 11% above its low.

All down once again

I think (and hope) we're getting to the point where the market will no longer be focused on TARP & stimulus announcements from the government. On Friday both the S&P 500 and Nasdaq traded at prices they traded at on October 10th, the first major reaction low in autumn. So one could argue that we've been in a holding pattern for four months now. That's a good sized base which should lead to a solid move out of that base whenever the right impetus comes along. I think the odds of a breakdown are sightly higher than a breakout because of the 200 and 50-day moving averages and that the triangles being built are usually continuation patterns.

no changes

Cameron just left a question for me in the comments to last night's recap. He asked:

I'm looking at your way of thinking about the market. One of the biggest questions I have, though, is regarding your stops.

You said you set your stop at just .20 over your short dollar amount. With all of the intra-day fluctuations, how can you know that it wouldn't have gone up, say, .25 and then nose-dived? It's a perfectly plausible situation.

Said another way, I can place a buy order with a stop, but we easily have 1% swings in a day. If a swing occurs, I have automatically sold for a lower price, only to see the market go back up. Therefore, I'm encouraged to set much broader stops. You set yours for only .20 over the buy price, though, which is why I'm confused.

I often get asked variations of this question, so I thought I'd put my answer in its own post. This was my response:

I couldn't have known that the stock wouldn't have shaken me out. But I also wouldn't have known if I'd have been shaken out if my stop was 50 cents or even a dollar higher. That narrow range candle just provided me with a tight stop. I like tight stops b/c they give me a better opportunity to get high R-multiple winners.

But to your point, how tight of a stop is too tight and will practically guarantee being stopped out? It's hard to answer that question but I generally shy away from any stop that's less than 0.5% of the stock price. I normally like my stops to be about 1% of the stock price. In general, I'm more comfortable with somewhat tighter stops on the QQQQ b/c of how liquid it is and b/c it's less volatile than an "in play" stock would be.

Also, note that I didn't pick a 20 cent stop out of thin air. I went with what the previous candle told me was resistance.

The key thing to remember is that I'm on the hunt for high R-Multiple winners. Because of the way I size my positions (the percent risk model), the tighter my stops the higher the potential reward. In other words if I think a stock has potential to move $2 I'd rather have a 20 cent stop than a $1 stop. Risking 20 cents to make 200 cents ($2) would give me a 10R winner vs only a 2R winner if I had risked $1. (If R was 1% of my equity that would be a 10% gain vs a 2% gain.) For a real example of this see the DGX trades I posted on my Narrow Range Bars post.

So there' a trade-off at work here between stop size and risk/reward multiples. The tighter the stop, the better chance you have of getting a high R winner but you also have a better chance of getting stopped out. Your win ratio is likely to be inversely proportional to how tight your stops are -- looser stops should lead to a higher win rate but also fewer high R-multiple winners.

It's also key that you don't pick your stops willy-nilly. I always use the support/resistance levels that the charts dictate to me.

Well the plan I laid out last night worked pretty well today. I said I was going to focus on the S&P 500 but I ended up shorting the QQQQ instead. Like I said yesterday, I wanted to wait until after Geithner started speaking at 11 AM before I did anything. Luckily the indices traded in a tight range between 10:30 and 11:00 which gave me a narrow candle to execute against. I jumped in QQQQ at 11:04:55 at $31.17 with a stop at $31.37. The bottom fell out within minutes and I just covered at the end of the day for just under a 4R gain.

It seems to me that today's selling was more than just "sell the news" but actually a bit of disappointment with the lack of specifics in the plan. Volume on the S&P 500 was the highest since November but the index is still above recent support. So as usual in this market we're stuck waiting for some follow-through.

The Nasdaq fell back below its 50-day moving average on a volume spike.

There was a lot of damage in the financial stocks again. XLF was dragged down 10% thanks to moves like the 19% drop in BAC. This sector continues to teeter on the edge of the abyss.

lots of downgrades today

There's not much to do now except wait for the market's reaction to what Obama has to say tonight and what Geithner reveals tomorrow at 11 AM. I almost don't want to mention the technicals given that we should be driven by the news everybody's been waiting for. But I do see many setups (NR7s, spinning tops, harami...) that I'd normally be licking my chops to short. If I do enter any shorts tomorrow it won't be until after Geithner starts speaking and then only if we trade below today's lows. I show a couple of setups on the indices below. Normally I prefer to trade the Nasdaq (QQQQ) over the S&P but for a short here I like the S&P (SPY) much better. It's got worse relative strength, is bumping up against its 50-day moving average and would likely suffer more due to a bad reaction to the government's plans since it's composed of so many financial stocks. I'll also be locked in on XLF.

It's also worth noting that the Nasdaq is at its upper Bollinger Band (not shown).

no changes

The market had a promising reversal today after a weak open. Even better, the strength came on one of the highest volume days we've had in months. Despite those and other positive technical developments, we still need to see some follow through. Tomorrow's big bad jobs report could provide the needed spark or it could take the market right back down.

The Nasdaq actually broke its 50-day moving average and its January downtrend today. I'm surprised that I'm saying this but it looks like it's ready to breakout. It's certainly in a good position for some good (better than expected?) news to give it a pop.

The S&P 500 doesn't look quite as good as the Nasdaq and it's no wonder with all the financials weighing it down. Let's see what the news flow bring us...

The QQQQ is actually up for the year. It's worth taking a look at how the sector ETFs have done year-to-date as a reminder that there's actually some strength in this market. Could we possibly be back to the good old days of tech leading the market higher?

no changes

Today's early rally hit the wall right at resistance levels. I suspect the indices will continue to chop around at least through Friday's jobs report and possibly until whenever the government reveals the stimulus/bad-bank/"bailout 2" plan.

The Nasdaq poked its head above both its 50-day moving average and its downward sloping January trendline but sellers pushed it back below both lines. So it remains inside the triangle/coil it's been building.

The S&P popped above the well-watched 850 level before falling back.

Here's yet another look at Bank of America (BAC). It slid to a new 18 year low today on extremely high volume. It sure seems like it wants to go to zero...

The XLF has resisted following BAC to its January lows and beyond... so far. It looks like it's ready to fail but I guess sellers aren't willing to sell all the financials off ahead of the announcement of the gubbermint's rescue plan (or whatever it's called). But do we get a "sell the news" reaction once that plan's been announced?

no changes

It was a positive day for all the major indices today but the technical picture is largely the same as it was last night, despite the minor improvements in the trend table below. As the charts show, the Nasdaq and S&P 500 still seem to be building triangles. The biggest technical development was the Nasdaq touching its 50-day moving average. It needs to break through that line as well as its January downtrend in order to get me thinking that it could actually be headed somewhere besides sideways.

Some minor improvements today...

We had a mixed day for a change today with the Nasdaq & Russell 2,000 up, S&P 500 flat and the Dow down. It's tough to get excited about the strength in tech and small caps since so many stocks are just stuck in ranges. I saw a lot of bullish reversal candlesticks when I ran through my scans tonight but almost every one of those stocks was in the middle of congestion. Good risk/reward swing trades are hard to some by right now, at least for the type of setups I like.

I feel the same way about the indices. They seem to be coiling (building triangles) right now. The Nasdaq has to get through its 50-day moving average before it can get a whiff of the potential resistance at the top of the triangle. I don't see much to do with this index until it's free of the top of the triangle or below the January lows.

The S&P is a bit further away from its 50-day moving average but otherwise it's the same story as the Nasdaq.

Howard Lindzon's new book, "The Wallstrip Edge: Using Trends to Make Money -- Find Them, Ride Them, and Get Off" is out this month. If you are a fan of the WallStrip show and/or trend following you should check it out. I haven't read it yet but here's the product description from Amazon:

It's been often observed that anyone who invests in the stock market needs to have a very strong sense of humor....indeed; no truer words were ever spoken.

And the truth is, Howard Lindzon took that observation quite literally. Indeed, Howard's creation -- Wallstrip.com -- has become just that - a total melding of humor and investing, or as the New York Times observed about Wallstrip - "It's Squawk Box meets Saturday Night Live." Wallstrip.com pulls in between 5 and 7 million visitors a year, and the show's rabid following includes stock market enthusiasts, venture capitalists, traders, and others who tune in to hear, see, and talk about what's happening in the markets.

If you haven't been to Wallstrip.com, well, you're in for a real treat. Lindzon's parodies are priceless. And in THE WALLSTRIP EDGE, Howard captures his most unusual (but very smart) approach to how he picks winners, and you can too.

In THE WALLSTRIP EDGE, Howard Lindzon shows readers how to profit from his straightforward investment philosophy -- a unique trend watching philosophy that makes Wallstrip.com such an amazing phenomenon, including how to look at trends from a different perspective, knowing when to buy a certain stock, how to hold it, and of course when to sell. It's all done using the power of the Internet and your own instincts. It's a surprisingly simple (and fun) strategy that works, and best of all, you don't need to be a financial genius to make it work for you.

The banks and other financial stocks continued to lead the broader market lower. Today the BKX broke to a new all-time(!!) low by dropping below the 1993 low of 24.69. There's really not much more to say besides "all-time lows" and "the trend is your friend".

The XLF also made a new all-time low today, as it's been doing since last July. The volume here caught my eye though because it's lighter than it was at the January and November lows. I'd certainly be suspect of new highs on lighter volume so I must be equally suspect of these new lows on lighter volume.

*Somehow* the Dow closed just 31 cents above its November closing low. Darn those technical traders... Note the same volume non-confirmation here in the Dow as in the XLF.

The way the indices are positioned now reminds me of last September when the S&P and Nasdaq had taken out their July lows but the Russell 2000 was still hanging tough. Back then I wondered if the small caps would be able to withstand the broader market's weakness or not. It turned out that we didn't (couldn't?) get a bounce until all the major indices were dragged to new lows. Now I'm wondering if we can bounce without the S&P 500 and Nasdaq joining the Dow at the November lows. The S&P is 5% above its November low and the Nasdaq is about 11% above its low.

All down once again

I think (and hope) we're getting to the point where the market will no longer be focused on TARP & stimulus announcements from the government. On Friday both the S&P 500 and Nasdaq traded at prices they traded at on October 10th, the first major reaction low in autumn. So one could argue that we've been in a holding pattern for four months now. That's a good sized base which should lead to a solid move out of that base whenever the right impetus comes along. I think the odds of a breakdown are sightly higher than a breakout because of the 200 and 50-day moving averages and that the triangles being built are usually continuation patterns.

no changes

Cameron just left a question for me in the comments to last night's recap. He asked:

I'm looking at your way of thinking about the market. One of the biggest questions I have, though, is regarding your stops.

You said you set your stop at just .20 over your short dollar amount. With all of the intra-day fluctuations, how can you know that it wouldn't have gone up, say, .25 and then nose-dived? It's a perfectly plausible situation.

Said another way, I can place a buy order with a stop, but we easily have 1% swings in a day. If a swing occurs, I have automatically sold for a lower price, only to see the market go back up. Therefore, I'm encouraged to set much broader stops. You set yours for only .20 over the buy price, though, which is why I'm confused.

I often get asked variations of this question, so I thought I'd put my answer in its own post. This was my response:

I couldn't have known that the stock wouldn't have shaken me out. But I also wouldn't have known if I'd have been shaken out if my stop was 50 cents or even a dollar higher. That narrow range candle just provided me with a tight stop. I like tight stops b/c they give me a better opportunity to get high R-multiple winners.

But to your point, how tight of a stop is too tight and will practically guarantee being stopped out? It's hard to answer that question but I generally shy away from any stop that's less than 0.5% of the stock price. I normally like my stops to be about 1% of the stock price. In general, I'm more comfortable with somewhat tighter stops on the QQQQ b/c of how liquid it is and b/c it's less volatile than an "in play" stock would be.

Also, note that I didn't pick a 20 cent stop out of thin air. I went with what the previous candle told me was resistance.

The key thing to remember is that I'm on the hunt for high R-Multiple winners. Because of the way I size my positions (the percent risk model), the tighter my stops the higher the potential reward. In other words if I think a stock has potential to move $2 I'd rather have a 20 cent stop than a $1 stop. Risking 20 cents to make 200 cents ($2) would give me a 10R winner vs only a 2R winner if I had risked $1. (If R was 1% of my equity that would be a 10% gain vs a 2% gain.) For a real example of this see the DGX trades I posted on my Narrow Range Bars post.

So there' a trade-off at work here between stop size and risk/reward multiples. The tighter the stop, the better chance you have of getting a high R winner but you also have a better chance of getting stopped out. Your win ratio is likely to be inversely proportional to how tight your stops are -- looser stops should lead to a higher win rate but also fewer high R-multiple winners.

It's also key that you don't pick your stops willy-nilly. I always use the support/resistance levels that the charts dictate to me.

Well the plan I laid out last night worked pretty well today. I said I was going to focus on the S&P 500 but I ended up shorting the QQQQ instead. Like I said yesterday, I wanted to wait until after Geithner started speaking at 11 AM before I did anything. Luckily the indices traded in a tight range between 10:30 and 11:00 which gave me a narrow candle to execute against. I jumped in QQQQ at 11:04:55 at $31.17 with a stop at $31.37. The bottom fell out within minutes and I just covered at the end of the day for just under a 4R gain.

It seems to me that today's selling was more than just "sell the news" but actually a bit of disappointment with the lack of specifics in the plan. Volume on the S&P 500 was the highest since November but the index is still above recent support. So as usual in this market we're stuck waiting for some follow-through.

The Nasdaq fell back below its 50-day moving average on a volume spike.

There was a lot of damage in the financial stocks again. XLF was dragged down 10% thanks to moves like the 19% drop in BAC. This sector continues to teeter on the edge of the abyss.

lots of downgrades today

There's not much to do now except wait for the market's reaction to what Obama has to say tonight and what Geithner reveals tomorrow at 11 AM. I almost don't want to mention the technicals given that we should be driven by the news everybody's been waiting for. But I do see many setups (NR7s, spinning tops, harami...) that I'd normally be licking my chops to short. If I do enter any shorts tomorrow it won't be until after Geithner starts speaking and then only if we trade below today's lows. I show a couple of setups on the indices below. Normally I prefer to trade the Nasdaq (QQQQ) over the S&P but for a short here I like the S&P (SPY) much better. It's got worse relative strength, is bumping up against its 50-day moving average and would likely suffer more due to a bad reaction to the government's plans since it's composed of so many financial stocks. I'll also be locked in on XLF.

It's also worth noting that the Nasdaq is at its upper Bollinger Band (not shown).

no changes

The market had a promising reversal today after a weak open. Even better, the strength came on one of the highest volume days we've had in months. Despite those and other positive technical developments, we still need to see some follow through. Tomorrow's big bad jobs report could provide the needed spark or it could take the market right back down.

The Nasdaq actually broke its 50-day moving average and its January downtrend today. I'm surprised that I'm saying this but it looks like it's ready to breakout. It's certainly in a good position for some good (better than expected?) news to give it a pop.

The S&P 500 doesn't look quite as good as the Nasdaq and it's no wonder with all the financials weighing it down. Let's see what the news flow bring us...

The QQQQ is actually up for the year. It's worth taking a look at how the sector ETFs have done year-to-date as a reminder that there's actually some strength in this market. Could we possibly be back to the good old days of tech leading the market higher?

no changes

Today's early rally hit the wall right at resistance levels. I suspect the indices will continue to chop around at least through Friday's jobs report and possibly until whenever the government reveals the stimulus/bad-bank/"bailout 2" plan.

The Nasdaq poked its head above both its 50-day moving average and its downward sloping January trendline but sellers pushed it back below both lines. So it remains inside the triangle/coil it's been building.

The S&P popped above the well-watched 850 level before falling back.

Here's yet another look at Bank of America (BAC). It slid to a new 18 year low today on extremely high volume. It sure seems like it wants to go to zero...

The XLF has resisted following BAC to its January lows and beyond... so far. It looks like it's ready to fail but I guess sellers aren't willing to sell all the financials off ahead of the announcement of the gubbermint's rescue plan (or whatever it's called). But do we get a "sell the news" reaction once that plan's been announced?

no changes

It was a positive day for all the major indices today but the technical picture is largely the same as it was last night, despite the minor improvements in the trend table below. As the charts show, the Nasdaq and S&P 500 still seem to be building triangles. The biggest technical development was the Nasdaq touching its 50-day moving average. It needs to break through that line as well as its January downtrend in order to get me thinking that it could actually be headed somewhere besides sideways.

Some minor improvements today...

We had a mixed day for a change today with the Nasdaq & Russell 2,000 up, S&P 500 flat and the Dow down. It's tough to get excited about the strength in tech and small caps since so many stocks are just stuck in ranges. I saw a lot of bullish reversal candlesticks when I ran through my scans tonight but almost every one of those stocks was in the middle of congestion. Good risk/reward swing trades are hard to some by right now, at least for the type of setups I like.

I feel the same way about the indices. They seem to be coiling (building triangles) right now. The Nasdaq has to get through its 50-day moving average before it can get a whiff of the potential resistance at the top of the triangle. I don't see much to do with this index until it's free of the top of the triangle or below the January lows.

The S&P is a bit further away from its 50-day moving average but otherwise it's the same story as the Nasdaq.

Howard Lindzon's new book, "The Wallstrip Edge: Using Trends to Make Money -- Find Them, Ride Them, and Get Off" is out this month. If you are a fan of the WallStrip show and/or trend following you should check it out. I haven't read it yet but here's the product description from Amazon:

It's been often observed that anyone who invests in the stock market needs to have a very strong sense of humor....indeed; no truer words were ever spoken.

And the truth is, Howard Lindzon took that observation quite literally. Indeed, Howard's creation -- Wallstrip.com -- has become just that - a total melding of humor and investing, or as the New York Times observed about Wallstrip - "It's Squawk Box meets Saturday Night Live." Wallstrip.com pulls in between 5 and 7 million visitors a year, and the show's rabid following includes stock market enthusiasts, venture capitalists, traders, and others who tune in to hear, see, and talk about what's happening in the markets.

If you haven't been to Wallstrip.com, well, you're in for a real treat. Lindzon's parodies are priceless. And in THE WALLSTRIP EDGE, Howard captures his most unusual (but very smart) approach to how he picks winners, and you can too.

In THE WALLSTRIP EDGE, Howard Lindzon shows readers how to profit from his straightforward investment philosophy -- a unique trend watching philosophy that makes Wallstrip.com such an amazing phenomenon, including how to look at trends from a different perspective, knowing when to buy a certain stock, how to hold it, and of course when to sell. It's all done using the power of the Internet and your own instincts. It's a surprisingly simple (and fun) strategy that works, and best of all, you don't need to be a financial genius to make it work for you.

The banks and other financial stocks continued to lead the broader market lower. Today the BKX broke to a new all-time(!!) low by dropping below the 1993 low of 24.69. There's really not much more to say besides "all-time lows" and "the trend is your friend".

The XLF also made a new all-time low today, as it's been doing since last July. The volume here caught my eye though because it's lighter than it was at the January and November lows. I'd certainly be suspect of new highs on lighter volume so I must be equally suspect of these new lows on lighter volume.

*Somehow* the Dow closed just 31 cents above its November closing low. Darn those technical traders... Note the same volume non-confirmation here in the Dow as in the XLF.

The way the indices are positioned now reminds me of last September when the S&P and Nasdaq had taken out their July lows but the Russell 2000 was still hanging tough. Back then I wondered if the small caps would be able to withstand the broader market's weakness or not. It turned out that we didn't (couldn't?) get a bounce until all the major indices were dragged to new lows. Now I'm wondering if we can bounce without the S&P 500 and Nasdaq joining the Dow at the November lows. The S&P is 5% above its November low and the Nasdaq is about 11% above its low.

All down once again

I think (and hope) we're getting to the point where the market will no longer be focused on TARP & stimulus announcements from the government. On Friday both the S&P 500 and Nasdaq traded at prices they traded at on October 10th, the first major reaction low in autumn. So one could argue that we've been in a holding pattern for four months now. That's a good sized base which should lead to a solid move out of that base whenever the right impetus comes along. I think the odds of a breakdown are sightly higher than a breakout because of the 200 and 50-day moving averages and that the triangles being built are usually continuation patterns.

no changes

Cameron just left a question for me in the comments to last night's recap. He asked:

I'm looking at your way of thinking about the market. One of the biggest questions I have, though, is regarding your stops.

You said you set your stop at just .20 over your short dollar amount. With all of the intra-day fluctuations, how can you know that it wouldn't have gone up, say, .25 and then nose-dived? It's a perfectly plausible situation.

Said another way, I can place a buy order with a stop, but we easily have 1% swings in a day. If a swing occurs, I have automatically sold for a lower price, only to see the market go back up. Therefore, I'm encouraged to set much broader stops. You set yours for only .20 over the buy price, though, which is why I'm confused.

I often get asked variations of this question, so I thought I'd put my answer in its own post. This was my response:

I couldn't have known that the stock wouldn't have shaken me out. But I also wouldn't have known if I'd have been shaken out if my stop was 50 cents or even a dollar higher. That narrow range candle just provided me with a tight stop. I like tight stops b/c they give me a better opportunity to get high R-multiple winners.

But to your point, how tight of a stop is too tight and will practically guarantee being stopped out? It's hard to answer that question but I generally shy away from any stop that's less than 0.5% of the stock price. I normally like my stops to be about 1% of the stock price. In general, I'm more comfortable with somewhat tighter stops on the QQQQ b/c of how liquid it is and b/c it's less volatile than an "in play" stock would be.

Also, note that I didn't pick a 20 cent stop out of thin air. I went with what the previous candle told me was resistance.

The key thing to remember is that I'm on the hunt for high R-Multiple winners. Because of the way I size my positions (the percent risk model), the tighter my stops the higher the potential reward. In other words if I think a stock has potential to move $2 I'd rather have a 20 cent stop than a $1 stop. Risking 20 cents to make 200 cents ($2) would give me a 10R winner vs only a 2R winner if I had risked $1. (If R was 1% of my equity that would be a 10% gain vs a 2% gain.) For a real example of this see the DGX trades I posted on my Narrow Range Bars post.

So there' a trade-off at work here between stop size and risk/reward multiples. The tighter the stop, the better chance you have of getting a high R winner but you also have a better chance of getting stopped out. Your win ratio is likely to be inversely proportional to how tight your stops are -- looser stops should lead to a higher win rate but also fewer high R-multiple winners.

It's also key that you don't pick your stops willy-nilly. I always use the support/resistance levels that the charts dictate to me.

Well the plan I laid out last night worked pretty well today. I said I was going to focus on the S&P 500 but I ended up shorting the QQQQ instead. Like I said yesterday, I wanted to wait until after Geithner started speaking at 11 AM before I did anything. Luckily the indices traded in a tight range between 10:30 and 11:00 which gave me a narrow candle to execute against. I jumped in QQQQ at 11:04:55 at $31.17 with a stop at $31.37. The bottom fell out within minutes and I just covered at the end of the day for just under a 4R gain.

It seems to me that today's selling was more than just "sell the news" but actually a bit of disappointment with the lack of specifics in the plan. Volume on the S&P 500 was the highest since November but the index is still above recent support. So as usual in this market we're stuck waiting for some follow-through.

The Nasdaq fell back below its 50-day moving average on a volume spike.

There was a lot of damage in the financial stocks again. XLF was dragged down 10% thanks to moves like the 19% drop in BAC. This sector continues to teeter on the edge of the abyss.

lots of downgrades today

There's not much to do now except wait for the market's reaction to what Obama has to say tonight and what Geithner reveals tomorrow at 11 AM. I almost don't want to mention the technicals given that we should be driven by the news everybody's been waiting for. But I do see many setups (NR7s, spinning tops, harami...) that I'd normally be licking my chops to short. If I do enter any shorts tomorrow it won't be until after Geithner starts speaking and then only if we trade below today's lows. I show a couple of setups on the indices below. Normally I prefer to trade the Nasdaq (QQQQ) over the S&P but for a short here I like the S&P (SPY) much better. It's got worse relative strength, is bumping up against its 50-day moving average and would likely suffer more due to a bad reaction to the government's plans since it's composed of so many financial stocks. I'll also be locked in on XLF.

It's also worth noting that the Nasdaq is at its upper Bollinger Band (not shown).

no changes

The market had a promising reversal today after a weak open. Even better, the strength came on one of the highest volume days we've had in months. Despite those and other positive technical developments, we still need to see some follow through. Tomorrow's big bad jobs report could provide the needed spark or it could take the market right back down.

The Nasdaq actually broke its 50-day moving average and its January downtrend today. I'm surprised that I'm saying this but it looks like it's ready to breakout. It's certainly in a good position for some good (better than expected?) news to give it a pop.

The S&P 500 doesn't look quite as good as the Nasdaq and it's no wonder with all the financials weighing it down. Let's see what the news flow bring us...

The QQQQ is actually up for the year. It's worth taking a look at how the sector ETFs have done year-to-date as a reminder that there's actually some strength in this market. Could we possibly be back to the good old days of tech leading the market higher?

no changes

Today's early rally hit the wall right at resistance levels. I suspect the indices will continue to chop around at least through Friday's jobs report and possibly until whenever the government reveals the stimulus/bad-bank/"bailout 2" plan.

The Nasdaq poked its head above both its 50-day moving average and its downward sloping January trendline but sellers pushed it back below both lines. So it remains inside the triangle/coil it's been building.

The S&P popped above the well-watched 850 level before falling back.

Here's yet another look at Bank of America (BAC). It slid to a new 18 year low today on extremely high volume. It sure seems like it wants to go to zero...

The XLF has resisted following BAC to its January lows and beyond... so far. It looks like it's ready to fail but I guess sellers aren't willing to sell all the financials off ahead of the announcement of the gubbermint's rescue plan (or whatever it's called). But do we get a "sell the news" reaction once that plan's been announced?

no changes

It was a positive day for all the major indices today but the technical picture is largely the same as it was last night, despite the minor improvements in the trend table below. As the charts show, the Nasdaq and S&P 500 still seem to be building triangles. The biggest technical development was the Nasdaq touching its 50-day moving average. It needs to break through that line as well as its January downtrend in order to get me thinking that it could actually be headed somewhere besides sideways.

Some minor improvements today...

We had a mixed day for a change today with the Nasdaq & Russell 2,000 up, S&P 500 flat and the Dow down. It's tough to get excited about the strength in tech and small caps since so many stocks are just stuck in ranges. I saw a lot of bullish reversal candlesticks when I ran through my scans tonight but almost every one of those stocks was in the middle of congestion. Good risk/reward swing trades are hard to some by right now, at least for the type of setups I like.

I feel the same way about the indices. They seem to be coiling (building triangles) right now. The Nasdaq has to get through its 50-day moving average before it can get a whiff of the potential resistance at the top of the triangle. I don't see much to do with this index until it's free of the top of the triangle or below the January lows.

The S&P is a bit further away from its 50-day moving average but otherwise it's the same story as the Nasdaq.

Howard Lindzon's new book, "The Wallstrip Edge: Using Trends to Make Money -- Find Them, Ride Them, and Get Off" is out this month. If you are a fan of the WallStrip show and/or trend following you should check it out. I haven't read it yet but here's the product description from Amazon:

It's been often observed that anyone who invests in the stock market needs to have a very strong sense of humor....indeed; no truer words were ever spoken.

And the truth is, Howard Lindzon took that observation quite literally. Indeed, Howard's creation -- Wallstrip.com -- has become just that - a total melding of humor and investing, or as the New York Times observed about Wallstrip - "It's Squawk Box meets Saturday Night Live." Wallstrip.com pulls in between 5 and 7 million visitors a year, and the show's rabid following includes stock market enthusiasts, venture capitalists, traders, and others who tune in to hear, see, and talk about what's happening in the markets.

If you haven't been to Wallstrip.com, well, you're in for a real treat. Lindzon's parodies are priceless. And in THE WALLSTRIP EDGE, Howard captures his most unusual (but very smart) approach to how he picks winners, and you can too.

In THE WALLSTRIP EDGE, Howard Lindzon shows readers how to profit from his straightforward investment philosophy -- a unique trend watching philosophy that makes Wallstrip.com such an amazing phenomenon, including how to look at trends from a different perspective, knowing when to buy a certain stock, how to hold it, and of course when to sell. It's all done using the power of the Internet and your own instincts. It's a surprisingly simple (and fun) strategy that works, and best of all, you don't need to be a financial genius to make it work for you.