On Tuesday, April 24, approaching 2 PM, the time of the day that I regard as the Period Of Treachery—fondly referred to as POT—I noted MNST screaming red on the low ticker. I checked to see if there was news to explain the decline, and there was none. I quickly called up an one-minute chart of MNST and noted the two measured down legs.

Then I determined possible support via the thirty-minute and daily charts at around 43.40.

Price never touched the gap support on the daily (see below), but I let the fact that MNST did two measured down legs into intraday thirty-minute price level and 200 sma support to take preference. In addition, daily volume was set to be moderate and not the kind of high volume that would have been needed to fill in that daily gap so I was more inclined to trust what I was seeing via the two measured down legs.

I pegged resistance via the five-minute chart at around 43.87.

Guided by the one-minute chart (see below), I entered at 43.43, during a pullback following the capitulation bottom.

In summary, entry was at 43.43, exit at 43.83, and stop loss at 43.33 just under the intraday lows, resulting in a 4R trade lasting about thirty minutes. Once the resistance was hit, traders—like me—offered shares at the bid and not at the ask, causing a small downdraft. MNST can trade quite rough, and it is one of those stocks that I will trade only if I have mapped out everything before hand! This particular trade contained all the points listed in the capitulation checklist.

Post from: Trader Mike's Blog

A ‘Monster’ Capitulation Daytrade

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Peter has queried regarding the merits of anticipating versus confirming/reacting when entering trades. Here is an excerpt from an earlier post of mine:

Also note that an additional lot could have been purchased via an automatic buy stop once the resistance at 21 was cleared. Since the price action from the open was setting up a high probability trade, I decided to anticipate a breakout, keeping my stop loss fairly tight, just under the pullback lows. But a style combining both anticipation and confirmation/reaction to the breakout could have used—see a previous trade. And of course, a pure confirmation style could have been used, with only buying once the 21 resistance was taken out.

Beginner traders are often anxious to do the right thing. They want to be firm and disciplined. However, an experienced trader will be able to combine flexibility with a firm hand in order to enhance her/his edge. I would encourage Peter and others who are interested in this topic to read the following posts:

ININ, An Anatomy of a Friday Morning Daytrade

Anticipation versus reaction?

VCLK, Not Just another Pretty Face

Another post of mine, focuses on the importance of being true to yourself by discovering through trying various approaches the one which fits you the best. This awareness of your uniqueness as a trader with a specific set of abilities, skills, and preferences will encourage you to put in the time and effort needed to acquire the experience to become a consistently successful trader, meaning that you can rely upon yourself to accumulate profits. The trader’s best friend and mentor is her/himself.

Post from: Trader Mike's Blog

Anticipation Versus Reaction, Revisited

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STZ, on Thursday, April 5, released estimate-beating earnings. I noticed STZ during my premarket news reading, and once the market opened, via the top NYSE gainers scan and its notable movement on the high ticker. It gapped up, filled in the gap, and then made new intra highs within the first thirty minutes. This is very bullish action showing eager buyers and caught my attention, so I put the one-minute chart on my trading platform’s main page anticipating a bull flag consolidation and a second leg up. In other words, I was shown strength and was expecting that the strength would cause a continuation of the uptrend intraday.

The one-minute time frame was chosen because I needed to see the most detail possible to gauge the best entry and exit as my focus is to anticipate the breakout by entering at significant intraday support and exiting at the target price as close as possible. Entering at significant support allows a nice lot size because the risk is so small, as the stop loss is right under that support. Based on a measured move and the daily 50 sma resistance at 22 my original target was 21.90.

However, as is my wont, I checked out other time frames throughout the trade—the thirty-minute showed the consolidation clearly as a triangle which confirmed my plan of playing a possible second leg up from a consolidation pattern. In contrast, the daily showed in general a very weak chart.

In addition, I was cautious because of Thursday being a day before a market-closure holiday and because STZ showed by its candles and ticker information that it can trade abruptly with sharp moves and its bid/ask spread can widen suddenly. Because of the anticipated low volume expected in the afternoon, I put a time limit on this trade before I even entered it, which was by 1 PM I would want to have closed the trade.

Note in the above chart that the second leg was shorter than the first—not all measured moves are exactly equivalent. STZ reached 21.73, about .17 away from my target. When 2 bearish candles printed on the one minute (see chart below), I quickly decided not to wait for my price target. In addition my time target was running out also so I booked my profit shortly after. Here is a close up taken from the above one-minute chart of STZ:

The daily time frame for STZ showed a weak chart pricewise: price is far from a new 52 week high. This aspect cautioned me regarding the bullishness I was seeing intraday.

In summary, entry was at 21.43, exit at 21.63, a mental stop loss at around 21.33. So a 2R trading lasting approximately 60 minutes.

Using an intentional-training/solution focus as Brett Steenbarger encourages, the V-shaped breakout of the bull flag impressed me so much that I was too hasty in entering and got in about .08 higher than necessary and had to wait thirty minutes before STZ broke out to start the second leg up. If I had waited to get in closer to price level support, I would have been able to buy a bigger lot size since my risk would have been reduced, resulting in a larger total profit amount. Also I would have cut the time I was in the trade by half, a very important aspect for my precision-oriented but paradoxically impatient self.

Post from: Trader Mike's Blog

STZ: Bull Flag Separating Two Measured Up Legs

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As my posts show, I am a died-in-the-wool discretionary trader. I would not trade if I could not do it in a discretionary manner. Guided by chart patterns made by volume and price, I have noted in my years of trading that traders have different visual abilities. Frustration at times have surfaced when I have tried to hand over my hard-earned visual wisdom to another trader. I use little technical indicators and am not encouraged to change from that stance. I can eye trendlines without drawing them—sometimes I cheat and pop a clear plastic ruler on my screen to confirm what I am seeing.

Research in neuroscience has deepened our understanding how visual perception works. “When a kitten sees only horizontal lines for the first few months of its life, for example, it loses the ability to see vertical lines. These and other experiments suggest that the interconnections between neurons aren’t fixed at birth, but evolve depending on visual experience.” I vividly remember many years ago first seeing the squiggles which Gary B. Smith aka The Chartman would draw on his annotated charts when he was a RealMoney contributor. At first, I would chunk his carefully crafted work and see just a mishmash of meaningless lines and words. My eyes learned how to make sense of those annotations through time by constant watching of streaming charts and poring over countless annotated charts.

Being a visual artist in addition to a trader—I have a background in plastic arts and oils/watercolors—I have often wondered if my artistic abilities were connected to my visual strengths as a trader. A study shows that artists do indeed see differently from non-artists. Artists shift their gaze all over the visual field while non-artists chiefly focus on main features. In many cultures, it is considered rude, inattentive, or even suspect to shift our gaze away from the eyes of the person to whom we are speaking. Small scale shifting of our eyes, however, is excellent for comprehending charts. In other words: shifty-eyed lawyer, not good; shifty-eyed trader, very good.

I consider the appreciation and understanding of chart patterns to have significant artistic connotations. The artist, Devorah Sperber, focuses on shaking us up regarding what we see and think we are seeing: “… Sperber successfully disrupts and then refocuses our perception of familiar images; forcing us to reconsider how we interpret visual information and how we look at art.”

In lieu of this research, I think it is important for beginning traders to realize that they need to learn to see chart patterns, and how fast that learning will take will depend on their mix of innate abilities and experience which they bring to the trading table. Also, a recognition of their visual perception weaknesses and strengths should shape in part what trading style they use.

Post from: Trader Mike's Blog

Seeing is Believing

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LP commented concerning though he was aware ICE was moving down on strong volume, he did not have an edge in trading ICE as a capitulation play on Monday, April 2. ICE is noteworthy for several reasons. Firstly, it capitulated from a reverse head and shoulders bottom.

NOTE: Volume on below charts is not prominently displayed, please refer to your own charts to see the volume pattern.

Secondly, ICE used the bottom of a five-day price range as the springboard for the capitulation.

Thirdly, this range was echoed on the daily.

Post from: Trader Mike's Blog

ICEing on the Capitulation Cake

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LP, in a recent comment to this blog entry, expressed interest in understanding trades based on capitulation. Capitulation means that there are no more sellers for the moment, and the stock price will rebound sharply. The most important aspect is not to confuse capitulation with the low-grade drip, drip of continuing distribution, better known as the infamous falling knife. The two down legs shown in the chart below are distributive in nature, though quite vigorous, while the third and final leg down represented capitulation. Another important aspect is being able to know when they are happening—in my case, it’s my watching the hi/lo ticker that finds these kinds of trades.

At first, the beginner needs to focus on identifying the basic capitulation pattern and differentiating it from on-going distribution, and then learning the variations which can occur—set-ups with a different number of down legs, different bottoms other than a V-shaped one, like a double/triple bottom, reverse head and shoulders, cup and handle, and different time frames for the support level where the capitulation reversal takes place.

The below chart summarizes a classic capitulation setup that happened in the Q’s this past Thursday, March 29.

Another feature is that these trades often are not stocks making new 52 week lows. In addition, they often have no traceable news which can explain the decline, and they frequently occur in the afternoon.

Capitulation checklist:

1) Have a means of being able to identify stocks which may be in the process of capitulating.
2) Check for any news which could explain the extreme selling.
3) Verify substantial support—price, trend line, and moving average supports—on different time frames, including the daily.
4) Look for the price and volume pattern (especially the downward curvature morphing into a straight line) plus the time of day—afternoon—which is markedly correlated with capitulation.
5) Identify your price target, calculate your risk, size your lot appropriately, and enter the trade either on the first pullback on lower volume than the volume which occurred during the first capitulation bounce, or when price surmounts the first new resistance on the developing reversal. In other words, wait for the beginning of the reversal to show itself.
6) Exit per partial profiting out at various resistance levels, or by complete profit-booking once your target is reached.

Post from: Trader Mike's Blog

Understanding and Using Capitulation for Reversal Daytrades

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Having read a few comments at trading blogs—OK, I have read zillions—I have encountered more often than not, a frenzied, harried, stressful approach to time when one is trading. Some feel the demonic pressure crushing them as soon as the market opens; others feel enervated by its demands needling and pinpricking them throughout the trading day. Regard time, instead, as a wonderful and gracious friend, accommodating your need to focus and execute successful trades.

Specifically, I rely upon my friend, time, in three concrete ways:

I. Using Time frames

All time frames are useful and valuable–monthly, weekly, daily, hourly, thirty minute, fifteen minute, five minute, and last, but not least, one minute. My motto is: Fondle your candles. I look at my candlesticks lovingly and with great attention to details, sucking out the last bit of information they can give me. Certainly a graphic way of stating my point, but candlesticks of different time frames are worth the time upon which to ponder. Ah, time. We got it, so we need to use it well. And there they are, our helpful friends, all lined up, willing to protect our capital like dutiful soldiers, but we are too busy squandering time by not focusing and being distracted by all the action.

Often, time is used to oversee too many candidates or it is used to mind too many trades, so it is easier to just focus on one or two time frames, therefore resulting in the missing of much information. Some traders regard the one minute as dangerous, stimulating them to act foolish and blinding them to the smoother pattern of longer time frames. Others regard the longer time frames as concealing more pertinent details that only the shorter time frames can reveal. The disadvantages of one time frame is countered by the advantages of another, so using them all is truly taking advantage of those little bundles of time, with their high-quality content. In addition, looking at many time frames, will allow the beginner trader to learn the workings of the market. Checking out many time frames does not mean that you violate either your trading methodology or risk parameters.

II. Identifying, preparing for, and focusing on special time periods in the trading day

Already having discussed POT, I will address several other special times in the trading day.

1) 9:30 AM ET to 10:45 is a time of high volume, where usually a trend happens after a breakout in the opening range or consolidation.
2) 10:45 AM ET to Noon ET is when, following whatever trend that happened after the open, price will often consolidate during this time period on low to moderate volume.
3) Noon to 1:30 PM ET is when slow and steady trend continuing or reversals can happen on low to moderate volume.
4) 1:30 PM ET is when abrupt and pronounced continuation of trending or reversal on high volume can happen.
5) 2 PM ET (better known as POT) is also when abrupt and pronounced continuation of trending or reversal on high volume can happen.
6) 3 PM ET is yet again a possible time for either a high-volumed, abrupt, and pronounced continuation of trending or reversal happening.
7) 3:30 PM ET, yup, you guessed it, this particularly tricky time can trigger a very abrupt trend continuation or reversal on high volume.

III. Awareness of economic/seasonal events

It is important to know not only when earning releases are due, but also economic reports, options expirations, end of month and quarter, holidays, and seasonal times like the usual low-volume summertime.

Time is like beauty, in the sense how it can be interpreted differently in the eyes of the beholder. The above information was gleaned from actually trading the market over years. Each trader need to take the basic information and apply it to her/himself in order to make it their own so it will work equally well for them.

Post from: Trader Mike's Blog

Time is on the Trader’s Side

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Trading the second leg of two measured up legs separated by a bull flag is one my favorite trades, especially because the trade usually lasts only 30 to 60 minutes. In most cases, I will at least partially anticipate the breakout allowing me to keep a very tight stop loss.

What is noteworthy about this particular daytrade in PPL which I took Tuesday, March 27 is the smallness of the move. PPL is an electrical utility which got an upgrade premarket, and which I identified via the top gainers scan for the NYSE. Electrical utilities trading on the NYSE usually do not attract daytraders because intraday trading ranges are small. However, PPL made a new 52 week high and had high volume with a decent bid/ask spread.

Entering at 41.14 where the gently rising, one-minute 50 sma (blue line on the displayed chart) served as support and exiting at 41.46 resulted in only a .32 move. However, the stop loss was just .05, a couple pennies under the 50 sma support, so this small move packed a high R punch of 6. Because of such a small risk, I was able to trade a sizable lot resulting in a nice profit. So small can be big.

Post from: Trader Mike's Blog

Profit Punch of Small Price Moves

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Do the Q’s have a hefty oxygen tank of a striving economy on its back as it claws its way up a tough path? The monthly chart for the QQQQ show the rarefied air suspended over it at present prices.

Post from: Trader Mike's Blog

Can the Q’s Pull Off a Successful Scale of Mount Improbable?

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Reverend Shark aptly puts the sepia-tinted view forth, “…and if there weren’t some potentially serious problems out there — particularly from the housing market and the sub-prime mess — then the Fed certainly would not be setting things up for a rate cut.”

The market, however, will do what it will do, but because I agree with the obvious implication described by the Reverend, I started a small core long position in the double inverse ETF, QID, near its intra lows yesterday. I will add to this initial position if the market removes its rose-colored spectacles which as of yesterday are perched ever so rakishly upon its bullish nose. If the pretty spectacles stay on, I will honor my stop loss.

Post from: Trader Mike's Blog

Rose or Sepia-Tinted Glasses?

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