Weekend Thoughts 10/4/15

Trying something new, going to post my weekend thoughts each week. Please be patient for a few weeks as I make the formatting/content more reader friendly, I’m usually the only one reading these notes.

Here are my thoughts as we head into this week:

I went through all of the major US indices, as well as the sectors and am seeing a lot of the same things. Prices retesting the lows, or making new marginal lows near support, with momentum positively diverging. This sets us up for a nice tactical, counter-trend bounce which we saw start last week. Whether or not this is the overall bottom, I don’t think we have any enough evidence of that yet, but I think this type of whipsaw action is typical of markets trading below downward sloping 200 day moving averages.

So within that context, I wanted to figure out how I should approach this week given I am only long some Coffee via JO and didn’t get any stock exposure last week as we came into support. Well, the issue is that although I think we can continue to bounce here, we’re already 80+ points off the lows in the S&P 500, and the major indices are up four days in a row. Not only that, but every chart I look at has a ton of overhead resistance/supply just a few percentage points. Given my strategy, I don’t think that entering stocks on the long side while they’re more or less in “no man’s land”, equally as extended from immediate support as they are from resistance, offers an attractive risk/reward scenario.

Since that puts me in the neutral camp on stocks based on the daily timeframe, I took a look at the intraday timeframe (65 minute bars) to get an idea of whether we’re going to continue higher or are due for a bit of consolidation. Many of the indices/sector ETFs I looked at are trading right near their downward sloping 200 period moving average on the 65 minute chart, which tells me one of two things should happen. Either prices need to consolidate up here or pullback to allow that moving average to flatten out / begin rising, or prices are going to continue to the downside, as that moving average is a major headwind. Either way, if they consolidate or retest support once again, I think that’ll provide a much better opportunity at trying things on the long side from a risk/reward perspective. If they continue higher without me, that’s fine, I can then use the move into resistance to test out some positions on the short side where my risk is more well-defined.

Given that attitude, how do I know what indices or sectors to buy/sell if the opportunity presents itself? There are two ways of thinking about this. I can either own the Nasdaq and S&P 500 that have held up better than their counterparts, or I can own the Russell 2000 or Micro-Caps (IWC), which have been laggards, where risk is more well defined and overhead resistance is further away than in those indices/sectors showing strength. I don’t know if this is the right answer, but I’d rather own the laggards here because the risk is more well defined than the stronger indices that are hanging out in “no man’s land”. Given that, I’m looking to play some of the following sectors for a bounce if I get an entry with decent risk/reward: (IWC, IWM, MOO, GDX, XLE, OIH, XOP). Commodity related sectors look ripe for a bounce, which you will see is a major theme throughout the remainder of the post.

In the Foreign Equity ETF space, I’m seeing a lot of the same positive momentum divergees across all continents, but what particularly interests me is those countries with commodity exposure. In the Latin America space, I think Colombia (GXG), Latin America (ILF), Brazil (EWZ), Mexico (EWW), and Chile (ECH) look good for a mean reversion as copper bounces a bit. I like GXG and ECH the best as the risk is well defined. In Asia I like the way Vietnam (VNM), Thailand (THD), and Indonesia (EIDO) look for a mean reversion. I also like New Zealand (ENZL), as it’s highly correlated to the NZD/USD currency pair which I’m also bullish on. Also, Nigeria (NGE) is on another one to watch over the long term as it looks to put in a structural bottom. Again, a lot of these countries are setting up for bounces, but I like these in particular because the risk is well defined, and there is still a significant amount of upside by my measure. If I am going to put on a counter-trend (lower probability) swing trade, which these are, I want the risk to be well defined and the risk/reward to be high.

In the commodities and currencies space I remain long Coffee for a mean reversion toward the 200 day, and am patiently waiting for a breakout in Soybean and Yen futures. I do think that Copper can continue to bounce before continuing lower within its structural downtrend, but I’d rather play that through the Foreign Equity exposure listed above. Also, I continue to think the Energy Complex (ex-natural gas), looks interesting on the long side. After a long consolidation in Crude, Gasoline, and Heating Oil, I think the strength in energy stocks and the Canadian Dollar last week are suggesting that these patterns will resolve themselves to the upside in the coming days. For me however, I want to be playing it via the Canadian Dollar, where sentiment and commercial hedger positioning paired with a failse breakdown make the risk well defined for a mean reversion. Also, I think the Australian Dollar (another commodity-related currency pair) can catch a bit as well for some mean reversion as momentum diverges on multiple timeframes while it tests key LT support near .69-.70.

If you’re wondering what the charts discussed above look like, please check my stocktwits/twitter stream where I shared most of them. I do not have any shorts on the list simply because I didn’t see anything actionable that fit my strategy. Also, my sample size this weekend was a lot smaller because I did not do much/any analysis on individual stocks.


Longs: IWC, IWM, MOO, GDX, GXG, ECH, VNM, THD, EIDO, ENZL, NZD/USD, AUD/USD, Yen Futures, Canadian Dollar Futures.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.

Technical Analysis Guide

A few months ago I created a Technical Analysis “crash course” to help one of my good friends prepare for his summer internship. I’ve shared it with a few people and it proved to be of value to them, so I decided to clean it up and share it via PDF below.

Please feel free to download and share it with those whom you think may benefit from the information it provides.

It is a free download. My only request is that you provide feedback so I can periodically update/improve the content to better serve the needs of those trying to learn about the subject.

Technical Analysis Guide

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.

What is Technical Analysis?

What is Technical Analysis?

It refers to the study of the action of the market itself as opposed to the study of the goods in which the market deals. Technical Analysis is the science of recording, usually in graphic form, the actual history of trading (price changes, volume of transactions, etc.) in a certain stock or in “the Averages” and then deducing from that pictured history the probable future trend.

John J. Murphy: Technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends. The term “market action” or “price action” includes the three principal sources of information available to the technician – price, volume and open interest.

Market price tends to lead known fundamentals. Market price acts as a leading indicator of the fundamentals or the conventional wisdom of the moment.

Three Main Premises:

  • Price Discounts Everything
  • Prices Move In Trends
  • History Repeats Itself

Additional premise: Markets are fractal, meaning that patterns (in this case resulting from the psychology of market participants), appear at every scale. This is the reason why using a 200 period moving average or 14 period RSI will produce similar results, regardless of the timeframe they’re used on (i.e. daily vs weekly chart, 5 minute vs 65 minute chart).

One of the largest advantages technicians have is the ability to apply our tools to any liquid asset class, giving us the ability to analyze and invest in thousands of liquid products across the globe. Additionally, as technicians we’re not concerned with the “why”, but rather the “what”, “when” and “how long?”


Sentiment is another factor that is widely used by technicians in their analysis. Concensus can be right for a long time, but is usually wrong at extremes. There are a number of tools that can be used to gauge sentiment for a specific security. It is important to remember that sentiment is secondary to price action and should not be used as the sole reason for an entry / exit into a position. Large unwinds in sentiment can lead to aggressive moves in the opposite direction of the initial trend.


There are a variety of polls that are put out by different institutions that look to gague sentiment of different types of market participants. The idea is to watch these polls for extreme bullish or bearish readings, relative to historical norms that is. What happens in the middle of those polls is mostly noise, but the extreme readings can by very helpful in a technician’s analysis.

Commitment of Traders Report:

The commitment of traders report shows the net positions of futures and options for commercial hedgers, large speculators (institutions), and small speculators. This data is important because commercial hedgers are said to be the “smart money” because they are the ones whose businesses deal with the goods in which they are trading. They are essentially the insiders of the futures markets, whereas companies are the insiders of the stock market. There are also indicators that can be constructed using these data points including the C.O.T. Move Index and the C.O.T. Index.  I won’t get into this much further, but this is just another report to be aware of and made use of in your analysis. Check out timingcharts.com for on this subject.

Options Market:

The options market is a valuable tool in identifying the biases of institutions. By analyzing where the largest open interest is as well as scanning for large block trades and heavy volume, we can identify where the “smart money”, or institutional traders, are expecting the stock to go. The caveat here is that we although we may be able to see what position they are putting on in the options market, we do not know who the players are, nor do we know what role that position is playing in their overall portfolio.

Short Interest / Days to Cover:

The largest moves occur at extremes, which is why it is important to pay attention to short interest. This data can be found at Nasdaq.com and is reported twice monthly. How significant an amount of short interest is really is all relative to what it was for that particular security in the past. There are two numbers that are important.

  1. Shorts as a % of float: The float is the amount of shares available to be traded in the public (secondary) markets. If a security has a large percentage of its available shares (float) sold short, it can signal that concensus is overly pessimistic and that under the right conditions, a short squeeze may insue.
  2. Days to cover: Days to cover is used to determine how many days on average daily volume would it take for all the shares that are sold short to be covered. I usually use the 10 day average, but it really is a matter of preference.

Sell Side Analyst Coverage:

Another important indicator of how optimistic or pessimistic concensus is about a security is to look at how many sell side analysts that cover the stock have it as a buy rating. If a large percentage of the analysts are rating a stock a sell or hold, that presents what may be an overly bearish concensus view. The same applies if a large percentage of the analysts are rating a stock a buy, that presents what may be an overly bullish concensus view. Looking at this type of information may assist you in identifying extremes that may present good risk/reward scenarios if price confirms this secondary data.

Stocktwits / Twitter: 

Both stocktwits and twitter provide valuable information on how individuals are currently viewing the market or a particular security. Although it can be hard to quantify what the views actually mean, it may be helpful to use this info as anecdotal evidence to support your thesis. If you think that there’s no value in this, just try to post something bullish about a stock that nobody likes and see the hate and flack you get. Everyone hated treasuries to start the year, and now they’re on of the best performing asset classes of  2014.

Relative Strength Index

The Relative Strength Index, or RSI, is a popular momentum indicator used throughout the field of TA.

Rather than get into the definition and construction of this indicator, I think it’d be more helpful to go into how I personally use the indicator. If you need a refresher or are new to this topic, I suggest heading over to stockcharts chart school to familiarize yourself with it.

First off, I use a 14 period RSI for all the timeframes I look at because markets are fractcal, meaning that repeating patterns occur at all scales / timeframes.

The two main ways I use RSI are as follows:

1. Determining Bull / Bear Ranges

2. Identifying Divergences

Determining Momentum Ranges: If I can help it, I want to be trading in the direction that momentum is leaning. So how exactly do I define a bull or bear range? Well, it’s slightly subjective but anytime something hits overbought or oversold conditions and does not reach the opposite extreme on price consolidations or pullbacks I think of it as being bullish or bearish based on the original confirmation above 70 or below 30.

Bullish Range Example: When momentum is consistently hitting overbought, without reaching oversold.

bull rangeAs we can see from the chart above, after momentum transitioned into a bullish range by hitting overbought conditions in July 2013, AAPL continued higher in a nice uptrend. Since momentum never hit oversold conditions on pullbacks, that weakness ended up being a buying opportunity rather than a reason to be concerned if long or trying to be short.

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