Potential Trade: Short Copper via JJC

Copper has been in a confirmed downtrend for a couple of months (like the general equity markets) and it's now at a good spot to enter a short position. For the purpose of this post, I'm using JJC as the vehicle instead of Copper Futures just because the etf is easier and more accessible to most people. Here's a daily chart of Copper (JJC) with some annotations: As you can see, JJC is overbought according to the stochastic while in a downtrend. This is the ideal point to enter a short. The prior lows from earlier in June make for a great initial target. There's one other factor that supports a short in copper--the Commitment of Traders Report. Here's a chart of Copper Futures with the Commitment of Traders plotted under the chart:
This chart shows that the large traders have been reducing their positions while the commercials (hedgers) are adding to their positions. In fact, the lines representing the two opposing groups has converged and is ready to cross--a bearish sign for Copper.

As an FYI, the direction of the large traders generally correlates to the direction of the underlying instrument..i.e. if hedge funds are selling, the price is likely falling. The opposite tends to happen with commercials as this group is mostly made up of large companies that use the futures market for hedging. Since these companies are hedging, they are generally going against the grain and prices tend to go in the opposite direction. Here's a great website if you're interested in playing with the Commitment of Traders charts for various futures.

Just some food for thought. As for the overall market, I'm still bearish right now and I am positioned for a further decline. We'll see. Hope everyone's having a great week so far.

TLT

Down, Down, Down, Down, and Up Just a Tad: Pretty Bearish Week

This week, the market literally pulled a 180 and made lower lows and lower highs every day this week. In fact, today was the only day that the S&P managed to close up and it was barely up. It did however close in the middle of it's daily range which shows a little bit of indecision but I'm gonna keep my shorts on (pun intended) for now. Here's a look at the SPY daily chart:
I think at a minimum the market will test the recent lows, approx. 104 for SPY, and if that support holds again we will continue to be range bound but in the mean time we can trade this market down. So why am I bearish again? Treasury spreads (here's a recent post that explains the treasury spread indicator), which have been spot on, are pointing lower. Here's an updated chart of where we stand according to the spreads:As you can see, spreads are making new lows which means that my money will be fading strength in the market. That is why my shorts will remain on the table. Now all of this could change and I'll be watching for more divergences but for now, the path of least resistance is down.

Have a great weekend.

TLT

Wisdom Quote

"If you don't know who you are, the stock market is an expensive place to find out."

--Adam Smith
The Money Game

Treasury Spreads Indicating a Possible Buy Divergence

Yep, treasury spreads might be indicating a further move to the upside. I've been tracking the yield curve for a while now and have recently been playing with some potential treasury spreads as indicators. There are several standard spreads that some people use, like the 30 year-3 month and the 10 year-3 month. I've come up with a composite of the 30, 10, 5 and 3 month that seems like it might be useful. Here's the most recent chart:Note that there was a considerable sell divergence back in April as the spreads began making new lows (converging) before the SPY topped out. Now there is potentially a buy divergence forming, although it is a less obvious divergence than the previous one..not sure if that gives it more potential for follow through or less. Regardless, it will be interesting to see how it plays out.

It seems that everyone (including yours truly) is expecting another sell off and markets generally play out in a way that confounds the most people. How could it do that right now? Well, we had very bearish technicals yesterday, as the market stalled out at the 200 day moving average, but (drum roll) it rallied today instead of following the obvious signals. So from here, it might rally a little more, just to make more of the shorts throw in the towel (yes they are scared right now). After a little more capitulation from shorts, we could see a massive drop...leaving previous shorts to wonder why the lost money on the short side. Just one scenario that I could see playing out.

The problem is, that it's hard to tell how many others out there are thinking the same thing. If that's the case and we're all holding our shorts waiting for "the others" to capitulate, then the market could end up just trickling up higher and higher, slaughtering the greedy (stubborn?) shorts. As always, time and price action will tell.

TLT

A Look at the Big Picture: SPY Monthly Chart

About once every month or two I like to pull up the monthly chart of SPY with a MACD indicator attached to the chart. This helps me keep things in perspective and the MACD on the monthly chart does a good job of alerting you to potential changes in trend. Here's the chart:You can see on the above chart that the MACD never got above zero with this past year's rally...and now the distance between the signal line and the moving average is converging. These things are a very bearish indication to me but the market could go up.

The MACD is great for putting current price action in proper context but it does not tell you where price action is heading. This bearish looking MACD could turn very bullish if the market rallies for the next week or two. That being said, it still appears that the path of least resistance is down and that's the direction that I will continue to put money to work.

Have a great weekend.

TLT

Indicator Update: TLT Trender and TLT Oscillator

After another down day, lets see where my indicators stand. The TLT Trender v2 is still giving a sell signal on the Daily S&P 500 chart. Here's the chart with some comments:
And here's the TLT Oscillator, which is still very bearish down in extreme negative territory. This indicator ranges from 60 to -60 with below 60 being bearish. I plot a 5 day average over the bars to smooth out the data. Here's the chart:Well, both indicators are still very bearish and there is some evidence that the selling will likely continue. Even Trader Mike today pointed out that his Trend Table that he keeps up with is the worst that its been in over a year in this post. What's the take away? Expect more selling and hold onto the shorts.

TLT

Wisdom Quote

"For a lot of traders, it doesn't matter so much whether their first big trade is successful or not, but whether their first big profit is on the long or short side. Those people tend to be perennial bulls or bears, and that is very bad. Both sides have to be equally OK."

--Richard Dennis
Market Wizards

Markets are Moving Today: Check Out the Eur/Usd

If I could only watch one thing to make all of my market decisions right now, it would be the Eur/Usd pair. This should not be surprising to anyone that follows the markets on a regular basis as everything has been following the dollar..and the euro. This pair represents a gauge on the overall fear involving Greece, Spain, and Portugal and it also gives you a heads up on what the risk appetite of the market is...dollar still rallies as a safe haven currency when the equity markets tumble.

Today the Eur/Usd has made new lows and the stock market is falling which is confirmation to continue to hold shorts. Here's a daily chart of the Eur/Usd:
I've made a few notes on the chart relating some of the more important things that I'm taking from it. The 2 most important things that I see, things that give me conviction to hold positions, are the fresh lows and the leveling out of the BB Width. I've found that the BB Width indicator is one of the best tools for determining continuation of a trend. When volatility kicks up, the short term BB Width rises above the 5 period average and more times than not we see follow through in the direction of the trend. When the BB Width is declining and below the 5 period average, we generally get consolidation with the potential for a short term reversal, which is what we've had lately.

So, right now, it's looking like the sell off of the Euro will continue and we'll also see the stock market sell off with it. Note that the BB Width hasn't risen above the 5 period average yet..but it has leveled and looks like it will likely cross. For now I'll be holding my long dollar and short equity positions and if the continuation is confirmed, I'll add a bit to the positions.

Anticipating what will happen and then having plans and contingency plans is the name of the game. If you make the proper plan, then it's likely that market action will not surprise you. Then if you add the ability to cut losses to the equation, you've got what it takes to trade successfully. Simple, yes. Easy to do, not exactly!

I hope everyone has a great weekend.

TLT

Swing High Formed In MRK Today

I've been short MRK for a few weeks now and the position was beginning to look like it might get closed out soon as MRK has shown a little bit of strength lately. Well, that strength is more likely just some consolidation after the sell off that it's suffered lately.

Today MRK formed a swing high on the daily chart, which means that it failed to make a higher and and it made a lower low from the previous day's bar. This is a bearish sign and it is a pattern that provides a good entry for shorts because it offers a good risk to reward entry.

Here's the chart:For those looking to enter a short position, this pattern is a good one for it...the first profit target will be the previous lows down around $31 and the stop is placed above the prior day's high at $34.15. I'll be looking to add to my short tomorrow.

TLT

The Dollar is Still Heading Higher..For Now at Least

Yes, posts are a little far and few between right now. I've been incredibly busy and had to abruptly move offices (my old office suffered a fire). Needless to say, things have been crazy for me lately.

One position that I've been holding on to is being long the dollar via the UUP etf. Here's an updated chart from this morning:As you can see, the position was nearly stopped out last Friday, as it approached its ATR trailing stop. There's been a lot of chatter about the dollar moving so far so fast...I don't listen to chatter, I just exit my position when my PRE-DETERMINED exit point is reached.

Hope everyone's having a good start to the week.

TLT

Book Profits in Gold...ehh, not so fast!

A couple of weeks ago, I pointed out that gold was beginning to look interesting in this post. I think it's safe to say that gold got interesting, as it has continued to go up and make all time highs. So far, so good...this is what it's all about...you notice something interesting, buy it and it goes up. Now for what I consider the tricky part of a good trade...when to sell.

I must admit, my natural instincts of seeing a profitable trade in an instrument that's making all time highs started telling me to book profits. I even considered it on Friday. Then something interesting happend. I was watching CNBC and I kept hearing the talking heads speak about traders booking profits in gold or selling gold at these new levels. That's when my thinking changed back to how it should be. I realized that a lot of traders were feeling like me...looking at these high prices...seeing how far above the moving averages it's trading...thinking about the paper profits. This is when it pays to fade your feelings. Sure, I might see some paper profits go up in smoke, but I'm trading for big profits, not smaller profits and that's just part of the game. When "everyone" is selling out of an instrument that's making all time highs, it usually pays to hold on just a little bit longer because what nobody thought would or could happen sometimes does happen.

Will gold continue to go up? I don't know, but I'm willing to let a position ride on the premise that it could and that there has not been any good signal for me to sell gold. Sounds simple enough, yet many (most) traders don't step away from a trade and think about these things. You've got to ask yourself, "Why do I want to sell right now?" Then write that answer in your trading journal. If you do that over and over, and you're like me, you'll start to see a pattern of selling winners too early. That goes against Livermore's advice of , "Cut losses and let profits run."

Ok, back to gold..here's an updated weekly chart that I'm looking at:The most important aspect of this chart, aside from the bullish trend in price, is the rising BB Width that's still at relatively low levels. I said in my earlier post on gold that I was looking for the BB Width to reach between 20 and 25...it's at 15 right now. It may not rise to the 20-25 range, but it's likely that it will. This would mean that volatility is still expanding (Bollinger Bands are increasing in width) which I know is a sign of a trend continuing to gain strength. So for now, my analysis says HOLD.

Hope everyone's having a great weekend.

TLT

Trade Idea: Buy XLV and Short MRK

One cool feature that thinkorswim offers is the ability to pull up pairs charts. We'll use the daily spread chart of XLV-MRK to show this potential spread trade. Here it is:This chart represents the spread between XLV and MRK...as the price rises, that indicates that XLV is stronger relative to MRK and vice versa for the downside. As you can see from the chart, it appears that XLV bottomed and MRK topped back in January and now XLV is getting stronger relative to MRK. Right now the spread is roughly at -3 (XLV's price is $30.38 and MRK is 33.31). From this chart, I've set a price target of +1 spread...XLV would rise and MRK would continue to fall.

I've been tracking and playing with spread trades like this..especially trading single stocks against their sector etfs. This potential trade is standing out to me right now and I though it would be worth sharing.

TLT