Blog Archives

Viking Trader is Back!

Hey gang-

This blog was started with the best of intentions – like many ideas in this world – but life has a way of taking over. In the last 18 months, life has changed dramatically. I’ve taken on much more responsibility at my day job, rented an apartment with my girlfriend, bought a dog, and (most importantly) proposed to my girlfriend and am in the midst of wedding planning.

However, this space was meant as one to examine, critique and discuss the markets, investment strategies and trading methodologies, and that’s exactly what I intend to do with this re-launch. My day-to-day approach to the markets has changed dramatically over the past several months, adopting a new strategy that I’ve been learning and tweaking for several months. It’s far from perfect, but I wanted to share its basic principles.

Since May 2014, I’ve been learning a strategy developed by veteran market technician (and fellow Chicagoan) Rob Smith, who operates a trading room at T3 Live. The foundation of Rob’s strategy is simple: eliminate market noise, and focus on aspects that we can define, quantify, analyze and execute on. The pillars of Rob’s strategy are simple:

1) Time Frame Continuity

2) Broadening Formations

3) Inside Bars

These principles are not in order of importance – each principle has equal value within Rob’s strategy. In order to identify high probability, low risk/high reward trade set-ups, it is imperative that we evaluate a stock (or any security, for that matter) in the context of these three principles. I will touch on each concept briefly, but the goal of this blog is to expand on this strategy gradually, and perhaps convince you to check out Rob’s room and join the community of “In The Blackers” that he has fostered. Finally, in today’s entry, I’ll examine these three concepts in the context of a trade I executed today.

Time Frame Continuity

When we discuss time frame continuity, we want to evaluate a stock in terms of the four major time frames: month, week, day and hour. Identifying how a stock has performed on a monthly, weekly, daily and hourly basis allows us to identify whether buyers or sellers are a) active on a given time frame and b) firmly in control of that stock’s particular movement. Ideally, we want to identify stocks that are moving in the same direction on all four of these time frames. In other words, the best opportunities tend to lie in stocks that are trading above the opening price registered on the current monthly, weekly, daily and 60 minute candlestick. If a stock is above all of these opening prices, we consider this stock to be in full time frame continuity to the upside. Buyers are firmly in control of this stock, and we should look for opportunities to enter this stock long. The converse can be said for the downside: when a stock is trading below the opening price of the current monthly, weekly, daily and 60 minute bar, we consider the stock to be in full time frame continuity to the downside.

Broadening Formation

While many traders will talk about stocks making higher lows and lower highs, one thing that Rob has identified in his years of studying charts every night is that securities will always trade in a series of higher highs and lower lows. Even if a stock is in a steady uptrend from, say, $80 to $100, somewhere along the way that stock will make a series of higher highs and lower lows on some time frame. While this may seem irrational, it helps to analyze this statement from the perspective of supply and demand. When a stock reaches a new high, it means that a new group of buyers have been identified above the previous high. Eventually, that buying pressure exhausts, and the stock retreats. This new group of buyers becomes trapped, and this will create pressure to the downside, either on a short-term time frame or a long-term time frame. Inevitably, the stock will eventually get pushed towards a previous low, whether it’s a recent low on a 5 minute chart or a major inflection point on a monthly chart. As the stock pushes towards this low, those buyers at highs will succumb to the selling pressure, drive the stock to a new that is bought up, and the stock will resume higher until it reaches the next new high. This series repeats itself, which creates a formation that can be fit into a triangle.

Inside Bars

The first two principles are crucial in terms of understanding whether we should be looking for long or short opportunities. When a stock is near the bottom of a broadening formation and above the opening prices on the major time frames, we know that there is a possibility that all sellers who wish to sell have executed their orders, and the stock could resume upwards. In order to initiate a position in a stock, we look for inside bars. The inside bar is simple – the previous bar’s high and low prices are completely with the range of the bar that was printed just before it. These bars represent an equilibrium in trading: neither buyers nor sellers are in control of the stock, but a resolution is coming. We can look to initiate a position when that equilibrium breaks. In other words, when the high of an inside bar is breached, we can look to buy, and vice-versa on the downside. When game planning for a particular day, I tend to start by looking at stocks that have put in inside days – meaning the day’s high and low price are entirely within the previous day’s trading range.

The Strategy in Action

Today, one of the stocks I planned to focus on was Zillow Z. Zillow, an internet stock that will occasionally trade sympathetically with housing stocks (given the nature of Zillow’s business as a real estate search engine), put in an inside day yesterday (2/10), meaning an equilibrium had formed. Let’s look at $Z on the monthly and weekly time frames.

Z0212Monthly

Z0212Weekly

Looking at the monthly and weekly charts, I can see that $Z is at the bottom of a broadening formation on both time frames. $Z is building an inside month, which isn’t ideal, but it is above the opening price on both the monthly and weekly time frames. Based on this information, my bias today was on the long side, so I began to look for entries as soon as the market opened. Opportunities (inside bars) can be found on any time frame, but the idea is to align as many signals as possible to increase your probability of success. Let’s open a zoomed in, 1-minute chart.

Z0212minute

When  $Z opened, it put in a 1-minute hammer, followed by a 1-minute, inside bar. 1-minute bars are not ideal entries, but if a stock is volatile enough, they can be used as entry signals. My initial entry was small, and I got long at $103, when the inside 1-minute bar broke to the upside. At this point, $Z had still not broken the inside day high of 103.28. Once the stock broke that level, I added more long at 103.40, and the stock began to work higher towards $104. For me, I like to lock in some profit as quickly as possible, then look to re-add or place a stop either at break even or at some lower level of profit. Now, let’s look at the 30 minute, 60 minute and daily charts to identify where $Z could potentially go.

Z021230

Z021260

Z0212Daily

You can see on the 30, 60 and daily charts that $Z was trading roughly in the middle of its broadening formation in the beginning of the day. Knowing this, I took partial profits at $104.25. However, the stock began to consolidate around the $104 level, and began building more inside bars on the 5 minute chart. $Z built inside 5-minute bars at 8:55 CST and 9:05 CST that I was able to make two additional buys on. From there, the stock ran towards my “triangle resistance” in the 30 minute broadening formation of roughly $106, and I scaled out at $105.50. $Z ended up building another 5-minute inside bar at 9:15 CST, and I was able to get back in the stock and ride it through $107. At this point, the stock had run as far as my 30 and 60 minute charts had suggested, and I was satisfied to take roughly 3 points out of $Z in the first hour or so of the day. $Z actually rallied close to a second triangle resistance on the daily chart before retracing much of the move in the afternoon. Using the strategy, there were also opportunities to execute on the short side, but I’ll spare you further reading.

In the future, I hope to highlight trades like this in the realm of Rob’s strategy, and will likely provide a market commentary post or two along the way. Your feedback is always welcome, either in the comments section or at vikingtrader14@gmail.com. It’s great to be back, and thanks for reading!

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Post Game: Beware the Jobs Number

Interesting day out there despite a deep, deep lull mid-day that saw little volume across the board. With the 10-year hovering near 3% and the growing sentiment that tapering in September is a foregone conclusion, the $SPY told off a decent amount in the last hour of trading. With many calling tomorrow’s jobs number the most important ever, we took down some of our exposure to $FCEL to lock in some profits and up our cash position to allow some mobility tomorrow. We anticipate there will be far more opportunities tomorrow that can be carried over the weekend, and we welcome the volatility.

Let’s dive in, shall we? The big theme of the day was a strong sell-off in equities with interest rate exposure, including names such as $T, $HD, $LEN and $TOL. We highlighted the absurd move in $LNKD in our mid-day update, and $TSLA continued to muddle along in a tight range with light volume. The casinos looked alright today, with $WYNN leading the way up nearly 1%. $NFLX continued its flirtation with $300 while $AMZN remains within shouting distance as well.

We saw a number of small-cap names breakout including $HIMX, $RMTI and of course $FCEL. In terms of names we have a stake in, we were happy to see $T erase its gains from yesterday and boost the level of our puts. Put buying in AT&T has been heavy and the stock’s chart looks brutal. Any definitive word on tapering, and it could be curtain’s for AT&T’s stock. It is on a collision course with a major test of a two year break out channel, with support around $32.75.

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We decided to be prudent with our $FCEL position and took our stock position off for a nice profit. We still have our call options on as we think there is plenty of time for the stock to get going to higher levels, especially once we get the September option expiration out of the way.

However, we did initiate a new trade to the downside, buying the October $67.5 puts in Home Depot $HD. This stock has been on an absolute tear this year as it has been bolstered by a recovery in the housing market. However, as housing stocks have turned lower in recent weeks, $HD’s momentum has waned considerably. Given the stock’s reliance on the housing market for growth, rising rates could have a substantial bearish impact. The chart has also taken a turn for the worse since earnings. The stock has stayed above the Ichimoku cloud for the duration of 2013, testing the lower bound of the cloud just three of four times throughout the year and immediately bouncing each time. However, the stock appears to be rolling over and has broken through the cloud to the downside. The stock is hovering above support at $72.50 and could enter a key channel between $71.50 and $72.50 on tapering news.

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While we don’t necessarily believe tapering is bearish for the market overall, we think $HD and $T could be particularly exposed to rising rates, and we think these trades present compelling opportunities as risk-reward setups.