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.
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.
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.
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.
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.
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 email@example.com. It’s great to be back, and thanks for reading!
Good morning y’all. Well, not much has changed overnight as S&P futures continued to hover near the 1700 level. The buzz around a Janet Yellen appointment as Federal Reserve Chairman continues to grow, and some talking heads are speculating that we’ll get some direction from the White House in the next 72 hours as to who the next Chairman will be.
Interest rates will obviously be in focus quite a bit this week with discussions about not only the Fed Chairmanship, but also the September Fed meeting where the T-word will undoubtedly be uttered quite a bit. We’ve seen the 10-year knock on the door of 3% in the last two weeks before retreating in recent sessions to roughly 2.8%. Yields could take another hit today as the presumed hawkish candidate Larry Summers withdrew his name from the Chairmanship race yesterday, though we believe the market is overselling just how dovish Janet Yellen is (and, for that matter, just how hawkish Summers is).
On to the markets: There will be green. Just about everything that has traded at least one share this morning is in the green, and our longs are no exception. We peeled off our $DDD long last Friday for a nice one-day gain, but that 3-D printer is poised to move higher this morning. Our current longs $GOOG, $NFLX, and $FCEL all appear poised for a higher open. $NFLX has held up particularly well all year, and could be poised to break out this week above this year’s (and last week’s) high of roughly $315. The stock had a nice reversal off of the 8-day EMA on Thursday that could’ve provided entries and bounced again off of that level on Friday and sustained its gains.
Google looks strong this morning as well with the stock tagging $897. While the chart isn’t as strong as $NFLX, the stock provided another potential entry on Friday as it reversed off of the 8-day EMA as well. Look for a move over $898-$900 to send the stock to the $909-$913 level. If the stock can get through there, look for it to make a run at all-time highs once again.
Keep an eye on $TSLA, as the stock held up above its 20-day moving average despite being under some pressure last week from the shorts. The stock is moving higher this morning (duh) and could take another run at all-time highs if it gets continuation. The bulls have been calling the last few days a consolidation, while the bears are saying the stock is out of gas. Let the market decide for you, then act. Don’t let your opinion get in the way of momentum.
Watch out for the broader market to hold or begin to cede its gains in early trading. If stocks hold up, we could see a continuation move higher throughout the session and into tomorrow. However, with all of the economic news on deck this week, it may be prudent to take some profits to avoid any negative reaction coming out of the Fed meeting or rumblings of an appointment of a new Fed Chairman. Still, Monday appears to be a profitable day for those of you who leaned long today.
Happy Sunday y’all. Hopefully everyone’s rooting interest in the NFL is coming up aces today, and a special shout out to all the Chicago Bears fans out there today. Jay Cutler continues to be the most mercurial quarterback in the NFL, but Martellus Bennett managed to bail him out with two more touchdowns to lead the Bears to a 31-30 victory over the hapless Christian Ponder and the largely ineffective Adrian Peterson. In all honesty, the Bears should’ve won that game by double digits, but Bad Jay and poor special teams on the opening kickoff essentially spotted Minnesota 21 points. I digress…
It seems we can’t go one weekend this month without some sort of major economic or geopolitical news item that will impact the market. This was already shaping up to be a monumental week with the Fed meeting and the potential of a reduction in monthly asset purchases, but Larry Summers decided to throw us a curveball and withdrew from the race for the Fed Chairman appointment once Ben Bernanke takes his leave. Many have speculated that Summers’ confirmation would be an arduous process as many see him as an abrasive individual, with his detractors citing his tarnished tenure as president of Harvard University – specifically, his treatment of women. Janet Yellen, believed to be a far more dovish candidate than Summers, becomes the de facto leader in the clubhouse. Donald Kohn, a former Fed vice chairman, and former Secretary of the Treasury Timothy Geithner remain popular candidates among others.
The impact of Summers decision was fairly easy to predict before futures even opened. Given his aversion to continued quantitative easing and a more hawkish stance overall, stocks would be poised to rise should Summers not receive the nomination. However, given the fact that Summers is pulling out this early, S&P futures surged on the open this evening to the all-time highs, and the bulls appear to be in full control once again. While it is not a foregone conclusion that Yellen will be appointed (and some close to the Obama camp have stated the President would prefer to go elsewhere now that Summers, an Obama favorite, has withdrawn), we would expect even interest rate sensitive stocks to rise tomorrow as well, which does not bode well for our $HD and $T positions. Still, we should note that there is plenty of time for our theses on those names to play out. On the plus side, our long positions in $NFLX, $FCEL and $GOOG should get a nice lift. Obviously, we wish we were leaning a little longer, but we should see some nice gains Monday regardless.
Tomorrow should provide some opportunities for intraday trades at the bell. With so many events that could shake markets this week, it may be prudent to take some profits on long positions at tomorrow’s open should we sustain this rally overnight (and there is little reason to believe that we won’t). Still, it is easier to have conviction to the long side as the market has pulled off something of a stealth rally in the past week or two. We’ll be back in the morning to assess what is moving, but until then, enjoy the rest of your NFL Sundays!
Good morning y’all, hope everyone enjoyed the weekend. A little late with our preview today as someone may have been celebrating an anniversary a little too much last night and was responsible for today’s morning post. This week is shaping up to have a similar feel to last week as the same news events will likely be driving the markets for most of the week, starting with President Barack Obama’s pre-recorded address airing tonight on the major networks. Charlie Rose conducted an interview with President Bashar al-Assad in which he adamantly denied use of chemical weapons, stating that the weapons were used against his own forces. The situation remains a pressure cooker that could have catastrophic repercussions if handled incorrectly, which means volatility could return to the market at any point stemming from related news. Speculation over Fed tapering will likely continue as well, which we would welcome with open arms for our $T and $HD positions.
In the meantime, we appear headed for a higher open as S&P futures have traded in a tight range over night but are sitting up 3-4 points. Apple $AAPL is trending up in premarket action as the run-up into the company’s events tomorrow and Wednesday has begun in earnest. Look for continuation throughout the session today as the stock looks ready to break out, but there is the stigma that Apple’s events have become “buy the rumor, sell the news” situations, so take profits and trail with stops if you’re long stock. We remain long via both stock and options, and we may look to take off a portion of our options position today if the stock really surges.
Molex $MOLX is making news this morning on reports that the company is being bought out for $38.50 per share by Koch Industries, a premium of roughly 30%. The stock is halted and we’ve placed a large, low-ball limit bid in the stock as a lottery ticket, but we have no expectation of getting filled. Blackberry is also trading up over 4% in the pre-market as speculation continues over a possible buyout of the Canadian smartphone maker. While a takeover does seem imminent, these events are so hard to predict and there will likely be several head fakes in the stock before a deal is announced. Finally, Facebook $FB is up once again on another upgrade and $50 price target from Sterne Agee. Zuckerberg continues to count his billions.
One name we will be watching closely this week is Tesla $TSLA. The stock has begun to move sideways and is flirting with a breakdown below its 8 day moving average. Any short in Tesla must be tactical as the stock remains on an incredible trajectory with a strong chart, but opportunities to the short side may present themselves if the stock cannot resume upward momentum.
We’ll take a deeper dive in our mid-day update into some other names – one of us is a little behind this morning. Good luck out there today everyone, stay tactical and profitable!
Happy Friday y’all. Well, the “most important jobs number ever” is upon us, with NFP coming out at 7:30 CST. Consensus is calling for an addition of 180,000 job, while Goldman Sachs is the resident optimist on the street with an estimate of 200,000 additional jobs. We’ll cop out and say jobs fall somewhere in between there, and we’ll throw our hat in the ring with an estimate of 189,000 jobs.
So what does this mean for the market? Well, it’s hard to say right now, but we’ll take a stab at it. Markets have shown a considerable amount of resiliency this year as bad news has been good news and good news has been good news. Anything aside from a disastrous jobs number will probably signal to the Fed that we are ready for tapering (though the actual jobs picture is still fairly putrid – Bloomberg flashed a great chart this morning showing a massive deceleration of full-time jobs versus rapid growth in part-time jobs, rhetoric that is being translated as “a job is a job,” which I’m sure many Americans would disagree with). In our view, we’re not convinced that tapering is a death sentence for the market like some pundits are expecting. We partially outlined our stance yesterday, and we do believe that interest rate sensitive equities will take a hit, but with expectations of tapering happening sooner rather than later, perhaps equity markets have already priced in that expectation. That’s not to say that markets will surge out of the gate no matter what today, but we would refrain from calling tapering a major downside catalyst.
There are still other factors that could send the market into a swoon, including the ongoing situation in Syria and the seemingly never-ending debt ceiling debate (which feels like a non-event). While it is likely the proverbial can will be kicked once again when it comes to the debt ceiling, predicting an outcome in Syria is an exercise in futility as the Obama administration has been horrendous when it comes to execution. Let the market react as it will, just be wary of leaning too hard one way or the other. This is a headline-driven market until further notice, and selectivity will be paramount until these events are in the rear view mirror.
We pared our gross exposure yesterday to pocket some gains and allow some added mobility ahead of this jobs number. Whatever your market sentiment, just remember one thing today: keep your head on a swivel.
(Anchorman is clearly a theme this week)
Got a prediction for the jobs number and the corresponding market reaction? Throw it in the comments.
Morning y’all. Sovereign debt and economic stimulus is making all the headlines with the US and German 10-Year yields inching higher. The US 10Y is trading at roughly 2.94% while the German bund clipped 2% for the first time since 2012. The ECB is leaving benchmark interest rates unchanged at 0.5%, and the Japanese yen crossed 100 while the Nikkei rallied overnight for modest gains.
S&P futures are more or less flat this morning ahead of perhaps the biggest jobs data we’ve seen since the last release (rimshot!). In all seriousness, today’s jobless claims and Friday’s jobs report will be paramount in the decision making process regarding tapering, which should accelerate the rise of rates. While recent jobs data has shown decent growth, we’re not convinced that the underlying economy is as stable as some of the pundits would have you believe. With that said, we think it is indeed time to taper to allow this market to make a directional move without being throttled by every headline coming out of the Fed. Look for a lot of commentary regarding tapering in the coming days, while headlines out of the G20 and continued discussion regarding the Syrian situation could serve as shocks to the market. We would expect the market to take a definitive direction following today’s jobless claims.
On the company front, not a ton of news this morning. Yahoo $YHOO made a “splash” by unveiling a new logo… yawn. The stock has been on quite a tear this year, but Marissa Mayer is going to need to start delivering sooner rather than later, and we’re not sure how spending $1 billion on Tumblr is going to radically alter the face of the firm. Samsung is still in the spotlight after yesterday’s product reveal, setting the stage for Apple’s $AAPL event next week. The perpetual turnaround story at Groupon $GRPN received another shot in the arm from Morgan Stanley with an upgrade to overweight. Groupon has been acquiring warehouses to improve distribution of its consumer goods, and the company’s mobile efforts have shown improvement. As Chicagoans, we’ve always had a healthy disdain for the Groupon platform and in the few times I’ve been to the site, I’ve rarely found deals that are even of vague interest to me. Still, it’s hard to argue with the direction of the stock, and it seems like getting Andrew Mason out of the way has reignited the fervor of growth surrounding this name. Still, we can’t see Groupon becoming a serious competitor for Amazon $AMZN just yet, as some have speculated.
We’ll be looking to manage our $FCEL position today as the company has surged higher following a strong earnings report. The conference call is slated for this morning and we will be looking for further commentary on profitability in the coming quarters. Seasonally, this stock has performed well during fall trading, and we may be hesitant to exit our positions if the stock can hold gains today. We’ve been preaching it all week, but it remains difficult to have conviction in either direction with so many external variables impacting markets, and this is an environment that presents very few buying opportunities for long-term holdings. For now, we will stay nimble and try to be extremely selective when taking day, swing and momentum trades.