Mark Moskowitz Blog

The article from 10.11.11 pointed out a specific setup that we are looking for to see if this is a real rally or simply short covering. This rally has been great as we have taken advantage of many swing names such as IBM, SNDK, MOS, MON, CLF, POT. My rationale from yesterday and into today is that the truly strong names, IBM, SNDK and ANF are getting overbought and are losing steam. At the same time the names that have been the weakest are rallying strong and not that close to the overbought levels. My conclusion is that I would like to see a strong open and watch many of these names travel up into resistance and do so quickly. The chart below indicates where resistance is not just intra-day with Pivot Points but also with Daily Chart SMA resistance levels pointed out in colors. What happens when the stocks reach these overbought levels at resistance is going to be my “tell” on the legitimacy of this rally. A strong break and it is real buyers stepping in, a fade tells me to think short again and watch for support on the indices, S&P 500 support is 1166 and Nasdaq Support is 2258.

In my intra day analysis on stocks and indices I am formulating a setup for the rest of today and into tomorrow which will tell me if this rally is for real or just short covering.

The first part of the thesis hinges on a group of stocks that have rallied strong, are yet to be overbought but nearing resistance on the daily chart: AGU, POT CF, AAPL, BIDU, CAT, BAC, APKT are a good list of examples. Similar characteristics are a Daily MACD positive cross, but below the zero line on the daily and intra day all but BIDU are on an R4 breakout buy signal..

The next part of the thesis is the broad markets ESZ1 and NQZ1, neither index is breaking out intra day or overbought on the daily charts after an excellent run up.

The last part of the thesis is that names that have been technically strong such as IBM, SNDK, CTSH and CELG are now all overbought on the 14 day RSI.

My mind interprets all of these factors into the following thesis as I write this at 2 pm on October 11, 2011: The broad indices and the names listed in part 1 of the thesis rally strong into the close of today and/or the close of today and the open of tomorrow, I mean really strong. Strong enough to get them overbought which none of those names are close to doing at this point. The velocity of this move is important so the RSI can move up quickly into resistance. A break of these key levels means the market is full of real buyers and a fail means that the shorts got scared and it may be time to head back down for a testing of support.

On ESZ1 the 1210 to 1215 level is my target for this move and a pullback to 1167 is where I would be covering a short trade. NQZ1 the target is 2315 to 2320 with a pullback to 2252 as support.

AGU: target is $77.50 to $79.75

POT: target is $50.10

CF: target is $153

AAPL: target is $404

BIDU: target is $130.50

CAT: target is $83.00

BAC: target is $7.04

APKT: target is $44.35

Target is the level of resistance that I am watching to either short against or realize this is a strong rally. There are a number of other names out there, steel sector, Ag names, financial stocks. Not seeing the strong names rally today alerted me to this thesis. If this does not happen by 10 am tomorrow than I will have to reassess what my market “tell” is.

Will anyone ever follow sell in May and go away?  It works every year, I write about it every year and yet investors get slammed with a down summer.  The seasonally strong period is upon us and after just analyzing my universe of names, I am perplexed as to the next major direction.

Friday was a damaging day to almost every chart I analyzed breaking support in every sector including large cap tech which has been a trooper in relative performance.  Many charts are in a negative MACD pattern but the RSI is closer to oversold than overbought which takes that indicator out of play.  The natural resource names have been destroyed which is making me think about October 2008 and leads me to the title of this blog.

Lehman had just collapsed and the world looked bleak at best.  A friend alerted me to the natural resource names, X, AKS, MON, MOS, CLF, AGU, POT to name a few and we noticed that the put premius were through the roof.  My fund had been having a great year so I decided to take some risk and sell the puts for many of these names for the November strike period and about 20% out of the money on average and a premium that was another 20% of the price I would have to pay to buy the stock.  This seemed like a great reward to risk play and it worked great as I was not put stock on a single name.

Selling naked puts is a risky trade but it was well thought out and I had cash that I was happy to put to work if these names sold down to my levels.  I have yet to look at premiums today, but given the chart patterns, the time of year and the overall sentiment out there it might make some sense.

On the bright side it is a very easy topic for me to blog about tonight, on the bad side AAPL may be ready to sell off and bring the broad markets with it.  AAPL formed a Bearish Engulfing pattern today, which is a technical indicator, formed at the top of up trends and signals a potential for reversal. 

The pattern occurs when in an up trend a stock opens above the previous days high and closes below the previous days low, therefore engulfing the entire range of the previous days trading.

This has been a very accurate pattern in relation to AAPL and has consistently led to lower prices.  From April 2010 to today there has been a total of eight Bearish Engulfing Patterns on AAPL:

• April 30, 2010 from $270.50, low was May 6, 2010 (flash crash) at $199.25.  If you want to negate the flash crash, then the following day the stock traded to $225: RESULT –16.66% (using $225 low)
• May 13, 2010 from $265, low was $231 on May 21, 2010: RESULT  -12.5%
• June 21, 2010 from $279 on July 19, 2010 low if $239.60: RESULT –14.33%
• September 27, 2010 from $294.73 to a bottoming point at $277.77 on October 4, 2010: RESULT –5.76%
• November 9, 2010 from $321.30 to a bottom of $297.76 on November 17, 2010: RESULT –7.47%
• December 7, 2010 from $324 a higher high negated the signal on December 29, 2010 at $326.45, the only pattern that did not work: RESULT +.006%
• March 7, 2011 from $361.67, bottoming on March 16, 2011 at $326.26: RESULT –9.70%
• September 27, 2011 from $409.25…

The Bearish Engulfing Pattern has resulted in an average loss of 11.07% in AAPL and doing so with an average of 9 trading days, quick and painful.  Most “market gurus” tell you to not try to pick tops and bottoms but if I have a trade that has worked 6 out of the last 7 times and resulted in an average savings of 11% while risking mere basis points, well these are odds that Jimmy The Greek would be proud of.

Has the market put in a bottom?  For the near term it seems as though the answer is yes.  There were way too many stocks that tested the perfect spot for support and held to ignore and some of those have just been horrible performers but managed to find a level to stop the carnage for now.

Look at the natural resources sector, MOS, MON, CLF, CF, AGU, X, AKS, STLD is a short list of names that have just been getting hammered everyday and now have a very long bottoming shadow.  This is evidence of real buyers stepping in.  AAPL, AMZN, BIDU, SNDK and NVDA in the tech world, GS, JPM in the bank sector all proving to have the same setup.

There is certainly overhead resistance on the indices but if that was the bottom, it was done perfectly just the way a technician would expect.

-Mark Mosk

My morning planning session is great to discover common threads in the names I follow.  Today I see a lot of names with the R3/PP setup we have written about in previous blogs.  As I review each daily chart I also get a look at which names have been strong and weak recently adding to my conviction for each trade.

Yesteday we highlighted MOS and BRCM with levels of resistance to take advantage of and in both cases the levels were dead on.  This ability comes from years of looking at charts and a full trust in the indicators that we use and teach.  Both of these trades afforded great opportunity to make money but also had a small stop out point and therefore the reward to risk ratio was off the charts.

The gyrations in the current market environment are incredible from day to day and week to week.  For traders like myself this presents some excellent opportunity to take advantage of strong trends albeit in both directions.

After having a 20% sell off followed by a 10% rally the market could be staring in the face of a lower high and a move back to test the lows from six sessions ago.  The pivots have been working very well so know the levels of importance, 1178 on the ESZ1 (S&P December Contract) is important support today.  European sovereign debt is still a problem and Obama is going to put a bandaid on a broken leg with his deficit reduction plan today.

With the futures pointing lower this morning it is important to understand that these large gap days are not ideal for me as a trend following, mean reversion trader.  This means that I must be patient and wait for the inevitable pullback into resistance that will happen at some point today and if it does not pullback to stay off the keys.

It is also very important to know which names could fall the hardest today and stay focused on shorting those names.  This list will include the banks that have been weak except for a two day rally last week that we called here at DTW.  Big cap tech has been strong so I will not try and short those names.  As the day moves on I will compile my list and make it available.

The title of this blog says it all when it comes to success as a professional trader.  Success (making money) in trading is directly correlated to the amount of work you are willing to put in not just during market hours but I think more importantly after the markets are closed.  Weekends are an especially good time for me to put in that extra effort.  When the markets are closed I am able to put my whole focus behind the process of analyzing my performance and I can be most objective.

First, I start out by reading through the previous 5 days journals and look for common themes to tell me if I keep making the same mistake over and over or if there is a certain setup that is just killing it every time I see it.  Clarity is King in my world and the more clear I can be about the good and bad from last week the better I will perform next week.

Second, I look at charts in my larger universe and see patterns developing that will start my mind working on a broad thesis for the weeks trading.  I am watching to see if stocks are overbought/sold, where is resistance or support, MACD crosses, sectors that look attractive for trading.

The last step is to take an assessment of your “trading streak”, for me that is the last 20 trading days.  If I am in a good streak and making smart trades and strong P&L, then I want to push myself to bigger size and out of my comfort zone.  If those 20 days are not up to my standards, then I want to be more conservative in my planning and focus on simply a solid week.

I will go through this process early Saturday morning and then finish late Sunday night.  The purpose of that is to keep my mind on trading seven days a week, I do not want to get sloppy and breaking up this exercise over the two days is the remedy.  Try these three steps and you will see improvement in all facets of running your trading business.