One of the longer-term trades I am watching is, what I believe to be, good upside potential in the USDCHF. Waverly Advisors caught a nice long a few months back and recently closed it out on weakness, but there is still considerable room to run on weekly/monthly timeframes. However, this daily chart shows a market where the next leg is more likely down than up: tight consolidation near the low of a recent swing is usually more indicative of the bears being in control. In a case like this, short-term traders are better off waiting for the resolution of the short-term cross currents before trying to trade with the longer-term setup. Longer-term ideas are excellent reinforcement and can lead to fantastic trades, but, if you’re going to be using reasonably tight stops, timing is everything–and that requires a keen awareness of shorter timeframes and patience to wait until the stars align perfectly.
Archive for February, 2012
This chart shows a potentially actionable short setup in the stock of SanDisk Corp. (Nasdaq: SNDK). Yes, this is a stock sitting “on support”, but the tight consolidation right on that support is more indicative of support failing than holding. Also, note the volatility compression (multiple inside days) that sets the stage for a sharp directional move. The play here is to a short a breakdown somewhere below the previous day’s low and look for a further breakdown below support. Longer-term, mid 30′s could certainly be in the cards:
When faced with a strong uptrend with no pullbacks, as we’ve recently had in major domestic stock indexes (S&P 500 futures pictured in this chart), traders have a difficult decision: One, this contracting volatility makes the market vulnerable to a sharp selloff as there are likely many complacent longs. Any weakness will hit stops, which will trigger more selling, and a feedback loop can develop. On the other hand, it is hard to position in a trend like this because sometimes there simply will be no pullback. The question of the day is, “was this the pullback?” It’s worth pursuing longs aggressively here, but be alert to the classic signs of pullback failure as there may be higher-than-usual danger on any decline.
Continuing from this post, I thought it might be useful to show the initial outcome of the APOL Anti trade. As a refresher:
- A: Overextension. (In this case 3 pushes and climax beyond the upper Keltner channel.)
- B: Sharp countertrend momentum indicating that sentiment and control has shifted in the market.
- B1: Note that this also takes the MACD to a significant new low, relative to its recent history.
- C: Our actual entry was roughly here, on a breakdown of the previous day’s small bar.
- D: The initial stop was established here. There are many ways to do this, but this area is my usual preference for the pattern.
We took first profits on this position in today’s trading, on a resting limit order .02 above the day’s low. There is probably more downside, but, at this point, we should have a small profit on the trade in all but the very worst case scenarios. This discipline of taking partial profits at predefined spots is one of the keys to consistency.