$SPY in a tough trading area

Trading the $SPY for the last 7  days long has been relatively easy. Technically speaking it is text book. Large range days with good volume on rallies. Significantly lighter volume on days with small price ranges.

We rallied into the 200SMA on the daily chart last week @$111.78 and paused, with everyone looking at the same charts this created a lot of indecision. (again, perfect technical structure)

Keystone traders went home Friday with a game plan with two scenarios; what do I trade if the 200SMA holds as resistance and what do I trade if buyers some back strong and this significant level gets taken out?

Based on the light volume pause for the better part of 3 days (after the violent momentum rally) we expected a bullish day (this was not a guess it is technical analysis 101). However if we did get the bullish stampede there was an even bigger level to be aware of in the SPY at just over $113.

This $113 is the level that excites the sellers to come off the sidelines, it has been the trigger since just after the flash crash in May.

Now here is the situation you are faced with as a trader: long (being a buyer) is the correct trade, but there is limited upside potential to the trade taking into consideration this mornings gap to the upside.

What do you do? This is the zone where a lot of money is lost. The buying ideas are still valid but have less profit potential but there are not that many solid short sale scenarios.

I will ask again, what do you do?

Most inexperienced traders who feel the longs are not following through will put out short sale probes or actually in allocate capital to a full short sale position (because longs seem to have used up all their energy).

The correct play here is to be patient on the longs for new levels or better risk reward (from lower levels, which would be a flag on a daily chart) or do nothing. Doing nothing is the hardest thing to do.

Remember, not wanting to be long is not necessarily a reason to be a short seller.

Scenario Building

As I posted a while back planning for all scenarios in this market is a must.  If you aren’t ready for the unexpected, when it happens you won’t know what to do and will be prone to making a mistake.  But to take this concept a little further, are you planning for all scenarios in each individual trade you take. 

When you put on a trade are you the type of trader who when executed just puts in a stop and hopes for the best?  If you get stopped do you get discouraged and get mad when the stock reverses back into the direction you thought?  The reason that most people don’t make money isn’t for a lack of ideas, it is the planning of these ideas where most traders go wrong.  Most traders have no problem planning for what they are going to do when the stock trades in their favor and think they are planning for their downside by just putting a stop in the system.  What you need to be doing is coming up with a detailed game plan for what you are going to do if the stock trades against you.  Yes you should have a price where if the stock trades there you are exiting the trade, but you should have a detailed plan for how you are going to exit.  Are you going to bid/offer to get out or are you going to just hit out of the trade?  Are you going to scale out or take everything off at once?  If you are bidding/offering, are you prepared for the trade to keep going against you and where do you hit out?  If the stock pauses after you get out and trades back in the direction you thought are you reentering?  If the stock trades to your stop price but doesn’t print are you still exiting.  These are all things that need to be figured out before you even execute a trade. 

As I was reading the great new book by Mike Bellafiore, One Good Trade-Inside the Highly Competitive World of Proprietary Trading, I was reading one particular section where I realized I wasn’t planning my exits well enough.  Now I’m not the type of trader who uses stops, I generally am disciplined enough to bang out of a stock when it hits my price.  Also I know with the algos these days that I need to see volume around my stop price and to make sure it stays there in order to exit the trade.  But when I was reading this great book I realized I am not planning enough.  Mike has one section where he presents an example of the if/then statements that his traders have for each trade.  There was about 30 if/then statements ranging for what he needs to see to hold on to the trade, to what he is going to do if the stock blows through his stop price. 

I know one of my weaknesses is when a stock I am trading or the markets reverse their direction and explode.  This happened to me Friday in Las Vegas Sands(LVS) and to our firm Friday afternoon in the markets.  I paused when LVS hit the high of the and reversed because I was only thinking about my profit target.  I didn’t plan for the stock ripping against me so when it happened I was unprepared.  I think the main reason that we are sometimes caught off guard is that we aren’t planning for every single scenario.  If you know what you are going to do then you will just react instead of wondering what is happening.  Best of luck in the coming week and have a great weekend. 

Kyle

how a professional stock trader earns money

Do you want the secret to consistently going to the bank? The all powerful golden rule that will unlock stock trading profits and financial freedom for you?

The first part of the secret is keeping a detailed journal during the trading day of what definitely does not work. I am not talking about a long bunch of paragraphs, I am talking about maybe ten 7 word bullet points of observations.

As you build up more screen time you MUST build your personal list of  low probability ideas. In other words “Don’t do this, and this and this.” The sooner you can minimize mistakes the more crystal clear your trading plan will become and you will have a list of do this and this more often.

This leads us to the second part of the secret. New traders lose money on every idea they have, they allocate capital to every idea without deep consideration for the probability of that idea making money.

Consistently profitable traders lose money on good ideas. They don’t execute a trade if after giving it some thought the expectation for follow through is low. In other words newbies execute a lot of trades that they can manage risk on, but has little potential to actually earn money. They feel safe but they also won’t earn a living.

Everyone will lose money trading, maybe even 50% of the time, it is a given. Make sure you make the list of what definitely does not work, then commit capital great ideas only.

You will still lose money on some good ideas but you will come out positive at the end of each month.

WY: Weyerhaeuser Co. Building a solid base

WY: Weyerhaeuser Co. reports earnings next Friday July 30. No matter how you decide to find trades or investments you can’t ignore a huge spike in volume combined with a 24% increase in price.

Whether you are day trading or value investor this stock is building a classic base; one that is consolidating its recent gains as well as giving you a terrific risk point to plan for a solid risk/reward.

Initiating the first part of my trade here with a stop below $39, there is some short term resistance to get through at $44. A close above this level I plan to add to the trade which should take me to my profit target of just over $48.

If I start to see similar price action in IP: International Paper and LPX: Louisiana Pacific this will confirm money is flowing in to the sector for earnings season and I will increase my capital allocation on the idea.

Stcok will adjust for dividend today and conversion to a real estate trust, let the charts clean themselves up and scenario will still be good.

Keystone Trading

Looking at the Big Picture

One of the tools we use day in day out to look at the markets is multiple timeframe analysis.  What this means is looking at our charts in different timeframes.  This could mean a 15min chart, a daily chart, or a weekly chart.  Each timeframe tells a slightly different story, it is the combination of these timeframes that gives a trader his ideas and conviction for putting on a trade.  More often than not the bigger money trades are going to be when the lower timeframes are confirming a higher timeframe trend.  I made the mistake this week of putting too much emphasis on the lower timeframes.   When it came time for the daily timeframe trend to continue I wasn’t quite ready for it and didn’t make what I should have. 

For the previous seven days, before Friday, the market had been in rally mode.  Ever since we had broken 1040 in the S&P 500 and failed to push lower the market had exploded higher.  If you were trying to establish shorts during this period, more than likely you are licking your wounds right now.  Any selloff during this period was met with buying and shorts were just not working.  But in the back of your mind should have been how far we had fallen for the past 2 months and a rally should have been expected.  The market wasn’t just going to go straight down, was it?

I know what I missed.  I was putting too much emphasis on the past few days and was missing the big picture.  I was setting up plays for the market to break its 3-day consolidation to the upside and not setting up enough plays for if the market broke down.  For the past 3 months this market has been really weak and a low volume uptrend should not have changed my longer-term outlook.  You want a stock that is in a strong daily downtrend to rally a bit, it gives you very defined risk/reward scenarios.  The three-day consolidation should have been a sign that the rally was over and I should have been chomping at the bit for a break of the three-day lows.  I caught a nice breakdown in Cliffs Natural (CLF) that turned Friday into an ok day for me.  Missing Research in Motion(RIMM), Best Buy(BBY), Suntrust(STI), and Wells Fargo(WFC) is just unacceptable.  The market left money sitting in a corner and I didn’t take advantage. 

But Monday is another day.  Is this the beginning of a downtrend to test the 1040 level?  Are buyers going to come in and continue the rally?  I don’t know the answer to this, but what I do know is you have to be ready for anything.  Friday was a great lesson for me in my trading career.  I got too wrapped up in the shorter timeframe trades and should have been paying attention to the bigger picture.  As a trader you are going to make mistakes.  With proper risk management you will live through these mistakes.  Hopefully you will still be around when the education from these mistakes pays you off.  I know the next time the market provides an oppurtunity like this I will be ready, will you? 

Kyle