Going long a weak stock in a strong sector

Goldman Sach’s upgrade of South Western Energy ($SWN) pushed the energy sector up on Monday. On Friday I had been shorting Conoco Phillips ($COP,) but today I was looking to go long. It was by the far the weakest of the energy stocks I watch.
$XLE, $SLB and $HAL were all close to being up 2% and $CHK was up 4%. COP however was the laggard of the group and I anticipated that the rising tide in energy would lift all boats.

I first wanted to wait for COP to test and hold Friday lows at $50.81. On its second 15 minute candle it made it as low as $50.86. I then waited for the next 15 minute candle of buying to finish. It pushed up to $51.16 and then came back in.

I placed a bid at $50.99 and got filled passively on EDGX. My first profit target was the day’s high at $51.54 and the second target being the previous day high at $51.81. My out was a break of the previous day low, so I set my stop at $50.79. So it was just over a 2:1 risk/reward, which is not great but not bad for today’s market.

After some chopping around COP finally pushed to $51.17.  I was moving my stop up to the bottom of each completed 5 minute candle. So after I was in the money and it began hitting resistance at $51.17, I moved my stop up to $51.08. Next candle had me move my stop to $51.18 and then to $51.27.

Cop made it as high $51.38 and then came in. I had an offer up near $51.50 and thought it would make it up there, but wanted to lock in my profits on this choppy day of trading. COP came in and triggered my stop and I was out for a 28 cent gain.

Setting Up Your Plays

Trading is all about preparation and adjusting to the market day in and day out.  During the trading day you should be executing your trading plan not trying to come up with trades.  If you are coming into the trading day basically saying to yourself, ” I will see what stocks are strong or weak and trade those.” You are trading the shorter term momentum and missing the meat of the move.  If you have a plan to buy or sell a stock and only trade that stock if you get a signal that confirms your plan, then you will get in before the trade is over. 

The trading play that has been working for us at Keystone lately has been buying strong stocks after they close weak.  We are classifying the stock as a strong stock because of the trend on the daily chart.  The best risk/reward setup is when the stock closes weak then tests the previous days low.  If the stock opens strong and doesn’t test the previous days low then you are waiting for an opening range break in the direction of the higher timeframes direction, which in this case would be to the long side.  Your first profit target on this play would be the previous days high.  Because you have the higher timeframes confirming your idea, the probabilities are in your favor so a little more size then usual is appropriate. 

There were a few stocks that set up for this play on Friday.  The three stocks that set up perfectly that were on my list were JP Morgan Chase(JPM), Hartford Financial Group(HIG) and Las Vegas Sands(LVS).  The main thing for this play is just because we sold off the day before only look to go long these stocks.  You will get chopped up trading short-term momentum in this market.  We are in a bull market until told otherwise and buying strong stocks on dips is the higher probability play and the easier money. 

With JPM going into the day I was a little hesitant.  The stock had been strong but the selloff on Thursday was pretty aggressive.  But you have to know what the play for the day is.  Look to buy weak stocks and have a list of them going into the day.  When a play presents itself do what you are supposed to do without question.  Trust your preparation and you will be rewarded. 

The trade in HIG was probably the best setup of the morning.  There is no question that HIG has been strong and the stock tested the previous days low to the penny.  Basically the risk/ reward on this trade was around 9 to 1. 

The stock that has been on my radar the past few weeks has been LVS.  The stock has plenty of volume so getting out where you want isn’t a problem.  Plus the buying in this stock has been pretty aggressive and the moves are very clean.  I tend not to get whipped out of very many trades in this stock because of the high volume.  And looking at my PnL for the last few weeks doesn’t lie it is my most profitable stock by a mile. 

As traders you don’t have to trade every setup.  Find a setup you know works and are familiar with.  When that setup presents itself you need to crush it and get paid in a big way.  Hope you have a good weekend and best of luck in your trading. 

Kyle

Greecing the Bull!

Today’s market action was a roller coast of good turned bad. The Dow pushed up to 10955.51 on positive news from jobless claims that were at an 18 -month low.  Around 2:00 though, the Dow abruptly sold off over 100 pts. when comments about plans for Greece’s bail out by the IMF seemed highly unlikely.

The sell off in the DOW after the IMF announcement of "tres, tres, mauvais!"

A little back story since the last Greek blog(Feb. 11th) in this soap opera of fellow EU nations. Germany and France have been leading the way to offer moral support, though not monetarily, to the Greeks. This is being done by EU nations to keep the EURO from totally imploding against the dollar. This week the Germans and French were to reveal their plan to help Greece out, but instead passed the buck to the International Monetary Fund.

Today the IMF came out and let the world know their position on bailing out the flailing Greeks. IMF President Jean-Claude Trichet said that getting money from the IMF for Greece’s debt worries instead of EU government’s would be “very, very, bad.” And these 3 words sent the EUR/USD crashing down to make new lows.

Commodities just tanked after this bringing the rest of the market with it, although financials and service sector held onto gains. Tomorrow I will be watching the EUR/USD closely to see if the EURO continues to weaken against the dollar. IF this happens, commodity stocks such AKS will be prime for more shorting. I would also look for a lot of profit taking in tomorrow’s market in these “uncertain” times, so be careful of the longs!

I am not bold enough to say that this is an end to the bull rally, but I think we will definitely see some correction through the next week. Remember the market is closed next Friday. So with the Greece bail out plan far from secure, it would be hard to imagine a lot of buying coming into the market before a three day weekend.

Look for a continuation of the selling in AKS if EURO weakens to the USD..

The Idea and the Trade

I think it’s helpful at the beginning of the idea to break trading into two parts. The first being the idea of what you think a stock will do based on its previous daily performance, performance of the market and performance of the sector.

For example, I want to be long $HIG, because the financial sector has been the strongest sector over the last month and this is a strong stock on the daily.
(The Hartford Financial Services Group, Inc., through its subsidiaries, provides insurance and financial services in the United States and internationally.)

Ellipse illustrates the days covered in the 15minute charts below.

On Friday 3/12, $HIG sold off from its monthly highs 93c, closing near its lows on light volume. Monday, it continued to sell off in the morning. However, using the higher time frame of the daily, you know there have been buyers attracted to the stock. So you wait for it to sell off until it hits the level that brings the buyers back.

It finally hits a swing low at 1:15pm. Take a look at that volume candle. It measures 600K and dwarfs any of the days proceeding candles. The largest that day was 400k. The stock trended higher for the rest of the day, never approaching the lows again.

So the idea is that $HIG is going to continue up after the day and half of selling. The trade then takes place where you monitor it for some indication that price level has hit a point that the buyer’s will overwhelm the sellers and push this back up. This came with spike in volume with a 15 minute candle energy candle to the upside.

Notice the spike in volume at 1:15pm.

On Tuesday, I came in with the same idea. There was buying into the close. $HIG opened near it’s high’s, but then immediately sold off. Keeping the same idea of going long, I was trying to anticipate where the buyers would come in and form support. As it came down from the high of $26.80. I was looking at the 20 EMA on the 15 minute chart, which was at $26.49. The market was having an up day, so I thought with all the buying at the end of the day this had some more room to go up and would have to stop.

Anticipating can be difficult, because the danger is you are totally wrong and it runs right through your bid. The upside is if you are right, you have a great entry price and great place to manage your risk. The key is if you are wrong to know where you are going to get out. So for this example I set my bid at $26.51 with an out at $26.39 if I was wrong.
$HIG ended up pushing through this level to $26.46, which was the low for the day. Enough buying came into support the stock at this level, but it wasn’t until 12pm that it began to rally and make new highs.

Ellipse shows the swing low off the 20EMA and the push above the opening range.

It gaps up Wednesday on news it would pay back TARP. It then sold off at the end of the day with the rest of the market to the middle of its range. My idea is that is still that it is a long and will continue to trade it that way until something happens to change my opinion.

Importance of Higher Timeframes

Being day traders we are always focused on what is happening right now.  The mistake some traders make is focusing too much on level 2 and the 5 minute chart.  These traders who are focused on the shorter timeframes end up basically chasing momentum.  The bigger money in this market has been buying pullbacks in strong stocks.  Personally I have been working on this concept. 

Now I am classifying strength by looking at the daily and hourly charts.  Stocks that are trending up for a few days are on my radar.  I am looking to buy these stocks the day after they show weakness and trying to get in when they break significant levels to the upside.  The sector that set up perfectly for this setup yesterday was the gaming sector and specifically Las Vegas Sands (LVS). 

On the daily chart LVS has been basically straight up from 15- 19.85 over the past 11 days.  Then on Monday LVS broke the 3-day box to the downside and sold off hard.  It was a strong downmove but looking at the big picture was basically just a small pullback.  Coming in to the day on Tuesday if you were game planning correctly you should have been looking to go long LVS if we broke to the upside.  Obviously looking at the charts now it was a great trade.  What I am trying to do with my progress and what I am aggressively trying to work on is identifying these setups when they are happening.  The bigger money in this market is catching these 1-3 day moves and these are the setups that will help you get in to these setups. 

Looking at LVS above 20 going into today if we can stay up there.  Best of luck in your trading and happy St. Patrick’s Day. 

Kyle