Is defense the best offense?

It has been more than a month since my last post titled "Risk On" and today I feel 
compelled to write again as an short-term top might be in place. As SP500 and NAS100 
kept reaching new highs, the former leaders (Russell 2000 and Biotech) turned on their 
heads and fell down. Now  all of these major indices are showing weakness. The stars 
are aligned and the result is a focused laser beam pointing downward.

Let's look at some charts.

QQQ: RSI, MACD, and Stoch indicators show bearish divergence from the weekly to 30min 
time frames. 

S&P500: RSI, MACD, and Stoch indicators show bearish divergence from the daily to 30min 
time frames. 

IBB: Lower high + Head & Shoulder breakdown, $233 provides some support. 

IWM: Lower high + Head & Shoulder about to breakdown. Price action and volume profile 
suggest lower. 

At times like this, I will be defensive, or even mining for some short setups.  

Risk On - May 27th to May 30th

Trend Change:

Bond vs Equities: TLT/SPY:

On April 16, I wrote the following on the long term treasury and US equity ratio.
"This ratio gives us a proxy of when US broad market is going into correction phase. Since the inception of TLT in July 2002, there has been 8 times where this ratio changed trend to higher low & higher high. 7 out of 8 times, stocks pulled back immediately. This occurrence signaled the bear market in 2008 for the first time during the week of Dec 10, 2007. Then again, during the week of May 5, 2008. The last warming was around August 11, 2008. "

It has been coiling up. Every time it reached the top or bottom of the wedge, it gave us signals on short term tops and bottoms. The perfect example is the small cap ETF IWM. The ratio reached the upper wedge on May 15th, and it reversed and formed a short term bottom.

Direction:

IWM:

The ETF closed above 200 day moving average, and broke above the green trend line. Things look even better on the weekly chart. It finished the week with a decisive green candle above 50 week moving average.

However, one cannot ignore the damage that's been done after breaking the steep red trend line going back to late November 2012. And the fact that every rally has been sold since March this year.

Individual names:

ARWR:

This biotech has seen better days. It plummeted from $27.63 on March 6th, to $9.12 on May 7th.  It's currently forming a nice wedge. I like it above 12. First target $14.

JVA:

This coffee manufacturer has been resilient. It broke out on Friday with good volume. First target $8.50. It could go much higher if it takes out 52w high at $8.58.

RAD:

It's simply a beauty. Big 52 week high breakout with huge volume. First target: $10

Other names that I am watching are QTWW, SOHU, GMCR, BIOF, ATSG and ISIS.

Thanks for reading, and have a good week!

Range Bound - Week of April 28 to May 2

The Russell 2000 index has been trading between the 100dma and 200dma range. We are in range bound market as long as stocks roam around this area. Both market leaders IWM and QQQ are forming a potential head & shoulder topping pattern. A breach below $84.50 for QQQ could give us a good short signal. My goal is to find stocks that are at support or resistance, and then sell / buy based on market directions. Next week, I am focusing on finding stocks at resistance, especially those with double whammy resistance.

IWM:

QQQ:

Auto Sector:

GM (General Motors Company)

printed a big red candle after earnings on April 24th. It closed at $33.72 on Friday, just below the horizontal resistance and the 20dma (double whammy) around $34. A drop below Friday's low ($33.55) could trigger a fall to the next support at $31.

System Software Sector:

ADSK (Autodesk Inc)

dropped below the 17dma. The bounce created last week was a perfect bull trap. It is likely that the 17dma will continue to put a top on the stock price till it finds support at around $42.60.

Financials:  

ETFC (E* Trade Financials)

flirted with the green trend line and dotted horizontal resistance (double whammy) after earnings on April 23rd. The latest two red hanging man candles near $23 could be the retest before it plummets to $19.60, or 12% below Friday's close $22.4.  Ideally, we want to see a bounce on Monday AM to $22.9ish for good short entry. Pay attention to the latest volume profile.

Thanks for reading, and have a good week. 

Risk Off - Week of April 14 to April 18

Many growth sectors have broken their long term trend lines last week. The Queen QQQ broke down and lost 2.62% and 30y US Treasury yields went below 3.5%, while gold and utilities enjoyed decent gains. All the indicators are flashing red lights going into next week. 

Bond vs Equities: TLT/SPY:

This ratio gives us a proxy of when SPY is going into a correction phase. Since the inception of TLT in July 2002, there have been 8 times where this ratio changed trends. 7 out of 8 times, SPY pulled back immediately. This occurrence signaled the bear market in 2008 for the first time during the week of Dec 10, 2007. Then again, during the week of May 5, 2008. The last warming was around August 11, 2008. If you are a long term investor, the market tends to give you multiple warnings before it finally crashes. This is only the first occurrence since Sept 2012. So I will not rush to sell everything for now.

Momentum stocks: PDP

The Powershares DWA Momentum Portfolio printed a red inverted hammer, pinching the lower Bollinger band. Every time it touched the lower Bollinger Band since Nov, 2012, it has found support. Last Friday, it was the third time it’s pinched the lower BB since March 24 this year. Warnings ahead of some more blood?  

Commodities: DBC

DBC, the Commodities ETF is flagging on the weekly chart. On the daily chart, we hit the green TL, and found resistance. The doji on Thursday was the sign to take profit on commodities.

Gold and gold miners: GLD, GDX, GDXJ

The ratio of XAU / GLD just hit the mid Bollinger Band, and found resistance with a big red bar. This ratio has only failed to break the mid BB for only 24 times since the inception of GDX in May 2006. Every time it failed, GDX dropped immediately. However, Only 5 times of this occurrence GDX entered into a bear market. So I am not suggesting miners are in a bear market at all. In my view, miners are risky assets, and the recent decoupling with gold is a sign that we might be entering a risk off environment. All risky asset should be avoided or shorted. Gold, as seen as a safe haven asset, will bode well if we have another down week. Miners once more, will likely be a victim again. With that said, when this correction is over, miners will try to outperform the metal again.

So gold bugs, which instrument will you invest in? metal or miners? Or both?

In conclusion, I think many stocks still have room to drop. Have a good week!

April 6, 2014

April 6, 2014 (Week of 4/7/14 - 4/11/14)

A couple of things that were not well covered by the media last week were 
that steel (SLX), and Brazil (EWZ) made an attempt to break higher, but failed, 
and coal (KOL) has broken out of its long term channel.

With the expected economic boost from the 2014 World Cup and the 2016
Summer Olympics, we have seen Brazil put on a good show lately. Now the 
Brazil ETF (EWZ) is hitting major resistance, which failed to break out the last 
8 attempts. The more times a trend line has been tested, the more likely it 
will be broken. If we hear any news about Brazil in major media, I think it’s a 
cue to sell the news. Brazil was not the only good show in town, Turkey has
also risen +20% in the last two weeks and it's now also facing resistance; I 
have a strong feeling that it will break through. I haven't really been following 
the development in Ukraine and Russia, but I expect it to be the main headline 
again next week, and it will be the time to sell Russia after its ETF (RSX) back 
tests previous support.

Inflation index PPI is due on Friday. Will that give a boost to commodity prices?
From last week's action, precious metals and miners (GLD, SLV, GDX) attempted 
to grow some inverted shoulders. The weekly charts look great, but we might 
see some sluggishness on Monday and Tuesday, and then soar violently mid 
next week. Other commodities such as wheat (WEAT) and coffee (JO) are also 
looking bullish next week. Steel failed to break out on Friday, which made me 
bearish in the short term. If we are combining the bearish country (Brazil) with 
the bearish commodity (Steel), we get VALE, a good short candidate for next 
week imo. Coal broke out of long term channel. If this coal rally is real, we
might dance around nowhere for the whole week, and if this rally is wild, 
coal stocks will go sharply higher early next week.

I don't have a lot of trend following setups Monday to Wednesday as I think
we will start the week with a counter trend wave. I might just day trade the 
counter trend and take losses quickly if the situation turns the other way… 
the trendy way.

Week:

Trend long ideas: Wheat (WEAT, ZW)

Trend short ideas: Russia (RSX)

Mon - Tue

Counter trend short ideas: Brazil (EWZ, PBR, VALE) , Steel (SLX, X, AKS)

Wed - Fri

Trend long ideas: Precious metals (GLD, SLV, GDX, GDXJ)

Charts:

WEAT:

28dma is the major line. It printed a perfect hammer candle on horizontal support
and major line. Pure price action suggests we go higher.

Russia: It bounced back to previous support, and was quickly rejected. It could be 
the perfect back test before it heads south.

Brazil: That is a major trend line. I could pull back to $41.7, form another shoulder 
before it could grow legs.

PBR: Got stuck at resistance. Frist stop, $12, 34.

Steel: Basic Material sector failed to break out, steel included.

VALE: Brazil + Steel! First target, $13.8.

Coal: Breakout on the weekly. 


I will come back on Wednesday to review some precious metal charts! 

Thanks for reading and have a great week!