27/5 Weekly Market Recap.

Technically speaking, in order to analyze the market and try to determine where it’s heading, we have to list all the arguments for the upside and those of the down side.

On the upside, we have the Laguerre Filter which is still on an uptrend. we know from looking back through price history, that Laguerre Filter does a great job of pointing at the correct trend direction. When trend changes, he knows to quickly change course and point to the right direction.

On the downside, we see big red candles with, relative to the green bars, high down volume. Also, the price has drifted out of the uptrend channel (Blue pipe) and broke a widely watched support level – 164.00 level.

Adding all up, we get a slight bearish bias, but not quite of a definitive direction. A few more days of price action will tell us where are we going from here.

Another interesting aspect of analyzing the market is revealed if you throw on the 5 minute chart the Darvas Box Indicator. In all the previous week’s trading sessions we had 3 signals, all were on the Short side.

Notice how the box extended lines act also as support and resistance levels:

 

As traders, we often witness scenarios where a position we’re in, moves very slow, or doesn’t move at all. If you have been trading a day or two, you also must have felt the frustration of seeing the price of a stock go through your live order, without getting filled. Watching the price rocketing to the favor of the order without having a piece of the action is quite disappointing…

These problems are mostly due to lack of liquidity, volatility, or both.

This week we are going to find a less known set of securities that meet both liquidity and volatility issues.

We all know stocks like Apple (AAPL) and Google (GOOG) which have an average of millions of shares traded per day, and there’s quite a few that have the same volume numbers. The problem with these stocks is that they are quite expensive. With stock prices that reach over $400 (for Apple) and even $800 (for Google) we have to move large amounts of money in order to get into a position in these securities. For $1 of price movement we have to allocate $800 to buy 1 stock. This will prevent us, as a traders, of getting into other potentially profitable positions.

On the other hand, Stocks that reside on the lower price band, have the drawback of having a low volatility – You will get into that position you wanted, but the chances are that the price won’t move much…

Besides of using scanners and filters to find the much loved low-price high volatility stocks, traders have found, not long ago, robust trading candidates – the ETFs.

Two posts ago we talked briefly about the Exchange Traded Funds – ETFs. In short, ETFs are designed to mimic a certain Index, sector or security.

For example, the UVXY is an ETF that mimics the price action of the VIX. The FAZ tracks the price action of the financial sector (The Inverse price action!) and the XLE follows the price action of the Energy market’s price.

XLE includes companies from the industries of oil, gas, consumable fuels and energy equipment.

 

Why are ETFs so interesting for traders? Lets take a look at FAZ, as we said earlier, this is an ETF that mimics the INVERSE action of the financial sector, times 3. Take a look at the heading of the chart: ARCX Financial Bear 3X,  this means that for every point that the financials move, FAZ moves 3 points, in the opposite direction:

 

For comparison, here is the XLF, which represents the regular action of the financial index. Notice how cheap it is ($20) but the range of the last session is barely $0.5:

 

In the most recent trading session FAZ moved $1.5 with an average volume of 100K per 5 minutes (!) There’s no way you wouldn’t get filled at any point in time during the day!

Again, the ratio of $30/stock with over $1 of volatility gives a unique advantage to traders, and makes this security very convenient for trading.

Another example of a popular ETF is SSO. This ETF seeks a return that is X2 the performance of the S&P 500 for a single day. The average daily volume of that security is over 7M, and its range was almost $3 for an $80 stock (!):

 

Getting in and out of a position at the right price is crucial for your success on the long run. We hope that these new trading vehicles will offer you more choice and convenience in choosing the right tradable asset.

A good web address to scan and filter ETFs through various parameters is the following: http://www.etfg.com/research Check it out!

Metals and Energy

It’s been over a month that the commodities have been moving sideways, on a range-bound channel.

Overall it seems that this sector has not yet defined a clear direction, both on the weekly and on the daily time frame :

 

We all know that the market moves in waves. sometimes though, these waves are small and repetitive, this action is called Consolidation. What options as traders do we have when we encounter such a behaviour? Instead of looking to trade with the direction of the trend, that does not exist, we will look at a counter-trend technique called Divergence. Divergence always involves two parties, an asset and an indicator. Let’s start with the definition of a divergence: When the asset moves higher but the indicator moves lower  we call it a Bearish divergence. When the asset moves lower  but the indicator moves higher we call it a Bullish  divergence. lets look at a diagram to illustrate that concept:

 

When observing a Bullish Divergence, the asset shows us strength, and a long entry point should be identified. Vice Versa, when observing a Bearish Divergence, the asset shows us weakness, and a short entry point should be identified.

No we are going to put all this knowledge at work! We chose our DIG PPO oscillator, a distant cousin of the MACD, with tweaks that make it much more precise and accurate.

Let’s look at the USO (Oil ETF) and see how it behaves:

 

Here you can see two divergences, the first one, is quite obvious, a long position would be taken above 32.50, no brainer! The second one is somewhat less clear but tradeable – Double top with the 2 lines of the PPO crossing and drifting lower. Entering Short below 34.50 would make a nice gain.

Let’s look at Silver:

 

Now let’s see what’s happening now on Gold:

 

Here we are witnessing a live divergence occurring on the daily GLD – Double bottom with the PPO making a higher low resulting in a bullish divergence. The only concern here is that GLD is in an obvious downtrend, and taking a position against the prevailing trend encompasses more risk than usual.

Are you ready to take that risk?

That’s it for now, have a great trading week!