Saturday Morning Coffee: Bad Boys

Click charts to ENLARGE.


No stream of consciousness today...an outline and chart analysis. We listen to the charts as our core belief system and to the pundits and shills at our peril. Ultimately we all have to live with our trading decisions.

Core Beliefs

• Markets are not random
• Wall Street exists not to help us, but to help themselves. "There is no honor among thieves." Knowledge and experience help us to level the playing field, but it will never be level. Speculators must accept this and responsibility for their trades.
  
• Technical analysis encapsulates all that is known about price.
• TIME, not only price, is critical in analyzing market action.
• Markets trend or exist in trading ranges. The definition often depends on time frame. Over the longer-term, I believe we are in a trading range with sector rotation.
  
• Differing market environments favor differing approaches.
  
• Price analysis should encompass market, sectors, and stocks (including relevant peers - see refiners).
• Price analysis is incomplete without analysis by multiple time frames and intermarket analysis.
• "Edges" might include trading support and resistance levels, decision zones including moving averages, key Fibonacci levels, and round numbers.
• Edges also include seminal work in buying and selling exhaustion by Tom DeMark and other proprietary techniques.
  
• Ultimately we trade 'psychology' built into price and time.
• "Failing to prepare means preparing to fail."-John Wooden
• Asset allocation by market/sector is critical.
• There is no substitution for RISK MANAGEMENT.
  
• Rainy days and "Black Swans" do happen, with astonishing frequency relative to mathematical expectation.
  

I. Weekly chart analysis: Asset allocation

II. Point and Go Figure (US Sectors)

III. Commitment of Traders (Extreme Sports)

IV. Thinking Optional?

V. Mean Markets or Mean Reversion

So off we go.

I. Weekly chart analysis: Asset allocation

I do realize that "big" money comes from position trading around core positions...ideally grabbing the meat of the trend. As they say, "the trend is your friend, until it ends." Here is an "asset allocation" table with some potential ETFs/Index choices (cash not listed but always an option)...sorted by weekly stochastics (using the Worden TC2000 platform). I don't think that the values are as important as relative rank.

For example, I would rather let the prices speak for themselves than letting the Hammer dictate to me what I should believe. After all, he did call the bottom of the housing market and was "just a little off".Here is the weekly chart of SPDR Healthcare Sector (XLV)...I don't claim any special insight here because I work in health care, rather I am trading in the direction of stochastics weekly and seeing the MACD histogram action. (long XLV)
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Here's the SPDR Sector Approach...some pullbacks happeningA "Price and Time" pullback of about 2.5 points to 32.5 could be a meaningful pullback decision zone for the Telecomm Holders (TTH).
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II. Point and Go Figure (US Sectors)
Much of the point-and-figure action is less sanguine.
That includes TTH which has to reach 35 to break out by point and figure.
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Certainly the number of stocks ABOVE their 50 period average is extended north.
____________________________Telecom however has a LOW bullish percentage by sector (and is moving up) while energy is extended (no kidding)
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III. Commitment of Traders (Extreme Sports)

COT reports give us additional insight into insider thinking, from those with skin in the game, not loud-mouthed shills (and me)...
Is the pound really that weak? Ditto the Euro.
Are traders really 'sure' about the dollar? I don't think so.
Russell mania. Nope.
If equities are gonna fly, why do the commercials love the Ten year?
Rising Sun?
Who is gas crazy?
If the housing market's ready to soar, won't lumber tell us?

IV. Thinking Optional?

At periods of low volatility, I'd much rather be LONG than short volatility, that presuming that volatility is mean reverting. Volatility traders can look to buy underpriced options, or look for volatility/price expansion from volatility narrowing setups, e.g. NR7 (narrowest range of seven days), IDNR4 (inside day with narrowest range of four) with constricted ratios of short-term to long-term historical volatility, or Bollinger Band narrowing.
Here's Intel (INTC) with a high range flag, narrowed historical volatility, inside day NR4, AT the 200 day moving average, as we move into expiration. Love volatility? You could buy a breakout looking for fuel from traders piling in ABOVE the 200 day, the downside being the spike top a few days ago.
_________________Or you could buy protective puts with Intel, looking for a big and protected move. Or you could buy a straddle (23) for about 80 cents (I'm not wild about that)...or 23 puts and 24 calls for about 30 cents. Or you could just watch.
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V. Mean Markets or Mean Reversion?Hated? More than hated? Here are some refiners, sorted by price RELATIVE to Tom DeMark's Td Absolute (tm)...more than extended...more than hated...more. Long TSO, long VLO (vide infra)
___________________________________________________________Here's the same "principle", with a sort from the 100 MUST...again, this uses the maximum high price of 255 days multiplied by .382 as the 'bottoming price'. (Long TSO, long VLO, long MRK, long future BAC out of the money calls).

Have a great weekend.

Good trading and great risk management to all.

Educational use only. Never intended as investment advice. Positions are subject to change at any time.