XLB J-hook Frypan Bottom Update 2

We opened with a gap down after a doji candle yesterday, and that was after rejecting at the 127.2% Fib on high Stochastics. That looks pretty bearish. I should hold and see if we close below the 8ema or not before exiting because we may not and then bounce back up tomorrow. However, the SPY is making an Island Reversal today (see chart below), which is very bearish.

I was going to hold, but based on the new information provided by today's price action, I decided to get out. I can always get back in. I sold the spreads for .64 each and had bought them 1/23/17 for .53, so I made $11 per spread. Remember I also made $143 on 1/26/17 on this trade. All in all it was a good trade.

XLP Scoop Pattern Update 4

Today XLP gapped down after yesterday's close below the 8ema. It may reverse and go back up, but it did just bounce off the 200SMA, which is a powerful level, and the SPY is making an Island Reversal, which is very bearish. See chart below. It would be best to get out with a very small loss at this point and see what happens. We can always get back in.

So I sold the spreads for .75 each, which is a $9 loss since I bought them for .84. I've learned the idea in trading is to take small losses and bigger gains. You can't do this if you don't take the small losses.

XLP Scoop Pattern Update 3

We have an evening star type candlestick pattern peaked right on the 200 SMA (thick white horizontal line). Then today we closed under the 8 EMA (orange line). Normally you should exit your position based on this. However, today's low touched the 200 EMA, 20 SMA, and the top of the scoop handle, then price bounced off that level a little.

So, I'm going to hold the position and see if we continue down next week or reverse back to the original upward movement from the bullish Scoop pattern.

If we do go back up, there's a good chance, in my opinion, we'll penetrate the 200 SMA. Look back to around 9/21/16. See how price came down to the 200 SMA around 9/21/16, then consolidated, then bounced off it to the upside. Then on 9/23/16, price reversed, and went down and through the 200 SMA. Then it slowly came back up to test the 200 SMA for resistance around 10/27/16 before making a nice drop to the downside. Since patterns often repeat in the market, we may do the same thing but in reverse.

XLP Scoop Pattern Update 2

Price is up nicely since the entry. We made it past the halfway mark at "H" on the chart. Now we were rejected at resistance right at the 200 SMA. This is to be expected. The question is whether to take profits and wait for a re-entry, or hold the position. Since we're coming off the strong Scoop pattern, as explained in an earlier post, I'm going to hold on unless we close below the 8 EMA. Today you can see we closed below the 3 EMA but above the 8 EMA. I'm looking for a small pull back to "respect" the 200 SMA, never close below the 8 EMA, then resume the upward trajectory and break through the 200 SMA. Anything can happen, but that's my expectation if this trade goes well.

Another possibility is to chop around the 200 SMA for a while then take off to the upside. And another possibility is to retrace back down to the 200 EMA (thin white line that goes across the top of the Scoop handle from 12/15/16 to 1/6/17) and bounce back up. Either of these two scenarios will probably cause us to exit the position and re-enter on a resumption of the upward move.

XLB J-hook Frypan Bottom Update 1

XLB Daily

XLB 1 minute

On the daily you can see we had a nice pop right to the first target of 127.2% Fib extension. We're also well above the 8ema, which increases the probability for a pull back to the 8ema. So now I want to preserve some gains.

To tighten up my stop I went to the 1 minute chart. You can see we pulled back a little right at the 127.2% Fib extension. Coincidence? I don't know but see the dip that turned back up just above 53.10? I moved my stop to 53.10 thinking if we hit that then we're at risk of a more substantial pull back. I did that at 10:30am.

At 10:46 that stop was hit and the XLB Mar 51 Calls sold for 2.55. I had bought them 1.12 on 1/23/17. That's 128% Return on Investment in 3 days.Nice work if you can get it.

I'm holding onto the Mar 51/52 Call spreads because the 2nd target is the 161.8% Fib extension, and the spreads are a lower risk (because they cost less). If we close below the 8ema on the daily and the spreads have some value I'll sell them then. I have a standing limit order for those to sell at .90.

XLB J-hook Frypan Bottom

XLB daily chart above shows a nice move up from 11/3/16 to 12/9/16. XLB is an ETF for building materials. It may benefit if construction building picks up. Often after a strong move up, you see a pull back that looks like a cup or the bottom of a J-hook. Sometimes its a down sloping rectangle (a "flag") or a pennant.

Separately, there's a candlestick pattern that looks like a cross section of a boat with a keel in the middle. Some people say it looks like a wok for cooking Chinese food, and some people call it a fry pan bottom.

The pull back on XLB in the chart above has made a very nice fry pan bottom pattern. It even has the dimple in the middle of the bottom, which is the swing low of the pull back. I drew a thick white vertical line beginning from the swing low of the pullback on 12/30/16. This is the measured move for this trade. The top of the line is where we expect the price to go, if it makes the full move. The length of the line is the same length from the recent strong up move from 11/3/16 to 12/9/16.

The short horizontal white line at $52.32 marks the halfway mark up the measured move line. This is our first target.

Notice the 2 thick horizontal white lines going through the fry pan bottom. They are the same length. It means that the time it took to make the swing low is the same time that's elapsed from the swing low to today. Ideally, there is symmetry of time in the fry pan bottom pattern. If so, then we're about to break out to the upside.

I really shouldn't enter this trade until price has closed at a new swing high, and then continues higher the next day. So entering here is a little aggressive and more risky. So, I defined my risk by using options.

There are actually 3 targets on the chart:

1. The halfway mark of the measured move at $52.32.
2. The 127.2% Fibonacci extension at $53.18. 
3. The 161.8% Fibonacci extension, which is also the full measured move at $55.10.

I looked at March 51/52 Call spreads for the first target, March 51/53 Call spreads for the second target, and just a plain March 51 Call for the third target. I entered limit orders at the midpoint of the Bid/Ask spreads and only 2 orders were filled, the simple Calls at $1.12 and the Mar 51/52 Call spreads at $0.53. That's ok.

Fry pan bottoms can be volatile when price gets back up to the previous swing high, which is $51.69 in this case. So I'm putting my stop just below the low of the fry pan bottom ($49.50) , at $49.25.

OK, we're in a little early, so if we get a gap up we're good. Let's see what happens.

Oh, by the way, I used a simple Call for the third target because the 55 and 54 strike Call options were worth very little, so it wouldn't reduce my cost (risk) much to short those.

SPY Flag Breakout Exit

Bad news is I closed out of this trade with a loss. I had bought the SPY Mar 232 Calls for $2.00 and sold them today for $1.18. I sold because just before the close at 4pm ET, there was a bearish engulfing candle and a close below the 8ema. You can see this on the chart above. This is a bearish candle signal and the prudent thing to do is to exit and take the loss, rather than hope and pray it turns around tomorrow. Chances are it will continue down, and maybe even gap down at the open tomorrow, and the loss could be much higher. You must be willing to take controlled losses when trades don't work out, because they don't work out all too often.

Good news is that I followed my discipline. Which, after 6 years of trading, still is not easy.

This chart is a good example of the Halfway level of a measured move providing resistance. See the short white horizontal line, like a hash mark, across the middle of the vertical thick white line? That's halfway up the measured move to the anticipated target. See how that Halfway level held the candles from closing above it? I see this quite often.

Well, tomorrow is the Trump inauguration as well as option expiration day. You'd think the VIX would be higher, but it closed the day at only 12.78. It will be interesting to see what happens.

XLP Scoop Pattern Update 1

As of lunchtime, our position is working nicely.

I added a horizontal line labeled H. It marks the Halfway point of the measured move (it bisects wave AB). I have found that there's often resistance at the halfway point. Sometimes it's so strong that price reverses there and doesn't retest for a very long time. So, a conservative strategy is to set the halfway mark as the target. Or, you can sell some of your position there and move your stop to break even.

Also, if you look back to late Oct. - early Nov. you'll see there was congestion right at the halfway mark level. That can provide resistance also.

Then we have the 200SMA a little higher, and we have the inauguration on Fri. So this may be a bumpy ride.

The Scoop pattern often leads to a strong move. Since the option spread provides a fixed risk, I will probably hold through all the bounces, unless we hit my stop.

XLP Scoop Pattern

Today as of 11:00am ET we have a large green candle. If we close over the 8ema (orange) then we will have formed a "Scoop" candlestick pattern. This is a very bullish pattern. It starts about 12/15/16. See how from that date to 1/6/17 it is a sideways handle followed by a dip or a little cup? That looks like a ladle or a scoop. Also, yesterday was a doji and we gapped up today. A gap up after a doji is also a bullish signal.

The DI+ crossed up over the DI- indicator. This is a supportive signal.

To be conservative, I should wait until the close today and make sure we don't retrace all the back to the 8ema or lower. But the scoop pattern can result in an explosive move, so I'm going to be a little aggressive and get in now (mid-day).

So, I got some March 52/54 Call Spreads for .84. I chose March to reduce Theta time decay and give myself some time if I need it. An option spread, versus a simple option, helps with the Theta decay since you're selling an option as well as buying one, but it doesn't eliminate it. I chose the 54 strike because 54 is my short term target. The maximum risk is the cost (premium) of the spread. The maximum reward is the width of the spread, which is 54-52=$2. So the reward to risk is better than 2:1.

I chose a target of 54 because of 2 reasons:

1. The measured move is the length of the previous wave up. The previous wave up is from point A to point B. The thick white vertical line is the same length, drawn from the bottom of the scoop.
2. There is resistance from August right at 54. See the thick white horizontal line.

I'm using a stop of 51.25 on the XLP stock. If price gets down there then its below the scoop and that's a bearish sign. I'm using a Limit Sell order for the option spread of .15. If its worth less than that, I'd rather hold it for a possible reversal.

Of course anything can happen, and we have the Trump inaugural on 1/20/17 which could ruin the pattern, but my biggest technical worry is the 200SMA (Simple Moving Average; white meandering sideways line). That will probably provide some resistance. I'm planning on a small pull back when price hits it at about 53, then we reverse back up and go through the 200SMA and on up to the target at 54.

VIX possible bounce Update 5

Just a quick update. Normally I would have closed out this trade several days ago. But when the indications were to exit the trade, the options were worth so little, they seemed more valuable as lottery tickets than the little cash their sale would garner. So I kept them in case we got the spike in volatility I was expecting.

The options will expire Jan 20th. The most likely outcome now is for them to expire worthless. The good news is that we got a spread which reduced our cost and limited our risk. Not all trades work out even if you do everything right. However, when they don't work out, I always feel like I did something wrong. So I look over the trade and my decision process, and try to find any mistakes or lessons I can learn.

On this trade, it would have been more prudent to have waited for a close above the 200 sma before entering. The candlestick signal was so strong I thought it would, but it didn't. So I took a more aggressive trade and will probably pay the consequences. If I don't like it, then don't take aggressive trades.

SPY Flag Breakout

This looks like a Flag Breakout on the SPY daily chart. The down channel I outlined is the "flag". Notice the last doji candle at the end of the down channel. There is a red candle to the left and a green candle to the right. This is known as a Flutter Kicker signal. A very bullish candlestick signal. The green candle closed outside the channel. The next day (1/5/17) was a doji. Then today we had a small gap up, and after some settling out at the open, we continued higher. If the day closes with this configuration then its a doji sandwich, which is also a bullish signal.

Some counter indicators I see are the high stochastics, decreasing daily volume, possible resistance at the previous swing high, and the fact that, as I write this (1:00pm ET), price is at the halfway point of the length of the previous wave up.

Let me explain this "the halfway point of the length of the previous wave up". See the mostly vertical, thick white line segment extending up from the most recent swing low? That's the length of the previous up wave from 12/2/16 - 12/13/16. Then, see the little, thin white, horizontal line segment cutting across the middle of the thick white line segment? That's the halfway mark. I've noticed that very often a new wave will only go half the distance of the previous wave. So I mark it off as possible resistance.

So, I wouldn't be surprised if we get a pull back, but this looks like a strong enough setup that its worth the risk.

For a target, I'm using the 127.2% Fib extension of the last wave up. You can see on the chart it occurs at about $230.86. So, to be a little conservative, I set a target of $230.50.

To control my risk I'll use a Call option. So I got some Mar 17th 232 Call options. I picked that strike price because the current Delta is about 32. I picked the Mar contract to get a lower Theta than a closer month. If I was more confident about this trade I would use a higher strike and a closer month. But because of the counter indicators I mentioned above, I want to decrease my risk.

After the last post, which was on a SPY dip, I'd sure like to show you a winner this time. But win or lose, from what I've been taught, the odds are in my favor and I have definite thought out, risk controlled plan, so let's take the trade and see what happens.

SPY Dip Update 3

I'm out. Had to bite the bullet and take the loss. There are 5 bullish signs on the chart at the close:

1) Notice today's candle is closing above the recent channel.

2) Notice today's gap up at the open, which was not filled, after yesterday's doji. Indecision has turned into decisiveness.

3) The combination of today's candle and the previous 2 days forms a Flutter Kicker signal, which is a strong change in sentiment.

4) The DI+ line crossed up over the DI- line.

5) The 14 day Stochastics crossed upward.

Plus stochastics has plenty of room to run.

So, one must accept the facts and switch mental gears. The recent down channel, with proper confirmation, was really just a Bull Flag. Did I do anything wrong? No, not wrong. You could say down channels usually break to the upside, so I could have been more cautious and waited for a break out of the channel to the downside. Technically I think I did everything right, but I could have had more respect for the possibility this was a bull flag in the making.

The bottom line is that not all trades will work, whether taken for a fundamental reason or a technical reason. A good trade is not necessarily the trade that worked, its the trade that followed all your trading rules. I followed my rules and I was patient for a definitive outcome, and I exited rather than hold on for hope's sake alone. So I will classify this as a good trade. It just doesn't feel that way when I look at the little divot in my P&L.

VIX possible bounce Update 4

Just before the close today, the chart looks very bearish. The last 2 candles on the daily chart have formed the Kicker signal. This is normally a very bearish signal. If this was any normal security I would sell my position. But the VXX has a natural price decay built into it and it is supposed to represent the VIX. I believe tomorrow is the last official day of the Santa Claus Rally (the 2nd trading day in Jan). I'm expecting volatility to pick up shortly and my risk is limited to the cost of my option spreads.

So, I'm going to ride this a little longer. I should tell you though, trading a VIX based instrument has almost always not turned out well for me. I should really leave this vehicle to my sim account for a while.

SPY Dip Update 2

At 10 minutes to the close, we have a doji on the day right on the 8 ema. The faster Stochastics are turning up, but I'm going to hold the position another day.

SPY Dip Update 1

1/3/17 Regular cash market opened today with a gap up on SPY, then went higher. This caused a candlestick "Kicker" signal to form on the daily chart, which is very bullish. But it only matters if that is still in place when the cash market closes at 4:00pm ET. The Kicker signal lasted up to about 10:30am which had me very concerned. But then SPY turned down and by 11:00am the Kicker completely disappeared.

Strategy now is to stay in the trade unless we break the current daily down trend channel to the upside with confirmation the next day.

It's still a long way to the close, but whatever the chart looks like at the end of the day, I'm proud of myself for having the discipline to wait. Discipline is what was most lacking in my trading last year. That must change this year.