August 7, 2011
Mish's Daily
By Mish Schneider
Given the historic event of the US downgrade by S & P, let's not lose perspective that any/all historic events have created and will create opportunity. To survive as a trader, one has to adapt. And to adapt, one has to have an educated plan. If you have been a classic position/swing trader, unless you have been short for some time, you must now expect volatility which will make risk harder to calculate. Although there are those who have maintained a short position, for the most part, even seeing the signs coming, you most likely have been more like me-in spite of the island top in SPY, the poor economic numbers of late and the increasingly dysfunctional US government, you have daytraded, taken small overnight positions, but stayed mainly in cash because you could not or would not believe that the US could be in fact downgraded; nor could you bring yourself to profit from the country's negative outlook. Now, we must take emotion out of the equation.
Currently, the indexes are in a distribution phase trading under the 200 DMA. A bearish phase occurs when the 50 DMA crosses beneath the 200 DMA. That has not happened yet and there is no guarantee that it will. However, even in a distribution phase as we have seen, 200 point ranges are typical. The strongest rallies happen during distribution and bear phases and typically last 1-3 days. Therefore, daytrading and at most miniswing trading will prevent carrying too much overnite risk right now. And let's not forget that every historical drop ultimately becomes a buy opportunity. We have the tools and the experience to help you determine when those buy opportunities will occur.
It is during volatile markets that our strategies work best. As former floor traders in NY, we honed our strategies during volatile times with short term trading. Understanding how to look at the pivots, their stack, resistance and support points, and most importantly combining all of that with the opening range strategies from the breakouts to the reversals along with understanding risk and proper position sizing, trading success is within your grasp.
Sure, we will have losing trades, but controlling risk is the penultimate goal. Then, when you lose you lose small. But, when you catch the momentum you are riding a wave of fear or greed and the profits far exceed the losses. No random trading right now. This environment requires focus, discipline, and a trading plan that is adaptable and flexible according to the sentiment of the day. At this point, it is difficult to predict the short and long term impact of the downgrade. But I do not trade with an opinion nor do I listen to the opinion of others. I read the signs that charts tell us. The volume patterns tell me this for sure-volatility is a reality and the trend is in a strong warning. But, we are not in a bear phase yet. Fear can turn to greed on a dime and still anything can happen. I urge you to use the strategies and be flexible!
SPY More about volume patterns. Thursday, the volume did indeed double. But what is fascinating is that in anticipation of an accumulation day in volume on Friday with a close in the green, instead it tripled the average volume and closed in the red putting in a huge Distribution day once again. Given the announcement about the downgrade after the close, if 177.25 area holds up, would be interesting.
DIA Although it is a smaller barometer, the volume patterns are a bit different. Thursday was indeed a Distribution day in volume, but not double what the average daily volume is, hence not as potent. Friday, however, it had an Accumulation day in volume closing in the green.
QQQ Same as SPY. Had triple average volume, 53.73 pivotal area.
IWM Friday we got double the average daily volume with prices in the red. 71.62 now pivotal.
ETFs:
GLD A bearish engulfing pattern followed by an inside day is powerful. This is really an "anything can happen" scenario. Under Friday low, see a quick drop to 159. Over Friday's high clear skies.
SLV Got short the Opening high failure Friday for a great position daytrade. I did not stay short because it landed on and held the 50 DMA. A move back above 38.37 very positive otherwise, under the 50 DMA trouble.
OIH Triple the average daily volume Friday. To get long for more than a daytrade, needs to clear Friday’s high.. XLE very similar.
TLT** One of the best trades Friday, which I publicly tweeted, was buying TBT near the lows and riding it up 1.40 after anticipating Thursdays run in TLT was a blow off rally. However, since TLT did not break Thursday's low, I sold the TBT at the end of the day. Will look to re enter the TBT in anticipation of a move to the 10 DMA in TLT.
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