In early August, on my beloved younger daughter’s 2nd birthday, I wrote this piece about a ‘new’ type of trade I have begun to do a little more in attempting to adapt to the changing markets:
http://www.capitalmarketforum.org/entry.php?119-FRI.-AUG.-6-The-Fakeout-Leading-To-Two-Trades
Upon speaking with a friend who has a good 30 IQ points on me but was a bit confused about how to differentiate between ‘old school’ and ‘new school’ breakouts, I want to address the difference a bit before I begin to discuss other nuances that have begun to occur somewhat frequently over the last few weeks as I continue the ‘change’ theme as has been noted here often since the changing over of Direct Edge to a stock exchange. I described in the Aug. 6 piece an example of a stock that breached a high, failed, and then got slammed. Today, I want to give two definitive examples to try to differentiate situations.
Example 1: On Friday July 30, AIG (AIG) came out with good earnings and the stock marched higher in the early going. It rallied from 40.50 to 42 over the first 30 minutes of the post-NYSE open. At 10AM, the stock burst through the 42 resistance level in popping rapidly after a huge offer was present at 42. It touched 42.19 (although on a couple of ticks) as most of the volume took place between 42 and 42.10. When it breached 42 to the downside, it flopped in declining 30 cents in the next minute. This compares to the move in AIG on Thursday August 5 that started just after 10:45AM ET. The stock had traded in a relatively narrow 50 cent band between 40.50 and 41 on no new news. When AIG took out its low, it went to 40.47 and failed. But instead of exploding higher, it only bounced to 40.55. It then tested the 40.47 spot a couple more times, each time bouncing to a lower high. When the stock breached 40.47 after a long stretch of consolidation, it rapidly fell 25 cents in continuing the trend over the next few minutes.
Example 2: Vertex Pharmaceuticals (VRTX) came out with some positive drug data yesterday morning. The stock rallied to almost 39 in the fertile pre-opening trading hours. As 9:30AM ET approached, the stock slowly began coming back in as it opened exactly unchanged at 37. It popped to 37.20, but came in slightly. It breached 37 in ticking to 36.97 on big volume. Shortly thereafter, the stock went to a refreshing 37 bid/buyer and then blasted off in flashing to 37.55. Compare that to what happened a few minutes later. The stock came right back down and consolidated around 37 anew for a few minutes. This time, it cracked to 36.56 in two minutes.
So, what was the difference in these trades? In the first trade in each example, the stock had moved on significant news. When the stock tried to keep going in the trend, it came right back to the major entry point (long in AIG, short in VRTX respectively). Using the AIG example, in the first trade, the stock tried to rally and fail thus the trade was to short it just below the neckline of the 42 at 41.98/41.97 with an out just above 42. In the second trade, the trend was much gentler and there was no real bounce. Ergo, when it failed to truly uptick as the market was declining at the time, AIG was a short in that example as well in the 2nd scenario. In the VRTX example, the stock refreshed on the 36.97 bid thus the trade here was to short it thru 37; when wrong, exit just above 37 and then go long immediately as there was a refreshing buyer at 37 with the aim of buying more thru the high in the first scenario. In the second example, it was a case of try try again as after more consolidation, one should try to short the stock through the new low of 36.97. Thus the career question in the immediate-term: how does one know exactly what to do…and when to do it? The truest answer should be prefaced as follows: there is no certainty to anything- particularly nowadays- but one can definitively play odds. In both examples, there was a lot more consolidation in the 2nd scenario than the first. In both examples, the market was trending correctly in the direction wanted for the trade in the 2nd scenario as compared to the first. In both examples, the trade went opposite as one would think it would- and quick in the first scenario but took its time and eventually worked in the 2nd scenario. Thus, the way I am playing these things is to try and play the opposite of the traditional play which I’ve utilized for 15 years if I don’t have the market with me strongly along with consolidation yet I will do the ‘normal’ play with the consolidation and the market. When doing the ‘new’ play off of the algorithms, the goal is to wait until the breakout/breakdown fails and going with it with an exit just below/above breakdown. When doing the old school play, the rules remain the same except that the set-up takes even longer to form and may not work absolutely positively immediately. As I’ve been saying for weeks now, one has to adapt when necessary- this is one of those times.
Markets rallied strongly throughout the world overnight with markets up 1.5%-2% both in Asia and in Europe. Commodities are sharply ahead with gold up 2% and oil up 1.5% as it is now notably above $85/barrel. The dollar is little changed against the yen but down significantly by ¾% against the euro. Jobless claims (445,000) are due out at 8:30AM along with productivity (0.9%). Futures are indicating a resumption of the massive dollar-depreciation fueled rally this morning. For the day, as long as the dollar stays weak, look for the rally to build on itself a bit before the market consolidates and quiets later ahead of the jobs report tomorrow. Focus on the earnings plays (many notable companies such as QCOM are moving a lot this morning), big cap momentum plays should the speed of the market pick up as it did yesterday afternoon, relative weakness plays particularly this morning, and the fertilizers on POT’s overnight news.
Reiterating-
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.
If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-
Good- The following stocks have good news and/or a strong technical pattern
PRU- decent earnings
QCOM- good earnings
WFMI- good earnings
VCLK- decent earnings
IPI- decent earnings
ZUMZ- good earnings
HCN- decent earnings
MTZ- good earnings
BGC- decent earnings
FFIV- closed near a high
CCME- closed near a high
DPW- closed near a high after posting earnings
PRX- closed near a high after posting earnings
MOTR- closed near a high after posting earnings
RLD- closed near a high after posting earnings
SNCR- closed near a high after posting earnings
MGM- closed near a high after posting earnings
CATM- closed near a high after posting earnings
LINC- closed near a high after posting earnings
WNC- closed near a high after posting earnings
AMZN- closed near a high
AAPL- closed near a high
GGAL- closed near a high
CCCL- closed near a high
CBEH- closed near a high
BTU, SODA, LINE- featured on “Mad Money” last night
PUDA- closed near a high after announcing an agreement to buy additional coal mines under Pinglu Project Phase II
TDC- decent earnings
TWC- decent earnings
SU- decent earnings
APA- decent earnings
Bad-The following stocks have bad news and/or a weak technical pattern
MELI- bad earnings
MUR- bad earnings
DOX- bad earnings
MPWR- bad earnings
CVD- poor earnings
FRPT- poor earnings
JCOM- poor earnings
CHK- poor earnings
QLIK- poor earnings
POT- Canadian government did not give BHP deal its approval
ESI- closed near a low
CTRP- closed near a low after posting earnings
HSNI- closed near a low after posting earnings
LAMR- poor earnings
KSS- poor same-store sales
Earnings:
THURS NOV 4 BEFORE
APA ATPG AUXL
BDX CBOE CNQ
CVC DLR DNR
DTV HNT HOC
HUN LIZ MAC
PCG PCS PDE
SIRI SU TDC
TWC UPL VRX
WCG WPI
THURS NOV 4 AFTER
ALKS ATVI BID
CBS CEDC CF
CLWR CROX DLB
DVA FLR HANS
IRF JAZZ KFT
MCHP MGA MHK
NFG PSA RSG
SBUX SD SWKS
TSO
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
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