June 30, 2009 - update on HNU

Today HNU dropped on large volume due to an unfavorable report from the EIA stating that "abundant natural gas supplies converge with weak demand driven by an 8-percent decline in industrial sector consumption."


Although I do like Nat Gas as a long-term play and believe that it will do very well when we are out of the recession and well into recovery, I have to keep to my trade rules and technical signals. My stop-out target is below 5.50 and today I came close to getting stopped out.

We have unsuccessfully tested the 50day moving average, and that is bearish. However, counting today's move, we have also re-tested the 5.50 support level 3 times in the past 2 months and stayed above it.

Let's take a closer look with the 2-day chart, broken down in 5 minute intervals:

The 5.50 support line was tested twice during the day but proved to be strong. However, we are not out of the red zone yet.

I have given this trade time to work but it is starting to go flat. I will look to the next trading days for signs of support, otherwise I will close out the position and stay on the sideline and prepare for another approach in the future.

June 29, 2009 - SP500 - Place Your Bets

Well we've had an interesting week. Following the post on June 23rd, bulls lost steam at the 950 level and the S&P500 fell - but to a very strong convergence of the 50day and 200day moving averages. There was support at these levels as we bounced off 890, however, not on the volume that I would have liked to see.


Volume is below average and even though the MACD has ticked up, it is still in a bearish pattern.
Now, let's take a look at a daily chart for SPY, which is the ETF that tracks the S&P500 on a one-to-one (non-leveraged) basis. The chart of SPY clearly shows the same price movements as the S&P500 and the 50day and 200day moving averages converge at the right side of the chart. (click on the chart for a larger view)


At the bottom portion of the chart the Call and Put option volumes are plotted. Notice anything interesting at the right side?
A very distinct spike is visible right before the place of convergence of the averages. A vertical line has been drawn to align the top of the call volume spike with that of the price chart.
At this point a lot of call options are exchanging hands. Buyers of the Calls are betting that the S&P500 will bounce off the averages and the sellers are taking the reverse side. The wheel spins... but who's placing these bets? Which side are the pros taking and which side are the sheep on?

Option volume is another important technical indicators that signals market sentiment and possible shifts. Even though volume alone does not tell us which way the tide will go, it does tell us that the market is taking sides and that there is a tide coming.......

June 23, 2009 - SP500 Moment of Truth

On June 13th, I posted the S&P500 Technicals , indicating that the bulls may be running out of steam as the resistance builds around 950 levels. The MACD had also turned bearish.

In the past couple of days we've had some down days, including yesterday which resulted in a 3% drop in the S&P500. The daily percentage drop had not exceeded the 3% line in the recent weeks.



We are at a very important technical point. The 50 day and 200 day moving averages are very important to traders as indicators of resistance or support. And now they have converged at the 900 level, which is also a psychologically significant number.

Yesterday we crossed both moving averages to the downside and closed below 900, while the MACD remained bearish. Today I was looking for some support in the morning, but it was very short-lived and did not produce a significant gain. Movement was in a tight range, but we still closed below the moving averages.

The next few days will be a good indication of the state of the market. If we break the two averages without significant support then we could go a lot lower from here. The next support line may be as low as the 800 levels. If we do see support, I would like to see what happens as we approach 950 again. Resistance seems strong.

June 20, 2009 - Tricks of the Trade! - part 2

In the last "Tricks of the Trade" post on June 18th, I wrote about how to not get into positions where emotions can become strong enough to affect your decisions. And today's topic also serves to keep you out of emotional trades.

Have a Complete Trade Plan Before You Get In
When you pick a trade with high-probability for profits, pick your entry and exit points at the same time. Remember that you have to pick two exit points. I assume that you would like the trade to be profitable, so first (based on analysis) pick the exit point where you would close the trade and take profits. Secondly, but maybe more importantly, pick your stop-loss point. Pick a point where you imagine the trend you are following to be broken if it is hit. This may be based on support lines, trending lines, or other evidence of a broken trend.

Even if you have determined a zone to execute the exit, pick a price point before you enter the trade. Write it down. If price hits X, I will do Y. This is an important part of your trade plan, and perhaps an overlooked part of trading as a whole. The difficult part after that is actually sticking to your plan once you are in the trade as emotions will run high.

Picking the exact prices before you enter into the trade may not be the greatest idea to an experienced trader as markets are continuously evolving and our trades need to evolve with them, but it will help a newer trader keep out of highly emotional situations, which is the hardest part of trading.

If you don't pick a profit-taking exit, once in the trade, the feelings of GREED will compel you to hold on to the shares in hopes of bigger profits. But as the market turns around and cuts into your profits a new feeling will emerge and take over. This (often very strong) feeling is hope. Hope that "it will go back up!"

If you don't pick a stop-loss exit, once in a bad trade, the feelings of FEAR will dominate. Fear that once you get out of the trade your losses are "real", while if you're still in the trade, the market can come back and make you whole again - financially and emotionally. Here too, feelings of hope have taken over.

I guess it's ironic that hope, a feeling that can be very positive in life, can be disastrous to a trader's account!

Happy Trading.......

June 18, 2009 - Tricks of the Trade! - part 1

This post is dedicated to a trick you may not find in any trading book. It applies to all trading but it is especially meaningful when day-trading.

It's a common saying that you should "put emotions aside" when trading. Well if it was that easy to turn off your emotions then everyone would be making millions. With experience it becomes a little easier to "see through" your emotions to what your ultimate goal is, but you will never be able to trade without those feelings of fear and greed sneaking back into your mind and affecting your trade. What we can do is not put ourselves in situations when strong emotions can be formed.

Don't Consecutively Trade Anything
Let me explain by way of an example. A new trader, let's call him John, will find what he thinks is a good trading setup and puts in the trade. Shortly after the trade goes against him and he is stopped out at a small loss. At this point in time, feelings are created in John. Feelings of loss and disappointment! He will feel especially attached to this stock so he continues to watch it even after he is stopped out.

John believes that the setup was right for the trade and he must have put his stop-loss in the wrong spot. At this point something interesting happens - the stock goes back up as if to continue the trend that John had predicted. Fear of missing the trade is now strong. John is convinced he was right and gets back in the trade, in hopes of making back the money he just lost and then some. He may even increase the size of the trade to get his money back faster - big mistake!

Unfortunately, the markets punish traders the harshest when they are desperate. John watches the trade turn against him again as if there was someone on the other side manipulating the price against his trade. Fearing bigger losses and doubting the trade ever worked, he gets out - now with a loss wider than the original. This creates even deeper feelings which resemble the feeling of trying recklessly to get your money back at the casino table. Nothing can be more dangerous to a trader's account!

It is human nature to feel greed, fear, and hope. We cannot control them, but we can avoid situations where strong emotions cloud our judgment.

I can say that I've been burned many times trading a losing position in hopes of turning it back into profits. As a result, this is now one of my trading rules: Do not consecutively trade any stock. Once you're out of a trade, do not put in a second trade, unless this was exactly part of your original trading plan. Let yourself cool down and the feels to dissipate before you trade that stock again. This often means not trading that stock again for the day.

Happy trading!

June 17, 2009 - Quick update on USD (counter-trend trade)

Follow up to the post on June 5th.

The USD.CAD has been a typical counter-trend pattern. In my last post (June 5th) I mentioned that the break in the steep downtrend line has provided a high-probablity potential for quick profits.

The chart below shows the same chart parameters and trendlines as the one posted on June 5th but now more of the trend is revealed as time has passed.



Let's take a closer look with the hourly breakdown:


Some of the support and resistance lines which were drawn on June 5th have held up very well - the local support at 1.0955 has be retested 3 times since.

I have drawn a new trendline to capture the recent move to the upside. It isn't a distinct and confirmed trendline but as a technical analyst it is in my nature to start trying to define new trends...

For those of you still long the USD vs. CAD to capture more profits, remember that this is a counter-trend trade. The general trend is still to the downside. Use smart stops to limit downside moves.

June 15, 2009 - Natural Gas breaks 50day moving average

In the recent weeks the price of Natural Gas has been swinging up and down, testing key support and resistance lines, which is reflected in the price chart of HNU.


After Thursday's test of the 50 day moving average, I expected a key move to define the power of the bears and bulls. Today there was a great move to the upside, breaking the 50 day SMA and most importantly, closing above it, at the top price for the day.



Looking at the 30 minute chart above, we have broken the $6.80 resistance that we saw Friday (June 5th) and again last Thursday (June 11th). We are looking to support a short-term incline that has formed on the short-term.

The only thing that concerns me is the way we are moving, it seems to be in quick burst to the upside, instead of a steady climb which can be sustained far longer. I will look to the rest of the trading week to see if we can keep a steady uptrend. The next resistance level to be tested is the $8 mark.

Disclosure: I own HNU in my portfolio.

June 13, 2009 - SP500 technicals

The S&P500 has, unbelievably, rallied over 40% since the March lows. This rally which started as a sharp 'V' shape rebound off the low has slowed to a more sustainable uptrend. The line drawn below serves as a loose support line in this uptrend.

There are many people who missed this uptrend and have been waiting for a downtrend to buy-in. The hopes for a much anticipated "buy-in" downturn dissipates everyday as the S&P rallies to new 2009 highs.

Why such a rally? Well, the "this-is-the-end-of-capitalism" fears have subsided and cautious optimism has return to the market, supported by better than expected economic stats. BUT is everything better? Have all the problems gone away? or is this the media at play?!

Let's look at the technical:



If the uptrend line is extended all the way to the right side of the chart, the price is still above it indicating the continuation of the rally. However, there are technical signs that the bulls may be running out of steam here. Looking at the recent price action, the S&P is moving in a very tight range, with lower than average volume - unable to penetrate the 950 level and close above it. The declining trend in MACD while the price traces new highs is a bearish sign, and a technical sign that bulls are losing power at these levels.

However, these are not signs that we're going to crash from here. There are 3 support lines: firstly, the support of trend line at around 925, then the 50day SMA at 911, and the 200day SMA at around 890. The 50day and 200day moving averages are very meaningful to traders, and have to be broken to the downside before another big down wave.

This week is option expiry week, let's see how it goes.....

June 11, 2009 - HNU is HOT

WOW!!! What a day for HNU. The daily volume once again reached a high, indicating big interest in this ETF. Today's volume was accompanied by a surge in prices. Looking at the daily chart below, the presence of the 50day moving average as a major resistance line is re-enfornced as we failed to close above it, even though it was broken intraday.

However, the fact that we shot up from the drawn support line also re-enforces the 5.50 - 5.80 level as a well tested local support.



As discussed in the first post on HNU, price is getting squeezed between the 50day MA and the support line. Even though there is still no sustained breakout, today's move is a bullish one. Lets take a look at the (30 minute) intraday action over the past 14 days.


The chart above is great evidence of the presence of technical traders in the market that had put their sell orders resting at the top of the recent high.

I am watching this ETF very closely, as like toady, any move will be fast. Tomorrow will be a test for the recent high and the 50day moving average. Watch for false breakouts to the upside. As there are still a lot of sellers in this market, tops will be formed quickly.

I added to my position yesterday at 5.90, and will be looking for a sustained rally above 6.80 to add more. Tomorrow will be interesting......

Disclosure: I own HNU in my portfolio.

June 9, 2009 - Don't Ignore Volume

Along with posts analyzing different trends, I will at time post educational or "thought pieces" to my blog. These consist of my thoughts and takes on trading and different trading methods, indicators, and strategies.

Today, I will talk about volume, which is often overlooked as an important indicator of what is happening behind the curtains, masked by the ups and downs of price.

Many times I've heard the increase in volume described as a "more" buyers or sellers in the market. It is very important to keep in mind that the volume describes the number of shares which have changed hands. This means that there were just as many buyers as there were sellers in that day who were willing to change positions at those price levels.

One thing to keep in mind is that an increase - usually compared to an average daily volume - can be an indication of an underlying change.

An increase in volume can result from different scenarios playing out. One could be that "big money" is coming in. This is institutional investors or funds that may be buying in big volume. Although they would try to space out their positions as to not move the market and absorb the sellers, their move will still increase volume. Another reason could be that big traders have flocked to a certain stock or security and they are trading the hell out of it, increasing daily volumes. Either way, there is much focus on this particular stock or commodity.

As an example, lets take a look at the weekly chart of HNU (Ultra shares for Natural Gas):


In this chart, I've separated the volume chart and dropped it to the bottom for more clarity.
At the right side of the chart, a ramp up in volume is clearly visible. Last week the volume sky rocketed to over the 60 million mark when the 3 month average daily volume has been around 4 million shares. This, combined with the stop in downtrend of price signals change.

Below is the daily chart of HNU, which you have seen posted on this blog many times, as I am following it closely.


The daily ramp up in volume is visible in more detail here. This increase in volume does not necessarily mean that the stock will take off from here. There are just as many sellers willing to sell at these prices as there are willing buyers - there is now more of them who are actively changing positions. This indicates a possible shift in market psychology. I've redrawn the support line as evidence has built up that support may not be up trending but more "base building". Let's watch for more developments....

Disclosure: I own HNU in my portfolio.

June 8, 2009 - Why Technical Analysis?

There has always been arguments between the fundamental and technical analysts on which method works. For those who may be new to this:

A fundamental analyst will look to the underlying of the stock, at what the company does, how it makes it money, what are the business risks, et cetera. They can get as deep as coming up with different ratios to compare the "health" of the companies compared to their competitors in order to conclude if the stock is over-valued or under-valued.

A technical analyst on the other hand, does not care about the underlying company and its performance. His trades are based on market psychology - the fact that there are million of people all with the same human emotions of greed and fear buying and selling these stocks. He bases his trades on resistance & support lines, and the different trendlines which may be formed in the process of everyday trading.

Now, why do I prefer technical analysis?
I believe that in the short-term the markets are manipulated on a massive scale. I don't mean in an illegal way, although I'm sure some of that is going on too, but manipulated based on what the media feeds the public. Basically I think the market environment would be MUCH different with the absence of the media, which serves entirely as a massive herding tool for the gullible sheep. With all this information being fed to us through the channels, it is very hard to distinguish what the true fundamentals are. Through loopholes and financial engineering, an ever increasing number of companies are stating misleading numbers and news releases; economic stats are constantly revised; and analysts interpret results to "spin" them in a favorable manner for their firms - there is no trusting these "fundamentals". Not to say that fundamental analysis does not work, it does if you do your own research and analysis and have a long-term horizon, because in the short-term the stock prices do not move according to true underlying values. The stock may continue to go down despite the fact that it is way under-valued and we've seen that in the down turns of January and March 2009.

A technical analyst is like a doctor. When a patient goes in to the office with a problem he tells the doctor what is wrong and maybe guesses at what could have caused the problem. However, the doctor does not base his diagnosis entirely on the patient's word, he runs his own tests like the taking the patient's temperature, blood pressure, or taking blood samples for further testing. The patient may lie or be misinformed but the test will reveal the state of the body. The patient may say he just has a headache, but the tests may point to deeper problems which have yet to surface. In that same way, a technical analyst tries to run tests to figure out the state of the market, irregardless of other data - presented by the company or the media.

For example, months before Enron fell apart, the stock was dwindling lower. There was evidence of massive selling by the people "in the know". However, the executives (who themselves were selling stock), told the public that everything was just fine.

A technical trader tries to "measure" market psychology and "run tests" to find patterns which may suggest which way the security may move. After all, the ultimate goal is making a profit. It doesn't matter what the underlying fundamentals are as long as the security moves in your favor.

June 8, 2009 - Trends in DIG (Ultra OIL and Gas)

I was looking at DIG over the weekend and noticed very distinct technical patterns in the daily chart. Let's take a look at the chart:



On the left side a very obvious head and shoulders pattern is visible. A horizontal line has been drawn to indicate the relative top of this pattern to mark a resistance line for the uptrend forming at the right side of the chart.

Even though the trend has formed a nice channel to the upside, I wonder if it will continue to climb. Here the resistance line at around $32 will serve as a very important mark.

At the bottom of the chart, the MACD traces a bearish pattern - it has formed a higher "hump" at the May 11th top compared to the lower one formed around June 2nd. RSI is not indicating over-bought levels, although it has been above the center line for more than a month.

I own DIG in my portfolio and will look to close the position for profits at these levels if I see signs that resistance will drive the price lower.

June 5, 2009 - quick profits with counter-trend trading

Following the setup I was waiting for and posted on June 2nd, USD.CAD broke the sharp downtrend line and stayed above it for a day.


The long-term chart shows price breaking the down-trend line. Now lets focus on the shorter term chart to see the action better.



When price pushed above the steeper downward trendline, it triggered a watch for entry into a trade. The US Dollar then came back to retest the line, which coincided with the latest high. In this scenario, the previous resistance has become the new support line.

I got in at 1.0975 and sold at 1.1111 for a quick profit. Although I would say that this rise may continue for a longer time period, I did not want to over stay my welcome with a long position in a down trending market. After all this was meant to be a quick counter-trend trade.

If the support level is retested and holds I will look to get in again. For now, I am on the sidelines.

June 4, 2009 - intraday HNU.TO

HNU has been a hot topic in this blog and others over the past couple of days. I've seen many articles on nat gas and heard traders talk about watching this commodity closely.

This morning at 10:30am, the nat gas inventories reported an increase nat gas storage, which drove the price of HNU down to a low of $5.46. To see intraday action better, I've posted the chart below which shows a monthly chart of HNU, plotted on an hourly basis.


Most trading books, tell new traders to put their stop-losses just below the previous low. In this case, this would be at $5.50, a couple of ticks below the low of $5.53 on May 26th. This morning HNU went down just enough to hit these stops, only to bounce back.

Let's see how the rest of the trading day plays out....

June 3, 2009 - followup to HNU.TO

Today was an interesting day for HNU. The price dipped below $6 intraday, resulting in a single day drop of around 20%. Buying opportunity or time to run away?!?!



Even with today's drop we are still technically within the uptrend channel. Today the price touched the short-term uptrend line (drawn in blue) and bounced off it - however, this is not yet a clear signal of a strong trendline. More support is needed.

The chart has created a triangle pattern at the right side, squeezing the price between the trendline and the 50day SMA. The next few days will be a good test to see if the bulls will take-over and push the price through the 50day SMA or if the bears still have a strong presence.

Tomorrow at 10:30am the EIA will announce the Nat Gas inventories, which will no doubt effect the prices, so keeping the current chart pattern in mind, look for swings and false breakouts.

June 2, 2009 - USD.CAD picks up speed

Winds of change seem to be flipping the trends on everything these days. Keeping with the times, currencies have reversed trends.

Unlike single stocks which can be choppy and news dependent in the short-term, forex follows trends very well. Thanks to trading around the world and longer trading hours, the gaps seen in stocks aren't very common in forex.

The chart below is the one year plot of USD vs. CAD, on a daily period. Many trends are visible and have been outlined.


Among the most obvious ones is the quadruple top at 1.30 followed by many short-term trends.

A typical pattern is present in the uptrend which started in January 2009. The uptrend is supported by the trendline. Once broken in March, the line gets retested from the bottom at the beginning of April. Failure to break to the upside was the start of a new downtrend, which is outlined.

The downtrend has sped up multiple times from a slow and steady downtrend within a channel to a faster decline. The last trendline, is too fast and steep to be sustained. Although, looking at the sharp rise in USD in October 2008 proves that eventhough steep, this pattern can go on for a while before breaking...

I am looking for a counter-trend trade here. When the price breaks the current trend to the upside and stays above that line, I will look to buy USD and sell CAD. But only for a short period of time and for a quick profit. It is important to be cautious not to stay in too long as the trend is still to the downside. Tight stop-losses will help in this trade.

June 2, 2009 - HNU.TO Consideration

Natural gas is one of those commodities that has taken a massive beating over the past year. I've been following the ETF that tracks Natural Gas on the TSX: ticker HNU.TO

With the current changes in the market and the return of cautious optimism to investors I am looking to get into Nat Gas. There are fundamental reasons why the price of Nat Gas doesn't make much sense below $7, but I am not about to go over the fundamentals here. All information is reflected in the price action. Let's take a look:



Above is the chart of HNU.TO drawn with a 200day (red) and 50day (blue) SMA. I've drawn the lowers trend channel for the downtrend, and the 50day SMA has served as a very effective ceiling to the downtrend. However, in the recent days, we have seen a test of the 50day MA which failed, BUT here we are going for a retest. Given the recent volume, it shows many have returned to trading this ETF.

The RSI is near 50, which does not indicate an over-bought position. MACD has been trending higher for a while in a tight range.

I am looking at this for a long term trade as comodities usually set up long-term runs when the trend changes. I will look to build a small position here, and add near the $6.50 line.

June 1, 2009 - S&P500 technical analysis

It has been an incredible rally for the S&P500. With all the sceptisism and bad economic news, the fear has subsided and money is starting to flow back into the equity markets.

After a well supported rally to the upside a double bottom has formed on the S&P500 near the 880 level.

The following days will serve as an important test for the S&P500 as the 50 day and 200 day moving averages approach and price is squeezed between the two.

It does not make sense that the 200 day SMA be broken so easily and with light volume. I think that this break is a false upside breakout and we will come back to test the bottom of the double bottom in the 880 - 900 levels.

Only the future holds the answer.......