December 17 - Counter Trend Trading (GLD)

In today's post I will show a high probability counter-trend trading strategy that I often use with a great success rate. This is what technical trading is all about; to recognize patterns which have in the past yielded a certain outcome and are "highly-probable" to yield the same result again. Of course there is never a guarantee that the pattern will play-out the exactly the same and that's why stop measures are taken to reduce downside exposure in case the trade doesn't work out.

Below is a daily chart of GLD which is the StreetTRACKS ETF for Gold:


Now this is obviously an after-the-fact plot which demonstrates the result as it has played out. The pattern before the breakdown around the 7th is that of a steady uptrend following an uptrend channel. Then the price runs away from the trend and starts a sort-of a "panic" buying frenzy where the new trendline has a sharp slope to the upside. These buying frenzies are often unsustainable, especially in heavily traded larger stocks/ETFs.

Near the end of the sharp uptrend the RSI shows an over-bought situation. On the day of the break the volume shoots higher than the average volume as traders sell out of this ETF and create further downward pressure. At the point of a confirmed break a short position should be initiated with a stop to the upside either in the form of a stop-loss or buying calls in the ETF.

Since the break the stock has declined a good 7% while consolidating near the "pre-frenzy" trendline and at the right side of the chart it looks to be bouncing back from the steady uptrend line.

For my trading this has been one of the most effective and profitable.

December 16 - GOOG and AAPL

Google:
I am still watching Google for signs of weakness as it has run up very quickly in the past couple of weeks and is now trading in a narrow range, where the bulls are being kept at bay at around $600. I will be looking at selling March 700 CALLS which are today trading around $4.20/share. I will look to slowly initiate a short position as signs of a downturn begin to show.

Apple:
This stock's explosive rally has come to a halt and it is now trading tightly around the $195 - $210 range. I'm bearish on this stock and looking to initiate a short position. I think the calls are trading cheap so instead of selling calls I am considering shorting the stock and buying Jan 205 or 210 calls as a hedge incase we start 2010 with a rally.

December 4 - AAPL Short

Following my last posted article on Google, another one of my favourite trades is currently AAPL. The current setup is a perfect resistance and trend break scenario.

The recent trend upwards has now come to a halt as the stock found a local ceiling around the 210 price point. This is not surprising as I think AAPL's price has risen too far and too fast - not to mention surpassing its pre-recession highs.

Below is a daily price plot of AAPL with my drawn trend lines:


As AAPL breaks the uptrend and starts to move down, I would look to straight out short this stock. Unfortunately I will not take a short position today as I will be on vacation next week and unable to monitor it. So I will be selling out-of-the-money calls for Jan 2010.

November 27 - Google Trade Watch

One of my favourite stocks for short-term trades has to be Google. Over the past couple of months this stock has had an amazing run up following the market's rally. However, in the recent months it has run away from the market and has started a steeper upward slope. The plot below shows a weekly chart of GOOG with my technical annotations and trend lines.

My counter-trend analysis tells me to watch for a possible break of the recent buying frenzy. Technical signs point to a possible slow down of buyers as volume has steadily declined over the past two months. The RSI is in over-bought position above the 70 line. The MACD is keeping steady and not providing any signals yet, but I would watch for a cross of the faster line over the slower (black line over red).

The daily chart below, shows a more granular detail and possible signals to initiate a short.


I will look to either initiate a short position in the stock or sell near-the-money calls on Google as the trend breaks.