04-27-14 Trade Plan

Last week was an incredibly slow week for me as I entered no new positions and trailed my stops in the energy positions I had.  When I am looking to load up my portfolio with relative out performers I want there to be a good (at least semi good) looking setup taking place in the S&P, and even better in the select SPDR sector ETFs (whether long or short).  The fact is that we are in a range and when price is extending to the outer bounds of that range I don't want to be getting long near the top of it or short near the bottom.  This isn't a nice tight consolidation either, this is large distribution swings.  That doesn't mean this is the top, the market will do what it wants (especially with QE pumping through the veins) but this is distribution Wyckoff style.  On top of that there has been absolutely no recovery in the NASDAQ 100 or the Russell 2000.  Both the weekly and daily charts are looking bearish.  Remember the Russell 2000 is what led us higher to start 2013 rally, and could now be leading us lower.

Bonds and gold both put in nice weekly candles but the S&P did not.  I have liked bonds for a while and continue to as they perform well, trailing stops accordingly.  Gold is giving some problems for the longs but printed a nice weekly candle last week so we will see where that goes.  Remember the accumulation/distribution bars I used to talk about?  Well the S&P printed one of those pesky distribution bars on the weekly in front of about two other distribution weekly bars up here (50% or more off the high = distribution & 50% or more off the low = accumulation for those that don't remember).

Looking at some of these sectors it is clear we are in a defensive market.  The thing about being defensive vs. going to cash is that the big institutions have no choice in this matter.  Joe Fahmy said it well that these big dividend paying stocks are the new cash or the new bonds for these large pools of money.  Energy is the most risk on sector that is catching a bid which is one of the reasons I like it so much and of course utilities and staples are still ripping.  So those are the three bullish sectors.  The bears have some pretty important ones in their pocket including financials, technology, healthcare, & discretionary.  Those sectors are the bull market we have been in, and without them I'm not sure it can continue (that's your cue, Yellen).  Industrials and materials are both in ranges which I just consider neutral for now.  So that is the make up of the market and it is just a matter of who wins the battle in the S&P to determine where I will be trading and in what direction.

Emerging markets fell apart last week before I ever got into them.  My reasoning was that I had already done extremely well with bonds and energy in a period where people were blowing up their accounts buying dips in momentum names so I really wasn't and am not looking to push my profits back into the market.  It had nothing to do with the setups.

This internal is a huge clue that the bears could be taking control here.  I don't think I need to do much explaining but I will say that just looking at the price of the S&P we are in jeopardy of putting in a lower high which would be significant.  Then when I look at this I see confirmation that a lower high is indeed a high probability with great risk reward as a trade (which does bring in new sellers).

I fully expect next week to be an active one with the FOMC coming out, GDP, employment numbers, ISM manufacturing, and a market in jeopardy of selling off which is probably why this post is so long.  I came across some great material yesterday that I wanted to share with you all - The RSI Series by @gtlackey.  RSI has been my primary indicator since I started trading literally so just from experience I understand the nuances and tricks behind it but I haven't ever found a place that has quantified it like he and Andrew did.  If nothing else, I highly suggest you take away from this the bull and bear ranges.  This is a concept I have used forever, in a bull move 40 is oversold and in a bear move 60 is overbought.  This is why people always get run over in a bull move when they are using 70 as the overbought level, when in reality 80 is.  Some of you that have followed me a while may remember when I used to have lines on my RSI at 20, 40, 50, 60, & 80.  Well that is what I was reading and still do but in a simpler way.  It is great stuff and I highly suggest you take time to study it if you use RSI as your primary indicator.

So I think I covered all the bases I wanted to cover this weekend.  Remember risk management is the most important part of trading.  As always I am on stock-twits and twitter @M5amhan

Trade well,
-Michael