Monday Game Plan

Here is my game plan to being the week. This is taken from the Trade Report, sent today to subscribers:

January 26, 2009

1.  Market Notes:
While the focus of my swing trading style is daily charts, I look at a few weekly charts every Sunday.  I do not use the weekly chart for specific entry, rather to help me define major support and resistance levels.  
On the SSO chart below, we see two key support levels.  The first is the November low (around $18).  The second is the bottom of the trading range formed at $20.  The other lines on the chart are resistance lines, which can be used as targets.  
Technically, SSO is almost oversold on the weekly (note that it is not on the daily) and RSI shows a positive divergence.  I didn’t market it on the chart, but notice that RSI is higher now than it was at the previous low.
 

Entry conditions:

A.  Intermediate term time frame
Traders with an intermediate term time frame (a few months) can enter here with a stop below the November low.  The initial target is the top of the trading range.  If entered at $22, with stop at $17 and an initial target at $30, the initial reward to risk is 2.67:1.  Waiting for a pullback would offer even better risk.
If the trade works, and the $30 target is hit, I would take partial profits, move my stop up and move my target to $35.  
B.  Short term time frame
Traders with a short term time frame should use the bottom of the trading range, not the November low, as the stop level.  I would look to enter on weakness, possibly around $21, with a stop under $20 and initial target of $25.  an entry at $21, with a stop at $18.90 and target at $25 would give a 2.5:1 reward to risk.  Setting the stop at $19.90 would give an even better risk ratio,.  I use a wider stop because of the increased market volatility.  
If stopped out of this trade, I would look to re-enter if the market tested the November lows for another quick, low risk trade.  If the target is hit at $25, I would take partial profits, move my stop up to entry level, and target to $30.
Trading Note:  I am focusing on risk for these trades.  Since the market is not at extreme oversold levels (T2108 and stochastics are not extreme yet), the probability of the trades working is not as high as if we tested the November lows.  This would create extreme conditions for T2108 and stochastics.  I label the SSO set above as low risk, average probability
2.  Sectors ETFs
Here are a few sectors that look promising.  You can trade individual equities within the sector, or just trade the ETF.  
FAS:  The leveraged financial ETF has been a volatile and gut wrenching trade.  So far I am one for two, with a third trade in progress.  My current trade was entered in the mid 7 range and is currently at $9.  As I learned from the loss I took on my first FAS trade, early profits are to be taken quickly, so I took partial profits at $8.90.  
The beauty of partial profits is it keeps you in a trade if there is a big move in the direction entered.  Of course it can limit gains, but I believe what is given up in gains is worth the profit it keeps in case the gains don’t hold.  My favorite part of the trade is when I lock in that initial profit and the rest of the trade is “free”.  
If not yet in the FAS trade, I would wait to enter on weakness, ideally as close to the bottom as possible.  An entry in the $7-8 range with an initial target between $10-12 and a stop at $6 would give us a good low risk trade.  
Aside on risk and picking bottoms or going against the trend:  
Whenever I propose a trade like this, I get e-mails (mostly from blog readers–subscribers understand my trading philosophy much better) telling me that it’s tough to pick bottoms, I am gambling and stocks making lows can go lower.  I certainly am not gambling, and I know the stocks can go lower.  If anybody doesn’t understand by now, my focus is on risk and probability.  If I can find a trade that risks only $1 to make $2.5-5, I am going to take it regardless of other market variables.  I don’t mind taking small losses where risk is easily defined, especially if technicals are extremely oversold (creating higher probability of a short term snap-back).
USO:  I sent out a trade alert on Friday letting you guys know I was entering USO since I had not mentioned it as a setup in the report.  Amazingly, it jumped just a little while after the alert.  This is another low risk setup, or was a low risk setup.  The move on Friday has increased risk if entered at the current level.  Stochastics are also nearing overbought levels.  If looking to enter, hope for a pullback as close to support as possible.  The target is $35-36, with a stop under the support range.   
XLB:  The materials sector is showing a good accumulation pattern, as volume has been positive since the November low.  The uptrend in the OBV indicator confirms what our eyes see in the chart.  An entry close to $21, with a stop at $20 and target of $24 offers good risk.  I usually post leveraged ETFs, but did not here since price is under the 50 day moving average (lowering probability of trade).  Those wanting increased leverage, use UYM.
XLV:  Healthcare shows a strong price pattern.  Pattern buffs will notice the inverse head and shoulders pattern that is forming.  Classic entry requires a breakout of the resistance line drawn in the chart.  I prefer early entries, and find entry here with a stop below the recent price range (stop at $25), provides a low risk trade.  I again did not post the leveraged ETF since this would be considered an “early” trade.  RXL provides increased leverage.
  
GLD:  Gold has been the easiest trade imaginable for those who trade extremes.  The last 11 times price has been either extremely oversold or overbought, according to the stochastic indicator, price reversed.  Not only does price reverse, but most of the trades provided big gains for those trading the extreme.  
We have now reached extreme levels again.  I will look to short on strength (90-91) with a stop above the October highs (93) and target $84-86.  While I use GLD as my guide, I will useDZZ or DGZ.
EWZ:  A number of counties, including Brazil, show more relative strength than the U.S. market.  EWZ looks good on a pullback, with a stop under the recent trading range and target around $40.
3.  Individual Stocks Focus List:
My focus this week is on the 7 sector ETFs (and ETNs) listed.  While these 7 charts will likely be my primary trading vehicles, I am still looking at some individual stocks.  
I have already gone over all of the focus list stocks via videos last week.  The analysis still applies.
MASI (short), HOC, RIMM, SSYS, SHLD, VAL, SIGM, CSTR, NOC, SGR, SVU, SVU, ELS, TTES, SLV, STR, USD, SU, PNRA (short), CBRL (short), ACI, CBI, FSLR, X, GFA, IIVI, PKG, GNK, WGOV, PLD, MEE, HP, CGRP, KALU, SID, IDCC, SIGM
New Additions:
BRCM, GOOG and QCOM
All three stocks show similar patterns.  On the BRCM chart, we see a positive divergence in OBV and RSI.  Price is holding above the moving average and volume shows accumulation.  I like all three on pullbacks to support.
4.  Current Positions:
Long USO, FAS, SHLD, TTES, STR

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