What’s so interesting though is that, like the market, many of these stocks have a shot at establishing a higher low on their daily charts relative to the July low - if this pullback finds buyers.

I should clarify, I was once told that “IF” is a really big word for only 2 letters.  That’s true, but let’s look at the financial sector ETF’s, starting with XLF.

By the way, the points stated below also apply to FAS and UYG, which I’ll review as well.

As a technician, I realize perfection isn’t to be expected when looking at a chart.  Algorithms and savvy traders alike recognize that the head fake breakout or breakdown can be a fabulous way to establish reversal positions.  And this is one such candidate.

With the July 1st low of $13.34 getting broken by a nickel just last week, XLF has stabilized (for now anyway).  I like that for a few reasons…

• First, it shook out some traders on that ‘breakdown’ through support.
• Second, it’s frustrating those who got short on the break, providing no follow through yet.
• Third, there’s a downtrend line just overhead which was established throughout August, which if crossed, would provide another technical reason for buyers to enter (or re-enter) the picture.

That leaves 3 potential trader types as would-be buyers if an advance begins…

1. Shorts would need to cover.
2. Shaken-out longs would want to re-enter.
3. New longs would want to establish positions.

So there is some appeal here, on both technical and psychological grounds.  Well-defined pivots like this from key zones can produce explosive moves - particularly when multiple groups of traders may be poorly positioned.

The Plan

With XLF churning over 70 million shares on an average day, this thing is not a fast mover.  Plus, it’s range-bound with the $15 zone offering formidable resistance over the past 3+ months.

I’m establishing a long position at current levels with an initial stop stop in the $13.20 area (1/2 position beneath last week’s low), and a final stop just beneath the $13 level.  That would be favorably offset with a potential move back up to the $15 neighborhood where key resistance resides.

The aforementioned $13 zone offered a multi-month peak back in May of 2009, and there’s an unfilled breakaway gap from August 2009 which could get filled on a continued slide from here.  So, I view that as an adequate loss-cut area for this trade.

If this thing is able to gather some traction, I’ll then lighten and tighten (peel off pieces on the way up and adjust my stop accordingly).  I’m expecting to be in it for a few weeks if it works, so I’ll be patient along the way.

Here’s a closer look at the XLF chart for you:

Chart courtesy of Worden

Not to be forgotten are the leveraged ETF’s, which offer more bang for the buck.  UYG is the Proshares Financial ETF, which is essentially the 2x levered version of XLF.  Using the same rationale, I’m looking for UYG to return to the $58.50 resistance area while using a stop of $46 should support happen to get broken solidly.

Here’s a closer look at the UYG chart for you:

Chart courtesy of Worden

Finally, the title of “most slippery” of the levered financial sector ETF’s goes to FAS, which is the Direxion Financial Bull, which is 3x the movement you’d expect to see in XLF.  Like the other charts, I’m looking for FAS to return to resistance, which is in the $24 area.  Should it happen to break down, a gap fill from August 2009 down to the $16.50 area would be my cue to exit.

Here’s a closer look at the FAS chart for you:

Chart courtesy of Worden

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If you were in attendance and didn’t get your question answered, look for it below. But even if you weren’t there, hopefully you’ll find this useful to observe.  I’m also happy to answer questions via the comments section below, so feel free to post yours there!

Here are 15 unanswered questions from the session:

1. Kevin: Jeff, what timeframe do you normally use in your charts, and do you let the bar close before entering a trade?

• Thanks for your question Kevin.  I focus on the daily charts for swing trades, and the 3-minute charts for day trades.  I don’t wait for the bar to close before entering a trade.  That might save me an occasional failed signal, but I feel it will cost me many other trades which work right from the start, so for me it’s worth taking my entries as they signal.

2. Ryan: Do you have any execution techniques that you like to use?

• Hi Ryan! I like to keep things really simple, so I use basic stops for entries and exiting losing trades.  That way, once a level has been crossed, a market order is generated immediately and I’m in (or out of) the trade.  I’ve tried to get cute in the past with more complicated orders or execution techniques, but in the end it made me no more money and often cost me opportunity (buying breakouts with a limit order, for example, as the stock never looks back). When I’m booking profits, I’ll use limit orders at my targets and let the stock come up and hit me, but that’s the only time I utilize them.

3. Moe: How can you scan the market for setups or make trades when the market is so volatile and so driven by daily events and emotions?

• Yes Moe, it truly is a news-driven environment right now, and it might be that way for a while.  I think the key is recognizing that I’m not trying to get in front of any news or predict what news may come along.  Instead, I’m looking to put capital at risk when there’s an expected reward, and in order to do that I need to be hitting the charts regularly.  Training your eye to do that will always leave you with opportunity, whereas waiting for emotions to settle could leave you sidelined possibly forever.  Remember, that emotion and volatility brings with it opportunity.  On the flip side, a trendless market with nothing but uncertainty brings with it very little opportunity.  Keep looking for trades, and keep your capital moving.

4. Guest: What sectors are you finding most of your trades these days?

• Hello and thanks for your question.  In terms of swing trades, I’ve traded many sectors and there really has been no consistency there to speak of.  When the right patterns emerge, I take the trades.  In terms of day trading though, I’ve focused frequently on the ags, financials, and energy names quite a bit in recent weeks, as they’ve been in play regularly.

5. Jon: Isn’t the general rule of thumb that in a correlation study, most of the correlation comes from selection, then overall market, so what we are looking for in trading is the small fraction which lead the pack on a given day which will then beat just trading the index ETF’s?

• Hi Jon, the recent discussion of being in a highly-correlated market (to the S&P 500, for example) carries with it some weight, yes.  And I do agree that what we’re after is to locate leaders and trade them instead of the ETF’s.  Keep in mind though that there will always be outliers which exhibit extreme strength or weakness, and those carry with them some real potential for good trades.  So, seek out momentum whenever possible, and you should find far better bang for your buck vs. the ETF’s.

6. Sam: Do you ever trade options?

• Hey Sam, I do trade them on occasion.  In longer-term accounts, I’ll short puts to establish long positions, then sell calls to collect premium.  I don’t do a lot though in terms of directional trading with options.  Occasionally when a stock looks to be very high risk, such as BP recently, I’d rather hold options overnight than common, simply to have defined, limited risk.  The rest of the time, I’d rather have the shares for the greater liquidity, less slippage, and more flexibility to trade extended hours or pre-market (if necessary).

7. Tom: Do you hold stocks into their earnings report or do you only trade following the report?

• Hi Tom, actually I never want to hold a stock into an earnings announcement.  Being a technical trader, it’s important for me that I can use the price action to determine both my entries and exits.  That’s technical.  When it comes to an earnings announcement, we’re talking about a major fundamental event, and since those usually happen outside market hours, I can’t control my risk.  The stock is so likely to gap big after that news that I might have no shot at closing the trade at my planned exit.  The excitement of potential ‘free money’ lures many traders into acting on their hunch, but it’s simply a coin toss and I am not about that with my trading.  So, I want to stay responsible and only take trades where I expect to be able to manage my risk appropriately.

8. Frenchy: What is your favorite ETF you like to trade?

• Hi Frenchy.  When it comes to the main index ETF’s, I like the usual SPY, QQQQ, and IWM.  Typically I’ll avoid DIA since it’s only 30 stocks, and that can complicate matters more.  In terms of leveraged ETF’s, I’ll go with SSO/SDS, QLD/QID, and TWM/UWM.  Those are double exposure, and while there are some triple exposure ETF’s out there, I find the 2x levered funds are enough to provide nice moves.

9. Leon: Do you believe a high volume move to the downside can be a reversal signal?

• Hello Leon, that’s a good question.  The short answer is yes, but it depends on how it happens.  A stock which has been in a parabolic uptrend will sometimes signal exhaustion in this manner, reversing to the downside on heavy volume.  Often, that’s followed by additional weakness.  However, a stock that’s range-bound which sees a high-volume decline on a given day may see no downside follow through.  So it can happen, but I’d be careful not to put a blanket statement across all high-volume selloffs that they’re reversal signals.

10. Jon: Do you feel price follows volume, or volume follows price?

• Hi Jon, this is a real chicken-and-the-egg topic, and there are cases of both.  For example, consider a stock in a pattern like a bull flag.  Price is consolidating, but one day edges toward upper resistance on heavy volume.  That will many times signal an impending breakout, so volume in that case tends to lead the way.  In other cases, price begins to gain momentum, and as the stock gets more attention, the volume naturally increases (following the move in price).  See CAGC in recent weeks for an example of this.  So it can happen either way.  Nonetheless, I care the most about price, so if I’m seeing volume kick in ahead of a breakout, for example, I’ll still want to see price confirm that before I look to make an entry.  That keeps me sidelined until I believe a real move is starting.  Just remember, price is of utmost importance.  If you’re on the wrong side of a move, it doesn’t matter if the volume is heavy or not, it’s still going to hurt!

11. Ryan: Do you have any interesting research projects in the works?

• Hi Ryan, actually I just recently completed a huge project with the creation of the Advanced Trading Course over at TheStockBandit University. That was a major project and I put everything I know into that course, so I don’t plan to do any other big projects for a while.

12. Layne: What indicators do you like to use?  Certain ones in certain markets?

• That’s a great question Layne.  I should say right up front I don’t rely on any indicators across the board, and actually utilize them rather infrequently.  However, there are times when they can help in the trading process, so I’ll put them on the chart when it’s appropriate.  A moving average, for example, is really only helpful in a trending market.  I just put out a post explaining how and when to use moving averages.  I will sometimes add ATR to my chart to see just how much (or how little) movement there’s been lately, and that’s another one which has been helpful for me.  If anything, the ATR value lets me know when there’s just not enough movement to offer real potential relative to the risk I’d be taking.

13. Jake: What are the setups that you look for on the chart before buying and selling?

• Hi Jake, first I’m going to look for the presence of a trend.  If there isn’t one, I’ll take a completely different approach in terms of what types of patterns I’ll look for.  If there is a trend, then I’ll be watching for continuation setups like flag patterns, pennant patterns, and triangle patterns.  And along with the price patterns, it’s important that the volume activity is confirming the price action, so I monitor that closely as well.  Taking note of the rhythm of a trend is another key element, as it helps me gauge whether I should focus more on breakout patterns or utilizing pullbacks to get on board.  There are a ton of ways to skin the market cat, but I’ve found it most effective to adjust to the environment you’re in rather than forcing one particular style at all times.

14. Ryan: Do you see the growing awareness and popularity of ‘technical analysis’ translating into an easier market to trade in the future, or a more unpredictable one as more retail money uses the same methods?

• Hello Ryan, another excellent question.  Technical Analysis 101 has certainly become more embraced by retail traders than it was even a few years ago, but my response to that is somewhat complicated.  First of all, I don’t think there’s a uniform usage of technical analysis methods across retail traders.  Take 10 traders and ask them to define a particular pattern, or ask when they should use a particular indicator, and you’re likely to get a variety of answers.  So that’s one issue I think that keeps everyone from seeing the exact same patterns or acting on them at the exact same time.  Another issue is a bit more vague, which is the program trading we’ve seen such a growing amount of in recent years.  Computer algorithms are likely preventing some patterns from fully maturing, or the institutional money heavily fades a breakout, causing many retail traders with tight stops to dump shares, only to see the stock head right back up.  So it can be pretty tricky out there, and for those reasons, I do not think the rise of Technical Analysis has resulted in an easier market to trade.  Bottom line is, ‘they’ will never make it easy.  You and I have to keep paying attention to what’s working and what isn’t, and do more of that which is working!

15. Guest: Have there been any patterns you’re finding that are working well in this environment?

• Thanks for your question, and yes there are.  I’ve focused more on trading the rising and falling wedges, as well as the “tilted” trend line breaks (like ascending or descending trend line breaks) for swing trading. For day trading, I’ve looked more for those exhaustion moves where news has caused an overreaction and the stock needs to come back in, so those are the ones I’d say have been most profitable to me in recent months. I also detail the most profitable one in the Advanced Trading Course.  The key is to remember that what’s working well right now will eventually morph into something else, so we have to stay on our toes and be willing (and able) to adjust when conditions deem it necessary.

Trade Like a Bandit!

Jeff White
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Many traders rely heavily on indicators, and while it’s my style to keep my charts nearly bare, indicators can be helpful.  I think where traders tend to get into trouble is when they rely solely on the indicators, rather than seeing how they confirm or deny the overall price action.

If you’re looking for a one-size-fits-all indicator to rely on in all market conditions, or which all stocks will respect, you’re going to be looking for a very long time!  However, if you’re willing to learn when, why, and how to apply indicators to your charts, they can be an aid to your trading process.

In this post, I want to show you how and when I use moving averages when eyeing potential trades.  It’s a very basic indicator, but when there’s a trend present, it can help you gauge momentum, as well as help you decide on entries and exits.

Let me suggest going full-screen with the ‘HD’ option for best quality in the video.

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Over at the main site, we posted another good month of trading to build even more consistency as we took a stick-and-move approach.  That involved both long and short-sided plays, most of which worked out quite well.  We took just a couple of hits, both of which were kept to a minimum, and easily overshadowed by all the other profitable trades.

So in this post, I just wanted to give you a look at how each trade unfolded and walk you through not only the entries and exits, but also the rationale behind each play.

Let me suggest going full-screen with the ‘HD’ option for best quality in the video.

Trade Like a Bandit!

Jeff White
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If that’s your attitude, you’ll be exactly right. Attitude is everything - especially in trading.

Using broad, absolute statements to ignore what’s right in front of you will help you be correct - only problem is, you’ll make no money trading.  And isn’t that what trading is about?  I’d rather make money than be right.

It’s dangerous to adopt the ‘waste of time’ mentality, now or at any other time.  Someone’s always making money, and therefore opportunity always exists.  Right now, whether you’re a day trader or a swing trader, this market is moving plenty right now.  We just rallied 12% in 6 weeks - how is that not enough? If you can’t pull some good trades during a period like that, then this game isn’t for you anyway.

Beyond that, the technical price action of late has been textbook - does it get any better than that?

We’ve seen multi-day rallies followed by shallow pullbacks, with higher highs and higher lows established along the way.  An uptrend line was tested several times before finally breaking Wednesday, and the reversal which has followed has been very decisive.  So whether you prefer the long or the short side, there’s been ample opportunity for you.

Here’s a closer look for you:

Chart courtesy of Worden

Finally, don’t be delusional enough to think you can call weeks in advance when a ‘real’ move will begin.  Remember, the market caters to nobody.  It’s not about being wrong or right on the timing either, it’s more about wasting the time between now and then by waiting and not watching for opportunities which are surfacing regularly.

Stay on your toes out there, and shun all excuses - a lack of success can’t be blamed on circumstances.  If you’re focused and you’re attentive to the price action, you’ll get paid for your time instead of thinking it’s a waste.

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Jeff White
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For those of you who were unable to attend, I’ve embedded the chat transcript below so that you can review the conversation sometime over the weekend. Hope you find it helpful!

By the way, if you were in attendance and did not get your question answered, feel free to either contact me or post your questions in the comments area and I’ll gladly address them.

Enjoy your weekend.

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Jeff White
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To the inexperienced, it may look like the move is done, but often times is followed by an encore of sorts.  Timing is everything, indeed.

Extremes can really pay quite well.  When fear is at its highest, it’s a great time to get long.  And when everybody and their mom is making money, it’s certainly time to raise cash.  But for the sake of this post, I’m not talking about buying a “generational low” or calling a long-term top in the market.  In fact, I’m not even referring to the daily timeframe here.

I’m talking about how some of the best trades will happen at extremes…

…the kind which are found intraday.

Profit Where Others Fail to Look

Define it however you like, but at the heart of it, an extreme is approaching quickly whenever a move is unfolding at an unsustainable pace.

That might be a parabolic uptrend, or intraday capitulation. An extreme is a price spike which is showing exceptional momentum now, but the enthusiasm is beginning to fade, and soon there’s going to be a reactionary move.

That reactionary move is the one you and I can catch most often.  I say that because once we see a stock that’s really on the run, the odds are that the easy money has been made for that particular move.  Attempting to join the move means chasing price without a clear-cut exit plan, and that’s a huge no-no for any professional trader.  So, the reactionary move is the money train for those who missed the original move.

What’s so funny is that most traders see a huge intraday run and just know they missed it.  Don’t be as closed-minded as them.  They drool over what it would have been like to be on board, and fail to recognize the opportunity that’s about to unfold.  Dare I say, a more defined-risk opportunity.

You Missed the ‘Move’ - So What?

Take Monday for example.  Education stocks bolted higher in the morning, ripping through offers on the way up as they painted the tape bright green.  By the time most of us noticed them, they’d already put up very impressive gains.

Maybe you saw APOL, ESI, COCO, DV and others up in the neighborhood of 10% in just the opening few minutes.  It looked like they could keep going, but suddenly the buying frenzy morphed into profit-taking, and thus, opportunity arrived.

RIG provided an excellent move for me (from Sunday night’s premium newsletter), but my most profitable trade of the day actually came in a short sale of ESI.  Let’s take a look…

ESI ripped higher by $9 right off the open Monday, but I wasn’t long.  It was up about $6 by the time I noticed it, and I’m not a buyer of that kind of strength.  So instead, I waited for the enthusiasm to wane.  And shortly after, it did.

The stock had painted a high of $95.62, and then backed off slightly.  It spent several minutes consolidating, and then on the 3-minute chart I saw something noteworthy.  I shorted at $95.10, set a protective buy stop up above, and waited to see if profit-taking would develop.

An hour later, the stock was more than $6 lower, trading in the low $89’s, and I was out of the last of my shares (after scaling out).  It didn’t last long, but the overreaction on the upside was followed by a nice reaction on the downside, and that was the move that paid me.

Here’s a closer look:

Chart courtesy of Worden

I outline my entire method for trading these extreme reversals in my Advanced Trading Course, so the specific details are reserved for students, but I will give you a few general pointers here.

Profiting from extremes begins with a mindset shift.  When you see a giant move, don’t kick yourself for missing it.  Instead, start looking for a way to profit once it’s over.  Be creative - the market requires it!

Take note of intraday extremes.  Don’t chase them, just watch them.  See if the pace of the move begins to slow down, and at the first sign of a turn, you’ll know you’re looking at an opportunity.  They will not all pan out, but the risk/reward associated with them makes them well worth studying, and often times quite lucrative to trade.

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But Costanza isn’t the only one who doesn’t fully understand Risk Management.  In fact, far too many traders struggle with this very topic, and it keeps them from surviving and from succeeding.

So, let’s look at 3 pillars of risk management as a way to keep it simple.  If you can nail these down, you should be alright.

Protect Capital

This is a biggie, no doubt about it.  Simple on the surface, but not easy to put into practice.

As traders, our capital is what keeps us in business.  Ignoring the consequences of mismanagement is a major mistake that’s not easily recovered from.  Those who fail to understand the importance of first preserving what they have tend to place profits ahead of protection.  That leads to the age-old error of eyeing new trades with only potential gains in mind, rather than placing equal importance on potential losses if the trade fails.

Capital comes in two forms…psychological capital and trading capital.  Both must be protected with vigilance.

Psychological capital is the amount of inner strength, confidence, and willingness to take risks that a trader possesses.  It can be eroded through many mistakes, and it’s not easy to replace.  Protecting one’s confidence as a trader is paramount to staying in this game, because the trader who’s unwilling to pull the trigger when good opportunities come along won’t ever win.

Trading capital is what’s available in your account, and it’s of course the type of capital most are familiar with.  Money can be more easier to replace than confidence, but it’s still critical to manage risk in such a way that your account stays intact.  Traders who disregard the importance of keeping an adequate capital base find out quickly they’re unable to profit big enough to matter, even when they’re right.  So, try to maintain account highs as often as possible, and you’ll find your account is growing on a regular basis.

Trade YOUR Proper Size

This one will vary for everyone, so the secret is to make sure you’re trading position sizes which allow you to be at your best.  That means avoiding trades which mean too much, both psychologically and financially.  Let’s look at those one at a time.

Psychologically, the ability to recover from a loss is something we all must ensure.  Taking a big hit from a trade which didn’t work out leaves us vulnerable to anger or despair, and neither are beneficial to our trading.  Anger promotes revenge trades, and that typically leads to digging a deeper hole than that which we may find ourselves in.  Despair leaves us so focused on our emotions that we fail to recognize good opportunities when they come along.

Financially, we never want to be trading so large that we can’t recover from a loss.  Taking a fairly large position when you’re confident is one thing, but dumping your entire account into a single idea is another.  Consider the math behind poor trades, for example.  A 20% loss in your account will require a 25% gain to get back to flat.  And the deeper that loss gets, the more that’s required to make it up.  Taking several smaller trades instead of one big one might require more management, but it can also greatly help to avoid one major disaster.

Exit When You Know You Should

This sounds really simple, and it is, but it’s the follow through which makes this one difficult for some.  Making a trading plan is one thing, but sticking with it can be another issue entirely.

It’s all about discipline, and that isn’t going to change.  You know at which point you’ve stayed too long in a position and the time has come to kick it to the curb.  All of us know what it means to blow stops, and most likely, it doesn’t pay off when we do.  That’s a self-inflicted mistake that can be avoided, provided some measures are taken to help automate the process.

Here’s the thing…defined risks are the best kind.  Pick your exit at the same time you select your entry, and commit to it.  If you struggle with that, set a stop order the moment you’re filled on your entry, and then you won’t have to make a decision under the gun.  If you get stopped, you most likely just saved yourself some additional pain.  But you’ll be managing your risk effectively and reinforcing discipline even when you’re wrong.

If you’ll protect your capital, trade your proper size, and get out when you know it’s time, you’ll be doing 3 of the things the most successful traders focus on.  How can there be any downside to that?

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Jeff White
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For instance, (and this changes periodically, hence no hard-set rule), not long ago the market was in a bit of a routine of not doing much for the opening hour or so, and then finally we’d pick a direction and make a move. When I began to notice that, I’d get extremely picky with which trades I’d take in the opening hour. Once that routine changed and we started seeing cleaner moves right after the opening bell, I was again willing to trade whatever happened to be on the move.

Listen With Your Eyes

There are always timing themes you can pick up on if you watch closely.  An obvious one is that it’s common to see stocks get quiet around the east coast lunch hour as traders step away, so that’s a good time to stay pretty quiet with your trading.  Sometimes we’ll settle into routines of making big moves in the final 30-45 minutes of the day, offering some nice potential late in the session.

Just keeping a close eye on these kinds of things, or keeping a trading journal will help you to identify common behaviors of the market and notice times to stay away or be more active.  Stocktickr has a time of day feature which will tell you which times of day are best or worst for you, among many other stats it’s able to generate, which makes it a great tool to check out if you haven’t already.

Here and Now

One thing I’ve paid attention to lately is the rhythm of the market moves.  The market has been volatile and very reversal-prone, and yet there has been some order to it if you look a little closer.

Taking SPY as an example, we’ve seen several moves take place, both on the upside and downside, of similar duration and size in the past couple of months.

For these examples, I’ve counted the bar where a low or a high is set as bar 1, and have used the final bar of the move as my total.  In the chart below, we see from the flash-crash May 6th low, there was a 6-day bounce before a reversal kicked in.  And from the July 1st low, we’re now sitting on a 6-day bounce (through last Friday).

We’ve seen a pair of 9-day declines as well, starting from May 13th and ending on May 25th, and another from June 21st to July 1st.

Here’s a closer look for you:

Chart courtesy of Worden

Paying attention to the size, duration, and general rhythm of prices carries tremendous benefits to you as a trader.  Watching for chart patterns is a great place to start, but don’t just stop there.  Study price moves closely, and see where it gets you.

What have you noticed lately?

Trade Like a Bandit!

Jeff White
Swing Trading & Day Trading Service
www.TheStockBandit.com

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