Continuing our little demonstration of how I do a Day Trade, when I do them, here’s the chart at the start of today:
How do I read this and what would I do today? (Realizing this is mostly a hypothetical for me as I’m more likely to have tea or vino with the bunny in the garden than make a trade today, just because I’m not feeling all energized and willing to be strung out today ;-) The garden is more relaxing…)
First off, we had a rip up off of the bottom yesterday. It happened on rising volume. Volume is now to the upside. I’d expect that to continue (possibly for several days, but for that long a time, one must move out to a longer time scale chart…). So I’d “go long” and stay there. (Or, if already long, I’d not sell now, but wait for a topping signal to exit).
MACD has crossed zero, headed up, blue on top. Time to be in, not out.
DMI is ‘blue on top’ and while slighly looking inflected to flat, that can be an ‘at the close’ artifact, so watch for it to head back up later in the day. ADX (the black line) is still way below it, so we ‘have a while’ before blue crosses black, and then longer before black inflects down and the day trade is ending.
So, were I in this for real, I’d be long (well, I’d be long from a buy at about 2:30 ET yesterday) and riding it for at least the day trade, and perhaps a longer “swing trade” waiting for the upward momentum to fade.
I “made the mistake” of leaving the S&P 500 index on this chart so GLD is not the gold line, S&P Index is. But note that gold, the blue line, and TLT at egg yolk yellow, are both dropping. Really big money is needed to move those so much. So big money is moving out of ‘risk off’ assets and buying risk (i.e. stocks). Time to be in, not selling stocks, is what that says to me.
I have a mantra I’ve used at bottoms. Oddly, it seems to work at day-trade time scales and at major duration (years) time scales. “Crash, Bang!, tinkle…” Market Makers and trading houses are no smarter than anyone else, and have no special gifts. Just a much fatter wallet (so ‘fattest wallet wins’ is in their favor) and price setting privileges. They need to KNOW you have been washed out before they run prices back up. So they tend to ‘bang on it’ a few times to be sure. Notice the 3 down spikes at the bottom? Then yesterday 1/2 way through the day it doesn’t quite make a 4th? “Crash, Bang!, tinkle…” time to buy… Prices then cleanly cross the PSAR “buy” signal, cut over the SMA stack “buy” signal, and we’re off to the races.
At this point, I’d be “long in day or swing trade”, watching the 10d 15 minute or maybe the 5 day 15 minute chart, and expecting to exit at the SMA stack of the 6 month daily chart on a ‘counter trend swing trade’. Why? Well, that ‘counter trend’ part is the key bit. Your context sets your trading rules. On long up markets, bias is to be in and ‘buy the dip’ is trading WITH the trend. After a top, bias is to be out or short, and any ‘buy / long’ is ‘counter trend’. So lets look at our context charts.
Update after the open:
Let’s step all the way back to a multi-year weekly tick mark chart. This is more useful for most investor sorts. It is your context for weeks to months and even a year+ at times. Notice that the ticker is SPY an ETF for the S&P 500 major US stocks. IFF you are in the USA markets, it is a very good guide. But IF, for example, you own British, EU, Australian, or other segments (like TLT bonds or some sector mutual fund) you simply MUST use the chart for the thing you are trading. This is only useful as context for the USA markets. (If anyone wants an example based on some other market or sector, holler, and I’ll put up a chart for it, too. The S&P is very well behaved due to being very large, compared to some others.)
Notice that price has cleanly crossed to below the SMA stack? The SMA lines have merged in what I call a ‘topping weave’. That means the long long bull market run is over. Yes, over.
RSI is an early indicator. It had been wobbling between 50 and 80 in a bull market. Now it has failed to reach ‘near 80’ back around March, saying ‘end is coming’ and has now moved cleanly below 50 into ‘bear market’. It will (eventually) be doing a wobble between ‘near 20’ and 50 during long bear market stretches. But for now, it’s just a touch below 50 as in the last “correction”. So the ‘bear market’ is not confirmed, yet.
“But you just said the bull market was over?!” – Yes, but that does not a confirmed bear market make… This COULD just be a long ‘go flat’ and a renewed bull market later (like in about June 2012). So for now it is “bear market rules”, but “in a top weave”. Later it will become a confirmed bear market once price returns to the SMA stack from below, then falls away lower without crossing.
MACD is similarly ambiguous. It is ‘at zero’ and ‘headed down’ and with ‘red on top’, but not yet fully below zero… So a bit more to go to be ‘confirming a bear market’.
DMI however is screaming “BE OUT!!!” and has been for about a month. Strong ‘red on top’ and with increasing strength (black ADX line rising).
“But but but!!! you just said above ‘time to buy’!” – Yes, on THAT time scale as a ‘day trade’ or ‘swing trade’. Attempting to catch that return to the SMA stack from below. NOT my favorite trade, BTW, as timing has to be very good and if some AwShit happens (like China doing something stupid on capital controls) the SMA stack and price can converge, but from the SMA lines coming down, not price rising enough to cover transaction costs… Unlikely, but happens. I prefer trading “with trend”… but as of now, the trend is only weakly ‘bear market’ as it isn’t confirmed yet.
And for anyone who didn’t sell in the crash, but wants out, it is better to wait and see if this confirms or not before selling. Personally, I’d sell at the SMA touch on the 1 year daily and buy back in if it fails to reverse; but that’s just me. Speaking of which, that chart:
Well, looks like markets opened “gap up”, who knew? ;-)
Which helps to illustrate why on a swing trade basis you can’t wait for the open to buy, but need to have taken a position ‘long’ when the Market Makers did at that inflection point yesterday… They have now set prices up so that the guys demanding a buy ‘at the market’ today still make a profit for them from the prices they paid yesterday…
OK, so on this close up we can see at the right edge that the SMA stack is inverted. Shortest time period gold line has gone from on top to on the bottom and red long duration has gone from below to on top. Given how far price has moved, we also know it will stay that way for a while, so can say that the ‘topping weave’ at this time scale has resolved into an inverted SMA stack. Bear market rules ‘for a while’, and that makes a return to the SMA stack from below a ‘counter trend swing trade’. Risky and be fast about getting out on an approach to the SMA stack.
MACD is ‘red on top’ and ‘below zero’ so ‘bear market rules’. DMI is red on top too, though the red line has clearly and strongly inflected. (The MACD looks like ‘inflection soon’ / crossover soon).
Then I’ll just mention it as it doesn’t need a whole new chart: RSI was hard at 20 on this time scale, saying “buy now up soon” about 3 days ago.
So our context is that after a very long somewhat tired Bull Market, we had a ‘topping weave’ for about 3 months, and have now resolved into a bear market. Then we had the “scare them good to start the stampede” heavy shorting event, next comes the ‘relaxation set the value trap’ happens to get some money out of those folks who have been trained to ‘buy the dip’ for 7 years of bull market. And, at the SMA stack, the ‘return of the shorts’ ought to happen.
The ‘trade’ is to be long until near the SMA stack, then exit long positions and prepare to short. Bear Market Rules are: Fast trades only if in a counter trend long position. Bias is to be short (but only a weak bias until bear market is confirmed).
And with the Bear Market Rules firmly in mind, and with that 10 day or even 5 day 15 minute fast chart as the trade guide for Fast Trades; then it is reasonable to be ‘long for a swing trade’ back to the SMA stack on the 6 month daily chart.
And that is how I do this stuff.
A lot of work? Heck yes. And high stress too. That’s why I spend so much time with the bunny in the garden ;-)
Hopefully this will help folks see how to use these tools to improve their own trading. What? You think you are an investor and not a trader? Every investor is a trader at the moment of the buy and sell… Choose that moment well, you can then stay ‘invested’ for months with much more comfort.
Here’s a live link to BigCharts for folks to get their own charts done:
This chart shows the EWA Australia ETF that had a topping moment back in about May. You can then see how it returns to the SMA stack about end June and again start of August. Note how the ‘down legs’ become steeper and the ‘up’ back to the SMA stack shallower? That means more gain by being short the down legs than by being long (owning) the up legs. And that is why ‘counter trend long trades’ are not my favorite. Eventually it isn’t up/down but flat/down alternations…
Update Mid Day
A note on types of trade:
Day Trade: Often used to mean a trade that is done in a day or two; formally it is a trade that is started and ended in the same day.
Swing Trade: A trade that looks for a ‘swing’ of direction and rides that swing until it ends. Often a day or a few days in length.
Trend Trade: Looks for somewhat longer term trends and tries to ride that trend for a week, a month, or as long as it lasts.
Inside a 3 month bull market trend (and the associated Trend Trade) there can be a 3 day down / bear ‘swing’ and the associated short in a Swing Trade, that might well have a 1/2 day bullish up run and the associated Day Trade that particular day. It is important to remember just which trade you are doing and only enter / exit on that trade on that time scale. While you can have a more complex strategy, such as having a long term trend trade with, say, $10,000 of mutual funds you can only sell end of the day, and yet put on a ‘swing trade’ bear position (often to protect the trend trade), I prefer to do that with a different vehicle. So, for example, buying a put on the S&P 500 index if I’m long a Dow Industrials or a S&P 500 Dividend fund. I find it easier to buy / sell the put and not touch the fund; than to try swapping in and out of a large fund position for that swing, and then not just forget all about the trend I was originally trading…
Here’s the chart as of now. It is just starting to shape up as a ‘sell the swing trade’. I’d likely do that had I bought yesterday. I would expect a bit of fade down toward the end of the day, then a dip at the open tomorrow (as the Market Maker reloads inventory for the day) then continuing on toward the SMA stack on the 6 month daily chart (or 1 year daily, same thing) with occasional dips to reload inventory and rises to sell it out. So on a ‘trend trade’ you could just stay in for that trend back to the SMA stack. But the ‘swing trade’ over the last few days is likely going to take a break, and the day trade inside the one day is almost certainly about to signal ‘sell’.
Here we can see that MACD is starting to look like ‘crossover soon’ to red on top (though still above zero) while DMI has had blue cross under black, just need black to inflect downward. Also note how PSAR is approximating price. It will also cross over soon and that’s the ‘sell’ on this time scale (day trades and swing trades – swing especially on an hourly tick mark basis 10 day chart). Volume is drying up a little as prices move upside, which implies a lower turn, but volume has a normal sag mid-day, so hard to eyeball (it would benefit from some normalizing statistics and anomaly presentation…)
It is possible, at this point, for MACD to more or less go sideways at a positive value and similarly have DMI+ blue line go sideways at a positive value and prices just drift up into the close. Sometimes I’ve put a close stop loss behind it at this point and just keep nudging that up as prices rise; that way I never have to decide when to sell, the market does it for me. (Only issue is the potential for a ‘surprise’ at the open the next day, so close and reset any open trailing stop loss orders at the end of each day. I usually avoid stop loss orders in the first and last 1/2 hour of the day).
Also, while a bit early to say for sure, that gold is mostly flat and TLT Bonds has a slight rise, implies money flowing into them which implies the Big Boys are pulling some cash off the stock table… Remember, though, this is on the day trade scale, it can be quite different if you are running a trend trade two time scales out…
Update: After the close
So how does it look after the close? “Well that was fun…”
After my (hypothetical) exit that was just about the local top, there was a rather large spike down, then a big rally back. For my ‘not quite a day trade’ style (as I don’t have live quotes and that 20 minute delay on quotes is a real killer on day trades) of fast swing trading, my exit was “not bad”. But a real live quote day trading operation would make more. (See the second chart below…)
For the ‘trend trade’ (really a ‘counter trend trade back to the SMA stack’, but they both happen at trend trade time scales so kind of silly to keep typing that whole thing each time…) trader, they would have had to bite their lip for the hour or so it took to dive, and recover. Here’s the ‘at the close’ chart:
PSAR called a nice easy exit about 1:30 near the top. The SMA stack is setting up for a longer term continued trend upward, so if staying in for that return to the SMA stack on the daily sized tick chart, one could ignore PSAR.
MACD had a crossover to an ‘exit’, but is still above zero, then seems to turn sideways – indicating a continued longer term rise possible, but at a slower rate. (It does that sometimes). DMI had a crossover and ADX inflected…saying ‘get out’ at about the same time, then promptly had another crossover to blue on top saying “oh, now get back in”. As a day trader, no problem (see below). As a trend trader that would be a whipsaw tossing you out and back into your position. For me, I’d have been out for the day with my swing trade done and unlikely to enter a new swing trade inter-day as that is just slowly dragging me into a Day Trader time scale. I would be waiting, in cash, for tomorrow to decide if I were going to get back in for the Trend Trade to the 6 month daily SMA stack, or look for the next swing set-up.
Basically, the whipsaw at the Day Trader time scale has muddied the readings on the swing trading time scale and I either need to go longer (trend) shorter (day trade) or sit out and await the next swing trade medium speed clear set-up call. I have a rule of not changing my time scale on any given trade, so I’d just wait for the cash to settle and plan while waiting.
Day Trading Very Fast Charts
And here’s that Day Trader chart. Yes, you could ‘sort of’ do it off of the 15 minute ticks, but when you already have delayed quotes, to then wait for them to average… you are trading on nearly 1/2 hour old trends; and when a day trade may last all of an hour, that’s a long long gap. Also remember that if playing that time scale, you don’t just take an hour off for lunch and come back to ‘check the chart’, or even take 15 minutes for coffee… It’s update and evaluate every 5 minutes. ALL day. (Why I don’t typically Day Trade…)
First off, notice that PSAR is more jumpy during those long slopes. Lots more whipsaws. At the reversals, it’s fairly useful, but how do you know one of those tiny sags isn’t a reversal until it is in the rear view mirror?…
Next, the SMA stack is a bit messier. I could likely move to a slower stack, but I’ve deliberately tightened this one up to a 10, 20, 30 stack ( 50, 100, 150 minutes) as that ‘bit over 2 hours’ longest scale is starting to be a significant percentage of the trading day… Note that the 20 / 30 crossover seems to call the reversals well for this volatile a market. (Flatter markets do not have such good definition, BTW).
I have RUT and QQQQ on here too. It’s pretty clear that Tech is still hotter than the “small caps” with SPY the middle / average runner (DIA Dow Industrials sits almost on top of SPY so why clutter this chart with it?…)
You can also see that GLD Gold didn’t tell us much at this time scale. Why? There is a ‘daily fix’ of the price… in London…
Taking the other indicators from the bottom up: DMI has a nice red / blue crossover to get in about 1 PM yesterday, then get out about 2:15 today. A bit of a lag behind PSAR, but a good confirmation. Note that at about 3:15 to 3:30 both of them (and MACD) said to hop back in for that close into the end.
But MACD had said to exit (via the crossover) just after the open this morning. This is where knowing how each indicator speaks and what it is saying matters. Being able to shift your context. MACD was saying “Hey, this thing is fairly flat after the open. No reason to be at risk, step out. Get back in after a dip”. DMI is slower and was saying “Hey, we’re up from yesterday and while the trend is weaker, it’s still up, hang in there”. You get some of that same message from MACD above zero… So for MACD you look at the crossovers AND the slope (gentle down so a weakening run, not an over and done run) AND position (above zero so still positive, even if weakening and slowing to a drop).
Basically that MAC crossover says that the lines of the SMA stack are starting to converge, but not crossed over yet. And the crossing of the zero line says SMA stack has rolled over. But since you can set a different rate on YOUR SMA stack than is used for MACD, you can shift them some relative to each other and get slightly different information ( or think of it as shifting the time scale your SMA stack looks at to be faster or slower).
Finally, volume. As this is such a fast time scale, volume bars have more to do with individual news items than trends. The news reported that there was $1 Billion of buy orders ‘at the close’ stacked up. That would explain the ‘run it down’ to scare loose some inventory to run it up and for the Market Maker to sell into that $Billion close demand. Volume went up some on that ‘scare them’ price slump, but went up MORE into the rising close. Overall bullish for tomorrow.
Prior I’d said that I would expect a down market at the open tomorrow to build some inventory for the day, to me it looks like they pulled that down spike into today due to the large overhang of ‘buy at the close’.
It will also have hit some stop loss orders and cleared them out, chastened some trend traders who got shaken out (and will need to buy back in higher to keep their trend trade on) and more. Expect those kinds of ‘harem scarem dips’ on big up days. Real Day Traders with live quotes can work both the up, and the dip, and then the up again. Long, short, long, close. (Or sometimes carry overnight to the open).
I would also note in passing that the RSI indicator touched 80 at the open and 20 at the bottom of that dip, saying ‘be out soon’ on the rise, and then ‘buy now’ at that dip. (The ‘dropping away’ from 80 came at about the 1 pm time. I use the ‘lower highs’ as it drops away as the ‘last call’ to exit).
And with that, I’m done with this running commentary on a stock trading day for fast traders. I normally don’t post about this as the time scale is entirely unsuited to the typical person who really doesn’t want to spend all day updating a chart every 5 to 10 minutes.
Hopefully, though, it lets folks get a handle on how to think about trading, and how to use some of these tools on the inevitable day when you, too, are a traders. Remember that at the moment you buy, or sell, you ARE a trader, even if the goal is investment…