The second most important aspect of my trading strategy (behind support and resistance) is using volume to classify stocks that are under accumulation and distribution.

Distribution is under way when, over a period of time, stocks show higher volume on down days and lower volume on up days. In a bullish trend, this predicts the trend will pullback or fail. In a bearish trend, expect the trend to continue until the distribution pattern is reversed.

Here is my plan for the market this week. The member only "Trade Report" also included my focus list, consisting of the stocks I plan to trade if we get a pullback.

Market Notes:

Here is the game plan for Friday, taken from today's Trade Report.

Market Notes:

The market drifted up Thursday on decent (but not great) volume, and is nearing the $85 resistance level. Stochastics are very overbought right now, which leads me to believe a pullback is in order. From a trading standpoint, I hope there is a pullback. Entry will be easier once overbought conditions are worked off a bit.

I may consider a short trade if we bounce towards $85 on average volume. This would be a quick "against the short term trend" trade with a tight stop probably around $87.

Increasing the odds of a pullback soon is the fact that the T2108 indicator, which measures the number of stocks above the 40 day moving average, is reaching overbought territory at 75. I like to see the indicator hit 80+, which should happen if we get another day or two of bounce.

Trade Tracker:

I am still holding SSO and FAS. I thought about unloading half of my SSO position today, but decided against it since my target has not yet been hit. I am concerned that FAS has not kept pace, but will still honor my stop.

Game Plan:

I continue to wait for a pullback for entries. I also may think about shorting if we get more bounce on average volume. Any shorts will be quick trades.

Focus List:

I continue to wait for pullbacks in focus list stocks. There were a few good breakouts today -- solar stocks like First Solar (FSLR) were on fire --which I'll post over the weekend; there's no need to post then since it will take a multi-day pullback for entry. (See focus list stocks in Monday report.)

All focus list stocks are over-extended.

If I decide to short strength for a quick trade, I'll use one of the following inverse ETFs: SDS, QID, FAZ or SRS.

See the Monday report for current SPY and Q trading strategy.

For the most part, Tuesday was an uneventful day for the market. However, a good entry was provided for those who want to short SPY. Also, another "clue" was given that increases the odds of a pullback.

Trade Journal: FAZ

Market Notes

The market is overbought. I'll get back to that, but first let's take a look at the overall picture. The market, via SPY and SSO is putting in a healthy looking bottom pattern. RSI has broke out over the middle area. Price is putting in a constructive looking price pattern. Depending on how you view it, an argument can be made for a reverse head and shoulders or a bottoming cup and handle. Price has broke out over the 50 day moving average. Last and probably most important, the volume pattern is strong, which signals underlying accumulation. Underlying accumulation is an important trait when bottoms are put in.

1. Be patient with trades and setups. Do not chase trades. Let them come to you. If you miss a trade, that's okay.

2. The best setups in this market focus on extremes. Buy extreme weakness and sell extreme strength.

1. Be patient with trades and setups. Do not chase trades. Let them come to you. If you miss a trade, that's okay.

2. The best setups in this market focus on extremes. Buy extreme weakness and sell extreme strength.

There are many positive signs for the market, but it's still tough to find a good entry. Positives include a strong volume pattern underlying positive price action. This is a sign of accumulation by the "elephants" or big money. Price shows a bottoming formation and is making higher lows and highs.

The problem for entry is that stochastics, while not extremely overbought, are still above 50. A better entry would require more of a pullback.

The power of resistance levels coupled with overbought markets. That was the lesson for Wednesday. My long exits and short entries could not have been timed any better, and it was all based on resistance levels [R] combined with overbought conditions. A reader asked me how "I knew" what would happen. I didn't know what the market would do, I just based my moves on these two potent factors. It's how I make most of my trades, and it doesn't take any extraordinary intelligence or any mystical powers to make good trades.

Let's take a look at my two SSO trades. I entered on the bottom retest around $26. For the past few days I marked $35 as the first R level at $35, and Tuesday pointed to this level as a good low risk short entry based on the R level, overbought stochastics, and light volume on the upmove. Thus, I exited my long position at $34 (30 percent gain in 7 days) and went short Tuesday. I entered short just above $34 and placed my stop at $36, one point above the R level. I took partial profits at the close Wednesday just above $31 (8 percent gain in one day) and moved my stop to entry to lock in profits.

With Tuesday's move, the market just became even more overbought.  The SSO moved right into a resistance zone on low volume with a high stochastic reading. This usually provides a good, low risk short entry.  

A few sectors asserted themselves during last week's market up move. Education stocks are on fire and showing buying interest from the big boys. While most stocks are coming off bottoms and nearing resistance levels, education stocks are near recent highs.

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As long as the lows hold, the bottoming thesis is in effect. I have focused on more short term 3-6 month charts lately, but here is a two year chart showing the power of the oversold Relative Strength Index, even in a longer term down trending "topping" market.

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There are a lot of theories about how to play the current market. Some are predicting Armageddon. Others think this is the mother of all bullish trade opportunities. Then there are those who think it's best to stay out of the market altogether. Very few of these theories provide a sound strategy that allow you to take advantage of your thesis without risking a major chunk of your portfolio.

Here are five sound strategies and how I would employ each one with the idea of staying solvent, while allowing you to "play" without risking your financial future.