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Jeff Yaede
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I'm just your average trader. Been entrusted with trading several accounts that I manage on a day to day basis. Been trading for 13 years and am a bit of a trading junky.
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  • Trade Of The Day - CAT

    This morning's market is set to move slightly lower as European stocks ticked down overnight. While the move lower is not a market game changer, it does present a day trade opportunity for the bears. Caterpillar (NYSE:CAT) may be the best representative of a stock showing signs of a small 2-3% correction. Lets start by taking a look at the daily candlestick chart of CAT below. There are several things to note.

    1. The 1st thing to note is the $87-$88 resistance level. While this level is not a major resistance level in the long term outlook of the stock, it does increase the odds of a short term pullback to come.
    2. The 2nd observation is the strong buying volume seen in the middle of July. This volume is typical of a declining stock that is putting in a major bottom. With the potential of a major bottom, we must keep in mind that any bearish trade is short term
    3. During the stock rally over the last 4 days, trading volumes have been on the decline. Declining volume is a typical sign of a short term pullback to come.

    (click to enlarge)

    With short term trading, keying only off the daily chart can be dangerous. The addition of a short term chart is needed. My favorite is the 1 hour chart as seen below. When looking at the hourly chart, there are a few things to keep in mind.

    1. The final hourly candle of the trading day can give a strong clue into the next day's stock direction.
    2. Closes below the 7 hour moving average are typically bearish while closes above the 7 hour moving average are typically bullish.
    3. Confirmation is needed to play the tendency of observation #2. This confirmation typically comes in the form of a gap the next day. A gap lower after a bearish close the previous day can be played lower as in the case of CAT below.
    4. Short term support must be located as well as a stopping point if the trade moves against us. This short term support is created by the gap higher earlier this month as well as the bottom band on the bollinger bands.

    (click to enlarge)

    The Trade:

    • Short Sell CAT on the open for 87.70-87.90. In the money options can be used for lower or no margin accounts.
    • Stop out on a move above the 7 hour moving average. Risk of $0.70-$0.90.
    • Take profit around $85.50 or today's close. Reward potential of $2.20-$2.40

    This trade setup gives us approximately a 3-1 reward to risk ratio. When reward is higher than risk at a 3-1 clip we know the trade is a solid setup as long as the technical outlook confirms the trade.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in CAT over the next 72 hours.

    Tags: CAT, Day Trade
    Aug 08 9:49 AM | Link | Comment!
  • Market Bulls - Continued Dominance

    As the S&P 500 pushes above the psychological barrier of 1400 today, the question arises as to the future direction of the market. From a market standpoint, I am a long term bear but cannot overlook the the Fed and European support of the financial markets. This support from the Fed continues to drive the markets higher as incredulous bears look on. So where does the market go from here?

    One of the common misconceptions that traders have is that when a stock nears the top of a chart it must pullback and go lower before the next move higher. Stocks (and markets) that set new highs are typically doing something right which draws more money to push the stock even higher. With a potential new market high looming, we must embrace the possibility of an even stronger move higher. Momentum (as shown by the MACD) is strong in the market and the underlying support of the Fed gives buyers great confidence.

    (click to enlarge)

    One of the technical instruments that gives some credence to the bulls case is the Bullish Percent Index. The Index uses point and figure charts to calculate the percentage of stocks with bullish price targets versus bearish price targets. In its simplest interpretation, a 6% move higher in the index is bullish for stocks while a 6% move lower is bearish for stocks. Over the last 2 months there have been 3 bullish moves on the index of greater than 6%. Until a 6% move lower is seen in the Bullish Percent Index, the medium term momentum of the market remains higher.

    (click to enlarge)

    Given the fundamental situation of the market, major selling is always possible. That said, the technical signs of the market remain strong. Buying stocks setting new highs is likely to continue to work as long as the market remains above the 1380 level.

    Aug 07 2:03 PM | Link | Comment!
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