Little engine. Fri May 27

The market is the little engine that could this morning. The weight of yesterday's rise caused the wheels to slip early but the Asx 200 has gained some traction and chugged up into the black. 12 points higher at 4672 after the first hour. The overnight lead was also a tale of triumph over adversity as indices clawed back early losses to post small gains. Commodities were pretty flat and the AUD is a touch firmer.

FMG isn't there yet, a break of 659 would be an encouraging sign that a decent rally is in the offing. However, I was looking for a trade through 636 to at least imply some short term strength. The stock opened at 640 and fortunately there was some broker selling in the June 650 calls so I was able to get the balance at 16.5.

12.04 It's all pretty quiet now, the index is up a few more points but my stocks aren't doing much. LNC is retracing some of yesterday's strong gains to be down 5 at 303 and AWE is starting to move, up 4 at 141.5.

I have a small new long position in KAR at 653. I had planned to pay 649, was distracted for a few minutes and the stock had popped. So I paid up and now the stock is back at 649. I'm looking for another leg up with a stop below Wednesday's low. The big picture has an overlapping retracement which so far has held above the March low. Of 3 broker comments this month, one has reiterated a buy, one has upgraded to buy and one has initiated coverage with a speculative buy recommendation. The target for these 3 averages 1070. The other 2 analysts haven't commented since March when they had 855 and 796 targets respectively.

1.45 Still grinding up with support from Asian markets and higher US futures. Up 25 now but a mixed bag as far as my positions go.

Paladin had a good day yesterday and is pushing higher today. This is one where I bought a reversal after 5 choppy waves down. It was problematic for two reasons: a, it was quite a strong reversal day when I bought so the stop was 7% away from my entry (303 v 324) and b, given that (worst case) stop, I needed to actively stop out on the first sign of momentum failing. The next day after entry was a doji, which was not excellent but only a warning sign since it did add slightly to the previous day's gains. However, the following bar, last Friday, saw the stock open and move above 330 only to fail and finish very near to the day's low.

Anyway, I didn't cut and had to sit through 3 days of retracement before a much better buy signal yesterday. I was already long so didn't add but at least the stock made its way back to 325. The nice thing about this entry is that you have more of a sense of selling momentum having faded and there's an entry at 317 with a stop at 307. Here's the daily.

3.42 We're just limping to the finish line as the market ebbs away, still up 13 though.

I'm worried about PDN, the 60 minute chart has developed a lame sort of c wave in 5 that isn't going anywhere. So, I've sold half at 325.

FMG has also sold off since the early 652 high but the intraday chart looks ok for the moment. Still within a range but higher lows and no overlap yet from the mini breakout.

4.13 A nice finish though after the slow sell off, up 24 at 4684, and no need to stop out of anything else. Adios.

This time you've gone too far. Thu May 26

An oversold bounce has the Asx 200 back up 1.1% as the commodities rebound continued overnight. There's much talk about a copper shortage while coal and iron ore do better than expected.

My main computer had a video card problem this morning so it has been a scramble to fire up the old PC and get cracking. My long positions have bounced well with the market although I've got chopped in IPL as it bounces back through yesterday's high and I'm getting long again. I usually have a rule to wait for an a-b-c correction before anticipating a bounce, especially when the stock is not in an uptrend. For some reason, I totally forgot about that when I bought IPL the other day. Anyway, it's a better entry, although I haven't bought much as I want to see how the stock performs through the day.

AWE is a new long. The company has started drilling in its potentially huge onshore shale gas find in Western Australia. The chance is there for positive news flow. I'm buying on the break of yesterday's high. That bar could be a higher low and a conservative target might be 146 but good drilling news allows for plenty of upside since the stock has no premium for the story. Long at 137 with stop at 132.

 

11.50 On a more strategic note, I've been thinking about why April and May have been a wash out for me with reasonably good risk management being the only reason I'm breakeven for the period.

First of all, I'm biased towards a trading range with my strategy since that's what I anticipate in the bigger picture. The recent moves have been quite powerful although, ironically, they have been within a range. Secondly, I've been pre-empting without having at least some short term momentum to support the trade. Thirdly, when you get it right with these trades but there is no clear trend change, then you need to be very quick to take your profits. Sometimes I have but sometimes I haven't. Fourthly, I've only played it from one side. Therefore, in April, once I decided that the rally was overdone, I only looked for shorts rather than also taking continuation trades on the long side. In May, I've done the opposite.

Where does that leave me today? Well, I'm long and have my first positive indicator which is a break of yesterday's high after a strong downdraft. My opinion is that this should be the start of a reasonable recovery but that it will not go above the April highs and may fall a fair way short, say, 4800.

However, I have no proof of that and my strategy should be to cut my longs rapidly on a loss of momentum. Looking at the last swing up from last week as if this was a stock chart, I would have been cutting some of the long on the weak inside day last Friday and cutting the rest this Monday as Friday's low was breached. Considering that it was most definitely a downtrend, despite my thought that the 5th wave low would hold, I could have been putting on a short position on Monday on the basis that the bounce had (tentatively) made a lower high and the trend was intact. Today would be cut and reverse.

The basic principle of waiting for some sort of evidence that your scenario might be correct would also have kept me out of trouble on the short side in April since the first serious down day indicated the top and the most negative days were a few doji bars.

This is not earth shattering stuff but it comes out of examining my trades. Over the past 15 months I've found that intelligent anticipation can make the difference between breaking even and making a decent return. But after running through my trades, I found that it's still not worthwhile buying on a down day near support. It's better to pay a little more on an up day as it seems to provides a better quality stop and a higher probability entry.

For example, using the XJO chart above, I might have decided to buy on Monday's down day on the basis that the swing low would provide support. It's better to buy today, at much the same levels, but without the whole aspect of trying to catch a falling knife. It also makes trading easier since the market tells me what to do, rather than me having to pick a likely point.

12.25 Back to the market, LNC has burst through 300 to be up 20 at 306. Maybe there's a coal tenement sale brewing. Here's the chart. It's my biggest position so I hope there's some substance to the story.

1.33 Today is May expiration for exchange traded stock options. It tends to have a gravitational effect where the larger stocks will get sucked towards a round number and the overall effect is usually to limit intraday volatility. You can also get cheap options as the weight of numbers of investors rolling short positions means that the traders throw up their hands by the end of the day and wind their bid prices right back.

Which brings me to Fortescue. I think the stock could go either way at the moment, it's forming a sort of a pennant after it recovered but made a lower high in April. Despite the hint of a head and shoulders pattern, there's a definite possibility that the stock has had its correction and has also had wave 1 and 2 of the next move to a new high. In that case, the stock could burst through 700 to new highs. FMG June 650 calls offer a reasonable way to play this move. They're down 1.5 to 12.5 on the day, despite a 6 cent rise in the stock as option premium is offered lower. Expiry is in 4 weeks time on June 23rd so it's a fairly short cycle but since the stock has already consolidated for a couple of weeks (relative outperformance) there should be plenty of time.

2.41 Bought half of the FMG June 650 calls at 13.5 as the stock pushed up to 633. Looking at the 60 minute chart, if the stock pushes through 636, 637 then there'll be a short term break and I'll buy the rest. They'd probably cost a couple of cents more but the picture would be clearer.

3.03 Something to do with cutting back to my new PC after repairs but the news stories on LNC hadn't been appearing. Anyway, the sale process for the Teresa property is close to completion with one bid already received. $500 million plus is expected.

4.12 It was quite a squeeze today and the Asx 200 closed on its highs, up 75 at 4660. It's a pivot reversal, according to the Dow Jones news wire. Apropos the commentary earlier, I'm long and hoping for more.

FMG closed at 633 so I haven't bought the last portion of the calls. LNC, LYC, IPL and PDN all finished strongly. AWE hung around the early levels to close up 2.5 at 137.5.

Bank on it. Wed May 25

A slightly disappointing night with regard to stock indices although base metals, gold and especially oil rallied. But the bank selling continues apace with the majors off by more than 1% again.

The Asx 200 has traded below yesterday's 4596 low, reaching 4590 and is back at that 4596 low, down 33. This swing down has now formed 5 waves on the intraday chart so there is a chance of a bounce today. No sign of it yet though.

11.56 US overnight futures are down 0.8% on banking fears of legal penalties stemming from GFC shenanigans. Newly listed resources powerhouse, Glencore, is also trading below the issue price in Hong Kong so it's actually quite surprising that the Asx 200 loss is holding at 30 points.

Maybe the wicked hedge funds should have a look in their own backyard and leave our Aussie banks alone! Actually, I don't mind this weakness in the banks, I want to start a buy/write book and I might be able to buy at the bottom of the range.

2.16 Another new low at 4584, down 45. Asian markets have trimmed their losses to around 0.5% and the S&P 500 futures are not getting any worse but there's negligible interest here and stocks prices are ebbing lower.

3.58 The AUD is below 1.05 to the USD and there's a downtrend in place which could gather steam. The DJIA chart is quite similar to the AUD/USD in recent weeks and that also looks as if it's in the early days of a sell off. Here's the chart of the currency cross.

I don't have much idea whether there are implications for our market. There was a period a few weeks back where the currency acceleration knocked resource stocks hard but the sell off hasn't generated any buying yet. I'd have to assume that we'll continue to be under pressure. I have a few longs still and that's a cause for concern but they're not quite at stop levels.

4.15 Down 44 at 4585. When we were close to these levels in March, it seemed like panic selling; now lower levels look inevitable and it's just a question of whether there is a rally first.

Oh, and I stopped out of IPL at 377. Yesterday's low failed so it's shaping as an a-b-c correction. It's one of the few positive looking stocks in my watchlist so I'll wait for another opportunity.

Ahead of the curve. Tue May 24

Apparently we were anticipating heavy overnight falls in commodity prices following the very mild drop in Chinese PMI yesterday. Extremely prescient, I have to say, and today the index is shrugging off European and US index drops with a "been there, done that" shrug of the shoulders. The support failed unsurprisingly since it was almost gone yesterday afternoon but the Asx 200 is off just 11 points after 44 minutes.
I've sold out most of the IAU balance at 178.5 and a few LYC at 219. OZL is arguably a cut but I'm holding on for now since there's a chance of a surprise up day. There was a 12 cent per share return of capital a few days ago, so my entry price is effectively 130.5 with the stock trading at 133.5.
It's quite difficult to trade with the index making choppy lows and the tricky part is that the pattern still looks corrective of the March/April rally.

11.52 The market is attempting to make a base but is facing the headwind of continued bank selling with 3 of the 4 majors down by over 1%. The talk is that hedge funds are initiating short positions so this could continue for a while.
12.23 Another wave down as support vanishes. Out of OZL at 131 and LYC at 216 with the last few IAU at 175.5.
1.01 On a daily basis, the index is chopping downwards in a trend channel and as per the comment above, it's probably retracing the earlier rally. On a weekly basis, it looks very much as if a lower high will be made if you compare the April 2011 high to the one made almost exactly a year earlier. So the next swing up might well fail at, say, 4800 and a couple of long term targets could be set.
A modest bear market might see a test of the bottom of the range at around 4200 while a "chickens coming home to roost" event would see the index back to the GFC lows. This would be on the basis that the retracement since the 2009 lows has failed to break the first GFC swing low down from early 2008. A 5th wave on the weekly chart could push the index down below 3100. Interesting.


3.13 I've reverted to Blogger for the time being after technical problems.
The market is bouncing finally, just down 13, was down 47. LYC has recovered to 222 so that's a lost opportunity but I bought more LNC at 383 and went long IPL at 387. IPL is one of the few stocks in the market that has potential for upgrades and is rallying after a lengthy, complete looking correction.

4.08 I bought back into LYC at 222. The rebound is impressive and if the market is due a bounce from trend lows then this will outperform. It looks like it's going to close at 226. 

Shame about cutting at 217.2 and buying back at 222 but that's an occupational hazard.

4.10 A decent recovery then, with a small late sell off leading to a 14 point lower close.

Black Knight. Mon May 23

At the risk of sounding like the black knight from Monty Python and the Holy Grail, I'm taking the view that the opening plunge of 61 points is a mere flesh wound. My scenario of support at 4710 vanished on the open as the market quickly moved to 4670 where it sits now but after a choppy 5 wave pullback in the market, I still think that we're liable to see support hold on a daily basis.

The US indices fell by 3 quarters of a percent while continental Europe fell 1% or more with the FTSE just a shade down. Spain is the next, and by far the biggest, domino expected to fall as the debt crisis unfolds. Gold rose over 1%, base metals were steady to up and oil was firmer too while the AUD held its ground. So the portents were not all bad for the Australian market despite the early reaction.

I've been a fan of LNC for a while and with coal prices stubbornly high, they're sitting on some juicy assets. The stock has been ranging for a while and that range is narrowing. Nevertheless, the price is tending towards the top of that band and after a 7 day retracement, the stock has traded above Friday's high. I'm hoping for a higher low here and have bought a few at 281.

12.04 There might soon be a test of daily support at 4840 as the market is now down 74 at 4658. Asian markets are around 1.5% off so there's no support there. As ever, the smaller cap stocks I'm trading in are moving more than the market but given that the main pressure is on the financial sector, the damage is limited.

1.21 There's still a pall over the market as a softening Chinese PMI figure has not helped sentiment. The AUD is weakening gently which is a medium term plus and it's possible that the PMI number is indicative that the Chinese authorities are successfully managing a slowdown rather than orchestrating a crash but for now, the glass is half empty.

I have one position which I need to cut and that's a bit of a surprise given the good lead from gold overnight. IAU has failed to hold support at 180 and has actually slipped as low as 174.5 on very light volume. I need to sell out today as I find that where the c wave retracement is much weaker than the a wave, as it is in this case, the subsequent falls can be pretty sharp.

3.02 The Asx 200 is inexorably closing in on support. There seems to be general surprise at the weakness across the board today throughout the region. Once again, it appears more like a buyers strike than serious liquidation and this approach is rational to me, stocks are in a downgrade cycle, rates have not topped and overseas holders are liquidating commodities and shorting our banks on the basis of wholesale funding issues and expensive real estate. I have a pool of money I want to allocate to some longer term trading but don't see the need to step in yet.

3.54 Out of half of the IAU on a minor rally to 177.5 but have held the rest as I think I can get them out at 179-181. The selling is driven by general market weakness and a large overnight fall is being anticipated when only a moderate one is so far indicated by the European opening calls and US futures.

4.06 Actually, the German and French markets are set to open down 1% plus, it's the UK market with its resource sector that is set to open down a comparatively healthy 41 points, on the back of relative outperformance on Friday.

4.12 The close was 4643 which is 1.6 points higher than last Monday's low of 4641.4 and what's more, last Monday's closing value was a tad higher at 4650. I'm close to stops in LYC, OZL and PDN and past the cut level in IAU with half done. My other long is LNC which had a good day and finished up 4 at 282. No shorts, unfortunately.

Here's the updated XJO daily.