Weekly Sentiment Update: Can We Ride a F.O.M.O. Wave to SPX 2500+?
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, traders swung to a moderately bearish stance. But yesterday, the SPX blasted up to a new record high of 2418.71, so let’s see just how quickly sentiment is turning. (click here for a primer on these 5 sentiment indicators) 1) VIX Spread – Bullish Last Thursday, the VIX spiked up to 16.30, but it’s collapsed back down to 9.83, butting it within range of the the 9.56 generational low on May 9. Last week, the VIX curve nearly inverted, but the 3-month curve is at +4.0, indicating traders not pricing in much near-term volatility. Or in plain English, folks are bullish. 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is at 56, up from 45 last week. F&G operates on a 1-100 scale, and a reading of 56 is neutral. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 32.9% of individual investors are bullish, up from 23.9% last week. This 32.9% reading is below the 38.5% long-term average, and indicates that individual investors are not particulary trusting of the market. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio was at 0.59 yesterday with a 3-day moving average of 60.3. These numbers are under historical norms, indicating that traders are not buying many put options. Therefore, they are bullish. 5) ISE Sentiment – Neutral The ISE Sentiment Index is at 92 this morning (92 calls bought for every 100 puts). The 10 day moving average is 92.3. These numbers show higher put demand, but they’re actually in-line with recent averages, so I’ll also lump it in as neutral again. Conclusion Out of 5 sentiment indicators, we have: 2 bullish (+2 from last week) 2 neutral (-1 from last week) 1 bearish (-1 from last week) The numbers indicate that we’re seeing much less fear than last week. So the important question to ask is whether we’re on the verge of outright forth. I’m going to guess no. The AAII Sentiment Survey indicates that individual investors are pretty skittish. Typically, at tops, you see the masses wanting to get in. On a related note, a recent Gallup poll showed that just 54% of US adults have participated in the 2009-2017 bull market. From 2001 – 2008, 62% of adults owned stocks. On a second related note, have you noticed the sudden BitCoin craze? Crypocurrencies are going up 5% or 10% a day, which looks like the 1999 dot-com boom all over again. If there’s froth, it’s in BitCoin, not stocks! (not that BitCoin can’t double or triple from here…) Looking forward, I’m wondering if the bears are destined to capitulate on a sudden wave of F.O.M.O. (fear of missing out), driving up SPX to 2500+ in a blowout move.
Continue Reading -->Red Dog Rules Volume 1: Facebook’s Journey to $150
One half of life is luck; the other half is discipline – and that’s the important half, for without discipline you wouldn’t knowwhat to do with your luck.-Carl Zuckmayer Welcome to the first edition of Red Dog Rules, an all-new trading and technical analysis video series by Scott Redler, Chief Strategic Officer of T3 Live. You’re going to learn how Scott attacks the market through real-world case studies and tutorials so you can take your trading to the next level. To Scott, trading is a marathon. It’s not a sprint. That’s why he takes a practical, rules-based approach to the market. Markets change, stocks change, and sectors change. But one thing remains the same — the importance of staying disciplined and grounded.In fact, the most successful traders focus on reducing risk above else. Why? Because one major mistake can knock you out of the game for good. In this edition, Scott gives you an in-depth look at one of the hottest stocks in the market, social media giant Facebook (FB): Watch this video and learn:Why the biggest risk you can take in the market is NOT participatingThe dangers of being lured in by the bears’ negative stories, like the claim that Facebook was set to lose 80% of its users by 2017The technical analysis signals that told Scott Facebook was ready to rockScott’s 3 favorite moving averages rulesHow the cup & handle pattern worksP.S. Don’t forget to sign up for Scott’s video on his favorite trading strategy — the Red Dog Reversal — below!
Continue Reading -->Dynamic vs. Static Risk Management for Swing Trading
Are you one of the many swing traders that takes the same level of risk notwithstanding the market conditions? Do you always trade “a thousand” shares just because that’s an easy number to remember? Do you have a hard time picking the best stocks for swing trading? I will discuss some finer points that might help you to become better at managing risk. First and foremost, the T3 Trained Trader (T3TT) should have a Trading Plan outlining his/her money management rules. Here you should establish parameters such as a “maximum loss per week-month”. When establishing a maximum loss per trade (because no one can know which trade is going to work out), the T3TT has to decide whether he wants to follow a more “static” approach where all the potential losses will be similar, or whether to adopt a more “dynamic” set of guidelines created with the purpose of governing when to be more aggressive, less aggressive, or not active at all. You have to understand the fact that not all market conditions present the same odds for a particular trade. Let’s say, for example, that market “x” is in an up-trend, and has pulled back to support over several days. Today we get a reversal bar, and then the reversal is complete. In this case, the swing trader will likely find several high odds entries both today and tomorrow (depending on the tactics used, many of which are taught in our T3 Technical Strategies Course. The third day comes along, the market continues to climb, and some more entries might be executed. As the market continues to rally, the odds of every new entry following through will diminish, as the probability of a reversal to the downside in market “x” is greater. Based on this scenario, a swing trader might enter into larger positions on days one and two, and might reduce his share lots as the market continues to climb. There will be a time when the market has climbed for 5 or 6 days in a row, and so the T3 Trader will devote more and more of his time to manage already open positions, by selling partial lots and raising stops, instead of being too active in entering new swing positions. (He might be more active in micro trading activities though) Using some modified version of this basic concept, the T3 Trader can implement an intelligent way to participate in the markets, while reducing the risks of getting caught with big positions on a reversal contrary to his positions. Trade Well!
Continue Reading -->How the 3-Bar Rule Can Help You Deal With Failed Setups
Our Trading the Pristine Method® Home Study Course teaches traders a unique approach to trading candlestick price patterns. What make it unique? It is 100% objective and systematic, and eliminates all guesswork from the buying and selling process. We teach identifiable patterns that stocks trade in, and then show the exact strategies of what to do in each stage of a stock’s movement, including how to enter, manage, and exit the trade. That said, not all trades work. No pattern makes money 100% of the time, and the failures must be watched for 3 reasons: 1) To see and capitalize on a “new opportunity” when a pattern fails but immediately sets up again 2) To know how best to manage a position before it fails by evaluating the charts objectively. 3) To help you in disaster management mode in the event you are in a position that has failed. One Failed Pattern we teach is the Three Bar Rule. Whether that means to exit the trade or enter as new opportunity depends on the overall pattern and market environment). Let’s assume you entered a stock with a perfect “quality” price pattern that suggested an immediate move up with bullish market internals. It could have been a T3 Buy Setup (T3BS), a Climactic Buy Setup (CBS), or a T3 Breakout (T3BO), timed with the futures at the 10 a.m. reversal period. The T3 Three Bar Rule states: If the setup is not doing as suggested within three (3) bars, either exit or reduce the position. That begs an important question, “How does one know when the setup is not doing as suggested?” Note that this must be used only in the time frame being used. Some traders will incorrectly bail on a daily setup because the intraday pattern is not moving. They should be using the daily chart to judge the setup. Here are a few questions to ask in considering whether to close a trade early before the stop is triggered: 1. Did the trade violate every single reason for entry? Did it take out major intraday pivot lows? Is it a healthy consolidation that might actually be an opportunity to add to your position? 2. Assess the situation from the standpoint as if you were not in the trade, based on your training. What would you tell a friend about the technical setup? Is the pattern’s “quality” decreasing? For example, are the intraday charts getting very volatile, with overlapping bars, No Follow Through (NFT) to bullish/bearish bars; Breakout Bar Failures (BBF), shakeouts, etc.? 3. How far has the stock already moved? Is the current stop and reward-risk still adequate? 4. Are multiple time frames in alignment? 5. Are market conditions (broader market, sector analysis, and market internals) favorable for the trade direction? 6. Did the stock move with the sector and market internals, or is it lagging, showing relative weakness? 7. What time of day is it? Is it a low volume doldrums summer day with everything going sideways, or is your position underperforming? 8. Is the position distracting you from other trade opportunities? You must overcome the temptation to act prior to gaining information needed out of fear of missing the trade. Selling out of fear that the market will move against you must be fought. You must have the patience and discipline to logically apply the setup. Always have at least two scenarios when entering trades, no matter how bullish or bearish. This will keep you open to other possibilities. Remember, anything can and will happen at times.
Continue Reading -->Red Dog Rules | Episode One | Facebook
One half of life is luck; the other half is discipline – and that’s the important half, for without discipline you wouldn’t knowwhat to do with your luck.-Carl Zuckmayer Welcome to the first edition of Red Dog Rules, an all-new trading and technical analysis video series by Scott Redler, Chief Strategic Officer of T3 Live. You’re going to learn how Scott attacks the market through real-world case studies and tutorials so you can take your trading to the next level. To Scott, trading is a marathon. It’s not a sprint. That’s why he takes a practical, rules-based approach to the market. Markets change, stocks change, and sectors change. But one thing remains the same — the importance of staying disciplined and grounded.In fact, the most successful traders focus on reducing risk above else. Why? Because one major mistake can knock you out of the game for good. In this edition, Scott gives you an in-depth look at one of the hottest stocks in the market, social media giant Facebook (FB): Watch this video and learn:Why the biggest risk you can take in the market is NOT participatingThe dangers of being lured in by the bears’ negative stories, like the claim that Facebook was set to lose 80% of its users by 2017The technical analysis signals that told Scott Facebook was ready to rockScott’s 3 favorite moving averages rulesHow the cup & handle pattern worksP.S. Don’t forget to sign up for Scott’s video on his favorite trading strategy — the Red Dog Reversal — below! Scott Redler Enter your text here…
Continue Reading -->Feeding the Ducks?
An historic contraction in volatility this year cooked up a whack-a-mole stew of selling volatility. Every time the market got hit, it was just another Sunday at Church for the Buy the Dip Congregation. Lately, it seems like it’s Sunday every day. The bounce back from last Wednesday’s air pocket set the land speed record for baptism by fire with the market jackknifing back into safety before you could say Lazarus. Never underestimate the scent of a ‘free lunch’ to lure the best and brightest financial engineers on Wall Street, the only place where the caboose always is in front of the engine. In other words, it’s always the derivatives, leverage, and tangential strategies that drive the money train. You don’t make the billions the banks and hedgies do with plain vanilla. When a political snowball from hell rolled onto The Street last week with the SPX hovering just below all-time highs and option expiration just days away, players who sold volatility were in jeopardy of choking on their own free lunch strategies. So in the best tradition of a bull in a China shop, it looks like players had no choice but to throw a Hail Mary into the fray and put on a Squeeze Play beginning last Thursday. What better way to do this then to let Wednesday’s selling run its course and close on its low before jacking this 18-wheeler back up out of the blue. Well it wasn’t completely out of the blue. Mr. Geometry lent a hand with the SPX closing directly 90 degrees off the key 2401 level last Wednesday. While a week ago, all hell broke loose and it looked like the SPX would finally test the key 2280-2300 level or worse, today, the hall of mirrors at 2400 is back in play… again. This must be the 7th attempt to covert 2400. I’ve lost count. The action certainly speaks to the idea that ‘There’s Something About 2400′ as we flagged before March. Some think the bulls have run out of money with a Big Seller sitting on 2400, or that there’s a lot of hedging going on there. Maybe, but underneath the surface, a handful of ‘Nifty Fifty’ names have been ripping higher. These include our old friends AAOI, SHOP, LITE, TTD, PFPT, WDAY and IRBT as well as the runaway Chinese Brigade, WB, SINA and SOHU. If I owned a major fund, this would be my strategy: I’d keep the indices flat below a ceiling of say 2400 and buy my belly full of stocks, keeping the crowd in suspense and competition at bay as they sold each time the index kissed 2400, only to be rejected. Then I’d add to my longs on each pullback. Once and only once I was ready, I’d let the SPX vault 2400 and start feeding the ducks, distributing positions into the quacking now that the ‘coast was clear’. I’m just sayin’: if it looks like a duck and quacks like a duck… The bulls would love nothing more than to get a close meaningfully above 2400 going into the long weekend. With names like X creeping higher as flagged yesterday and IBM catching a bid this morning, and with energy names getting a lift from $50+ oil, the junkyard dogs may create enough of a tail wind to chase the SPX over 2400 into early June, where a possible time/price square-out is on the table. However, I’m not so sure a breakout is an all clear: if the SPX satisfies our long outstanding target over the next few weeks, the bite of the bear may ultimately prove worse than the bark of the bulls.
Continue Reading -->Weekly Sentiment Update: Some Fear Is Here. But Maybe Not Enough.
Just when everyday seemed to greet me with a smile Sunspots have faded and now I’m doing time Now I’m doing time ‘Cause I fell on black days -Chris Cornell (R.I.P.) Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, traders swung to a moderately bullish stance. But yesterday, as the Trump/Comey controversy heated up, the SPX dove -1.8% — the biggest one-day decline since September 9, 2016. That’s a span of 172 trading days! So let’s take a fresh look at sentiment and figure out whether the bears are still growling. (click here for a primer on these 5 sentiment indicators) 1) VIX Spread – Bearish This morning, the VIX is at 15.89, putting up 66% from the 9.56 generational low on May 9. The curve is nearly inverted and the 3-month spread is at just +0.1, which means that traders are very fearful. 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is at 45, down from 63 last week. F&G operates on a 1-100 scale, and a reading of 45 is neutral. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that just 23.9% of individual investors are bearish, down from 32.7% last week. This 23.9% reading is well below the 38.5% long-term average, and is the lowest level since November 3, 2016 — the week before the Presidental election. 4) CBOE Equity Put-Call – Neutral The CBOE Equity-Put Call ratio was at 0.73 yesterday with a 3-day moving average of 0.62. That 0.73 number above historical norms, but this number was also very, very low from Friday to Tuesday, so we’ll call it Neutral. 5) ISE Sentiment – Neutral The ISE Sentiment Index closed at 88 yesterday (88 calls bought for every 100 puts). The 10 day moving average is 94.2. These numbers show higher put demand, but they’re actually in-line with recent averages, so I’ll also lump it in as neutral. Conclusion Out of 5 sentiment indicators, we have: 0 bullish (down from 2 last week) 3 neutral (up from 2 last week 2 bearish (up from 1 last week The question everyone’s asking is obvious: is there enough fear in the market? Now, sentiment is undoubtedly more bearish this week, perhaps best illustrated by the spiking VIX and its nearly inverted curve. However, I’m not sure sentiment is bearish enough to immediately form a bottom. The CBOE equity put-call ratio did spike to 0.73. That’s a mark of fear — but it’s not an extreme level. It actually hit 0.96 in mid-April. I’d love to see a spike above 0.90, and a dip in the ISE Sentiment Index as well. That would mean traders are aggressively buying put options for downside protection/speculation purposes, which is what you see at the point of maximum fear. In hindsight, that 9.56 extreme low in the VIX may have been a sign of true froth. At the time, other sentiment indicators were pointing bearish, but at that point, traders were pricing in almost no volatility, and thus no fear. Now we’re about to see if the volatility train is ready to leave the station after 6 months of nothing.
Continue Reading -->What Wild Boar Hunting, Triathlons, and Racquetball Can Teach You About Trading
Trading is like anything else worth doing. If you want to be good, you’ve got to develop discipline, patience, and mental toughness. Now, you can learn plenty about trading by watching screens and reading books… but sometimes, the very best lessons come on mile 25 of a marathon… or when a 200-pound boar is charging you at full speed. So we sat down with several of our trading experts to talk about the lessons they’ve learned far way from their charts and spreadsheets. Here are their stories. Brandon Perry on Hunting Wild Boars Here in Texas, we love the taste of wild boars. But wild boars love the taste of crops, grazing fields, wildlife, and private property. Smithsonian magazine said they’re “among the most destructive invasive species in the United States today,” doing $400 million worth of damage in Texas annually. I have a rancher friend who invites me to help take care of his problem with wild boars. We start with weather patterns. If it’s rainy, the boars spread out and won’t be concentrated around a water source. In the winter, food gets scarce and they move away from acorn-rich oak trees to lowland valleys with rich sources of grass and grubs. In the summer, they stay out of the brutal Texas heat during the day. That’s my macro analysis. Next, I have to drill down to analyze my specific target. Boars are probably the most dangerous wild land animal in Texas. They have razor sharp tusks and they’re not afraid to take on humans. One time on a hunt, we came across a 200+ pound boar. We’re talking a big ugly beast right out of a horror movie. We saw it and it saw us. Usually they run away. This boar didn’t. He turned toward us and started sauntering toward us. We had a choice. We could run or shoot. My friend took a shot with his AK-47. Now you may think having an AK-47 made this an unfair fight. But boars are very, very tough, with with inch-thick skin and a cranial bone that can deflect bullets. The first shot only made it turn. The second took it down. In hunting, there are a few very important rules to follow. Only take a sure shot Don’t be afraid to pass on a shot Don’t rush your shot. These rules also apply to trading. For example, I love trading washout lows, but it’s not easy. I have to make sure the technicals are right. And when I have my target picked out, I can’t rush in. I need to wait until the odds are in my favor. If things go wrong, I need enough room to exit the situation to minimize risk… whether I’m looking at a charging stock or a charging boar. When trading lows, you have a brief moment for action, and then the opportunity is gone. But in trading, like hunting, opportunities always come around again. So don’t rush to pick a shot. You’ll get another. Brandon is a contributor to the Virtual Trading Floor®. Click here for a 14-Day FREE Trial. Scott Redler on Triathlons If you want a better brain, build a better body. One of the biggest factors in my trading success has been competing in 100+ triathlons and marathons, including 2 Ironman events. When I started doing triathlons, my trading profits went through the roof for 2 reasons. First, I suddenly had fewer hours in the day. That may seem a little counter intuitive, but hear me out. To balance my trading career and family time with triathlon training, I was forced to become more focused. I started getting up earlier, partying less, and most importantly, I learned the power of a routine. Instead of flying by the seat of my pants, I started every trading day with a comprehensive plan. That’s why I’m so adamant about daily game planning. If you don’t have a plan, you end up wasting all your time and energy trying to figure out what to do! When you start your day with a plan, you can keep your eyes on the prize and not waste your time with distractions. And the second reason endurance training is valuable is that it builds mental toughness. You learn that you’re capable of a lot more than you think. When you start out running, running a mile or two may seem impossible. And then you read about Fauja Singh, a man who ran his first marathon at 89! So find an outlet that pushes you physically. It could be an Ironman. Or it could be a walk around the neighborhood, a martial art, or pushups in the office at lunch. Just do something. Click here to learn about Redler Ultimate Access, Scott’s new trader training program. Mark Harila on Racquetball I’ m a trader and a racquetball player. After a day sitting in the office staring at charts, I love the physicality of racquetball. Getting your heart rate up and losing yourself in the game is a great way to let the tensions of our profession go by the wayside. The comradery I have with other players and random little moments of levity really bring me back down to Earth. There are many parallels between racquetball and trading. There’s often a furious pace of play that requires instant analysis. On the court, you must assess: Where the ball is now Where it is likely to go Where the other players are Where to set yourself up in order to best take advantage of the situation In trading, you must assess: Where the price action is now Where it is likely to go Where support and resistance (other players) are Where to find your entries to take advantage of the price action Novice racquetball players are desperate to hit the ball to score points. So they’ll chase after the ball once it has passed them, rather than running to a spot that will give them an opportunity. They take wild shots, swinging and missing repeatedly, because they don’t plan, and don’t know
Continue Reading -->Weekly Sentiment Update: The Bulls Come Out to Play
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, sentiment was very bearish, and I said “I think SPX makes new all-time highs above 2401 by Monday at 9:45 a.m. ET.” And indeed, in the aftermath of Emmanual Macron’s victory in France, the SPX did indeed squeeze to a new record high at 2401.36 at 9:35 a.m. ET. That was followed by another all-time high on Tuesday at 2403.87 before the market fell back into the range. So let’s take a fresh look at sentiment and figure out whether the bears are still growling. (click here for a primer on these 5 sentiment indicators) 1) VIX Spread – Bullish The VIX is at 10.70 this morning after hitting new 10-year lows earlier in the week. The 3-month spread is at 3.7, which means that traders are moderately bullish. 2) CNN Fear & Greed Index – Bullish The Fear & Greed Index is at 63. F&G operates on a 1-100 scale, and a reading of 63 means traders are moderatly bullish. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 32.7% of individual investors are bullish, down from 38.1% last week. This is below the long-term average of 38.5%. 4) CBOE Equity Put-Call – Neutral The CBOE Equity-Put Call ratio was at 0.65 yesterday with a 3-day moving average of 0.63. This indicates that traders are neutral. 5) ISE Sentiment – Neutral The ISE Sentiment Index is at 97 as of late morning (97 calls bought for every 100 puts). The 10 day moving average is 87.6. So the recent trend shows higher put option demand. However, I’ll consider this number neutral because it’s actually risen a bit in the past couple of weeks. Conclusion Out of 5 sentiment indicators, we have: 2 Bullish (up from 1 last week) 2 Neutral (unchanged from last week 1 Bearish (down from 2 last week Traders looked pretty negative last week ahead of the April jobs numbers and the French election results, but they’ve swung to moderately bullish this week. Looking forward, we’ll probably need a meaningful surge above the new 2403.87 record high to push the market into full-on froth category. But to be fair, for 2 reasons, it could be argued that froth already set in: 1) The VIX hit 9.56 earlier this week the lowest level since February 2007 2) There’s just no volatility because the shallowest of dips keep getting bought But let’s play it by ear. Low-volatility stretches can go on for a long time before anything changes.
Continue Reading -->Volatility Hits a 55-Year Low: Is a Trump Slide Coming?
On Monday, I provided an in-depth analysis of the post-election collapse in volatility, just as the VIX was hitting levels not seen since February 2007. In that piece, I focused on day-to-day volatility of the S&P 500. Now, I’m going to take a look at intraday volatility. I used a very simple but effective formula to make my judgements. I took the day’s range (the high minus the low) and divided it by the prior day’s close Since 1950, the S&P has had an average intraday range of 1.2%. Since 2000, the average intraday range has been 1.4%. In 2016, that number was 1.0%… up until the election. And after the election, it dropped to just 0.6%. So just as day-to-day volatility dropped, intraday volatility has dropped just as much. Now here’s where things get really interesting… We’ve had 125 trading days since the election, with an average intraday range of 0.584% — half the long-term 1.2% average. (as of 1:00 p.m. ET) The last time we’ve had a 125-day stretch with so little intraday movement was March 19, 1962! If you’re falling asleep… you have good reason. And oh yeah — the S&P had a rough time after March 19, 1962. It closed at 70.85 that day, and fell to 52.83 on June 27. The market’s dip in 1962 was deemed “The Kennedy Slide.” Heck, there was even a Flash Crash on May 28, 1962, with the Dow falling 5.7%. Could we see a similar Trump slide? I guess it’s possible, mostly because it’s not uncommon for a bear market to be proceeded by a low volatility stretch. To balance that, I’ll issue my usual caveat: a sample size of 1 means absolutely NOTHING, and I do this kind of research mostly for entertainment purposes. And to be even more clear: I’m not rushing to get short the market in anticipation of a big drop. But for fun, let’s look at some historic parallels. The JFK Library said this about President Kennedy: John Fitzgerald Kennedy captured the Democratic nomination despite his youth, a seeming lack of experience in foreign affairs, and his Catholic faith. And in 2016, Donald Trump completely smashed the Republican establishment despite having zero political experience. Sheer charisma played a big role in each man’s victory. And in both elections, the market rallied after the result. What about geopolitical tensions? Kennedy had the Bay of Pigs Invasion in 1961 followed by the Cuban Missile Crisis in 1962. In 2017, we’ve got Russia, Syria, ISIS, etc. That’s quite a few coincidences to content with…
Continue Reading -->