Like Forest the NASDAQ seems tired

When looking at the NASDAQ on the weekly charts we can see that two peaks have formed and a Doji has formed from last week on what can be the third peak of a "Triple Top Reversal" pattern.  What may give this some credence is that darned Doji from last week may be forming an "Evening Star" in candlestick speak which normally has a high reliability of coming to pass.  We will have to wait until this week is over before we  can start running around in circles though.  The market has made an incredible "Coast to Coast"  run of slightly over 14% since the beginning of  this rally.  If you still have any longs left just respect the stops you have set and as far as starting  anything new, well... the MACD and RSI don't seem that bad but just remember plan your trade and trade your plan.

Hammer Time "MAYBE"

This looks Positive...

So did this back in Aug 3rd 2011

Time to reset the Mayan Calander

As of this writing the $SPX futures have taken a nose dive to the 1430 level on news that congress is going to take off on their Christmas vacation while uncertainty runs rampant in the markets.

The retrace levels are approximately the 50dma for the 38% and the 200dma for the 62% retrace.  Let's see if things hold at those two important levels.

Isn't this apropriate for the Mayan End of Days Scenario.

Position Size Matters

Position Size Matters

If you are watching the twitter stream and wondering how traders can still have intact trading accounts after stocks like $AAPL ,which looked like they put in a bottom and are heading back up, do an imitation of an Acapulco cliff diver, then the answer is Discipline and Position Sizing.

Discipline is the harder of the two but either you have it or you don't.

Position sizing is easier to figure out.

Determine how aggressive you are with your trading account.  Some say that you should not risk more than 2 percent of your total account worth on any single trade and this value can skew to an even more conservative figure if you want to be trading for any length of time.  1%?  Less than 1% like a 1/4%?  This amount is up to you.  There are plenty of examples of how to assign risk to your capital on the Internetz.

Let's imagine you have a $100,000 account from which to trade with and you want to be relatively conservative and risk 1/2% for a possible 1.5% or more gain.  That gives us a $500 to risk on the trade.

The next step is to determine a possible support area for your equity.  Let's say you have identified $50 as a possible support area and the equity seems to be bottoming out at $52.  That gives you a $2 possible loss because if it loses $50 you are certain that it will continue downwards.

You take your maximum risk of $500 and divide it by your maximum loss value of $2 

which gives us 500 / 2  = 250 shares.  

When you enter your buy order, you also enter your Stop-Loss price of $50.  If more sellers overwhelm the buyers you are out $500 instead of $5,000 or more.  This allows aggressive traders to attempt a second or even a third catch at confirmed support points and walk away with winning trades of 100% or more at times.

If you are trying to catch falling knives you need to be prepared to get a few cuts here and there, but make sure they are just little paper cuts and nothing so serious where you can't use a keyboard like our fuzzy little friend down below.

Fibonacci numbers work unless they don't

My early November post drew a line in the sand at around 1340 plus or minus a few points.  If you were aggressive  you could have tried to catch that knife at 1384 which was the first Fibonacci retrace at 38.2%.    Unfortunately, that first level left many with a few cuts I 'm sure.  If you obeyed your stops, you were not left with stumps albeit a bruised ego.

The next Fibonacci level of 61.8% seems to have done the trick last week.  If you eased into the market, you were pleasantly surprised today when it gaped up 10 handles and continued on it's merry way closing up almost 2%.  That was quite a gain so if we can begin metering this Holiday rally it would give us a more sustainable up-trend.  The main trick to knife catching is obeying your stop loss price so you have enough fingers to attempt the following catch.

The only fly in the ointment is if we get some nasty macro news like the middle east getting out of hand or the fecal cliff discussions turning south.  Then this could be a dead cat bounce and the O'Neil methodology about waiting four days after the first serious up day, like last friday, would prove itself yet again.  On the other hand you would have possibly missed a $30+ gain in $AAPL today.

There is a funny image of a "Dead Cat Bounce"  at 

http://guidepostings.blogspot.com/2008/12/dead-cat-bounce.html

Bigger picture on the $SPX not bad yet

If we take a step back and look at the $SPX on the monthly view, we see that the MACD has been embedded up at the top and wanting to begin a downward move now.  Looking back at 2005 we can see that the MACD didn't fully cross, but when it does, look out below.  I hope QE3 will have enough gumption to continue an upward trend albeit another 6-9 months.

If we step in a little bit, the weekly MACD has crossed but there is still a possibility of pulling out of this at the 200 daily moving average or the 40 week line.  The trend lines are comfortably below us so there is no reason to believe the Mayans got it right for the end of this year.

Catching $SPX knives

Looking back at the Shooting Star post back on Sep 17th we can see that we are nearing the 50% retrace of the Summer's move and could be ready to attempt a holiday rally anytime soon.  Keep your eye on the 62% retrace which is in the 1338 - 1346 area.  If that is breached then we are in for some pain but you have to keep in mind that the Bernank's sugar will be absorbed into the system soon.  Will we bounce tomorrow?   If you are attempting to catch knives, pay attention to your stops so you have enough fingers and capital to participate in the ho-ho rally.