Quick Summary
SPY bounced off 50 dma. Look to exit bounce plays. Short entry possible on more bounce. Focus list long setups UA, NFLX, JAKK, CODE all at or nearing entry levels. Focus list short EMES may invalidate short setup. Watch next few days. Market leader GMCR still pulling back to gap fill area. Money still flowing to oil sector and India. Exited SPY bounce trade and still holding SPY short after taking profits on half earlier and “letting it ride” with a stop at entry. Still holding GDP as it nears target. Still holding UA. Trader Education explains the real holy grail, the reward to risk ratio.
The Market
Key Pivot Levels: 190.42: new high resistance 186.64: 50 day moving average 181.31: recent low 181-184: plenty of buying in this range.
Under the Hood:
As we expected SPY bounced at the 50 day moving average after the bearish evening doji star short setup. Volume is still showing distribution (down bars show more volume than up bars) with today’s bounce coming on puny volume. This type of low volume move is what we want to see if looking to short the market.
There is a strong area of support in the $181-184 range.
Bearish Evening Doji Star pattern provide short opportunity at resistance levels.
T2108 (stocks trading above 40 day moving average) and A/D line are neutral.
Trading Game Plan:
Continue to hold SPY short if entered at the highs, as profits have been taken and stops have been moved to entry. If looking to enter short, enter as close to resistance as possible. Stops should be placed above the highs.
If still holding the SPY bounce trade, look to take profits on strength if still in the trade.
A few focus list stocks still have good entry levels.
The Focus List
Here we find actionable setups culled from “the watchlist” for the coming trading day.
UA is still near entry level. Weakness can be bought with a stop under converging price and 200 day ma support. Converging support lines strengthen support levels. Targets are around $50 and $53 (50 day moving average).
JAKK has pulled back to 50 day moving average support and stochastic is oversold. And entry here with a stop around $7.75 and target at 9 gives us a risk ratio near 4:1.
NFLX broke out just over the 50 day moving average. A pullback near the 200 day ma is also near the area where the stock broke out of the “W” bottom formation. RSI remains strong. A entry in the $349-355 range, with a target at $380 (January breakout bar) and a stop under the 200 dma at $345 provides anywhere from 3:1 to 6:1 risk depending on entry level.
EMES has been a strong trend stock that pulled back hard with big bars on high volume. This type of pullback signals a deeper correction. We have been watching for a low volume pullback up to resistance for short entry. We got the low volume today, but the price bar was bigger than I would have hoped (+8%). I prefer smaller bars over a few days. I’ll still watch it over the coming days, but won’t enter short if we get another big bar.
New Additions:
CODE is basing above the 50 day moving average after pulling back from a multi-year high. The volume pattern is positive. An entry in the $17.60-17.70 range, with a target at $18.60 and stop at $17.35 provides 4:1 risk.
BEAV has formed a range after breaking out hard. The volume pattern and size of pullback is what we want to see. However, often times these types of breakouts pullback into the gap zone. This setup is focused on the favorable risk ratio offered. Entry at $96.50, with a target at $99.50 and stop at $96.75 gives us a 4:1 risk ratio
The Watchlist
Lots of green today in the watchlist. Most gainers traded within support and resistance ranges. Losers did not violate support areas and are holding within patterns.
Market Leaders
These are stocks that I always watch, though they might not be in my tradeable watchlist, nor are they actually always leading the market (TSLA and NFLX certainly haven’t in recent months).
GMCR is still pulling back in the “gap fill” area. A continued pullback near $110-111 offers a good entry. Z is at all time highs and is overbought. NFLX explained in focus list. Not much of note with the rest.
Sector and International ETFs
This list of “watchlist” ETFs is used a number of ways. Most are market leading ETFs that I use to find watchlist stocks using a “top down” approach. You’ll notice in my watchlist that a number of stocks come from healthcare. materials and energy, sectors that are represented here. I also trade ETFs that have good setups. Finally, following sector ETFs can give you an idea of where money is flowing and an overall gauge of the market. I carefully watch the 5 and 30 day price trends versus the market. This gives me an idea of where money was and is flowing.
Money continues to poor into India, with a 2 percent gain that handily beat SPY. Notice that the 30 day trend vs market was .19 and the 5 day is 1.2. Oil also continues strength. Note that while natural gas and utilities show strong short term trends vs market, the price patterns on the charts are horrible.
Current Trades
Exited entire SPY long “bounce” trade. Still holding half of original SPY short position, with stop moved up to entry and letting the rest “ride”. See previous free reports for explanation of trading SPY both short and long on different time frames. Still holding UA and GDP. Note that GDP was removed from the focus list as it is away from entry level and near its target.
Trader Education
The Reward to Risk Ratio:
What is the holy grail of trading? It’s not a setup. It is the reward to risk ratio. The risk ratio is to trading what compound interest is to saving long term. To calculate your risk ratio going into a trade, you must know your entry level, target and stop level. Let’s use JAKK from the Focus List as our example. We came up with an entry at around $8.05, a stop at $7.75, a target at $9. We are risking .30 in order to gain 1.25. That gives us a 4:1 reward to risk ratio.
Why is this the holy grail? Think about what it does to the importance of your win rate. Let’s say you a $30,000 account and risk 1% of per trade ($300 loss). If you have a losing win rate of *only* 40 percent, over the course of 100 trades you will make $30,000, or double up on your account (40*1200)-(60*300). That’s with a 40 percent win rate!
It takes more than just giving yourself a good risk ratio. You must know where to place your stops and targets according to support and resistance, where to enter, how to manage the trade and position size in order to handle draw downs. However, this example shows the power of the reward to risk ratio.
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