Trade Review: Opening Range Breakout

Yesterday I mentioned in my weekend review that I felt the market right now is frothy and as such I was going to be more discriminating in my set-up selection and focus upon beaten down or highly shorted stocks. I considered taking smaller positions with wider stops to adjust for volatility as an option, but decided instead to look for short-term opportunities for a day trade. One stock that caught my eye was WNR.

Recently I came to a fundamental shift in my trading philosophy. This shift in awareness occurred serendipitously in April when I attended a trading seminar by Pradeep Bonde at StockBee as well as coming across three books, 'Day Trading With Short Term Price Patterns and Opening Range Breakout' by Tony Crable, 'Hit and Run Trading' by Jeff Cooper, and 'Trading the 10 O'clock Bulls' by Geoff Bysshe.

One of the central principles is that from range contraction comes range expansion and that price tends to move in the direction of this expansion. To gauge range contraction I focus specifically on the same price pattern used by Crable, Narrow Range 7 and Inside Day 4. After the close of the market I scan through my set-ups and watch list for stocks that meet this price bar pattern and place it on a list of 12 that I will watch for the open.


Regarding range expansion, Jeff Cooper notes, “Over the years, I have observed the number of times a stock will trade around its 50-Day moving average for a period of time, and then without warning, explode either to the upside or downside.”


When preparing for this week and making watch list I noted a scan that a number of oil/refineries were in the top 20 and one in particular stood out, WNR. In addition to what I believe to be constructive price action, there was an ID4 that touched the 50MA. As an added bonus, according to FinViz 25% of the float on this is short. I considered this a low risk trade that if triggered should work immediately with price confirming in the direction of the break.

WNR

So now that I had the set up I simple waited until the trigger, a break of the opening range high.  At first my bias was to the downside as there was a price gap up/fade on the open so I set a reminder alert in case there was a reversal and entry signal later in the session.

WNR OR

I differ slightly from what Jeff Cooper considers a Range Expansion.  For consistency with NR7 I use a WR7 which WNR met at the end of the day. Under more preferred market conditions I would have held this for a swing but given my belief that this is market is has breadth issues I opted to sell the position.


Another trade I took today was HAIN which I've been watching for weeks now after it had an earnings break out. 3 days ago a logical pivot low was established confirmed by a higher close the next day. I felt confident about this stock given that it is catalyst driven, confirmed a logical start to a swing and had an inside day 4.

HAIN

This triggered an entry signal early which I took, unfortunately sometimes even the best laid plans... My exit was very premature.

HAIN OR

Weekend Review 09/28/2012

Given that I haven't done a weekend breadth analysis in some time I'm going to backtrack two weeks to 09/14 which showed confluence of breadth metrics indicating that the market was reaching an extreme zone and susceptible to pullback and perhaps a correction. First, that date established a new pivot and 52-Week high which has thus far held for 10 days without being broken.

SP 9/28

Secondly this coincided with an extreme reading on the Primary Ratio of the MM.

Primary Ratio Market Monitor

Thirdly, the 10 day ratio of buying/selling started to wane.

10 Day Buying/Selling

Also of note is this date pushed the $BPNYA over 70. On the following chart I've noted when this reading has moved above 70 and where the market peaks were. Clearly this reading can remain above 70 for extended periods of time as the SP can continues to rise so it does not follow that the markets have necessarily topped when this reaches an extreme level, but it is an indication that in the least a pullback becomes increasingly likely, sector rotation may occur, and profit taking and asset reallocation can happen. There's also a more problematic occurrence to pay attention to that gives insight into the frothiness of the market –junk. At some point when the vast majority of higher quality stocks have given buy signals what remains to increase this reading will be junk stocks breaking out or broken down stocks bouncing.

$BPNYA 09/29

One junk stock that I keep on my radar is ROYL. This is a stock that tends to have significant spikes prior to market pullbacks and corrections and I use as an alert to indicate frothiness.

ROYL

Another stock that I noted began to move during this time was TSTC which showed a price increase of 100%. When I start to see stocks like these have momentum burst bells start ringing and red flags start waving.

TSTC

The SP has seen a 14% increase since the pivot low of this swing that was established in June so this pullback is in keeping with a move of this magnitude. My continued focus is to avoid draw downs to my account as much as possible and to avoid or tip toe around zones where I perceive risk as it relates to my trading style to be increasing. Typically I trade break outs with a tight stop and a time horizon of 5 days for a position to prove itself. What I've experienced is that this is ineffective during periods of breadth extremes so I've come to learn to trade down much smaller in size with wider stops to adjust for a higher propensity of break out failures and widen my holding time for swings as well.

In general I focus my watch list on stocks near 52-Week highs but during pullbacks many of these tend to be extended and subject to profit taking. In a rotational market I've noted that there can be money flow into former leaders or rebounding stocks so I've begun to scan for set-ups that meet my criteria in some of these names and focus my attention on highly shorted stocks for potential squeezes should there be increased buying in these names.     

Beer, Gluttony and the King

Each August I take some time to visit friends and family and celebrate my birthday. Last year I brought my laptop down with me and traded during this time –horribly. This year I opted to leave everything and anything market related behind and simply enjoy. Well, this mood carried through August and much of early September resulting in my shirking my market analysis, which turned out to be a good thing. Sometimes it's best to step away and digest. To bastardize a Nathaniel Hawthorne quote, “Trading (originally Happiness) is a butterfly, which when pursued, is always just beyond your grasp, but which, if you will sit down quietly, may alight upon you.”

So for my first post to get me motivated to begin blogging again will be beer, gluttony, and the king.

Toronado 25th Anniversary

Lagunitas Beer Board

Rogue Voodoo Doughnut Ale

Voodoo Doughnut

By the end, not so happy.

Who doesn't like waffles after doughnuts?

Brenda's in S.F.

Toronado Burger Tuesdays

Toronado Anniversary Mascot

Street Food in S.F.

More Street Food

I'd do seconds and thirds.

Not much else to do after all that food.

Spending a day by a river works too

Voodoo action with King Khan!

Now that I've digested everything it's back to play.

Right in the Kisser

The small caps took it on the chin today.  While the SP dipped a modest .29%, the Russell dropped 2.01% like a stone and closed at the days low. This divergence is enough to be suspicious of the sustainability of the current rally.  When looking at the Russell, there was a failure to make a new lower high and now the higher low may be in play, whereas the S&P over the past three days looks like a modest pullback in comparison after a strong two day bounce.  For a broad market rally to sustain itself, the Russell must participate and under current light it looks like it's breaking down as it continues to underperform the S&P.

 
Perhaps this weakness is due to a risk off environment where money is flowing out of the smaller caps and into larger cap stocks as a flight to "safety", or perhaps this is portending of a larger flight out of equities in general. Regardless of the narrative, this is clearly a signal to be very cautious.

Up Trend In Tact

This week started off where Friday left off as selling hit the tape through Wednesday with the Russel taking the brunt of it and breaking the pivot low established on 07/12. Given the Russell's importance, being the first to break the sequence of higher lows and lower highs suggested that the rally was breaking down, however this didn't stick for more than a couple of days and as of today the Russell reclaimed that pivot with a strong 2.43% move.

$RUT

Although the Russell cracked this pivot briefly, the NASDAQ did not and the 07/12 pivot low has now held for 11 days. In addition, the volume on the positive days has been higher on average than the volume on the negative days.

$COMP

Additionally further strength has been shown in the SPX which held its pivot and closed today with a new lower high.

$SPX

On the indexes there has been continued strength evident by the sequence of higher lows and lower highs which is positive. Unfortunately this has not been achieved in a linear manner as of yet and there continues to be volatility and choppiness as the right side of the range is being carved out. With 3-5 up days followed by 3-5 down days with multiple gaps and range bars of 1-2% being the norm, as of now it has been difficult to choose a side –long or short, due to the whiplash nature. There also continues to be a mix of influence upon the market whether it be news from Europe, current weather conditions in the US and the effects of drought, as well as individual stock catalyst through this earnings season. This being said, the action over the past two days furthers the bullish case as the market continues to shrug off bad news and bad earnings.

Weekend Review 07/20/12

Since the 06/04 pivot the SP has increased a modest 7% over 7 weeks. Unfortunately this move has been anything but a persistent up trend due to the intraday volatility and whiplash from the sharp pullbacks that have occurred along the way. The appearance of higher lows and lower highs is visually constructive action but the underlying breadth that I follow is indicating some issues.

The first and most critical is the lack of buying pressure, particularly a follow through to what at the time looked like a very bullish kick off on 06/29 when 675 stocks in my universe were up 4% on increasing volume from the previous session. This move was also highlighted by the 2% move with a close near the high as well as kicking off from a pivot low established by the prior pullback. The flaws began to become apparent a few days in when there was no follow through indicating there was not a rush to get into the market and a mere 4 days afterward selling began to outpace buying.

4% Adv/Dec

In addition the most recent 3% leg up comes on a declining ten day differential of buying to selling. A divergence of an increasing index coupled with decreasing buying should begin begin to set off flags.

10 Day Buying/Selling

This lack of participation also shows up on the Primary that I follow which will increase sharply when there is strong buying and bidding up of stocks. It started moving from the 06/29 buying day but quickly peaked within 3 days before rolling over, and ever since has been showing lower peaks before quickly turning back down after a string of positive days.

Primary

On the one hand the action on the indexes is positive, however there's also some danger to be thoughtful of because there is still a lot of headline risk to this market along with catalyst risk as earnings are looking less than stellar. Given that this move has come on weak breadth is further reason to tip toe here because for the duration there has been a lacking in buying support, so a sneeze of selling could hit this market hard and be contagious.   

Divergence

The indexes ended this week with some subtle divergences across the board.

First, the SP established a lower high on a closing basis:

SP 07/20/12

Secondly, the NASDAQ did not:

COMP 07/20/12

Third, the Russell which had a short period where it outperformed the other indexes failed to establish a lower high this week and lagged as well closing the week down 1.18% overall:

Russell 07/20/12

   This underperformance shows up more clearly when compared to the SP:

$RUT:$SPX

Additionally some of the long time IBD darling stocks have taken some clear hits this week as well.

So far a consistent theme has been the indexes getting some traction for 4-5 days before pulling back. Thus far the higher lows have held and as long as they do I'll view this as positive. It's becoming evident this earnings season that there is still some excess to flush out as indicated by the number of stocks that are getting their wings clipped, particularly the old guard IBD type leader stocks that have held their ground the longest. AAPL reports Tuesday and I suspect they'll be anything but stellar so it's my view that market reaction to this will be very important given the divergence that occurred this week during what has thus far been a muted rally.

$COMP