On the Long Side: C&D Update

On February 8th, I ran an extensive scan looking for C&D (Cats and Dogs) trades, I described what I found in the following terms...


"I've run about 6 different scans, went through 300 charts, came up with a 1st round of 64 candidates, narrowed that down to 32 and that down to 14, out of those 14, I found a mere 5 trades that look good, I will say that I'm pretty shocked, I expected to have more like 30 or so, but going through the 32 stocks in a narrowed down watchlist, I found a lot of these Cats and Dogs trades are already burned out, meaning they drove them up and got the heck out of Dodge taking their profits with them, not at all what I suspected I would find."


As for what C&D trades are:


"these are trades that can move very fast and put in some spectacular gains, very few are lasting trades so I generally take at least partial profits on any double digit move, especially if it comes in a single day. The rest of the trade (if it still looks good-decent volume, closes near the top of the range, etc) should be put on a tight intraday trailing stop. The ideal situation is to get enough profit to take your original investment off the table and let   the profits run. Don't underestimate their ability to move, they can easily make 30-50% 1 day moves and several hundred percent in a run, but don't fall in love, know when to take your winnings."


Friday, as suspected, many of the C&D trades that had been leading the market and dominated the top 25 percentage gainers last week as well as the top 150 percentage gainers, quickly reversed and as I had found in my original scan, many were burnt out and were now the worst performing 25 and 150 stocks.

Most of the candidates still have the original set up in preparation for their breakout move, so they for the most part, still look very interesting. I had to cull a lot of candidates to come up with these 5.

The original 5 trade ideas I posted still look pretty good. Here's an update on where they stand.

DHT is a shipping company, generally these are not doing well, but have been in rotation among the C&D trades, breaking out, pulling back and breaking out again. None of these trades are meant to be anything more then trades and I explained above how I treat them, however at the same time, I believe in taking the opportunities the market offers where you find them.

 DHT has advertised it's mark-up intensions with a series of volume spikes which are picked up by momentum traders running volume surge scans. The recent breakout and pullback has been on light volume and DHT HAS NOT collapsed like many of the other C&D trades did late last week. It's showing a little momentum today, watch volume carefully, even a seemingly minor uptick in volume can be a sign it is getting ready to pop. DHT stands at about break-even from when it was mentioned on the 8th (up .88%). The fact it has not crashed like many other C&D trades is proof of some relative strength there.

 The hourly 3C chart was in near perfect confirmation of the down trend and recently saw a positive divergence and on an hourly chart, it still looks good here.

DRRX-Drug Manufacutrer

 This one saw at least 1 capitulation event and then formed a nice, quiet lateral area before volume picked up. The volume pick up may not look like much, but it is the little movements that most don't pay attention to that are often the hints we are looking for. The pullback of the last several days has been on light volume. This one is only down 3.5% since Feb 8th which is nearly unchanged for a C&D trade when others are down 40, 50% or more. There's some slight interest brewing today that should be watched.

 The 30 min 3C chart shows a positive divergence in that flat quiet period as I would expect, accumulation is done quietly and in a stable price environment. Volume only starts to surge when the accumulators start to move the stock to stage 2 mark up, announcing to momentum traders that this stock should pop up on their watchlists.

GERN

 Here's another capitulation event and a rounding bottom-like pattern. It is also forming a symmetrical triangle (which considering the preceding trend is viewed as a bullish consolidation) right below resistance, which seems to indicate it is gathering strength for a breakout. Volume has been light on the consolidation as we'd like to see.

 GERN's 5 min 3C chart at the bottom with a positive divergence and in line during the ongoing consolidation.

GSIT (semiconductor)

 This one is a little more volatile, but it has held the 22 day moving average with a hammer candle thus far today indicating that it has most probably found support right where we'd expect to find it.

 The hourly 3C in a flat and quiet base-like environment.

SCHS (Education & Training services)

 This one has an interesting pattern, a breakout move and a bullish ascending triangle consolidation on lighter volume which is very close to a support level at the bottom trend line.

 The 60 min 3C chart before the break out move and a current leading positive divergence in the consolidation.

The 15 min chart has also gone from distribution/profit taking on the first move up to some positive divergences as the consolidation has formed, this may be my favorite among the candidates. If you didn't already, make sure you read the original notes on these trades from Feb 8th which are linked at the top of this post.

CRR, RES, VAR & XOM

All of these have been recent short ideas, all with the exception of VAR (Medical Appliances/Equipment) are in Energy, CRR and RES are in the same sub-industry group (services) so you want to keep that in mind as you don't want too much exposure to any 1 group. However you can trade all 3 in the Energy group, but they should be treated as 1 trade for risk management purposes. All are offering a slightly better entry today for those of you who may be looking at phasing in to these trades, which is the approach I favor.

Let me know if you need the specific trade idea date, all of these are recent and can be found in the 2012 archives, all I believe in February, but if you need the exact date, just shoot me an email.

 CRR's long term trend on a 5 day chart and its volatile top.

 Friday CRR broke below the last major support area, whether it can produce the commonly seen volatility bounce or not, is hard to say. Usually I would say yes, but we are in a different environment now. I favor 1/3rd positions, maybe 1/3rd in this area, leaving enough room in your risk management to add on a volatility bounce/shakeout and finally the last 1/3rd on a break below the recent lows. Of course there are many different ways to phase in to a trade, but this appears to be one that will trend well in a stage 4 decline over the coming months.

 Viewing CRR a little differently, you can see, while volatile, it is already trending lower.

 RES is right at it's final major support area, RES is in the same industry group / sub-industry group as CRR, which is good for confirmation of the group' weakness, but for risk management purposes, if you are trading both, they should be treated as 1 position as they will likely move together.

 VAR is breaking it's sub intermediate up trend and has bounced a bit off support I mentioned Friday, I would leave some room as I favor wider initial stops which can later be tightened in case VAR sees a shakeout, again this is another trade that can be phased in to so long as you set up your risk management in anticipation of phasing in to the trade.

XOM is near  small top which appears to be within a larger topping formation seen on a 5-day chart. I would leave some room if you phase in to XOM for it to fill the recent gap from Friday's gap down. You can also wait for a gap fill rather then phasing in or wait for a break of the trendline.

Credit/Risk Assets

Here's a look at how Credit and Risk Assets in general are performing today.

 Commodities faltered Thursday, followed by the market Friday. This morning commodities are not sharing the enthusiasm of the SPX as they remain in Friday's range. There is a slight bounce in the $USD on a bit of EUR weakness or weakening that I shoed you in the last post, but it's not enough to explain commodities lack of relative performance today.

 High Yield Credit as I mentioned last week seems to be de-leveraging as it has not made a higher high with the SPX in over a week.

 Rates, which are like a magnet for equities gave an early tip off on Thursday, today they are not moving out of Friday's sell-off range.

 For those who think the Euro correlation is not alive, here you can clearly see the Euro posted higher lows while the SPX was still bottoming, dragging the SPX higher last week, it also warned on Thursday.

 Here's the longer view since QE2 ended and the correlation started coming back.

As for today,

The same enthusiasm is not there, especially recently in the last hour or so, I suspect the SPX is outperforming a bit on the opportunity to fill Friday's gap.

 High Yield Corporate Credit is also underperforming on the day, it seems everywhere we look thus far, the only risk appetite is in equities, not commodities or credit.

 It's been nearly 2 weeks that High Yield Corp. Credit has failed to make a higher high with the SPX, again... de-leveraging?

While Financials are the best performer on the day, they did warn on Thursday before Friday's gap down, there's pretty good performance today, although in the last 30 mins or so it is starting to diverge from the SPX.

All in all, while the equity market points to risk appetite in a gap fill, the rest of the risk market is not so enthusiastic.

Early Sector Movement...

While the averages continue the trend of filling all gaps, there has been some early and interesting sector rotation.

Most notably is Tech which has been strong for weeks and just started showing cracks on Friday, XLK is underperforming the SPX notably. Also underperforming is Energy. Financials are the one risk on group that are doing well thus far today, but even some defensive sectors like Industrials are falling off, while the more defensive plays like Staples, Healthcare, and recently Utilities are coming in to rotation.

I suspect Energy (+.29%) is falling off in part due to USO, but more broadly, the FX sensitive Energy and Materials are seeing a decline in relative performance due to the EUR/USD as the original excitement in the Euro on last night's FX open for the week starts to fade as the reality sets in that the vote was a step, not a solution and there are many more hurdles for Greece. No one even knows for sure what the German end game is, I suspect it will be to make terms so demeaning that Greece cannot accept them, as mentioned earlier, giving Germany a face-saving escape from what they have called a , "Bottomless pit" as recently as today.

Here's the Euro since FX trade opened yesterday.

The Euro opened up after the Greek vote went through, but has since fallen off below its opening levels for the start of the week and approaching the next support level.

ES Addendum

Around the same time in premarket that 3C started leading negative, ES broke below VWAP after having been above it most of last night.

ES Update

Overnight 3C showed pretty good confirmation of ES, until pre-market, then it went negative and by the open or just before was already leading negative.

USO-FADING STRENGTH STILL THE TREND

Oil jumped today on news that two Israeli embassies were car bombed in India and Georgia, however, as has been the trend since the new year, fading strength in USO continues to be the theme.

 This morning's open and subsequent fade,

 Today's daily chart, thus far has kept USO within the down-trend channel, the Trend Channel on a daily basis is also still holding the down trend.

 An early lack of confirmation on the gap this morning.

This is the 15 min chart I posted Friday showing at least 15 different areas where strength has been faded since the start of the new year. We'll keep an eye on USO, but it seems that trend is still intact, even in the face of strong geo-political problems.

Good Morning

As you know, last night while Greece was burning, the parliament passed the harsh austerity measures demanded by the Troika. True to their words, party leaders and Papademos who threatened any lawmaker who did not go along, kicked out an unknown number of members of the PAOSK party were expelled while at least 40 MPs and Ministers resigned. Their resignations, rather then votes seems to indicate this was a fait accompli.


However, as we saw last week in a candid video in which Germany's Finance Minister, Schauble seemed to hint they were making an example of Greece when talking to the Portuguese Finance Minister, reaction from Germany and the Northern countries has been muted if not critical. The Troika keeps changing the rules or moving the line  and this morning seems no different. Remember there is a vote in Germany Wednesday whether to go along with the bailout, so it is not a done deal by a long shot and even that may be pushed back until March!


Comments from Schauble today echoed that reality,


"Greek promises on austerity measures are no longer good enough because so many vows have been broken and the country that has been a "bottomless pit" 


"With a new austerity programme they are going to first have to implement parts of the old programme and save."


Cutting it close...


"Germany’s finance ministry said the country won’t give its final approval for the new aid payments until early March — after there is clarity on how well a debt relief deal with private bond holders would work and its parliament has voted on the new measures."


"National parliaments in Germany, Finland and the Netherlands will have to vote on the second bailout package. Since those countries are traditionally most critical of bailouts, the votes are unlikely to happen before there is clarity on whether the bailout deal will actually make Greece’s debt sustainable again."



"Now we need to wait and see what comes after the legislation," Economy Minister and deputy Prime Minister Philipp Roesler said on German television.

"We have taken one step in the right direction but we are still far from the goal," he said.

Austrian reaction, too, was muted.



"Adopting the austerity package is one thing, implementing it is another, and this is something in which we have to place great store," said Austrian Vice Chancellor and Foreign Minister Michael Spindelegger.

Greece has until Wednesday to commit in a written statement to the changes voted on last night, however the populaces' anger may change the look of the government in April, which may also see Greece back-track on the austerity measures.


If there was one thing the Troika didn't want to hear and fears,


 "Samaras, the current front-runner to replace Lucas Papademos, told parliament last night: "I ask you to vote in favour of the new loan agreement today and to have the ability to negotiate and change the current policy which has been forced on us".


Greece is still far away from the next tranche and it seems like Germany will keep forcing harsher and harsher demands until Greece can no longer go along, which gives Germany an out, such as, "We tried, they wouldn't go along"


Next up, expect news from Germany about an EU Finance task master embedded in the Greek constitution.

Swing Trade Layout

Still making progress on the Swing Layout, although there's still more work to be done. There are a few different charts in the layout, depending on how you want to trade, your risk tolerance, market conditions and timeframes.

 This particular layout has condition markers in red at the bottom, the conditions include:trading with the trend in the stock, trading with the trend in the sub-industry group, stochastics and RSI in a favorable place, a small pullback against the trend before entering and a few other things. So when there is a red marker and a red candle on the same day, those tend to be the highest probability areas to enter the trade.

 This is another indicator, when red the environment is more favorable for swing shorts, when light blue, more favorable for swing longs, there is still some work to be done here though to trade with the trend. The volatility stop indicator can also be used rather then the candlestick color.

Three's also an additional Trend Channel stop system I'm still putting together that allows you to get out sooner at a better price on extreme moves or oversold moves in the case of the short trades in the trends shown above.

Updates from Greece...

When I read these update from the rioting in Greece before parliament's vote tonight, I was reminded of the end of the movie, "Gang's of New York" when the telegraph reporter voice over said things like, "this building is burning", "there have been reports of looting", etc, it was in the final scenes if you recall the movie.

These updates have a similar tone...

• FTW: Public order minister resigns in Greece as fires burn - BBC
  
• Rioting spreads across central Athens, at least 5 buildings set ablaze - AP 
• 2:02PM EST: FIRES ARE BURNING SEVERAL SMALL BUSINESSES AROUND ATHENS AS PROTESTERS CLASH WITH POLICE NEAR GREEK PARLIAMENT
• 1:52 PM EST: POLICE ARE CLEARING PROTESTERS FROM OUT IN FRONT OF GREEK PARLIAMENT BUILDING
• 1:50 PM EST: ATMS ARE REPORTEDLY EMPTY AROUND ATHENS... STILL UNCONFIRMED WORKING TO CONFIRM THIS 
• 1:48 PM EST: LARGE FIRES ARE REPORTED AROUND ATHENS... INCLUDING A BRANCH OF EUROBANK AND STARBUCKS
• Skai TV reports that police have run out of tear gas & have asked for more supplies to be brought