Underdog Perspectives 01 - 05 February 2016

05 February 2016

The T40 again had a choppy day as it managed to oscillate between the broad support zones around 43,400 and 44,500. It ended fairly strongly almost against the strong overhead resistance zone and it will be interesting to see if it can punch through as as follow on to today's bullish performance or if it starts to fall away from here leaving a potential double top in its wake. The stochastic is starting to look like a failed reversal which is very bullish and despite the downtrend which remains evident, the index could now be looking to rollover the 89 period EMA.

Our response is going to be continue to peddle within the defined channel with quick profit-taking likely to be a feature of our intraday activity unless we get some clear room to run here.                         *********************************************************************
Intraday trading was difficult today as the market was very choppy. We entered 4 trades with 1 winner, 1 break-even and 2 losers, all-in-all netting a 1xR loss for the day.

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Took a hammering on the CFD portfolio front today with stop triggers coming in on BIL as commodities continued their relentless bounce and also on ITU as was expected. End to end capital losses were 2.1% on BIL and a more palatable 0.5% on ITU. So not the best outcome but far from a disaster. Very importantly we continue to respect our systems' rules and stop levels. One can use as an example the recent stop out we had on KIO for a 1.2% loss. As reference, had we attempted to "hold through the storm", our losses would as at the end of today been some 2.7% and still climbing. Very important lesson there which we will continue to adhere to and if we need to take small knocks along the way, so be it. Our aim is to be around for the fight tomorrow...

Our VOD setup noted yesterday unfortunately left the station without us again as we set our limit order for entry a little too far back. Unfortunate as it ended the day more than 2% in the black and what we will not do is chase prices from here though.

A position not written up here was long entry on MND which we took at a price of R270.00. Setup details on this position are available at Traders' Corner. In addition to its setup quality, what this entry does also add is further balance to the portfolio which is taking on a much better balanced complexion - especially with the short exits in ITU and BIL thrown into the mix. Open downside risk is now at 3.6% and our risk-adjusted return ratios have all improved.

We also noted a new potential short setup on the AWB front with details as follows:

Arrowhead Properties B(AWB)

System: TST V2.0 EOD

Short position

AWB has been in a steady downtrend since the beginning of November last year. The rally over the past 2 weeks has however pushed the stochastic to an overbought level and as it crosses its signal line downwards and starts to retreat from this level, the daily candle appears solidly bearish. 

We're going to look to enter on a break of the previous day low of R7.90 with a stop in as a close above R8.38 as indicated. Downside targets are at R7.00 and R6.80 yielding an average target reward-risk of 2.2-1

04 February 2016

One of those days that the market decides to demonstrate that "calling" the day's trading action is an exercise in futility. With the odds heavily stacked towards further downside, after an early gap down the market failed to follow through to the downside and instead retraced almost all the way back to the previous day's high before closing just above support at 43,400.

In a broader context though the stochastic still looks extremely bearish as it starts to move down and overhead resistance levels remain well intact as indicated. So the critical spot level for the T40 is going to be the hard-won 43,400 level and the bulls need to hold this break and start to make inroads on the overhead lateral and descending resistance levels which will come into play as the index approaches the 44,500 level. Failure to do this could see a break back below 43,400 and cause today's rally to fade as as the index continues its downward move. 

On balance, our view is that the bulls have lots of work cut out for them so the balance of power still remains in the court of those favoring the short-side.

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Intraday trading was fairly slow today with a lot of choppiness keeping us on the sidelines. After closing out our overnight position for an additional 0.5xR profit, we only managed one other trade for the day and this ended in a 1.7xR loss on the sharp market retracement.

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As per the plan set out yesterday we did't make any changes to our CFD portfolio but with the market strength, our short bias saw a negative move in overall value over the course of the day. We will therefore look to close out ITU on further weakness as it painted a green 3LB candle and closed above its stop level on the day.

At the moment downside risk exposure is at 4.4% and this, together with the potential ITU close out gives us the opportunity to add into our portfolio. We did manage to find a good setup which fits in well with the portfolio in that it's a long position which allows some dilution of our short-heavy setup and also adds to the risk-adjusted return measures we have in place. We are looking to risk 1% of capital in this trade.

Vodacom (VOD)
System: 3LB EOD
Long position

Standard 3LB on VOD as the candle breaks its previous swing high level. We'd look to enter around the R147.55 level with a stop in as a close below R143.50 and upside targets at R153.50 and R159.50 yielding an average target reward-risk of 2.2-1

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03 February 2016

A down day on the market as all the technical overbought stocks started to roll down from the build-up over the past 2 weeks. The T40 painted a very bearish candle and we can see how the stochastic has now turned down and has crossed over its signal line from the overbought zone. The high came in very close to the 44,500 resistance level along with the downward sloping resistance level we've been highlighting. What this does do is open the door to a potential move back down to the previous swing low with the potential for a further break down towards the 127% projection level. While an end of day position trade has somewhat gotten away from us and would not yield an acceptable reward-risk given the depth of the reversal to date, we will look to utilise this information in our intraday strategy.  





Intraday we find ourselves in some deep blue water at the moment with the next major support level being 41,500. There are some minor structures all the way down which we'll trade around but the essence of the day's trading will be to look south trying to ride any positions down as far as possible. Long positions will for the moment be viewed as counter-trend and while we are comfortable exploiting small bounces in this regard, we will continue to do so very cautiously while below the 43,400 level.

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We had a very good intraday session yesterday with 2 profitable trades yielding a 1xR profit and then a 1.5xR profit lock-in with the balance of the latter position being kept in place to trail out overnight. Trade execution was solid but what was particularly rewarding was our discipline in executing against the fixed trading plans.

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We've also been commenting on the short-bias inherent in our end of day portfolio and yesterday saw this starting to yield some good outcomes. Despite closing out on the KIO short position as it strengthened on the day (4 days/2.1xR loss/1.2% capital loss), a new short on BIL (courtesy of Traders' Corner! ) and a decent start to the IPL setup we highlighted yesterday (short entry was in line with plan at R115.00), combined with strong MTM moves on the balance of the portfolio saw us progress well into the block on this segment of our overall portfolio.

Overall our portfolio remains short-biased with a 5.1% downside exposure level at a target reward-risk of 1.9-1. (our downside exposure increases as stocks move further from entry) Our 6% exposure limit therefore not only prevents us from overtrading, it also encourages the tightening of stop levels and profit-taking.

Now there have been a host of potential short setups popping up in the wake of yesterday's market move (SOL,PAL, TBS, GRT, FSR, SLM, RMH, BGA, NED, SBK, SHP to illustrate) but given our overall exposure levels we've elected to stand aside for the moment given that we're approaching our downside exposure threshold and also, as mentioned, we've been doing some work on overall portfolio risk and returns and at the moment, with yesterday's changes to the portfolio and price movements, we appear to have decreased the potential returns on our open positions (as noted above) while increasing our overall risk levels - mainly due to increased correlation between the various elements of our open positions.

Therefore, with so many potential short setups to consider, our feeling is that these would - while adding to the potential return side of the equation, also increase correlation levels - resulting in a negative impact on potential risk-adjusted returns. So for now we will wait and monitor our existing positions.

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02 February 2016

The T40 has now moved into overbought territory although price has not quite moved into the resistance zone highlighted on the price chart. We'll be looking to see whether the market now starts to reverse or manages to push into this zone. The daily candle appears to be a spinning top, which would reflect a level of indecision between buyers and sellers and could be indicative of a pending reversal as the stochastic flattens out.For now however, the intraday plan will remain unchanged as we cap longs at around the 44,500 level while giving shorts the scope to move as far down as possible towards initial support at 43,400.

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We had a solid enough intraday session today with 2 trades - 1 x break-even and 1 locking in 1xR profit. Execution against our rule-set was good with an 89% trade management scoring achieved. Just to reference this, we rate all intraday trades against theoretically perfect systems' execution trades with the primary ratings coming through in entry level, position size and exit level.

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From an end of day perspective we closed out our short position in OCT which was had just opened at the end of last week. With 2 closes above the stop level, we would prefer to cut the position now and get in later should the downside move start to materialise. End-to-end this close resulted in a 3xR loss but because our entry price was well above target, this only translates into a 0.7% capital loss. 

We also entered the ITU trade setup posted yesterday at an entry level of R66.88 as planned.

Open downside exposure is now at a modest 2.9% and with one eye on a potential KIO short position exit should it continue to strengthen, this gives us another opportunity to add to our portfolio via this short setup on IPL which we noted:

Imperial (IPL)
System: TST V2.0 EOD
Short position


IPL is in a downtrend but over the past week or so we've seen prices rally pushing the stochastic overbought and price is now well into the zone between the downward sloping 21 EMA and the 89 EMA (the "sell zone"). With a potential reversal painting on the day via a fairly bearish, long-bodied candle, we'll look to break of the price low at R115.00 for a short entry. Our stop is positioned as a close above R123.00 which is above the current candle high and also lines up with some lateral structure going back to 2011. Our plan is to target the previous swing low with an initial target at R100.00. A secondary target will be around the 127% projection level so we're setting this at R91.00. This yields a blended target reward-risk of 2.4-1. We'll be risking 0.7% of capital on this trade setup.

01 February 2016

The start of a new month and the usual refreshed feeling as the P&L resets to zero. Its a strange mind game we play with ourselves with the human conditioning needing that sense of completion and new beginnings in order to sustain itself. After all, a month-end or even a year-end isn't really real - its an artificial construct we put in place as a coping mechanism. However, all of this is digression. Just a quick reflection back on January before we proceed (another one of those mechanisms!).

It was a tough trading month all told with lots of volatility on the back of global market turmoil pretty much straight off the bat. We started out fairly well but ended but tailing off towards the month-end - in analysing the ebbs and flows the turning point from just pure market fallout to an oversold bounce - despite being recognised in this very blog  - wasn't traded to very well and improved responsiveness to broader market changes is one of the elements we'll be focusing on as we move into the new month.

Statistically we had 59 trades with 21 winners, 23 losers and 7 trades ending in break-even. So the win-loss ratio was some 48% at a 2.8-1 reward-risk. End to end we achieved a 3.8% capital gain for the month which compares favourably with the 3.8% decrease in the T40 index over the month. So early days yet but we're pretty happy with outperforming the market by more than 7.5% just one month into the new year.

So then looking at the way forward, we thought we'd start on an even higher time-frame analysis of the T40 to try and assess the extent of technical damage which the overall market has experienced and how this impacts on our trading for the month ahead. Firstly we can see the broad consolidation channel we have in place and at the moment we're trading just below the halfway mark in this channel. The stochastic is far from oversold though and is angled very bearishly down and we're breaking a long-term support line going back to around 2009. All very gloomy and pointing to further medium-term downside. Worth noting the long-tailed monthly candles though and what's interesting about these is that despite the bearish outlook on a monthly basis the market has over and over again rallied off its low levels towards month-ends. This is important to bear in mind trading the last week or so of the month - we don't want to necessarily overload ourselves to the downside in a  rallying trend.

The next chart is a weekly 3LB chart which we've posted a number of times before in various forums. We've made a few tweaks to reflect % movements from closing levels rater than extremes but the message is still the same. In a nutshell, over the last 13 years, we have only seen 4 instances (including the current one) where the weekly 3LB has broken and closed below its previous swing low. Comparably, at the point we now find ourselves, the global credit crisis in 2008 is the only one of these instances with a deeper pullback (as measured by the swing high and low closes of the 3LB candles) and the March 2011 instance is the only one with the broader consolidation (as measured by the number of months between reversal candles being painted on the 3LB). And finally we've also highlighted the fact that only in the 2008 crash did we see a double break or a break of both the prior swing low and the one before that (2008 in fact saw was in fact a triple break!). At the moment, a weekly close below 41,900 would result in that happening in the current downtrend. The message here is that we are fast approaching a a tipping point where continued weakness could potentially open the door to substantial further downside. Alternatively the market will need to start a substantial rally fairly imminently to negate this structure.

But bringing this all closer to home, we now drill down to the daily chart and what we see is that the stochastic has now moved oversold as we approach the 38.2% retracement level and with a downward sloping resistance level joining the November and December swing highs also in play, the probability of the market finding a short-term top during the course of this week is fairly high. So again while we're not going to preempt the turn, we would be wary of long positions as this week starts and we'd be looking for the opportunities to go short. 

And finally, on the support and resistance graph we can see that the little inverted head and shoulders pattern we highlighted last week has almost run its course as we approach the 44,500 resistance level. 

So translating all of this this into the plan for the week ahead, we will be very wary of long positions below that resistance zone centering around 44,500 and instead will remain short-biased looking to ride short positions down as far as possible intraday. We may also look for another opportunity to short the T40 on an end of day basis should there be an acceptable daily reversal formation playing out.

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On the portfolio front we've been doing some interesting work on portfolio optimisation and position correlation analysis in order to manage our strategies around targeted risk-adjusted return maximisation. We'll share that once the work reaches a logical point of fruition. But for now suffice to say that in addition to assessing quality trade setups in line with our trading systems, another level of filtering will also involve assessing the potential for excessive absolute exposure as well as the potential for increasing relative exposure levels by adding highly correlated positions into the portfolio.

That said, we remain primarily biased to the downside with short positions in GND, PPC and SUI. Shorts in OCT (R20.71) and KIO (R33.02) were also triggered on Friday as per the setups highlighted last week. The KIO positon entry was triggered prematurely but we'll monitor this for now as the downside setup remains valid. 

Total portfolio downside exposure now sits at 2.9% looking forward with a reward-risk of around 3-1. The relatively low exposure levels gives us some opportunities to take further positions and post filtering we've identified the following setup:

Intu Properties REIT (ITU)
System: 3LB EOD
Short position

The end of day 3LB broke its previous swing low on Friday setting up the trade. We are now looking to enter at R66.88 (blue line) with an end of day stop at a close above R68.00. Our expectation is for the price to move down towards the 127% projection but we've conservatively set the target above this level at previous structure support of R64.50. This yields a 2.1-1 target reward-risk.

Based on certain portfolio exposure, risk and correlation criteria touched on above, we'll only be taking a 0.2% capital risk position in this trade. 

And that's the wrap for the start of a new week and new month. Happy trading!

Underdog Perspectives 25 - 29 January 2016

29 January 2016


Another strong move on the T40 with little indications of the potential momentum slowdown we mentioned yesterday. Price broke the 43,400 resistance (now support) level with the next potential target being around 44,500 (38.2% retracement) . The little inverted head and shoulders highlighted yesterday also looks to be playing out well.

However, although its still looking solidly bullish and is not overbought yet, it is worth noting that the stochastic is approaching overbought territory and that price is now in the "sell zone" between the descending 21 day EMA and 89 day EMA with the longer-term trend remaining bearish.

So at this stage we do view this move as a price retracement in a downtrend with the market continuing to paint lower lows and lower highs. What's key here is for the 43,400 level to hold. A breakdown at this point could see the previous swing low at 41,500 come into play with further downside to 40,000 with that big head and shoulder pattern we highlighted a while back still lurking in the background.

But for the purposes of the now, we will use the 43,400 as the key level and trade around it on an intraday basis with a long-bias above it and a short bias below it.

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Intraday we had just 1 x 3LB setup yesterday at 50% exposure which lost 102 points at an average risk-reward of 1 x R loss. 

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Following stop closes on AGL (20 days/1.3xR loss/0.5% capital loss) and TBS (16 days/0.5xR loss/0.4% capital loss) intraday, our open portfolio position moved slightly positive on the day and closed with some 4.4% open downside risk exposure at a potential reward-risk of 2.2-1. 

No new setups triggered on the day. On SOL the price just took off to the north not triggering our setup and with the chart now looking as if it could have double-bottomed, we'll not take any trades for now. In fact we may consider going long on a retracement - but that's for a later time. BAT we unfortunately set our entry retracement order a bit too low as price never came back that deep before taking off and hitting the first target we set by the end of the day. So our trade setup on that one has also been negated.

We have however identified 2 new setups to look at trading today:

KIO remains in a clear down as can be seen with the 21 day EMA well below the 80 day EMA. With the retracement to at or around the 38.2% level  over the past week, the stochastic has moved into overbought territory while falling well short of the previous high (as indicated by the dashed red line). With a fairly long-wicked candle forming yesterday, there could be a potential reversal on the cards but this would only be confirmed on a break below previous structure swing low as indicated. So our setup is to enter on a break of that level with an entry target of R31.00 and downside targets of R24.50 and then R20.00. This would yield a blended target reward-risk of 2.2-1

OCT is not one we've traded before but it's generated a 3LB short setup with an entry zone between R19.72 and R20.26. Stop is a close above R21.00 and downside targets are R18.44/R17.16 and R16.52.

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28 January 2016

Today saw the tightest high-low range on the index for this month so despite the bullish candle the stochastic is starting to flatten slightly as momentum wanes. 

There is however an interesting mini-inverted head and shoulders potentially showing as indicated on the support and resistance chart and a break through the neckline at around 42,900 could give the market the impetus to break the 43,400 overhead resistance level as it projects upwards towards the 44,500/61.8% retracement level we've been commenting on this week. 

So again until we get a signal to the contrary, the bulls appear to have the short-term lead and we'll look to take advantage of any upside intraday setups at 100% of acceptable risk capacity while capping downside moves at 50%. All of the above subject to the support and resistance lines we've been playing to this week.

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The rather narrow high-low range on the T40 today meant that the index didn't really break out far enough to get some directional momentum going. Consequently we had a tough day with 2 x 3LB setups and 1 x HA setup all ending in the red and losing 340 points on the day at an average risk-reward of 1 x R loss. While the setups were all valid, the learning here was that we should not have reverted to 100% risk capacity on the downside as we did for today's trading (this would have cut losses by 120 points) - hence the change noted in the paragraph above.

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The CFD portfolio moved slightly positive on the day and closed with some 4.6% open downside risk exposure and a potential reward-risk of 3.5-1. This allows us some further capacity to broaden our portfolio and we've picked up signals on SOL (short) and BAT (long) which we'll look to take advantage of tomorrow:

The weekly chart of SOL reflects the downtrend the stock has experienced since peaking in mid-2014. To be fair its been range-bound in a  relatively wide-range over the past year but what  we can see is that the stochastic rallied from oversold but then failed to cross above 50 before breaking back down below its signal line. This together with the downward sloping 21 week and 89 week EMA's means that we will favor a short position.

The daily chart shows how the recent rally has pushed the stochastic into overbought territory where it's starting to flatten out. With a relatively long wick forming on the candle around the 61.8% retracement level, this looks like an opportunity to get into a short position at around current levels.

On the support and resistance there's a level of lateral overhead resistance coming in around the R420.00 level and also some potential minor downward sloping resistance joining the previous highs. 

With this being quite a choppy stock, we'll look to enter on a break below R402.00 (previous day low) and we're going to set a fairly wide stop as a close above R420.00 looking to ride it down towards the R360.00 level as an initial target. We're also eye-balling this Traders Corner setup to potentially exploit further downside should it materialise. Our initial target reward-risk will be around 2.3-1.

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The setup on BAT is a 3LB setup. It's a bit odd looking with the choppiness the stock has been experiencing of late but with the 21 day EMA above the 89 day EMA it remains systematically valid with an entry zone between R155.37 and R153.14, a stop as a close above R150.91 and upside targets at R159.83/R164.29 and R166.52

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27 January 2016

After initial weakness the market came back strongly towards the end of the day eventually painting a long-tailed bullish candle. The stochastic also continued to rally as expected but its going to be interesting to see how far this momentum can be carried as the stochastic is outpacing price growth to the upside which could signal the potential for negative divergence in the next week or so if things start to top out. 

Drilling into the price range over the past 2 days, its also interesting to see how the market reversed intraday as noted and then almost closed on a dime at the 61.8% retracement level. 

But for now, also looking at the support and resistance chart, the expected bounce is still playing out with the next expected resistance level remaining at 43,400 and then 44,500 as we've noted before.

Our tactical plan remains in place with upside price target caps at the 43,400 and then 44,500 if that level breaks and turns into support and downside targets being capped at the 42,000 support level. We'll also revert to trading 100% of accepted risk per trade levels in both directions for now. 

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We don't really have an opportunity it post live intraday setups in this blog, but have decided to add a daily summary on T40 trading for the sake of completeness. The upside run today allowed for 2 x 3LB setups on the long-side ultimately banking a total of 400 points at an average reward-risk of 1.1 x R profit. 

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Being short-biased, our CFD portfolio took some strain today on the back of some market strength and more specifically a massive rally in the AGL price. We also managed to take new entries in PPC as per yesterday's setup post as well as SPG as per the setup post from earlier in the week. With both of these positions moving fairly slowly out of the blocks, this also added to some of the downside experienced today. As a result, our overall portfolio has actually seen a decrease in open downside risk to 4.2% with a an increase in potential reward-risk to 3.9-1. With no new setup signals for tomorrow, we're pretty much just going to monitor and manage our open positions with potential close-outs on AGL and TBS as a potential.

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We've all heard of 'buyer's remorse' but as a trader, one of the emotions that very often rears its ugly head is that of 'seller's remorse'. Using the terms very generically in the sense that buying implies opening a position and selling being the closing of a position (so not to be confused with the concepts of going long and going short), what we often come across is that situation where we close a position and then see the market moving strongly in the direction we were originally trading. We don't even have to make a loss in these instances - instead the anguish of profits foregone or more dangerously what we perceive as profits lost can often haunt us for hours or even days after the trade has passed.

Assuming our exit was in line with our trading plan, intellectually what we need to do is start to wire our brains into evaluating not the outcome of the individual trade or the outcome of the trade as it could have been but rather the outcome of the last 50 trades, 100 trades, 500 trades as collectives. Its the appreciation from an emotional perspective that every individual trade is in itself meaningless as its just another small step in a lifelong trading journey.

Its not an easy mental and emotional adjustment to make but when you find yourself slipping into frustration in these instances, the first thing to try and do is to observe what is happening. Actually stop, put down the pen and the mouse or whatever is in front of you and say these words: " I observe that I am feeling frustration. The market does not care that I am frustrated. The market is not to blame for my frustration. This frustration is of my own making. I am frustrated because ....." At this point its often difficult to complete the sentence because having acknowledged the problem is of our own making, we struggle to put a truly valid reason to the emotions we are experiencing. But to a large extent just by going through this process we have started the defuse a potentially damaging emotional response. Try it and see! 

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26 January 2016

Despite the market coming off a bit on Monday it was more of a downward meander than the result of any major shift in sentiment with the intraday price action playing out very sluggishly. Consequently, there doesn't appear to be much of a change in terms of outlook versus the views we expressed at the beginning of the week. On the daily chart, the stochastic continues to look bullish on an end of day basis with plenty of headroom to the upside and we're still very much in the zone between 42,000 and 43,400 on the support and resistance chart. On this basis, our intraday game plan therefore remains unchanged as well.

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Portfolio-wise, we closed out the T40 end of day short (17 days/0.8xR profit/0.3% capital profit) - as noted in yesterday's game plan - on early strength. Unfortunately we couldn't get the desired entry we were looking for on SPG (also noted yesterday) as the price ran strongly away from us over the course of the day. At this stage the setup remains valid though so we will continue to monitor and will consider an entry if the opportunity presents itself. 

This then leaves the portfolio with 4 open positions and 4.5% downside risk on the table, looking to generate a 2-1 reward-risk. Again, while this is a decent enough state of affairs, we would like to try and bulk things up slightly more, especially on the reward-risk front. With the probability of SPG retracing into an acceptable long order value level for us becoming less likely though, we have also identified a 3LB short setup in PPC which we will look to trade:

Entry zone between R12.00 and R13.00 with a stop as a close above R14.00 and downside targets at R10.00/R8.00 and R7.00

We did manage to trade a very successful 3LB on PPC early last month so looking to see if we can repeat that performance.

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25 January 2016

In our post at the beginning of last week, we highlighted the fact that trading would be tricky over the course of the past week with the bulls and bears tussling for the upper hand. That was pretty much the order of things with a very choppy week playing out as the market consolidated. 

In the final summary, the bulls had the final word as we can see on the weekly chart below. After coming close to breaking the late August low, the T40 had a strong rally to end the week - eventually painting a fairly bullish candle with a relatively long tail. The RSI has also managed to start rallying off its low (but not oversold level) and although the weekly stochastic remains pointed downwards, its back in oversold territory. 

However, as pointed out last week though, the 21 week EMA still continues to move closer to the 89 week EMA with a negative crossover of those averages pointing to greater downside potential. So the weekly chart is giving us slightly mixed indications but the potential for continued short-term consolidation and at least a further temporary bounce off the swing low appears to be on the cards for the next few weeks - although the sustainability of this potential movement remains questionable while we are below the 45,000 level

Drilling down into the daily chart, the morning star pattern highlighting the reversal we discussed for Friday played out in textbook fashion and with the stochastic crossing out of oversold territory and moving upwards, it adds further credence to the short-term bullish move over the next few days.

On the daily support and resistance, we can see the bounce playing out with upside resistance at 43,400 and then 44,500. 

And  finally, we look at the daily 3LB chart where a counter-trend break has just taken place. What this means is that the T40 short position we have had in place over the past couple of weeks will also be covered on further strength.

So on balance, it appears as if the bulls have it in the short-term so our trading strategy will be to weight our intraday positioning on the long side with capped target levels at 43,400 and should that be broken 44,500. We'll also look to restricting downside setups to 50% of accepted risk per trade levels while trading remains above the 41,500 level. We'll continue to re-evaluate this rule-set on a  daily basis as the week's trading action unfolds. 

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With respect to our overall portfolio, our short-side bias in the context of Friday's bullish move did see further value retracement and we also closed out the PAN short position  (14 days/1.73xR profit/1.1% capital profit). Even with the opening of a new short position in SUI at R82.10 though, our overall downside risk exposure has reduced to 4%. Our target reward-risk has also grown to 3.02xR. Adding the potential for the T40 short covering which appears likely to be on the cards for Monday, the following long 3LB setup on SPG appears to be coming at an opportune moment to maintain the portfolio depth and also to add some further long-side diversification to the mix:

Setup details are as follows: Entry zone between R38.34 and R37.46 with a stop in as a close below R36.57 and upside targets at R40.11/R41.88 and R42.77

***

Finally, something which has been popping up quite frequently, especially in the past week, is the the concept of deleted setups. When intraday trading and depending on the time-frames used (we use 15 minute charts), there are periods of hours and sometimes even days when not a single setup present itself. This can then be followed by periods like last week, where there was a surge in the number of setups which lined up. 

The frustration can creep in when despite the number of setups, none or very few of them actually trigger and result in a trading position. Rather than be frustrated, we prefer to take the contrary view and regard deleted setups as hugely positive because they very often prove to be an inherent safeguard in the system to protect against taking losing trades. 

Certainly there'll be situations where "if only this candle had closed 2 points higher we would have caught a decent trade" but the reality is that these opportunities will always recur and a missed opportunity is so much better than forcing a trade which ultimately ends up in a loss. So the moral is to trust the tested system, focus on executing 100% in line with planned setups and let the money take care of itself - it will.

***

Underdog Perspectives: 18-22 January 2016

22 January 2016

Another choppy day on the market today with, interestingly enough, the narrowest daily high-low range on the T40 for the new year - which could potentially be indicative of the the bears starting to - at least for the time being - run low on steam. This is also reflected on the daily price candle chart where we can see a long-tailed (albeit relatively minor given the small price range) candle painting on the day. The stochastic also continues to hold its form as it threatens to start moving up out of the oversold zone.

The critical support at 41,500 continues to hold on an end of day basis and overlaying a fibonacci retracement on the high-low originating at the top of the right shoulder, we see some interesting confluence levels at the 43,400 major overhead resistance (38.2%) and the 44,500 level (61.8%).

So there are indications that the long-waited oversold bounce is potentially ready to start playing out. The first thing that needs to happen is that the index needs to move out of the 41,500/42,000 support zone and on a move above 42,000 we could run any long setups as far as the first major resistance at 43,400 as highlighted above. The alternative scenario sees a break and hold below 41,500 - at which point the 40,000 level could be eye-balled. So the essence of our intraday strategy we set out in yesterday's post remains intact: "We'll trade this by taking tight fixed target trades in either direction while within the support channel noted and only let trades run on the long-side above 42,000 and on the short-side below 41,500."

***

On the portfolio front, we've not made any changes to the composition but a small retracement in value combined with a tightening of the PAN stop-loss has seen our downside exposure reduced to 5.2% with the potential reward-risk increasing to 1.8-1. The latter isn't ideal yet so we will continue to look for opportunities to further tighten our stops or cash out on profitable positions tomorrow. With gold retreating in the face of a potential positive move on the overall market, we could see PAN closing out during the course of the day. This then affords us the opportunity to add to our portfolio and to this end we've identified the following 3LB short setup on SUI with an entry zone between R80.47 and R83.74, a stop as a close above R87.00 and downside targets at R73.94/R67.41 and R64.15.

And that's pretty much the wrap for this week....

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21 January 2016

Today was an example of changing a plan from the get go as the market gapped down out of the blocks and pretty much barely glanced back as it plummeted to its lowest close since October 2014. The stochastic managing to hold its upward angle is one of the few minor positives coming through on this daily candle chart.

On the support and resistance, the market broke through the 42,000 emphatically but then towards the end of the day managed to regain the 41,500 level leaving it floating in what can best be described a support channel between 41,500 and 42,000. 

It's now imperative that it claw its way back over 42,000 to stage an bounce which would see the stochastic moving back up out of the oversold zone. Equally important is that it not breakdown beneath 41,500 as this could see further weakness towards the 40,000 level.

We'll trade this by taking tight fixed target trades in either direction while within the support channel noted and only let trades run on the long-side above 42,000 and on the short-side below 41,500.

***

From an overall portfolio perspective, being short-biased today saw a healthy increase in position profitability but this was accompanied by a consequential increase in downside risk. Despite closing out the AFE short (12 days//1.3xR profit//0.7% capital profit) following a trailing stop trigger, downside risk has now jumped back up to 6.4% and the potential reward-risk of the of the overall portfolio has dropped to 1.4-1 This has necessitated some more profit-taking or stop-tightening tactics for tomorrow. One position we'll specifically be eye-balling in this regard is PAN which has been moving strongly positively on the back of overall market weakness and rallying gold prices. While there's some headroom towards target, if it starts to falter we may look to start taking profits faster while aiming to tighten the stop on further strength.

Against this backdrop, its still difficult to be adding more positions into the mix although we again note that tradeable technical 3LB short setups have now triggered in NPN, IPL, WBO, TFG and RBP. But again we'll continue to wait unless some risk capacity opens up in the portfolio. 

* INTERLUDE *At this juncture it might be worth a slight deviation off the beaten path to explore this concept in a bit more depth. When we find ourselves in market conditions such as those we have been experiencing, it can be heavily tempting to simply let the excitement and adrenaline rule the roost by "putting it all on red". And this may well be a winning tactic....today. But its also very risky to take this approach and in no way is it sustainable. Bulking up on the short side and taking on 10%, 15%, 40% risk exposure levels to the downsides could be viewed as a no-brainer in a market which has now dropped more than 9% in a relatively steady downtrend since the beginning of the year but the reality is that its at this very point that the greatest care needs to be taken. Think about racing fast down a steep slope. You're generally accelerating pretty fast and the last thing you want to do is to speed up. Chances are you'll end up bloody and bruised and pretty much out of action for at least the near future. Sustainable trading is about slowing down, maintaining control and being available for tomorrow's race. #end-of-random-interlude/lecture

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20 January 2016

Intraday trading of the T40 was characterised by a high degree of chop as the battle between the buyers and sellers we highlighted yesterday played out within the range of the pre-defined support and resistance levels. Overall it was a strong bullish candle which ultimately prevailed on the day and kick-started the stochastic back up over its signal line from well inside the oversold zone. While it still needs to move out of that zone to really confirm the bounce, this is the most bullish candle the market has delivered year to date.

The support and resistance chart also shows a solid move off the 42,000 support level on an end of day basis.

On balance, it looks like the market is trying to start putting some momentum behind its oversold bounce. However, its currently moving around within the relatively tight range of the 42,000 to 43,500 levels and these are the levels we'll respect as extremes of any low or short trade until such time as they are broken. So the plan is to let trades run within this trading zone with a re-evaluation if support or resistance is broken.

***

The risk exposure within the overall portfolio continues to decline with a move down to 4.3% following our closeout of the ANG short at end of day today (7 days//1.6xR loss//0.8% capital loss) when it closed below its stop level for the second time. With the benefit of perfect hindsight yesterday's decision to re-balance the portfolio by closing out the SAP long trade as opposed to the ANG short option wasn't the best as SAP continued to move higher over the course of the day against the backdrop of a solid overall market rally. But, as there are no new setups in play, we're also pretty comfortable letting these risk levels run down for now; giving us some dry powder for trade opportunities that may materialise later in the week.

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19 January 2016

A tough or rather a frustrating trading day today as the consolidation and choppy trading action played out as anticipated but was exacerbated by the fact that the US markets were closed. After an early rally the market effectively meandered sideways and downward for the balance of the day eventually closing slightly in the red but painting a candle with a very long wick.

On the support front, the 42,000 level continues to hold on an end of day basis.

On balance, the stand-off between the oversold bulls and the downward momentum bears remains in place and we will continue to stick with our intraday tactic of taking quick profits within the 41,500 to 43,400 trading range.

***

On the portfolio front, we've now closed out on the SAP long position as per our planned approach as well as the PSG long position mentioned in yesterday's post (following a second close of this stock below its end of day stop-loss level). While the resultant 5.9% overall portfolio downside exposure (at a 2.6-1 target reward-risk level) is now within the acceptable threshold, it still leaves us pretty much at trade capacity. This was also unfortunately what prevented us from capitalising on the TFG setup we highlighted in yesterday's post. With the stock trading in the R121.00 to R111.41 range over the course of the day, we would have entered and hit target on an intraday basis! Such are the missed opportunities one has to deal with however....We will continue to monitor the overall portfolio and probably look to start taking off more positions over the course of the week as we now have trailing stops running on the AFE short as well as the PAN long and an end of day stop on ANG.

***

There are 3 new trade setups detected today - all 3LB breakdowns on the short side. The setups are for CML, CLS and TRU. With the overall portfolio at capacity we can't really open any new positions unless a gap opens up so its unlikely that we'll trade any of these tomorrow. We also remain heavily short biased with the only long positions in our portfolio being in gold stocks, which adds to the case of pretty much sitting on our hands for now and managing our open positions.


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18 January 2016

I'm changing the format of this blog a bit to to improve the flow of my thinking in respect of market and individual stock movements as new developments unfold over the course of the week. As an active member of the Traders Corner website and service, I've made the point on that forum that the purpose of this blog has really been an attempt to maintain an electronic trading journal which will allow me to reflect on the logic and rationale being applied in negotiating the markets. The benefit of making it an online journal also enforces a large element of accountability. At some point in the future I may migrate this blog to an Underdog Investments website but its not a major priority at the moment and instead I've decided to work on just refining the articulation of my thinking processes in this space and also to expand the breadth of the commentary to move beyond just posting of mechanical trade setups to encompass some of the broader considerations and views which shape my trading business decision-making processes. Also, improving the richness of the content will I hope also assist in keeping the whole blogging and journalling experience fresh and interesting from my own personal perspective!

So for those who do pop in here to read this, I trust my idle meanderings will be of interest to you with the caveat that these meanderings are my own, crafted for the purposes highlighted above and not designed to be a form of advisory service.

But enough of this waffle, lets kick-off with some perspectives on the JSE Top 40 for the new week:

The bearish outlook we expressed in last week's T40 post, has pretty much been playing out over the past few days culminating in the week-end break of the 42,500 rising support level. On the weekly chart, we can see that the prior week low which we also also highlighted as important for the market to stay above, was comprehensively broken and now there is a massively bearish failed stochastic reversal on the weekly charts as the stochastic crossed back down below its signal line. The RSI confirms this trend and importantly is not yet oversold in this time-frame. We also need to keep a sharp eye on the 21 week and 89 week EMA levels as a negative crossover in that space hasn't taken place since October 2008 during the global financial crisis.

The daily candlestick chart is also highly bearish as the market continues to form lower lows and in this time-frame we also see a clear failed stochastic reversal as the stochastic moved up off oversold levels but then failed and broke down below its signal line.

On the daily support and resistance chart, we see the potential head and shoulders highlighted last week which has now seen a break below its neckline. The projected downside of that formation towards the 37,800 level adds to the continued bearish outlook. However, its unlikely that this downside will play out in the near term and there are a number of support levels which could come into play as highlighted at 42,000/41,500 and then 40,000.

Putting all of this together, with the market down 8% for the calendar year so far and being oversold in a number of time-frames, one could be forgiven for having the expectation that a bounce was overdue. And with some support levels coming into play we may see some consolidation in the 41,500 to 42,000 zone. However, its going to take some major effort to undo the damage done to these charts, and the odds are heavily in the court of further downside over the next few weeks. In light of that scenario, we are continuing to hold our end of day T40 short position as highlighted in the 4th chart in this post. In the near-term next week's intraday trading is going to be tricky and with oversold consolidation facing off against downward momentum with relatively tight range support levels, tactically we'll approach the T40 intraday trading by taking quick profits (aiming for 2-1 trades) in either direction off signal setups. If 41,500 breaks however, we'll look to treating that as overhead resistance letting short trades run down toward the 40,000 level.

***

On the end of day front, we mentioned the T40 short position we have open above, but over the past few weeks, we've actually built up a sizable portfolio of CFD positions. On balance, its very much short-biased with short positions in AFE, AGL, GND, TBS and long positions in gold via ANG and PAN as well as in SAP with perhaps only long play being the position in PSG (setup details on this one can be found by subscribing to Traders Corner ). We reassess the potential risk and return of the portfolio daily and as at today's writing, our open risk is now at 6.5% of capital with a 3-1 open reward-risk target; a level which we'll probably look to scale down during Monday's session as its now shifted outside of the 6% threshold we regard as acceptable. We'll be eye-balling some profit-taking on PAN or SAP to achieve this as it reduces overall risk and also lightens the short bias in the portfolio somewhat which wouldn't be a bad idea in light of some potential short-term consolidation playing out.

***

So, we're certainly not looking for many immediate end of day trades although the fallout on Friday has resulted in an overwhelming number of short setups. Technical tradeable 3LB short setups were activated for REM, NTC, MRP, FFP, DSY, CCO, MSM, LHC, HUD and the STX RESI - which continues to be hammered! Having said that, the potential short we will be favouring, risk-capacity permitting - is the following setup on TFG, which in addition to the points noted below, also allows some systems' diversification as the bulk of our portfolio is concentrated in the 3LB setup space at present:

On the weekly chart we can see the same failed stochastic reversal as reflected in the T40 analysis above. The weekly price chart shows the negative crossover in mid-December with the 21 week EMA crossing below the 89 week EMA as the price struggled to move above the 38.2% Fibonacci retracement level of the high low from 6 November to 11 December 2015.

Drilling down into the daily chart, we can see how the price rally of the past week failed towards week-end culminating in a long bearish candle. The result is that the overbought stochastic is now starting to reverse down from those levels

On the daily end of day support and resistance, we can see the potential wedge formation in place with strong lateral support in around the R111.00 level.

Within the tactical playbook of sticking with quick profits, we'd look to short this on an intraday pullback to R121.00 with a stop in as a close above the swing high close of R124.30 and a target near the wedge bottom at R113.00 yielding a 2.4-1 target reward to risk. Trade grading is 100% meaning that we'd be willing to risk up to 100% of our maximum permissible risk per trade (1%) on this setup.

And that's the sum of the thinking as we head into the new week!

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