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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