Underdog Perspectives 08 - 12 February 2016

12 February 2016

And another big bear candle on the T40 saw the 42,000 level being tested as discussed in the last post. However, importantly, it did manage to hold that level by the end of day. The stochastic has moved into oversold territory but remains pointing firmly downwards. The critical 41,500 - 42,000 support zone is now well in play and is clearly visible on the price as well as the 3LB charts. In a nutshell, the bulls need to find a bounce at this juncture to have any chance at pulling this one back.

The fact that the T40 managed to hold form for the last few hours of the day around the 42,000 is a point in favour of this potential outcome and with an oversold stochastic reversal materialising, we could see an oversold bounce - perhaps back towards the 43,000 resistance level which at the moment coincides with a 38.2% retracement of the current down move.

The alternative continued downward momentum now needs to push through a 500 point support zone with a break below 41,500 unlocking significant further downside potential.

                             

Tactically we'll now look for longs off the 42,000 level with a potential run back to 43,000 . Conversely we'd be happy to build some headroom and then short back down into the 42,000 level should reward-risk levels justify this off the back of an oversold bounce. We're hesitant to trade the choppy channel between 41,500 and 42,000 though and so and would rather trade above or below this channel on an intraday basis.On balance it looks like tomorrow's session will involve some tight trading or hand-sitting needs to be the order of the day tomorrow.

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Intraday trading was muted today after watching the morning sell-off from the sidelines. 1 loser and 1 break-even trade was the order of the day netting a 0.9xR loss.

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Our 100% short positioned portfolio did very well on the day leveraging the overall market weakness extremely effectively. The downward momentum has however run a bit ahead of stop tightening or profit-taking processes with the result that our downside open exposure has jumped significantly to 6.4% which is just outside our 6% threshold. The potential reward-risk level on the portfolio remains acceptable at 2.2-1. Our RaR measure has however dropped off to a level of 1.41 from 2.13 previously reflecting an increase in volatility combined with reduced potential for gains as we approach target levels.

At the same time, we have very stale trade which hasn't really played out in the form of the PPC short entered 26 January. Its not far off break-even now and we'll be looking to simply shut it down. While this won't have much of an impact on our RaR, it will bring downside exposure back to within 6% and if we can also hit some further target levels on our more advanced positions to start booking profits, this could unlock good capacity on both the risk and reward legs of our equation so that we could look to start adding more setups in next week.

In essence, we do have a number of short setups coming online with the GRF and TKG setups still in the zone for entry and new breakout setups on NPN, COH,CCO and NPK and a trend continuation setup on MTN. However with the potential for the oversold bounce as we head into the weekend were going to be wary about simply adding to our overall short exposure at this point and we're opting to focus on rather managing our existing portfolio exposure as per the thoughts set out above.

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11 February 2016

A long wick painted on the day and despite the T40 not moving much on an end of day basis, intraday saw a retest of and in fact a false break back above 43,400 resistance before the market fell away towards the end of day. This could also be seen as a throwback to the underside of the wedge pattern broken yesterday. With the stochastic still pointed downwards, the bears have control at the moment and despite some support around the 43,000 level, on balance it appears as if we will see the support zone starting around the 42,000 level being tested in the near future as the market moves towards its previous swing low. 

Against that backdrop, our intraday tactics remain unchanged.

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Structure trading was the order of the day in the last trading session in which we managed to book 2 out of 4 winners - including the carryover-trade from the previous session - netting a cumulative 4.3xR profit with a 93% execution quality rating - a very good day.

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Portfolio-wise, we managed to enter our INL setup highlighted in the last post. With an entry at R96.26 its not far off our target level but given the high watermark that this stock's price touched intraday, there's definitely room to work on finessing our entries more in future. We also managed to tighten our GND stop position as it moved down massively on the day. That leaves us with a 3.9% downside exposure at a decent 3-1 potential reward-risk. Our RaR measure also climbed nicely to 2.13 from 1.59. 

At these levels, we're almost in our target zone for our portfolio measures and with some more setups coming across the table (The TKG short setup from yesterday is still affording a decent entry. AGL and GRF look tohave good trend continuation short setups), we've decided to go with the following short breakout setup on DTC:

The initial 3LB break painted on 09 February as price closed below it's previous significant swing low. This was confirmed on a close below the new low yesterday - despite the long wick on the daily candle. This gives us quite a broad opportunity to enter the trade with maximum reward-risk being achieved on an entry at R40.01 with a stop in as a close above the price candle high at R41.00. Downside targets would be at R36.00 and then R33.10. At maximum levels, this setup yields a 6.5-1 reward-risk but this may deteriorate somewhat as risk-based position sizing may necessitate phasing into the trade.

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10 February 2016

And once again the trading action played out with a rather surprising swiftness. The T40 went the route of being squeezed bearishly and broke through the bottom of the rising flag we had noted before. With the stochastic breaking back down below its signal line from overbought territory, a solid bearish candle and a 3LB end of day color switch, we're now looking very, very bearish.

With 43,400 comprehensively broken, The next major band of support now comes in between 41,500 - 42,000. We may also see some throwbacks towards the bottom of the flag pattern and lateral support at 43,400 but with the stochastic at such high levels, this may be difficult to sustain on an end of day basis.

Intraday we will continue to favour shorts towards the support band at 42,000. Longs will need to be counter-trend moves with sharp and quick profit targets. All eyes will be on whether major support holds in the days ahead or if the market punches through and starts executing on the projections of the larger head and shoulders pattern we've highlighted in weeks past.

We usually include a contrarian view but its a bit of a struggle in this situation.We'd need another failed stochastic reversal, and a break back above lateral resistance into the flag pattern. If that were to play out we would need to re-evaluate but for now, that's the less likely scenario.                                                               

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Today did see a difficult intraday session starting off with the closing of our overnight long position post today's open. All in all we then took another 3 trades for the day - the last of which remains open at the time of this writing. In aggregate (again excluding the open position), we took losses of 6.3xR for the day. Consolation for following system rules to the T need to balanced with pragmatic flexibility is the best way to express the learning coming through on this. In a nutshell, this is not an acceptable outcome and a repeat performance is most definitely not going to be on the cards anytime soon!

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On the portfolio front, we saw a solid entry at the target level into the EMI setup we noted yesterday. We also closed out our MND long position (1xR loss/ 1.2% capital loss) - in a  sense fading the inevitable close below the stop level for this stock. With stop adjustments also being made on certain positions, we find that our downside risk level has remained static at 3.4% with the potential reward-risk dropping to 2.1-1 and our risk-adjusted return measure increasing to 1.59. Just as an aside at this point, this measure is a combination of the Sharpe and Sortino ratios and is designed as relative measure for us to ensure that we're balancing both sides of the risk and reward equation. On balance, at 1.59 this is an "ok" rating but we'd really like to get it up to above 2 or even better above 3. Digging deeper, the fact that we're a bit light on exposure appears to be the what's holding the ratio back at the moment.

So to cue the next tactic, interestingly we have 4 confirmed setups that have come online after today's trading action. ALL of these are on the short-side.  KIO and ARL are trend continuation setups as they come off overbought conditions with their major trend still being to the downside. INL and TKG are short breakout trades as the breaks below previous structure support are now being confirmed by continued weakness in price. 

The setup offering the best reward-risk for us is INL. We can see the initial 3LB coming through on 11 December and today finally saw a close below this level confirming the breakdown for us. We'll look to enter around the current price level of R96.50 setting a soft end of day target at just above the candle high of R99.90. Downside targets are at R88.00 and then R78.00 yielding a blended target reward-risk of close to 4-1. 

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09 February 2016

Intraday price action played out pretty much in line with expectation although the brevity of the early morning rally was surprising with the market topping out in the first 15 minutes of the day, once again failing to hold the 44,500 level and then pretty much falling away for most of the day before a late afternoon rally started coming online. 

On an end of day basis we can see how for the 3rd day running the 44,500 level has rejected the break with some intraday capitulation being the consequence of this today. The stochastic isn't giving many clues with the bullish failed reversal still in play in the overbought territory, The 3LB candles are still green and we remain in the flag formation we noted yesterday. On balance, despite the intraday action, not much seems to have changed but we can see that we're starting to get squeezed by downward sloping and lateral resistance and rising support. 

So for now we'll continue to peddle the zone between 44,500 and 43,400 both long and short side until such time we see a break outside of these structures.
                                                       
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We had quite a busy intraday trading session today. In addition to closing out our overnight short position, we took 5 new trades, 1 of which, an overnight long, remains active. Excluding this overnight position, we managed to generate a rather modest 0.1xR profit for the day - a reflection of lack of follow through more than anything else with the T40 stuck in that narrowing range noted above.

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As mentioned yesterday, we sat on our hands with regards to our portfolio today and with no changes taking place, despite some volatility playing out, we find ourselves, unsurprisingly, in a fairly unchanged situation with 3.4% downside risk exposure at a target reward-risk of 2.6-1 and due to reduced volatility, an increase in potential risk-adjusted returns. On balance, not a bad position to be in given current market conditions. 

But we have identified the following short position in EMI which warrants some consideration:

The stock has been in downtrend since late October but has rallied off its recent lows in the last 3 weeks, pushing price into the "Sell Zone" between the 21 day and 89 day EMA. With the stochastic moving overbought and now looking to be reversing down from its high watermark, we also have a hint of negative divergence playing out as price made a lower high while the stochastic made (just) a higher high. This coupled with a thick bearish candle pointed to a good short trade setup.

We will look to enter the short at the low of the current candle (R15.25) and we're setting our stop at the higher structure level with the stop coming in as a close above R16.50. We are targeting the previous swing low as a first target (R13.50) and then a second target near the 127% projected level (R12.70). All in all the reward-risk on this trade is around 1.7-1 which is slightly dilutive to our portfolio position from that perspective but it does enhance the overall open risk-adjusted return measure we monitor on a daily basis.

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08 February 2016

Last week started out in line with expectation on the T40 with the bounce fading as the overbought index started to move down. All of this was pretty much put to the sword by a massive short squeeze coming through on the resource front though and this saw the T40 effectively revisit its recent high water mark by the end of the week.

So this week, we'll start off by looking at the resource position by referencing the relative performance of the industrial and resource indices as represented by the STXINDI and the STXRESI. Now this is a weekly chart which maps the relative relationship between the 2 indices and  we can see the break of support coming through as the resources surged over the past week. Interestingly, we can also see that we're still in the upper bollinger area and the longer-term support which has been in place for more than a year only comes in at a substantially lower level. This could imply that the relative out-performance of resources still has some way to run over the course of the year. 

Drilling down into the daily chart, we can see this same support breakdown but now we see that in the short-term, there's been a move outside of the lower bollinger band. So here the expectation would be that we start to see some form of retracement with some mean reversion and potentially a  throwback to the underside of the previous support (now resistance) level. If this does play out, we would view that as another opportunity to jump into the longer-term trend by going long on resources and shorting industrials. 

So this is definitely a chart we'll keep on our radar in the weeks ahead. In translating this into our T40 discussion, we start off by looking at the daily T40 layout. As we noted at the end of last week, there has been a bullish failed stochastic reversal with the stochastic starting to move back down and then failing to confirm by reversing back up over it's signal line and now back into overbought territory.

The candles over the past 3 days, and indeed over the week, has been bullish with another long-tailed structure to end the week. The index now finds itself pressed up against the 44,500 resistance level - a level which it tested and failed to break a number of times during the course of the week. We also have a strong confluence of downward sloping resistance coming into play here.

At the same time - as indicated in blue, we have a potential flag pattern coming into play here with a 4th wave up move potentially in progress. This could see further upside towards the 45,500 level. If this starts to play out, we could see the making of a false break of resistance as the T40 breaks 44,500 and moves to the flag ceiling before reversing.

Zooming out and looking at the bigger picture on an end of day basis, we see a relatively unchanged situation. Unless the right shoulder of this head and shoulders formation is broken, we are still looking for further downside over the medium-term.

Putting this all together we seem to find the market at an interesting juncture (isn't it always!) with the bears still taking the lead over the medium-term but with the potential for further legs on the bullish rally in the next week. But even with a break through initial resistance there are so many hurdles for the bulls to face that we would think there's a high probability of any further rally being relatively short-lived. The impetus of the resource short squeeze as noted above also looks to be fading which adds to this aspect of the argument. As an alternative, the immediate overhead resistance could just prove too much for the bulls out of the blocks and we could start to see a reversal from these levels from the get go. 

In either scenario we are very, very wary of chasing long positions on an intraday basis and that will feed into our intraday strategy for this week.

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Portfolio-wise our exposure levels are relatively low at the moment with total downside exposure of 3.3% at a target reward-risk of 2.7-1. This was in the wake of a Friday morning close-out in respect of our SPG long position (0.4xR/+0.2% capital profit)with an intraday stop alert coming through. We also did not enter the AWB short setup noted at the end of last week due to a shortage of scrip available for the short position. All this does leave us a bit light in terms of positioning but our pure risk-adjusted return measure has still improved. For now this is acceptable until we get more potential setups being presented.

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So overall we're adopting a bit of 'wait and see' on the market before venturing in with further positions and while we do have a short T40 position in place since Friday, much is going to depend on what happens out of the blocks tomorrow.

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