Underdog Perspectives 15 - 19 February 2016

19 February 2016

After attempting to maintain upwards momentum towards the 45,350 level, the bulls were exhausted on an intraday basis and selling into the afternoon forced the T40 down to a close below the 44,500 support level. This is significant from a  number of perspectives:

• We're starting to see a stochastic reversal from overbought territory
• Should yesterday's high water mark be indicative of a swing high there is some negative divergence being displayed with the stochastic making a lower high and price making a higher high
• The daily candle is in the sell zone between the moving averages and with a long wick to the top and a close near the day's low, this appears to be a reversal candle.
• The market effectively stalled and appears to be reversing off a key fibonacci level

Putting all of this together along with our comment yesterday that the 45,350 was key for an end of week close (which now appears remote), would suggest that the 'jet fuel' has been - at least temporarily exhausted and that we could see some downside being on the cards here.

In fact, the T40 is displaying some key characteristics for a portfolio short position, so we entered one last night as marked up on the charts and off the back of the rationale set out above. Entry was at 44,333 with a stop in as a close above 46,701 and downside targets at 41,247 and then 39,800. This is clearly not an overnight trade but we will monitor and manage it as we do all our portfolio positions. Our target reward-risk is 1.8-1.

Tactically, on an intraday basis we will look tot he short side for the most part. Any long trades would be completely counter-trend and treated as such.

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Intraday saw us net a 0.6xR loss but we do have 2 overnight short positions in place which we'll monitor and look to take profit on during the course of the day.

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Quite a few changes played out on the portfolio front. The trailing stop on our GND short position was triggered intraday for a 1.5xR profit.  This was however offset by and end of day close out on our IPL short which also triggered its stop loss level resulting in a 1.5xR loss. At the moment, our RMH position is also looking vulnerable and unless it can share in anticipated market weakness today, we may see that closing out as well.Finally, we entered the new T40 short as set out above. The impact of all of these along with the normal stop tightening trade management processes has been to reduce open downside exposure to 1.5%  (2.6%) at a healthy 4.5-1 potential reward-risk level. Our RaR has also reduced to 2.3 (4.1). It is tempting, given the portfolio positioning to add via some setups which have landed on the table but as noted yesterday, we're still in the process of bringing some management changes into play so again we'll just continue to manage our positions. No rush!

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18 February 2016

Yet another bullish day on the markets with the T40 now up 6.5% in 4 days. The index also managed to regain the key 44,500 support level. But with the stochastic now in overbought territory - although still very firmly bullish - and the T40 closing virtually on a dime at the 61.8% retracement level of the high low for the year-to-date, it's going to be key for the bulls to maintain momentum. 

To this end we could now start eye-balling the 45,350 level as a weekly close above that level would constitute a positive 3LB on the weekly chart, negating (at least for the moment), the 5 month downward trend we've been highlighting using 3LB charts. But with 750 points of headroom, in overbought conditions and a continued negative EMA21/89 condition,  this could be a tall ask for the bulls...

From a tactical perspective, we'd be comfortable riding momentum up to the 45,350 level but any short-side breaking - especially below 44,500 would be an opportunity to catch a piece of any downward move. 

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Intraday was again a muted affair with a net 1xR loss on all positions.  With the big moves over the past few days, it's almost a  relief not to have overnight positions running in the market at the moment.

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Portfolio trading saw us close out our INL short position for a 2.3xR loss with another close above the stop. Thee's an argument to be made in post-trade analysis and based on some development work that the stops on these 3LB end of day trades are too tight (we currently position them on the opposing end of our trigger candles as opposed to the setup candles) so that may be a minor amendment we look to bring online shortly.

We also managed a solid entry into the RMH position highlighted late yesterday, coming in at R57.91. For the balance, we have tightened a number of existing position stops as well with the result that our open downside risk has remained fairly flat at 2.6% (2.4%) but our potential reward-risk has shot up to 5.2xR. Our RaR has also benefited from these changes moving up to a substantial 4.1 level. For now we're standing pat on our positioning as we've brought some money-management criteria into play which caps overall CFD gross long-short portfolio exposures at a lower level but we are fairly comfortable with how we are currently exposed. The focus is now on maintaining better consistency - especially on our RaR levels as the portfolio turns over.

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17 February 2016

Some abbreviated posting today on the back of some illness. On an end of day basis, yesterday saw the 44,500 resistance level broken and then the sellers managed to push the price back down with a close back beneath this level. Even though the stochastic is still heading upwards, we have what looks like a daily long-wicked reversal candle in place and a follow through from this could see a move back down to the 43,400 support level. Also if the stochastic stalls here, we could see some negative divergence being exhibited on a daily basis. The bulls would need to take out yesterday's high water mark to negate this.

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Intraday was a fairly flat situation with a 50% win-rate on 2 trades closed out and a break-even result. We do have 1 overnight short position which we continue to monitor though.

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Similarly on the portfolio front there've been no changes. We decided to continue to hold INL as it ended weaker into the close. Today will be critical for this share to see if it can resume its move back down. Open downside exposure is now at 2.4% with a target reward-risk of 3.67-1. 

**LATE update**

Looking at the analysis of RMH, we can see how the its moved into overbought territory with the major downtrend still remaining in place. Yesterday saw a bearish candle being painted allowing for an opportunity to get short at current levels and potentially look to target the R49.00 and R46.00 level again. With the stop in above R60.10 this is a decent target reward-risk of 4.5-1

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16 February 2016

Another solid bullish candle saw the T40 break through 43,400 and move all the way up to the higher resistance levels noted yesterday. The stochastic still appears quite bullish with room to spare before it would be regarded as being overbought. 

With momentum still in place, tomorrow will see whether the bulls can follow through and start pushing the T40 to a break through the descending and lateral resistance levels - in which case, the next structural resistance level would come in at around the 45,300 level. Alternatively a failure on this break could see some consolidation with a potential move back down towards 43,400. Worth noting that the daily candle ranges for February have to date exceeded an average of 1,000 points for the month to date and large daily moves have become the order of things to date making early session setups quite a profitable prospect. 
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On that note, we've not really caught much of these moves over the past few days with our setups. Today saw us nett a 1xR loss for our efforts. Not by any means damaging but it can be frustrating to watch opportunities go amiss. Important in these situations to maintain focus and discipline - new chances will come!
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On the portfolio front, we have struggled a bit more with another short closeout on DTC coming through today (4 days/2.1xR loss) and potentially a closeout on our INL position being on the cards for tomorrow. Consequently, our open downside risk is now at 2.1% and despite the potential reward-risk of 4-1, our RaR has deteriorated greatly to a very modest 0.3 -1. With no long position setups being presented to complement the SAP long we flagged yesterday and managed to enter today, we did manage to find a short setup in a stock which appears of late to be displaying a relatively low level of correlation to the balance of our open positions. 

The COH short noted has a target entry at R40.22 or better with a stop in as a close above R42.50 and downside targets at R37.10 and R34.20 yielding a target reward-risk of 2-1.

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15 February 2016

A solid bearish move over the course of the week despite a late week rally on Friday. Last week we highlighted the bearish channel in which the T40 was moving and the market broke out of the bottom of this formation quite convincingly moving all the way down towards the major support zone between 41,5000 and 42,000 before finding a substantial bounce on Friday, again moving to test the 43,400 resistance level. 

Looking at the week ahead, there are a few elements to keep an eye on. The weekly chart shows a fairly neutral stochastic with the potential for forming a fairly low higher high top if the bulls cannot push convincingly forward on a weekly basis. So if last week's high cannot be challenged on the T40, we could see the makings of some weekly negative divergence in the making (price would be making a lower high). Also worth noting - as we've noted in the past - is the fact that the 21 week EMA is getting very close to crossing the 89 week EMA - the last bearish crossover like this was seen in September 2008. On the flip-side, we need to remember - as highlighted in the start of the month post - that the T40 has tended to rally into month-ends over the past few months. 

On the daily chart, we can see now how the stochastic is coming off oversold conditions and is threatening to start moving upwards fairly sharply. This is mainly on the back of a very bullish daily candle painted on Friday. However, we're once again in the overhead resistance zone between 43,000 and 43,400 and the bulls will need to push ahead off Friday's momentum to break through here and try and make in roads on the higher placed lateral and descending resistance levels. Failure to do so would start confirming the negative divergence noted on the weekly chart analysis above with downside potential back into the 41,500 - 42,000 support zone.

On balance we have the makings of yet another tricky trading week ahead. Again we would look to trade the range between 42,000 and 43,400 but on further strength we could look for potential longs on a break above the 61.8% retracement level towards 44,500 (with a wary eye on the descending resistance line)

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Following Friday's rally and a close-out of the PPC short position on Friday (a  break-even exit), downside risk exposure is now at 3.3% with a target reward-risk of 2.97-1 factoring in the DTC short position which is under risk with a close above its stop level on Friday. (We would look to close this position down if it fails to start moving down on Monday.) Potential RaR has also increased to 2.36 from 1.41 so the potential for the current positioning looks solid enough. Given the high level of short-side exposure, with capacity in hand and a long setup opportunity presenting itself, this is the one we'll be looking at for tomorrow:

SAP has been one of the stronger stocks on the market and has been in a solid uptrend over the past 5 months. The daily stochastic has now moved oversold though and with the painting of a bullish candle on Friday, this presents an opportunity to get onto the longer-term trend. So we're aiming to enter at around the R67.98 with a stop in as a close below previous structure low at R63.79 and targets at R79.40 and R84.00

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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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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!