Long Philip Morris International, Short American Express

We are suggesting going long Philip Morris International (ticker: PM), and short American Express (ticker: AXP). This is yet another longer term, defensive, pairs trade idea that should benefit from overall market action that is either sideways or down. 

The charts for both PM and AXP are classic. PM is consolidating near the high end of a long term range after an uptrend. We feel that enough time has been spent in this range to warrant a decisive breakout, especially when considering that other tobacco stocks such as BTI, RAI, and MO have exhibited powerful relative strength of late. 

PM

The reverse is true for AXP. Instead, it is exhibiting all of the characteristics of a stock ready to break down. Here we see a long term trendline break with action near the bottom of a consolidation range that should finally give way to more downside.

AXP

Disclosure: The author took this pairs trade yesterday.

Bottom on the DOW for the day 7/31/15: OP retest and Low trade volume (trap)

OP retest and low trade volume trap could signal that the DOW bottomed for the day. If not, it's given us enough of a move in our favor on the short-term BOT that we're risk-free on the trade. So, it's considered a good "attempt" now.

First, the Origination Point (OP) retest, highlighted with blue circles. We wiped out the up move gains, stopping traders out the caught that long leg starting yesterday.

Second, low trade volume at low of day, 4 contracts traded; circled in green on the right of DOM.

If we hold a higher low today from yesterday, the long BOT longer-term is still intact. Being that we set a new high today compared to yesterday, the structure is still in place for the long BOT.

Why the Market Could Continue Higher: Temp Trap Break Will Direct Us

We broke prior day's high by a tick and sold off this morning. Market was able to clime back and we're trading right below the trap level. Historically, a temp trap break leads to follow through, so we're adding to our position on the break of the Bull Trap (in the blue circle).

Here is the 1 hour chart showing the potential bull trap at HOD (high of day).

Update on long trade:

We were stopped out of a portion of the position earlier today, being that we went risk-free. We had around half of the position size remaining and added on the 1 Hour BOT. Below is the current position and stop placements.

As you see, all stops are above our average price, so we are risk-free on this trade. Our highest stop is at the FL1 bar. Once again, this is a failed short bar that if one shorted, should take heat prior to being correct on the trade; sometimes this is a lot of heat against the failed trade signal. Therefore, we believe that that's a critical level for a stop placement. The rest of the stops are below there and will be adjusted accordingly as more price action develops.

Previous Day High Bull Trap: Why we're cautious and trading Risk-Free 7/30/15

Don't need to say much about this. We had a Bull Trap at previous day's high (blue circle). This is why we're "Risk-Free" on our long market trade.

Our stops are spread above entry price on the long, so we have no risk. If we get stopped out, we locked in some profits. If we don't get stopped (or stopped on some), that's cool, we traded the "pull-back" stress and risk-free- and have potential to make larger gains and add to position.

How to trade with NO Risk (eventually): Long U.S. Stock Market BOT example from 7/29/15

We discussed the simple concept of trading "risk-free" in previous posts. When we say "RF" in any posts, this means "Risk-Free". So if we say "moved stop to RF", we moved our stop above (below) our entry price on long (short).

It's based around the idea that there are always uncertainties when trading in the markets. We feel that if you can get into a high number of "risk-free" positions, the ones that work out will really work out well! A lot of times, we see that a month is made from just a couple of trades that really took off for us. Trading "risk-free" results in a large amount of break-even trades, but also ensures that we never let a winner turn into a loser.

Here is a real-time example of trading risk-free with our Long U.S. Stock Market call from 7/29/15.

So, here is how to trade risk-free (eventually):

1) You start out with you max risk on a trade: Dow example was 150 points, on previous post

2) Once you get movement in your favor, move stop above entry price

3) If continues moving in your favor, spread out your stops so that you can lock in profits above break even

4) As days close and price levels set, move your stops accordingly. For example, if trading a BOT long, keep stops below prior day's low. As higher lows form, move stops higher.

Long U.S. Stock Market and Long Oil- BOTs: 7/29/15

1 hour Break of Trend (BOT) on Dow and Oil. Calling short to medium term long on both as of 7/29/15.

We were watching for BOTs in our post from yesterday, Long U.S. market soon? Testing top of downtrend channel right now, waiting for BOT- 7/28/15

Dow

HH / HL setup

Target 1: ~300 points

Target 2: ~600 points

Stop: ~150 points

Oil

Bear Trap Setup

Target 1: ~$3.50

Target 2: ~$7.00

Stop: Below $47.50 level (conservative) $46.70 level if longer term target

Pounding the Table: Long EWJ versus ... well ... Almost Everything

Just a quick "tweet" here. There is a risk that the post from Friday July 24th had a misleading title. Keep in mind that the post served two purposes: to update readers on our long EWJ:ADRE spread trade, AND to recommend other defensive trades that seem to be in even earlier stages of development. In a nutshell, we like:

Long EWJ versus the following ETFs short:

IJJ, IJS, IWN, HYG. You could probably add MDY to the mix (the S&P Mid Cap 400 Index Fund). Perhaps soon we will add the S&P 500, the Dow, and the Nasdaq. However, Tim is starting to notice some bullish potential on the "Major" indices, so for now, we wait. Should the "Majors" resolve bullishly, that still would NOT invalidate our defensive call to go long EWJ versus ... well ... almost everything!

Long U.S. market soon? Testing top of downtrend channel right now, waiting for BOT- 7/28/15

We're testing the top of the downtrend channel right now. Looking for a BOT long signal as next potential trade. As mentioned before, we need to patiently wait for the following setup:

- BOT (break of trend)

- Should have a bear trap or higher low from previous day before the BOT occurs. The current potential setup would have a higher low pre-BOT signal as is indicated by the higher red line from previous day on chart

- Once a BOT occurs, we need a pullback to OP or opposite of trend line test. If neither occurs and the break is quick, the FL1 (failed short) is what we look for as entry signal.

Here is the 1 hour chart showing the trend with potential BOT long. We will keep you posted.

Crude Oil: Still waiting on BOT Long, short trend holds- 7/27/15

Update: 7/27/15- 10:00am EST

No trigger long on oil yet, still waiting on BOT long. Bear trap did not hold, but using our trigger / entry rules of requiring a BOT for entry never executed a sweep in long entry. Once again, we need a break of prior day's high for confirmation, this is where long orders are pending when a signal forms. The break of prior day's high is the "trigger" / execution point.

We will keep you posted once a BOT long occurs. As of now, still short and not worth trying to catch a falling knife.

Update: U.S. Stock Market (DOW) Short Call Targets Met

Update: 7/27/15- 9:45am EST

Both targets met on the short call from 7/17/15 (link below).

U.S. Stock Market (DOW) Short Call 7-17-2015: 1st target 300 points, 2nd 650 points

We will update when we get our next signal. Looking for a bear trap or FL1, followed by BOT long to confirm. Stay tuned!

 

Part II: Long Japan, Short Emerging Markets

We update our post from May 9th where we suggested a defensive Long Japan, Short Emerging Markets trade. Since then, the spread between the two indices widened by over 10%. The market, as measured by the S&P 500 has gone essentially nowhere.

Ratio chart of EWJ: ADRE daily ("dollarized" versions of MSCI Japan and BoNY EM 50 Index):

Same chart weekly:

The trade still seems to have legs, but we will now highlight some additional defensive (re: negative beta spread trades) that appear to be in even earlier stages of development:

Long Japan, Short S&P MidCap 400 Value Index via EWJ/IJJ:

Long Japan, Short Russell Small Cap Value Index via EWJ/IJS:

Long Japan verus Russell 2000 Value Index via EWJ/IWN:

All of these trades have, or are beginning, to confirm long term trend reversals to the upside. These are long-term thematic reversals that should last for years to come.

Another idea that looks promising is long Japan, short U.S. High Yield:

Remember, we are not suggesting to go long the ebullient Nikkei. We are pairing EWJ, which is long Nikkei AND Yen, against higher beta shorts. The Yen is an historically defensive currency. 

Update: Pullback to OP on Crude Oil Bear Trap Long Signal: 7/21/15

Update: 7/21/2015 - 3:00pm EST

We pulled back to OP levels identified in 10:30am 7/21/15 post: "Long confirm: Pullback to OP with a Break of Trend".

OP pullback with "aggressive" long signal on 1 hour bar is shown on chart below. Break of today's high will confirm BOT mentioned in quote above from earlier post. BOT is point for addition into current position and/or "conservative" initial long entry depending on whether aggressive initial trade was taken or not.

Stop: Currently remains below bear trap, but can place below OP if risk is a concern.

Target: Remains unchanged.

Crude Oil Bear Trap Long Signal: 7/21/15

Crude oil potential Bear Trap long signal on 7/21/15

The first chart show the break of prior day's low with no follow-through. This is a sign that bears tried to short the break out down, but are now trapped short at those low levels. Historically, traps end trends at least for the short term to provide a leg up. If a BOT long occurs, this can be further fueled by short covering (even though there are no fundamental reasons for price to advance).

Horizontal lines are OP pullback retest levels. A pullback to OP with a break of prior day's high would confirm the BOT long signal which is strengthened by the Bear Trap if it holds and we trap at / above OP.

Second chart shows trend line that will trigger BOT and target zone (horizontal green line) due to OP of down move from June 26th.

What is an OP?

OP stands for origination point. It is the level / point where an up move or down move started / originated from.

Long confirm: Pullback to OP with a Break of Trend (BOT Signal- detailed in earlier post)*

Target: Approximately $9.00, over 17% to upside. Around OP of down move starting June 26th.

Stop: @ July 21st 4:00am low of day.

*If there is no pullback to OP, we would be looking at entry on BOT following failed short.

 

Confirmed FH1 Short 7-21-2015: U.S. Stock Market (DOW) Short Call 7-17-2015: 1st target 300 points, 2nd 650 points

Update: 7/21/2015 - 9:30am EST

FH1 short triggered on daily chart.

Short entry / addition point to current short: 17,980 - Break of prior day's low

Stop 18,059 - Break of prior day's high (above FH1 bar)

Targets hold from prior trade entry / 7-17-15 short call post

What is an FH1?
An FH1 is a failed long signal, confirmed by a short trigger. The chart above provides a real-time example. Here is the syntax:

Low today < Low 1 day ago AND
High today <= High 1 day ago AND
High 1 day ago > High 2 days ago AND
Low 1 day ago >= Low 2 days ago AND
High 2 days ago <= High 3 days ago AND
Low 2 days ago <= Low 3 days ago

Update: Triggered, LH LL - Bear Channel Forming: U.S. Stock Market (DOW) Short Call 7-17-2015

The break of prior day's low triggered the short call. Price structure is still intact as you can see from the 15 minute chart below. I highlighted the trend lines (top of bear channel) and Bull Trap bar. With bear channel formation beginning, we are in short to medium-term shorting territory here.

Being that we're at the top of the minor bear channel with the a lower high and lower low today compared to yesterday, I would look for FH1's (failed long signals) to short. We have historical posts about our FH1 and FL1 signals, but we plan on doing another post with details.

As mentioned in the earlier post, stop is above prior day's high, make sure to trail the channel swings once we print more prices. Targets hold at previously stated levels.

* If there is a BOT long out of here, this would become an FL1 with bias to long side and potential reversal of trade from short to long if the FL1 did occur. The short would be closed on the BOT by out stop management system and a long signal could trigger.

U.S. Stock Market (DOW) Short Call 7-17-2015: 1st target 300 points, 2nd 650 points

7/17/2015 - 9:20 am EST

* The call confirmation requires the following conditions which can occur today or next week, but need to trigger to make the call:

1) We do not break a prior day's high

2) If we do, only a bull trap would allow the signal to still be valid

3) For short trigger, we need to break below prior day's low

4) For trade confirmation / to add to position, we need to close below prior day's low to began the bear down

We pulled up to the expected resistance on the widening bear channel down on the daily chart. On an hourly chart, we have a bull channel within a major bear channel. The daily chart below shows the top line channel resistance and the move expectation:

 The 1 hour chart below has the conditional requirements for the call.

Targets:

1st target: Origination Point of up move, around 300 point profit, ~17,700

2nd target: Bottom of widening bear channel, around 650 point profit, below ~17,350

Stop:

Above prior days high to start. Recommended to go Risk-Free if sufficient leg down then trail the channel.

Buy or Sell, Long or Short? How to know which direction to trade: Break of Trend will tell you!

To start my post series, I want to share a major concept that we implement on every single trade, the "break of trend" or "BOT". We will refer to this concept as BOT on our charts and in posts. I will discuss our process in future posts, but I wanted to start with something that you can research and see on your own before we get into further details regarding specific signals, chart setup, etc. It's important to understand the BOT concept as it will tell you when to ignore certain triggered signals and when to focus on the high probability ones.

Here are a few chart rules that we have before I get into details on the BOT concept. I will also make a post regarding chart setup and what we use, in a future post:

Rule #1: NO Indicators!
Rule #2: Plot prior day's highs and lows and current session's highs and lows.
Rule #3: Analyze price structure to determine if bulls or bears are currently in control

So, pretty simple, right? All that a chart can tell you is executed trades and volume of trades on an instrument, nothing more! Why have a bunch of indicators on a chart? Is it that hard to see what's actually going on?? No! The hard part is setting yourself up in high probability trades, and a lot of times a good trade goes against our psychology. We "want" to buy low (super low), we want "the best" price, and want to sell at the highest price possible. But think about this, what is "the best" price? There is no such thing, it's just a number. So, what we believe is to trade in the direction of the trend because this will "help" your trade. I will get into psychology deeper in a future post, this was just a quick comment.

Now, the break of trend: When lows continue to be broken, sellers are in control. When highs continue to be broken, buyers are in control. When you see both in one day or on a selected segment, there's a battle for control. The BOT signal applies on every time-frame. For trading purposes, we like to glance at daily bars, focus on hourly bars, and analyze 15 minute bars. Essentially, there can be a trend within a trend within a trend. What I mean by this is that there could be e.g. 5 BOT signals on a 1 minute chart that are within 1 BOT signal on a 15 minute chart, mini BOTs within a more significant BOT.

In the above chart, there was a BOT Long confirmed by the HL/HH setup I discuss below. But, this was also strengthened by a Bear Trap at Low of Day from 9:00 am on the chart!

Here are the rules to determine BOT:

BOT to Upside for Long Trades
Rule #1: Connect highs sloping downward for a downtrend with potential BOT to upside. *
Rule #2(a): HL/HH pattern BOT: Look for 1) Higher Low and then 2) Higher High with break out of the downtrend
Rule #2(b): Trap BOT: Look for 1) Bear Trap at Lows (I will do a post on traps) and then 2) Higher High with break out of the downtrend
Rule #3: Look for trade signal confirmation in direction of BOT

BOT to Downside for Short Trades
Rule #1: Connect lows sloping upward for an uptrend with potential BOT to downside. *
Rule #2(a): LH/LL pattern BOT: Look for 1) Lower High and then 2) Lower Low with break out of the uptrend
Rule #2(b): Trap BOT: Look for 1) Bull Trap at Highs (I will do a post on traps) and then 2) Lower Low with break out of the uptrend
Rule #3: Look for trade signal confirmation in direction of BOT

*Don't focus on exact details of tails, you want to determine the general price action.

When to know what signals to consider and which to ignore:

Quoting what I said above, "It's important to understand the BOT concept as it will tell you when to ignore certain triggered signals and when to focus on the high probability ones."

Referencing the chart above, the blue arrows represent our FL1 long signal (to be discussed in detail in future posts). Since the FL1 is a long signal, why would you take a long signal in a downtrend, you wouldn't! Knowing the direction of the trend using BOT will help you avoid low probability trades.

The application is very simple: Do not take FL1 long trades in major downtrend. Take them once a BOT Long occurs, on the break of the trend line drawn, and is confirmed by Rule 2 above.

Hope this helps and please let us know if you have any questions!