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.