Far be it to say that Ballard Power Systems (NASDAQ:BLDP) is a
bellwether NASDAQ stock, but subscribers of PremierInvestor.com
should finally have been stopped out of this bearish play from
our August 14th play date at $32.02, when the stock traded $22.50
today.
It's funny, but I think there's something to be said between the
correlation of today's "stopping out" of Ballard Power Systems
(BLDP) and today's broader market rally. The correlation? It
was time for the market to rally, and time to book some handsome
gains on a short play that produced big gains. But that's not
it. Check out the retracement bracket on Ballard Power's chart.
Coincidence?
Ballard Power Systems - last 8 months
Once a trade is closed (successful or unsuccessful result) the
trade should be reviewed. This is when the trader learns the
most and further instills good habits and can help eliminate
future mistakes. Jon Farnloff picked this short play and I take
no credit. All I'm doing here is pointing out how the "fitted"
retracement worked so well and perhaps had traders systematically
moving down their stops each day after initiating their short.
Isn't it interesting how this stock "decided" to eventually firm
up at our 0% retracement bracket at $20 and eventually trigger
our stop at $22.50? While PremierInvestor.com only profiled this
stock just recently, look how this stock has traded inside of the
retracement bracket and at different levels. Would I think about
trading this stock long from here? NO WAY! I don't like trying
to trade long in stocks where I could have just recently booked a
$9.52 gain or roughly 29% on a bearish play. This stock is weak
and way too much success has been had by bears. I have a feeling
they'll be back, and so perhaps will we. Now what I'd do is
this. Remember the success and look for opportunity. Since I
(and hopefully you) classify this stock as weak, I can use its
further trading activity to give me a feel for the market. I can
now begin correlating some levels from BLDP with that of the
NASDAQ. Hey... the stock was up 9% today (BIG DIVERGENCE FROM
PAST SEVEN SESSIONS) and the NASDAQ Composite (COMPX) was up 4%
(BIG DIVERGENCE FROM PAST SESSIONS). Levels to monitor for BLDP
as potential shorting opportunities are $27.63 and $35.21. Is
$20 the bottom? I'm not sure, but neither are market makers. I
think the only reason that BLDP finally put in a gain today and
stopped traders out was that the stock finally reached a level
where inventory levels needed to be adjusted by market makers
based on market conditions. In essence, it was simply time to
buy back some short-inventory and the volume pickup from "panic
sellers" gave ample opportunity.
Could it be that other stocks were also in a similar state? I
don't think Cisco System's (NASDAQ:CSCO) reorganization plans
were a reason for the markets to rally. Sure, Mr. Chambers'
comments about signs of industry firming didn't hurt the
technology rally, but we did note that shares of Ciena
(NASDAQ:CIEN) hardly budged today. If the MARKET felt a bottom
was definite for networking stocks based on Mr. Chambers'
comments, then shares of CIEN should have set the world on fire.
You, I and everyone in the MARKET knows the stock is being added
to the S&P 500 and that should create DEMAND for the stock. The
problem? There's probably a lot of supply just waiting to sell
into that demand and smart money knows it! If you can, go back
and read Wednesday's market wrap. What did we talk about?
Here's why reviewing past observations and taking notes is so
darned important. We don't have an archive section on the site
just so I (Jeff Bailey) can go back and point out my successes
(because there are "failures" too, which I point out also, VTSS
as an example).
Now, lets NOT go back and review Ciena's chart. Nothing has
really happened there anyway. We didn't think anything was going
to happen for several sessions anyway did we? Let's do this
though. Remember how we talked about PMC-Sierra (NASDAQ:PMCS) in
that very same August 22nd "Market Wrap" as a comparable stock
that had been recently added to the S&P 500? We actually thought
that stock was a better bullish trade at $31.92 than CIEN. The
main reasons were the technicals (upward trend and stock had
recently tested the old bearish trend as support). Now... let's
add retracement to PMCS's chart and see if we can't figure out
what the heck this stock will tell us about the future. If
you're not long PMCS at $32, imaging that you are just to put
yourself into the mindset of the market maker and what you might
do with the stock from here at $34.67.
Now... pay close attention. I'm going to refer to the "sucker
move" or "head fake" that market makers have implemented in the
past on PMCS to sucker in some buyers and sellers to create
liquidity for their own needs. I'm going to now set up the
scenario for how I think the stock trades in coming sessions,
what to look for and what it means for the market. If we can get
inside the mindset of the market makers and trade like them, then
we may be able to sniff out market direction shorter-term.
First things first. I believe market makers "manipulate" stocks
for their own good and to get a feel for order flow. You've
heard of "bull traps" (a stock moves sharply higher above a
resistance level and sucks in a bunch of bullish traders, then
quickly moves lower and traps them in the stock at a loss) and
"bear traps" (a stock dips below a level of perceived support,
traps in a bunch of shorts or causes a long to sell his stock,
then reverses higher). Both of these moves creates added
liquidity for market makers and gives them a good feel for order
flow.
What we're going to do, is identify what I feel are spots where
market makers put the dupe on traders and suckered them in (long
and short). Yes, this is all hindsight, but it helps set up our
trading scenario. All you and I do is play along with the game,
learn from past mistakes, and get the heck out with a gain.
Again... if your long at $32 this is not a game, but if your not
long, imagine that you are to get a feel for things.
PMC-Sierra, Inc. - last 6 months
I've "circled" different areas on the retracement bracket where I
think market makers have "suckered" in traders and built
liquidity for their inventory as they've seen fit. The "circles"
can be envisioned as the market makers sitting high in his/her
tower wearing a big smile and saying, "sucker... I gotcha!" This
is what sets up our scenario of where we look to sell, and
perhaps also "call the market."
My scenario goes like this. If a trader is long at $32, our
original target was a re-visit to the $37 level. Perhaps I
should have circled that little dip just recently under the
$30.28 as a "gotcha" also.
Now, see that blank circle with the question mark (?) labeled
"sell?" That's where a trader currently is targeting and looking
to sell. He/she may base this on past trading at or near this
level. Let's roll forward and imagine that PMCS hits our target
of 61.8% retracement of $37.18. Most traders are happy with a
15% gain (less commissions) in a month, let alone several trading
days. Heck, today's gain of 8.75% wasn't a bad day!
Ok... at $37, lets imagine that we sell for a profit. What's the
worst thing that happens after that? All I can think of is that
I have to pay capital gains and the stock shoots higher to 80.9%
retracement of 42.76! Let's also say, that by selling at the $37
level, a trader is making a market call that the market will not
go higher also.
If I don't like that scenario, then I can do what? How about
move my stop up to $32.50, just under today's low (to at least
try and manage break-even in the trade, but give the stock a
chance to continue on to $42.76) and at the same time, we're
managing this trade just as we did the Ballard Power (BLDP)
trade. Just inching the stop along day after day, until the
stock runs its course and tells us to sell. If I follow this
scenario, then I'm taking a more bullish bias to the market
thinking that the market is bullish and that bullish bias is
going to have the stock trading higher to my 80.9% retracement
level.
Now, this seems so frustrating to subscriber at times. Many just
want me to make a market call. I can do this (and I will), but
it is so much easier to simply lay out two trading scenarios,
then implement them as you the subscriber see fit. Then as time
progresses, I run my system of checks and balances against the
scenario to make sure everything is going to plan.
Now for my market call. Since I think PMCS has a chance to trade
the $37 level, then I must be thinking that we've got some upside
left in the NASDAQ. From Monday to Wednesday, I think we see
further gains from today's close. I don't think we'll see
another BIG day like we saw today.
What I'll be watching is this. Bond YIELDs of course. For
further strength for stocks, I want to see continued selling in
bonds and YIELDS to rise. Not much new here, but this is
probably my most important indicator. If bond YIELDS are red and
PMCS is trading $37, then a short-term trader is locking in gains
and saying, "thanks for the trade and I'm out'a here."
What I also want to be measuring is the PERCENTAGE gains or
losses of the Biotechnology Index (BTK.X), Semiconductor Index
(SOX.X) and Software Index (GSO.X) against each other. Just as
we've recently measured the relative strength of each of these
indexes against the broader S&P 500 and each other, we can get a
feel for how things shape up on a daily basis.
Since I've characterized the Biotechs and Semiconductor sectors
as "strong" relative to the market, then I want to see both of
these sectors stay near the top of the gains board relative to
the three, for me to continue to think bullish. Today that BTK.X
lagged a bit (up 3.47%) and the Semiconductor Index (SOX.X) lead
all sectors with a 6.16% gain, while the Software Index (GSO.X)
was right behind with a 6.11% gain.
Since my August 10th commentary of how I believed that the
Semiconductor Index (SOX.X) would outperform the Software Index
(GSO.X) that analysis has been accurate. Today's action and
close percentage gains between the two tells me that there was a
lot of shorts looking to cover some positions in the beaten down
Software sector and some risky bulls also came into the group.
The bit of lag in the Biotech's (BTK.X), relative to the SOX.X
and GSO.X percentage gains, gives hint that there are still some
unsure market participants that probably aren't believers at this
point. I don't blame them. I've only been recommending that
traders take 1/2 positions and that's not overly bullish is it?
Right now, my bullish near-term target on the BTK.X is 564, which
was established by our retracement bracket level and rolling 200-
day MA currently at 568.
My Semiconductor Index (SOX.X) target is currently 615, which is
correlates nicely with our 19.1% retracement and 200-day MA
currently at 616. Today we achieved the 50-day MA of 591, and
that was a good accomplishment in my book. Support in a strong
market environment should now be near 38.2% retracement of 577.
The GSO.X. Can you believe it? Just as we rolled down
retracement not long ago using our "fitting" technique (top
244.69, bottom 105.07) and this silly index managed to find
support near our 61.8% retracement of $158.40 and has bounce
back, but still under the 50% retracement level of $174.88.
Since I feel that this sector is weak, relative to the SPX, then
I'm looking for some resistance at the 175 level (50%
retracement). If this index can make a bold move above that
level, then I begin to think that bears are worried about
something and stepping up their buying as they perhaps begin
assessing risk to 191 and 38.2% retracement. It's this type of
action in a weak sector that will help us determine the strength
of the current rally.
GSTI Software Index - last 6 months
Hmmm.... trader were stopped out of PeopleSoft (NASDAQ:PSFT) for
a decent gain yesterday. The above chart is missing Thursday's
bar (some type of Q-charts error) but isn't it interesting how
the GSO.X seemed to find some support at our fitted retracement
level near 158? Now we'll monitor the 175 area for resistance as
well as that nasty downward trend. We can perhaps measure some
strength/weakness in this group just as we did on the downward
move.
As I try to put all of this activity together, I can come up with
no other reason that there were a lot of stocks that must have
been at some market maker support levels, where inventories had
to be corrected. Perhaps the Cisco Systems' (CSCO) news just
made the decision making that much easier. However, if we were
simply trading the levels and identifying levels as well as
risk/reward from the bullish and bearish trader's perspective,
then all is well.
I remember not long ago when we "rolled down" retracement in the
Semiconductor Index (SOX.X). I think it was on July 25th.
Remember how that index seeming found support at the 530 level
that day and then rallied like a cat on fire for 6 trading
sessions? I sure do. Everything is possible from here on out
and the Software stocks could catch fire also, but it all depends
on how bullish the market wants to get. Never underestimate the
power of a rally. On July 26th, there's no way I was going to
say, "the SOX.X will rally for 6 sessions from 550 to 657 and
gain nearly 20%."
Today, I'm not going to say, "the GSO.X will rally from 170.28 to
244 and gain nearly 43% in 6 sessions." But I've learned over
the years, "Forget what you believe or don't believe, and simply
trade what you observe." While I won't be focusing on trading
software stocks, you can imagine what my be taking place in
semiconductor stocks or biotech stocks should the software sector
be surging. At the same time, this is the group that I must be
looking for weakness first. Most often, the weak are the first
to fall.
If you believe, like I do, that strong sectors/stocks lead, then
we have our scenario in place, and good levels to be monitoring
in the coming sessions. We've had a good week of trading and
it's now time to rest. Next week we're going to be put to the
test and we will have to be sharp! Have a great weekend!
Jeff Bailey
