Friday, March 5, 2010

What to Read

Trading is a game of information. You live and die on the quality of your information. I'm not talking about actual stock price data, but about news. You need to be informed about what's going on in the world to help guide your trading decisions. Of course, with the net, there's a wealth of stuff to read out there - far too much stuff. And of course I'm not helping matters by adding to it :-)

But it's always interesting to hear what other people read. Here's what I follow on a daily basis:

First and foremost is Dr. Brett Steenbarger's excellent Trader Feed blog, right here on blogspot:

Reading this blog has made me a better trader, and a better person. There's something for traders at every level here. Dr. S is smart, creative, and insightful. I can't say enough good things about this. I make sure to never miss a day of this. Check it out.

Seeking Alpha is another great resource for traders. There's always lots of good analysis there:

I also subscribe to the Dealbook from the New York Times:

as well as a series of newsletters from my investment broker, Wells Fargo (formerly Wachovia, formerly Prudential). This is not meant as an endorsement of this company - I'm sure all the other big brokerages offer the same service to their clients.

Finally, I read the free weekly articles from Stratfor:

Not directly market oriented, it nonetheless provides great strategic insights into what's going on in the world of global politics. It's fascinating reading.

I also generally have CNBC going on a separate PC. They're not a great source for investment advice, but I figure if Osama Bin Laden is ever captured or flying saucers land on Wall St., I'll probably hear about it fairly quickly from them.

I don't subscribe to any "pay services". There's just too much good free stuff out there and I don't really have time to read anything else anyway. Also, there's a real point of diminishing returns in reading market commentary. If you read too much, eventually you will accumulate so many different opinions that you'll be no better off than reading nothing.

Dow Forecast for 3/5/10

Yesterday's forecast proved completely wrong as the shooting star candlestick failed to pan out. Actually, these mistakes are more useful than the successes since they are learning experiences. Why did the market not fall following this bearish signal?

The key here may be that while the Dow chart looked ready to roll over, we were seeing a divergence in the ES chart. There was no doji there yesterday. Given today's action and the current state of the ES, NQ, and YM, I have to call tomorrow's close up from today, with moderate confidence. 10,400 is now established as firm support. If the bears couldn't knock it lower today given yesterday's action, then it appears the bulls remain in control.

It may also be that there wasn't really enough of a trend preceding the shooting star we saw yesterday for it to count as a true reversal signal.

Wednesday, March 3, 2010

Dow Forecast for 3/4/10

Well, yesterday's forecast proved correct, just. But what an interesting chart pattern we're seeing. Check out this daily Dow chart. A double shooting star. I went back over the daily chart for 12 years and didn't find anything like this. Today's pattern is even longer than yesterday's. Right now (5:15 PM EST), I will make the call that tomorrow will close lower again, with a fairly high degree of confidence, on this basis alone. And that the decline will be greater than today's 9 point loss. I'll update this post later on tonight when the Night Owl comes out.

12:45 AM Update: All three US futures (ES, NQ, and YM) have turned decisively lower as the evening wears on. Also, the VIX put in a doji after falling for five days straight. This tends to reinforce my earlier opinion.

Dow Forecast for 3/3/10

Following the long doji the Dow put in last Thursday, we saw three consecutive up days. Then today's action constituted a shooting star, always an ominous bearish reversal sign. The RSI is indicating overbought and momentum is decreasing. In addition, money flow is again at levels associated with a top.

And although Asia closed mostly higher, the US futures are lower right now, though not by much. In addition, the euro/USD looks like it is putting in a short term top around 1.33. So all in all, I'm going to call tomorrow's close down from today, with fairly high confidence.

Tuesday, March 2, 2010

Market Streaks

"Those who do not remember the past are condemned to repeat it. " - Sanatayana

One way to tell if a market trend will continue, either up or down, is to see how the current streak compares with the past. So I took a look at the daily closing price of the Dow over the last 10 years, or 2514 sessions, to see just how many winning and losing streaks there were, and how long they were. The results are interesting:

(Up streaks are in green, down in red. Click graph to view larger.)

The data is pretty similar for both winning and losing streaks. The longest streak was 10 sessions; three of those were up, two were down. We also see that by the time a streak has gone on for four days, it's starting to get pretty long in the tooth. For example, there were only 36 times over ten years that a winning streak went on more than four days. You can use this data to guide your confidence that a streak may or may not continue.

Monday, March 1, 2010

The Only Rule of Trading

Here is the Only Rule of Trading, the one rule you must follow in order to succeed as a trader. It's so simple, so trivial, and so trite, you may be tempted to stop reading right here, but hear me out. Rule One, the one and only rule, is very simple:

Buy Low, Sell High.

Yes, these four words completely summarize everything you need to know about trading. This is the only way you can make money. There is no other. All the charts, technicals, fundamentals, news, and rumors boil down to is that you must be able to tell when a stock is low enough to be worth buying, and high enough to think about selling.

So if it's that simple, why is it so hard to make money in the market? I think there's an evolutionary reason for this. You can see how animals in the wild band together to form herds for protection from predators. Ships crossing the Atlantic in World War II formed convoys for mutual protection. There is a survival advantage to doing what others do, being where others are. It's an instinct. Unfortunately, in trading this instinct can kill you. It's what leads people to pile on to a stock that's been going up and up, one that everyone wants to own. It looks like a sure thing and everyone's doing it. Unfortunately, unless you're early on the bus, you generally end up holding the bag.

It works the same way on the down side. When everyone is bailing out and running for the exits, you want to do that too, just like a herd of zebras fleeing a hungry lion. But this instinct can lead you to sell at exactly the wrong time - ask me how I know.

It's really hard to view down days in the market as buying opportunities, and up days as selling opportunities. Your natural instinct is just the opposite. You want to join the crowd and buy when everyone else is buying, or sell when everyone else is selling. But that's almost always the wrong thing to do. I can tell you that I've made a lot more money since I converted to contrarianism than I used to when I tried to be in with the in crowd. Buy when your stock is down, not when it's rocketing skywards. Sell when it's topping, not when it's cratering.

Of course, obviously this doesn't apply if you own an Enron, GM, or other fatally flawed stock. Unless your holding time is on the order of a few hours or less, make sure your stock has some basis in reality before even thinking of buying into it.