Friday, May 14, 2010

Wrong and wronger

Well Tuesday I though the market would be down and it was up. Today I thought it would be up and it was down. Sometimes you just can't win (though my play in AA was up 0.34 today). Apparently, the 10,900 level is harder to push through than I thought. But I'm going to stick to my guns and call for a move higher tomorrow, if for no other reason than that we haven't been down more than one day in a row for a week now. Asia is down right now but the US futures are up.

Another thing I'm watching closely right now is gold. My favorite gold play, AUY, topped yesterday and is now headed back down. The daily stochastic and RSI are at levels consistent with previous peaks in AUY. I'm expecting it to be back to buyable levels by the middle of next week.

Thursday, May 13, 2010

Dow Forecast for 5/13/10

The Dow easily held its key support level of 10,700 this morning. That put to rest all my expectations yesterday of a lower close. We ended instead with a rally of 149 points to close at 10,897. My SDS limit order fortunately just missed being hit, so no harm was done there.

Tonight, there really isn't much of any particular significance going on. Since yesterday's spinning top was resolved to the upside, I'm now looking for resistance in that direction. I don't see anything until 10,990, which is last month's major support level. Being that a daily uptrend is now established off last weeks lows and since none of the indicators on my chart are yet in overbought territory, I'd say we're good to head back to that area. So I'll be looking for further gains tomorrow.

Today's trades: I bought more AMD at 9.55 and picked up 200 shares of SONS at 2.48. Normally I don't look at stocks under $5, but I'm going to take a purely speculative chance on this one. And for a total outlay of less than $500, there's not a whole lot of downside.

Wednesday, May 12, 2010

Late Night Update

At this time (1:20 AM), all three futures are lower by non-trivial amounts, the ES having dropped 10 points since the close. The euro has resumed its march lower, as analysts start dissecting the flaws in the GARP (the Greek TARP). Asia seems to be mainly higher.

Though I'm still looking for lower tomorrow, the line in the sand for the Dow is 10,700. If that fails to hold, the next two stops are 10,670 (the lower daily regression trend channel) and then 10,600 (the 50% retracement of yesterday's gains). The latter level is not out of the question and would be consistent with my "bar 4" call in my previous post. If 10,700 does hold, we may just see more consolidation around the current levels. I'm not expecting a major breakdown though.

These are the hardest calls, when everything is sort of in the middle: the market is in the middle of its Bollinger bands, the A/D line is pretty even, and the indices are neither extremely overbought or oversold. I do have a limit buy order in for SDS at a level under today's close, as potential insurance for my longs. We'll see if it triggers tomorrow.

Tuesday, May 11, 2010

Dow Forecast for 5/12/10

Well, things played out pretty much as I thought for today. The Dow did not in fact end up higher, and I was cautious about predicting a higher close, but it did make a (relatively) small range spinning top (nearly a doji) closing down just 37 points at 10,746. This clearly indicates some indecision in the market. So where next? Check out this chart:

Remind you of anything? Look at the current daily Dow:

The first chart is from the crazy times of October 2008. I've labeled four bars on it. Bar 1 is the hammer reversal on Friday, 10/10/08. Bar 2 is the subsequent huge runup on Monday, 10/13. Bar 3 is the doji day on Tuesday, 10/14. Now doesn't that look a lot like the action of the last three days? If history holds true, we can be looking at another significant down day tomorrow (bar 4). Even the daily volume shows a similar track. Even the days of the week are the same!

Now I know it's real popular to pooh pooh this sort of historical analysis, generally on the grounds that this is now and that was then (see my earlier post on "this time it's different"). Nonetheless, the similarities are striking. I guess we'll find out tomorrow.

Dow Forecast for 5/11/10

Well this is a tough one. The euro has turned around and is headed south again and the Asian market is lower on concerns over the "Greek TARP" (which I will call the GARP). Also all three futures are down right now, though not by all that much. The ES is off 1.5 points from the close.

So I took the daily Dow chart and went back ten years looking for cases where we had a big down day that formed a hammer that took us down below the lower Bollinger band and was followed by a big up day. I found ten instances of this. In 9 of the 10 next days, the market was up by a small amount. (In the other case, the market formed a small doji, closing virtually unchanged from its open).

So unless the Greece fire flares up again tomorrow, I'm simply going to call for a small range day tomorrow. Technically, it looks like the close should be up, but with the VIX still almost at 30, I just don't have the hubris to make that call.

I'm actually looking for an opportunity to get into SDS to insure the gains I made today, but I don't quite see it yet on the daily chart. Hopefully the picture will become more clear after tomorrow plays out.

Monday, May 10, 2010

Down, Up, Now What?

Well, my call yesterday for a "higher close" today proved to be somewhat of an understatement. I woke up this morning to charts with more green than a St. Patrick's Day parade. With the major averages all almost 3 to 5% higher on the day, it was one of those days when you could have made money by throwing darts blindfolded.

The bad news is that I missed almost all of it. My personal system involves not trading the opening hour. Of course, today that's where 90% of the action was (more like the opening 5 minutes). But for me, there's just too much risk in trying to pick a direction right at the open to participate intelligently.

Nonetheless, I did put on two trades today. I went long AA at 12.59 and long AMD at 8.92. Even at that, I'm still 30% in cash. Oh, and the good news is that I made back almost all of my losses from last week today alone. In fact, today I had me best day ever. I was up 4.22%.

So the question now becomes, "what next?" Check out this chart of the daily Dow. It's kind of busy but bear with me. I've superimposed the Fibonacci retracement levels going from the highs of April 26 to Friday's lows. (I specifically did not run down to Thursday's lows because I believe they are an aberation, an outlier, if you will).

So what do we see? Today the Dow shot right past the 50% retracement level at 10,585 and even edged past the 0.618 retracement at 10,803 to close just under at 10,785. Notice next that all my indicators are in oversold territory. The RSI color line bar in particular has turned green and it's been pretty good at calling bottoms lately. That said, there's probably some distortion in the indicators due to the anomolous dive from last Thursday.

Notice also the diagonal red line slicing through today's big green candle. That's the lower regression trend channel line. Piercing up through that is a bullish sign.

Reading the news today, I'm hearing a lot of negative sentiment. Take this headline from "Commentary: Is Corporate America really worth 10% more than last Thursday?". Well the answer is clearly no. On the other hand, it wasn't worth 10% less last week either. Which makes me even more inclined to discount that monster negative spike as a red herring.

One thing I do watch is the after hours action. And this evening (it's nearly closing time at 8 PM right now), it's been creeping slowly upwards. So there we have it. Bullish after hours, holding the last Fib retracement, big spike up in the ES and on heavy volume just before the close, and still oversold indicators. On balance right now, I'd have to say for tomorrow we're going to hold 'em rather than fold 'em.

I'm not necessarily long term bullish at this point, but at the moment as a swing trader, I don't see any reason to sound the bear raid siren. I don't expect much more in the way of an advance tomorrow, not after the monster run today, but I also don't see another collapse coming. Of course, I'll reevaluate this during my late night session around 1 AM. Stay tuned.

On a sad note: it looks like today was the end for Dr. Brett Steenbarger's wonderful Trader Feed blog. We'll miss you, Dr. S.

Sunday, May 9, 2010

Dow Forecast for 5/10/10

Well, it's 9:05 PM here in the Eastern time zone. Asia is open and moving higher, the Euro is moving higher in the Forex market, and hallelujah, the finance ministers of Europe have finally decided to put their fiddles down and announced that they will do "whatever it takes" to do something constructive about the Greece fire in their collective kitchen before it burns the whole house down.

And so we have the ES up over 2%, a pretty convincing 23 points (2325 last I looked) in the overnight so far. NQ and YM are staging similar comebacks. After last week's washout pounding and with this evening's news, I think that Mr. Market's meds are finally kicking in. I'm pretty confident at this point that we'll see a higher close tomorrow.

To Stop or Not To Stop

That's one heck of a question. Nothing seems more problematic in trading than the issue of stops, and how, when, or even if to use them. Some people, like Dr. Alexander Elder say to always use them. Others, like Jim Cramer say to never use them. I think the truth, as with most market matters, lies somewhere in between.

The whole point of a stop order is to keep from losing your shirt. Unfortunately, it doesn't always work that way. In your arsenal of trading weapons, the stop order is like a hand grenade. If not used carefully, it can kill you just as easily as the enemy.

First off, most stop discussions never say which type of stop they're talking about. There's two: the stop loss and the stop limit.

The stop loss order guarantees that it will get executed, but not at what price.

The stop limit only guarantees the price you'll get if you get executed. In a rapidly falling market, the order might not trigger and you might not get out at all.

It's taken me a long time thinking about it, but here's what I've decided about stops. In a normal market, trading a high liquidity security, a stop loss order can be an excellent way of enforcing trading discipline, guaranteeing your profit, and protecting you from, well, loss.

However, the problem with a stop loss comes when the market goes nuts and the VIX goes through the roof like last week. Imagine this scenario: you bought ACN back in March at 42. By last week, it hit 44, a full two points from your entry. So you feel pretty safe in placing a stop at your entry point. You're feeling good because you know the worst you can do on this trade is break even. Then last Thursday comes along and ACN drops to $0.01 in the blink of an eye.

Your stop triggers but ACN falls so fast who knows what price you get. If you're lucky, it will be 42. More likely, it will be at 30, 20, or maybe you're the one who sold for a penny. Then in another blink of an eye, it pops right back up again, only now it ends the day at 41. Your stop not only cost you your entire two point profit but now you're a whole point in the hole, and that's assuming the best case.

Sure, some of those ridiculous 1 cent trades got busted, but I'm sure a lot didn't too. And this isn't a rare occurrence. It happens all the time, just not quite so dramatically. Check out the action in DISH on 11/27/09 (and ask me how I know about that one). Believe me, there's no worse feeling in the world than seeing your tidy profit turn into an ugly loss because you thought you were being prudent.

So in a high volatility environment like we're seeing now, a stop loss order can be like throwing the pin and holding onto the hand grenade. This is where a stop limit order is much better. It will protect you in an orderly market and keep you from getting stabbed by these crazy deadly downward micro-spikes. There is absolutely no way to intelligently place a stop loss order in a market like this. Trader emptor!