The Seven Deadly Sins of Trading

Just in time for Halloween, here are the Seven Deadly Sins of Trading. It's some scary stuff, let me tell you. I may not be the world's greatest trader, but I am definitely an expert on this particular subject. I've made all of these mistakes myself at least once, some more than once, and I'm still working on one or two. Hopefully, someone else can learn from my sad experience. So without further ado, here they are:

1. Impatience

I put this first because impatience has cost me more money than the rest of them put together. I can't count the number of times where I've unloaded a stock because it wasn't performing and the next day it took off. Or bought too early - that's the classic "catching the falling knife". And the most irritating case is when I'm trying to get in on something and the price just keeps hovering right above my limit order. Every time I finally get tired of waiting and bump up my limit to meet the ask, two minutes later the price drops down to my original price - or lower. Patience above all else.

Oddly enough, the opposite of impatience, timidity, can be almost as bad. I've had lots of stocks just take off and run away from me while I was debating pulling the trigger. There's nothing like the feeling of being left standing in the dust as you watch the tail lights of the bus pulling away from you. That's one reason I like swing trading - this isn't as much of an issue there.

2. Sloth

This is also one of the "classical" seven deadly sins. Trading is hard work. Just because you're not swinging a pick axe or twisting wrenches doesn't mean it's not work. Forget all those stupid ads for automatic systems where all you have to do is hit buy or sell when some blinky thing lights up. You have to stay current with the news, both financial and general, and watch the charts. Every day.

3. Avarice

Another classical sin, aka greed. Now it's well known that greed and its companion opposite, fear, are what make the market go round, but that's no reason for you to join in. You don't have to trade without emotion like some sort of financial Mr. Spock, but fear and greed will kill you eventually. Fear is what leads you to leave profits on the table or worse yet, get out at the bottom. Greed is what keeps you from getting out at the top so you end up watching all your profits evaporate. Buy low, sell high. Fear and greed are what make you do it the other way around. Try to replace fear with respect and greed with gratitude. You need to respect the power of the market and be grateful when it hands you money.

4. Undercapitalization

I don't think the importance of this is sufficiently appreciated. I think way too many people decide they're going to trade for a living and start off with tiny account, like $5000, figuring they'll parlay that sum into riches of Bill Gatesean proportions. Ain't gonna happen. Too little capital means you are limited in how much heat you can take, and unless you enter every single trade exactly at the bottom and then it goes straight up, you're going to have to suffer through some unrealized losses at some point. Insufficient capital leads you to take excessive risks to generate returns you might think are reasonable (but are usually just a dream). The net result is that your account blows up and you're done.

So how much capital do you need to start trading? Well the SEC says you need a minimum of $25,000 just to get in the game if you want to day trade. But that becomes your floor so you really need at least 10% more in order to have room to maneuver. Even if you don't want to day trade, I'd say $25K is the bare minimum, and that number won't make you a living.

I started my first account with the laughable sum of $2000 (back in the days before the pattern day trading rule) because I was afraid if I had more I'd lose it (see avarice and fear above). But that wasn't enough money to be successful, so naturally I blew it all up. I think it took about four months. As Jim Cramer always likes to say, "you've got to stay in the game".

5. Ignorance

When I first started trading, I knew nothing, and I got my head handed to me. The problem was that I'd read a few books, did a bit of paper trading, and thought I had it all figured out. Bzzzt! After 10 years, I'm willing to admit that I now at least know what I don't know. But I'm far from an expert. Trading is a performance art, like skiing or playing the piano. To get good at it, you have to constantly practice, study, and learn all you can (see "sloth" above). This was a recurring theme in Dr. Brett Steenbarger's late, lamented TraderFeed blog right here on Blogspot. I highly recommend reading that over.

You also need to keep meticulous records. You absolutely need to keep a trading diary and a performance spreadsheet. Track everything. If you don't know what you're doing, you can't tell how well you're doing.

If you don't have the time or inclination for this, forget about trading. You're going up against armies of people who are smarter, stronger, and richer than you'll ever be. You don't show up to a gun fight with a knife. Don't trade until you are properly armed with a solid plan and all the time and capital you need to execute it.

6. Hubris

Oh my, another one of the classics. The sin of pride. If something doesn't go your way, just take your lumps and move on. The market is excellent at sniffing out know-it-alls and teaching them lessons. Don't let your errors get you mad (see TWM below). Revenge trading is about the worst thing you can do, and it is guaranteed you'll get your head handed to you.

7. Distraction

TWD - trading while distracted. And the results can be as deadly to your account as texting behind the wheel of your car can be to your life. You can't trade if there are kids screaming in the background, dogs barking, phones ringing, etc. You really have to concentrate. I have occasionally hit Buy when I meant Sell, or sold the wrong number of shares. This is the sort of behavior that ends with keyboards smashed on the table top and monitors thrown out the window. One time I even hit sell on the wrong row and accidentally sold one of my cherished holdings. Oddly enough, that stock tanked shortly afterwards proving once again that it's better to be lucky than good.

Also, obviously don't commit TWI (trading while intoxicated), the other TWI (trading wile ill - if you have the flu, take a sick day), TWM (trading while mad - at your spouse, at the market, or at life in general), or TWS (trading while stupid - see "ignorance" above).

Well there you have it - the seven awful, scary things you should never ever do when trading. Avoid these errors and you'll be a lot better off. I know. Happy trading!

October Monthly Review

Whew! October is finally over and despite its spooky reputation, we managed to escape pretty much unscathed. Since the month is over, we're going to take a series of progressively larger views to try and figure out what to expect next month.

Let's start by zooming in on the last few days of the action in the Dow, which proved to be most interesting. Yesterday, I called an end to the uptrend and started a new descending RTC line. Here is is. You can see that today's action took us to the right edge of the channel, since it's so steep, but I wouldn't really call it a bullish setup. Conceivably, Monday could mark the end of this short downtrend and in fact, today's narrow range doji suggests further indecision. However, I think we remain inside this new downtrend for the time being. I note also that historically, the first trading day of November is not so hot.

Pulling out to the weekly chart, this week's downturn barely registers and the whole week simply forms a doji candle, but that in iself, coupled with the highly overbought readings on all the indicators is enough to suggest a reversal. Compare the recent runup to the one last spring. There's a striking similarity there. So if the daily chart suggests the possibility of a limited downside, the weekly chart looks considerably weaker.

And since today also marks the end of the month, we might as well look at the monthly chart. As a swing trader I don't do this very often, but it can be quite instructive for strategic planning. Check it out:

Here's four whole years of the Dow, a month at a time. The whole sickening slide from the 2007 highs to the March 2009 lows and the bounce back. In this view, the troubles of the summer of 2010 look more like a stumble than a bear market and the indicators aren't overbought at all. This longer term view suggests considerable upside remains in the market. Note also that we will soon be entering a pre-presidential election year and that these historically significantly outperform other years in the four year election cycle.

So where does this all leave us? I'll be looking for a limited decline on Monday and Tuesday in anticipation of the election. I'm still betting we'll see a gain on Wednesday based on election results that may be given up by the end of the week. But I think the month as a whole will end higher. November is traditionally a good month and I'm not hearing enough bad economic news to warrant any major declines at this point. We'll see.

Performance

The Dow ended up today a paltry 4.5 points. I was down 0.12% on the day, down 0.09% on the week but still up a respectable 1.32% on the month, compared to the Dow's 3.04% gain for the month. Though it's disappointing to have underperformed the Dow on a monthly basis, this still leaves me 21.82% up YTD, compared to the Dow which is up only 6.62%, so I can't complain. My little low price/high yield sub-portfolio continues to do well, gaining from 0.22% to 2.57% today, with the exception of AOD that lost 0.71%. However, all are still in a profit position, even though I'm only owning them for the dividend.

Today, I added a new name to it: DHY, Credit Suisse High Yield Bond Fund, buying an experimental 200 shares at 2.94. It closed at 2.92. It's trading at the lower end of its recent range and looks poised to go higher next week. It is currently yielding an attractive 10.89%.

I did not take any short positions today but I'm also holding cash in reserve. I see a number of names that are becoming more attractive lately, but not enough to pull the trigger just yet. And I'm wishing I'd execercised a bit more patience and held on to my AUY from the beginning of hte week. Oh well.

It's Over

Finally. It's official - the uptrend is over. We have now (finally) broken the RTC daily uptrend in the Dow extending back to the end of August. Tuesday's doji was the top, yesterday was the bearish setup and today's 12 point decline, finishing well below the lower RTC line was the trigger. I think we can now look forward to at least a few days of lower prices. There are several minor support levels on the way down, corresponding to the steps the Dow took on the way up - at 10,970 and 10,825. The lower Bollinger band stands nearby at 10,820, suggesting a possible stopping point. Then there's a stronger support level at 10,685, corresponding to the August highs.

This is followed by the 50% Fibonnaci retracement level at 10,571, a 5% correction at 10,558, and the 200 day MA at 10,525. The close proximity of those three numbers suggest strong support there too. In the meantime, we will now start charting a new descending RTC channel starting from two days ago and watching for an upward break out of it. My guess would be that might happen next Wednesday, the first trading day after Election Day. I know everyone says the election results are already "baked in", but I do think the immediate realization of a Republican victory should provide at least a temporary bounce to the markets.

Finally I note that the excllent Quantifiable Edges blog here did a historical analysis today and reached the conclusion that "the stats seem to suggest a possible downside edge over the next 1-3 days." We'll see.

I made no trades today. I'm now over 50% in cash and considering taking a position in SDS tomorrow as a short proxy. I'm also pleased to see that AMD, which I mentioned on Monday when it closed at 7.26, was up 3.81% today on a lackluster day overall to close at 7.63.

A puzzler

OK, here's today's action in the Dow. I have to say, I'm stumped. You tell me what this means. The Dow closed dead on the lower RTC line, exactly where it did on October 19th. And the next day, the Dow rallied furiously. However, unlike then, today's candle is a classic Hanging Man and that's never a good sign. On the other hand, the rally off the lows at 1:20 PM suggest an absence of true selling pressure. We actually had more extreme high TICK readings today than lows.

So we have a bearish setup but not a trigger. In a way, it's simple. If the Dow is lower tomorrow or fails to close above 11,175. then we have a sell signal. Otherwise,we cannot really say the trend is broken. Which way will it go? Who knows.

I'm playing it safe. No trades today but I have also not yet gone short. I'm waiting for some confirmation that we're headed lower and I'm willing to take the heat until I get it. However, I do have to say that intuitively, I think the uptrend is over.

Waiting for Godot

I swear, waiting for the end of this uptrend is like waiting for Godot. Every time I think the turn is at hand, it isn't. Even today's meager five point advance in the Dow still kept us inside the rising daily RTC channel. However we are now in the lower half of the channel, and have been there for the last six sessions straight, as opposed to the entire earlier segment of the current uptrend. A decline tomorrow of just 25 points will cause a trend reversal setup once again, like we got on the 19th.

But that one did not trigger and if the market falls tomorrow, I'd need to see a second day of declines to declare it time to go short. But for now, I still can't go short.

In the meantime, today's action formed a long doji candle, indicating the considerable uncertainty in the market. The resistance of the April highs continues to be formidable. No doubt many of the people who rode the summer roller coaster from there all the way to the bottom on July 2nd are just so glad to finally have made back their losses that they're cutting and running.

So what to do? I'm mostly just sitting back and watching right now. I did sell my position in SD today at 5.76; it closed at 5.66. It's RTC does not quite indicate it's time to sell, but all the rest of the indicators do. I also bought some more CIM at 4.08 after it took a 5.58% dive on a 2 cent miss; that closed at 4.06. But those are just tiny trades. I want to see how tomorrow pans out before doing much else. For what it's worth, the ES futures are not looking too happy right now (1:15 AM), down 525 after having been up by 575 earlier this evening. Patience is the key.

Still no downturn

Today's 34 point gain in the Dow kept us inside the rising RTC channel, but the small size of the increase moved us closer to the lower edge. In fact the last nine sessions have more or less been just consolidation rather than consistent gains. We're really just stuck at April resistance level of 11,200. Upwards from there, there's no meaningful resistance until 11,500 which is the "summer shelf" going way back to 2008.

In the meantime I'm hearing a lot of conflicting opinions on how much further this rally has to go. There's a lot of noise about how a Republican victory is now "baked into" the market and won't do much to help the rally. My personal feeling is that this is wrong. I expect the market to post some significant gains, at least short term, following the elections. It just might be the push to get us through the 11,200 level.

But for the time being, one just has to sit tight and watch the RTC. And there is still no sell signal there.

Political Aside

Personally, I don't think it's going to make much difference who wins. As far as I'm concerned, the Demicans and the Republicrats are just two sides of the same tarnished coin. Our choice at the polls is basically a choice between Jack L. Johnson and John L. Jackson. To quote those astute political analysts, The Who, "Meet the new boss, same as the old boss". Even worse, nearly half the races on our own local ballot are going completely uncontested this year. We have become like the old Soviet Union - one party, no choice.

Trades

I got tired of waiting for AUY to perform and dumped it today for a whopping 2 cent profit. It's just floundering around right now and I'm out of patience. See ya.

I could find nothing else to replace it with but I did notice something interesting in AMD. Check out this daily chart. Notice how on September 27th, AMD broke out of a declining RTC going all the way back to April and has been in a horizontal channel since then. It made two attempts, one last month and one this month to top 7.46. After that double top and a 5.37% gain today, it seems like it's about to make another run at it.

But here's the interesting part. Note how the indicators now are much less overbought than the last run (blue arrow). There has also apparently been a lot of call action in AMD recently on news of some new product (from a tehnical analysis point of view, it doesn't even matter what this product is). I think AMD could be poised to break out on this attempt. Note also the increased volume. I'll bet something's up here. Disclaimer - I am long AMD (though still underwater).

The Week Ahead

It's time to move out to the weekly chart on the Dow to see what might be ahead this coming week, the last trading week of the month. Here's a year's worth of action for your perusal. There are two things that stand out. First, we remain solidly in the rising RTC going all the way back to the end of August, and second, there's getting to be a lot of similarity between the current pattern and the February to April rally which ended very close to the current levels. The resistance at 11,258 is not to be overlooked.

Although it's too early to call an end to the current rally, it is definitely worth noting how overbought all the indicators are now looking, and also how the dollar has stopped its decline in the past week. I wouldn't be surprised if we got another 200 point drop sometime this week, but it's impossible to call it right now. As a swing trader, I'm trying to be less concerned with individual one day moves and look more at the overall short-term trend.

If the Dow stays around its current level (11,132) for three more days, that will take us to the lower edge of the RTC channel and setup for a trend reversal. A one day drop to 11,090 will do the same thing. I'm not going to try to call the top, but I will try to call the end of the trend using RTC analysis.

It might happen this week, but it's looked like a possibility for several weeks already and hasn't happened yet. Still, I'm starting to see more risk than reward in the current environment and it's getting harder lately to find anything that looks like a decent buy. It looks to me like the road higher is going to be a tough slog from this point.

That's about it. Trade well, do well, be well.

Performance update

It was a pretty blah week overall for me. I ended the week down 0.49% while the Dow was up just a bit. But I am still up 21.93% year to date which puts me on track for a 34.6% annualized return, very near to what I realized last year. Also, since the Dow is up just 6.76% YTD I'm currently beating the Dow by a decent margin.

I had one good trade in Lowe's last week, netting a quick point in two days. My AUY play didn't fare as well - if it doesn't perform tomorrow, it's see ya. My cheapo dividend stocks (AOD, CIM, NRF, RSO, SPIL) continue to do well.

Disclaimer

As always, this isn't investing advice, just a point of reference you will hopefully find interesting. I'm retired, I work for no one other than myself. There's no ads on this site, I am beholden to no one. I will always disclose my position in any stock I mention here, or my association to any product I may talk about. My performance numbers are honest (really, if I was going to lie about it, would I claim to be up merely 22%?) What you see is what you get.

Still rising...

I am just tickled pink with the performance of the regression trend channel technique. Since I learned about it this spring, it has become my analytical tool of choice. Yesterday it foretold of a continued rise in the market and today that's just what we got. Just look at the daily Dow to see how well this works.
Look back down the rising RTC channel from today to its start back in August.

Notice how in at least four different spots the curve flattens out and just looking at the candlesticks you might be tempted to call a top. But looking at the trend lines of the RTC, you can see that it wasn't in the cards. Today's small rise keeps us near the centerline of the channel and affirms a continuation of the uptrend. In fact, the traditional indicators (stochastic, RSI, momentum, and money flow) in the lower panels have come off their oversold levels lending additional support to the bullish thesis.

I made no trades today. I am now 50% in cash, though that is a function of some bonds maturing recently. Modulo those, I'd be fully invested according to my strategy earlier this year. The "high yield" section of my portfolio continues to do quite nicely. I'm in AOD, CIM, RSO, NRF, and SPIL.

Trend break rejected

The Dow today made back most of what it lost yesterday and in so doing climbed back near the middle of its rising RTC channel. The setup for a trend break yesterday was convincingly rejected. Accordingly, we remain long with one more week to go in the scary second half of October.

My long in LOW is doing well, up 2.85% today to close at 21.65. And after seeing AUY stabilize, I went long that too at 10.77 today. It closed at 10.87. I will let both of these run as swing trades until they look topped out.

Setup but no trigger

Today's nasty 165 point decline in the Dow (courtesy of the Chinese Communists) took us under the ascending daily lower RTC line but closed exactly on the line itself. Check it out:
For a definite bearish setup, the close should have been below this level (10,979) but I'll call it close enough. Is it finally time to call the top? Tomorrow will tell if the setup triggers as a trend reversal or if we climb back into the RTC channel negating today's setup. For what it's worth, the ES futures are actually up 450 at the moment (12:30 AM).

In the meantime, I note that gold was hard hit today with AUY falling to 10.65, something I thought might be coming as I mentioned last Friday. It is approaching a tradeable level here but I will wait to see what tomorrow brings before pulling the trigger on gold.

Today's action put Lowe's (LOW) on sale, so I bought some at 21.03. I note the following news, courtesy of Well Fargo Economic Commentary: "Housing starts rose 0.3 percent in September, which was well above expectations. Starts of single family homes increased 4.4 percent, while multi-family starts fell 9.7 percent. Single family permits rose 0.5 percent." This can only be helpful to LOW.

Uptrend Intact

A look at today's Dow daily chart shows that the RTC uptrend dating back to the end of August remains intact as we enter the scary season of late October. Forget what everyone says about how bad September is historically (and September was great this year) - I have found that the last two weeks of October have been the worst of the year by far in my own experience, going back 10 years now.

But in the meantime we remain firmly inside the rising RTC channel, so we remain long. To paraphrase the old TV ad, "We will call no top before its time".

Meanwhile, note how both AUY (11.17, -0.89%) and the gold/silver index XAU (204.95, -0.54%) are both lower again since I wrote about gold last Thursday. This now puts gold at the lower end of its own RTC. This bears close watching. A further decline tomorrow would signal a trend reversal in the precious metal.

Gold Gone Gaga

Well everyone else is talking about gold, so I might as well too. I'm not going to try to call the top but I am going to offer a few observations I've made recently.

1. You hardly see any of those "we buy gold" ads on TV anymore. In fact, recently I've started seeing ads from places that want to sell gold to you. Hmmm...

2. There was a piece on CNBC recently about some company in Europe that's going to bring gold vending machines to the US. That's right, stick in, well I suppose a credit card (I don't think anyone carries enough quarters to buy any visible amount of gold) and out pops a chunk of the shiny stuff. Hmmm...

3. They're even selling gold at the gun show now, of all places. Yes, last weekend, to my surprise, right there amongst the Glocks, the AR's, and the shotguns, was a table with someone selling gold. (I guess at least there, security is not an issue). Hmmm...

4. Today, AUY (Yamana Gold), my favorite gold play, fell out of its ascending RTC channel, indicating that the trend is over. Hmmm...

Soldiering on...

The upward trend in the Dow remains unbroken as it continues to crawl up the ascending daily RTC channel established at the end of August, despite putting in another doji candle that looks just like the one from two days ago.

It sort of feels to me like its been going for a long time and we should be due for a pullback, but consider that the rally back in March of this year lasted over 2 1/2 months. This one is now just 1 1/2 months old. It seems like they just keep knockin' 'em higher in the final hour of trading lately (just like they kept knockin' 'em lower in August). In any case, as long as we do not fall out of the RTC channel, I'm just going to stay long. There is still no sign this rally is over.

Well, I did sell my Alcoa (AA) today. I was ready to throw in the towel at 13.37 so I put in a limit sell on the ask. I came back 10 minutes later to find that it hadn't executed and the price was now 13.23. So wanting to save myself a buck, it ended up costing me 14. Lesson learned (maybe). I still had a 1 1/4 point profit on the trade so I can't complain. And it closed at 13.13 so I still feel vindicated. After yesterday's gap up and today's dark cloud cover that took it right to the bottom of its RTC, it just looked like it was time to bail out.

Not yet...

The Dow today took a stab out the lower end of the RTC channel but came right back up thanks at least partly to the hoopla surrounding the launching of the QE2 which helped neutralize the otherwise bearish omens recently on the horizon.

We finished with a 10 point gain and a doji daily candlestick indicating indecision in the market. So still no RTC downturn setup, though we're running in the lower half of the RTC channel so it could happen at any point. The daily ES on the other hand remains solidly in the center of its RTC.

So for the time being, I'm still just sitting tight. And the RTC is doing its job, keeping me from bailing out early.

No trades today. The VZ I sold last week did indeed go lower. We were up 0.97% today and are currently up 23.6% YTD. The Dow is up 5.7% YTD.

Moving closer

With today's anemic action, holiday impaired or not, the Dow moved closer to the lower RTC line of the current daily uptrend. A down day tomorrow (which is looking likely right now based on the ES futures, currently down 775, or more than they've been down at this hour of the night in a long while) will generate an RTC sell setup. We only need to lose 40 Dow points to enter such a setup.

Then Wednesday will either confirm or reject this setup. I'm still not going short, but I'm starting to think that there's more risk than reward in this market, at least from the swing trader's perspective.

Also, note how the past week's action looks a lot like back in mid-April on the weekly chart, where we just couldn't get past the 200 week MA and then came back down. The indicators on the weekly chart (RSI, stochastic and money flow) are all looking pretty overbought right now. And if that's not enough, note that the dollar index has finally stopped falling over the last two days. All bearish.

The thing about the RTC is that it won't call the top but it's pretty good about identifying the end of a trend. That could possibly happen in the next two days.

Today I sold 200 SPIL (Siliconware Precision) at 5.36 and bought 100 JRO (Nuveen Floating Rate Income Opportunity Fund) at 11.67.

Weekly summary

Well, it appears that rather than falling out the bottom of the daily RTC, the Dow actually moved up right back almost into the center of the channel as we see on this daily chart.

This means that the uptrend remains unbroken and makes it appear less likely that we've got a significant decline coming on Monday, or indeed in the next few days. We also managed to cross the 11K mark, just barely, this past week as well as the 200 week moving average (10,988), both bullish signs. There is no RTC sell signal here.

So I'm still not ready to go short. I'm holding onto my longs and in fact bought 100 shares of NLY (Annaly Mortgage) on Friday as part of my new strategy to add more high yielders to my stock mix. I was also gratified to see that VZ, which I sold Thursday, was down on Friday. Usually when I sell a stock, it goes up the next day :-)

Wait for it...

Today's lackluster market action edged us closer to the lower regression trend channel line on the Daily Dow chart. A drop of 50 points tomorrow or two more days of action like today will create a bearish setup. Then a drop one day after that will be the trigger, signaling that the upward trend dating back to the end of August is over.

If, on the other hand, we get some positive action in the next three days, that will keep us within the RTC channel and suggest that the uptrend will continue. The S&P futures right now actually aren't looking all that bad, up 125 at the moment. In the meantime, it's just more watching and waiting. I'm still not going short just yet.

Today I added 100 shares to my position in CIM (Chimera Investment). I also sold 100 shares of VZ (Verizon) at 32.93, taking a profit. VZ is looking a bit toppy to me, having formed a bearish engulfing pattern today that took it to the edge of its lower RTC line on the daily chart.

Another reversal?

Here's an interesting weekly chart of the US Dollar index. This usually has an inverse correlation with the market and lately its been particularly strong. Look at how oversold the indicators are and how it's approaching a strong two year support level. It's still firmly in its descending RTC channel but I'm starting to think a reversal may be coming soon.

At its current rate, I'd give it another week or two. If the dollar starts moving back up, that will make me consider a market top is soon to follow. The Dow also came within 13 points of its 200 day moving average today. Tomorrow should be interesting to see if it can break through that level (10,974). I don't expect a major change in trend but maybe a correction like we saw in June.


At the moment I'm sitting on the sidelines - not buying or selling. Right now I'm 40% in cash and my YTD trading return is 21.3%.

Reversal?

"When I have nothing to say, my lips are sealed".

- "Psycho Killer", Talking Heads

And so they were. I've just been standing aside for a week now, watching the circus we call the market self-destruct. To understand how bizarre the action has been, consider that one day last week GE dropped 5% because some of their coffee makers were recalled. And GE doesn't even make them. They've been out of the small appliance business for years now. Is the company General Electric worth 5% less because one, yes one coffee maker caught on fire?

But after today's action, my Fish Finder sonar bottom dectector has finally started beeping. I went long on RFMD, AKS, and AUY today, thereby reducing my cash from 40% to 15%, as low as it was in the March '09 bottom. I mentioned AUY on May 14th. I think it's now reached buyable levels.

Not that I'm long term bullish. Indeed I think this country is headed for total disaster if things don't change very soon. But in the meantime, say the next month or so, we may be looking at a time to finally put on the long hat.

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.

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.

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.

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.

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 marketwatch.com: "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.

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!

The Week Ahead

Well, hopefully the weekend will give our patient, the Market, a chance to calm down and stop foaming at the mouth. Who will show up on Monday - Dr. Jekyll or Mr. Hyde? I'm going to guess it will be the good Doctor and not the evil maniac. Look at the daily Dow:

The short term indicators are now extremely oversold, much more than they were on Tuesday when I thought we'd see a bounce on Wednesday. Unless some even more dreadful news comes out over the weekend about the PIGS, it's looking like the market may in fact close higher Monday.

Need convincing? Check out this dramatic view of the daily VIX:

Over the last two weeks, the daily VIX has gone ballistic. This is a classic exponential rocket, crazier than what happened in January, or even anything in 2008 at the height of the Lehman panic. I suppose the VIX could go higher Monday, but the odds are against it on a purely technical level.

That said, the weekly Dow has broken below its latest regression trend channel and amazingly is still looking overbought on all the indicators. So my plan right now for next week is to buy on Monday for a few very short term trades, then wait for this correction or whatever it is to work itself out. I'm still 40% in cash but not in a big hurry to do any major shopping just yet. Last week hurt, but it was not as bad as it could have been. I was down 4.12% on the week but that still beat the Dow which is about all the positive spin I can generate.

The 2 Biggest Lies in the Stock Market

1. "This time it's different".

Anytime you hear this,you can be sure that this time it's exactly the same as every other time. Who remembers the "New Economy" of the dot com years?

2. "XYZ is going to (price P)",

where P is some number far far away from the current level. Generally issued when XYZ has been on some extended trend. Not only is XYZ not going to P, but when you hear this it usually means the trend is over.

Remember Goldman's prediction that oil was going to $200 back in the spring of 2008? A few months later oil topped at $145. By the end of the year, it had collapsed to $30.

Remember when the Dow broke below 7000 last winter? We started hearing calls for "Dow 5000", "Dow 2000", even "Dow 1000". A month later, the Dow hit 6500 and then took off to eventually top 11,000.

And when someone tells you that XYZ is going to some crazy number because "this time it's different", then you know for sure they're wrong.

It seems to me there's a third Big Lie in there somewhere, but I can't quite think of it at the moment.

Stockocalypse

I recently wrote a post about "psychoanalyzing the market". Well you didn't need to be Sigmund Freud to understand today's action. Today the market was a knife-wielding homicidal psychotic hearing voices telling him to slash everyone within reach. Today, the market was Charles Manson, Norman Bates, and Freddy Krueger all rolled into one. The 5 minute chart of Accenture below tells it all:

Does anyone seriously believe that ACN dropped in value from $38 to one cent in less than a minute? That's simply nutso.

The market is now clearly off its meds. The best course of action at this point is simply to stay as far out of harm's way as possible until the men in the white coats show up to take this lunatic away. Until then, I will continue to sit on the sidelines and watch the carnage. The last three days reduced my YTD profit from 13% to 7.66%. I'm just glad I was 40% in cash. The damage could have been much much worse. I'm hearing of people having their accounts liquidated - it's a mess. This is October 2008 all over again.

Yesterday, with the Dow at 10,868, I wrote that we'd see 10,610 before we went higher. I just wasn't expecting it to happen all in about 30 seconds worth of trading! Holy moly.

Oh, and thanks, Greece - for nothing.

Dow Forecast for 5/6/10

The dead-cat bounce I was expecting today never materialized. In fact we ended up lower by a non-trivial 58 points. Where next? Look at the weekly chart:

Yesterday we rejected the 200 week MA and moved lower today. Right now I see no support until the 10,610 level, marking what had been resistance earlier this year. That also corresponds to the lower edge of the regression trend channel starting at the low of March 9.

So I'm going to have to say we're going to see 10,610 (in the next day or two) before we see any further moves higher.

Dow Forecast for 5/4/10

It's important to acknowledge your mistakes, but it's also not a bad thing to recognize when you're right, and I called the last two days correctly.

I guess I ought to take my own advice sometimes :-) As I forecast last Friday, the market was indeed up on Monday. Expecting the market to go lower today, I took the opportunity yesterday to sell my holdings in NCZ at 9.87 (closed today at 9.52). That brought me to 44% in cash, the highest level I've had all year, and going back most of last year too. It's even a bigger fraction of my trading balance, since my portfolio includes a core of dividend payers that are in solid profit positions that I don't intend to sell (GE, MO, VZ).

Today, Wall St. held a sale so I bought some more DRYS at 5.77 and AA at 12.59. Both have been beaten down mercilessly and look quite oversold on the daily and weekly indicators. I just bought 100 shares each in case I'm wrong and the slide continues tomorrow.

However, at this juncture I'm expecting the Dow to close higher tomorrow if for no other reason than the fact that sell-offs of this magnitude on old news (the Greeks are lousy money managers, oh my) generally are followed by at least a dead cat bounce. After that, we'll see what's what.

The Name Game

Nothing impresses people more than the ability to rattle off a company's name given its stock symbol (or the other way around). I'm not sure why, but they think you must be a real stock picking expert if you can do that. Now there's thousands of different symbols so it would be pretty hard to learn them all. But there's a much easier exercise: can you name all the single-letter stocks? There's only 19 of them - seven of the letters are not in use.

And there's even an online quiz you can take, here:

http://www.sporcle.com/games/MikeSang/single_letter_stocks

It's pretty cool. The quiz even ranks your score compared to how others have done. So how to you stack up? I managed to name 7 of them.

May Musings

The daily chart for the Dow (and basically the market in general) is looking fairly positive for tomorrow. I believe the Dow will close up from Friday's close.

However, the weekly chart is quite the opposite. Where the daily stochastic is quite low, the weekly is quite high and the other indicators are at overbought levels. So I will be looking to take some profits tomorrow as I continue to move more into cash. I'm less optimistic about May, or at least the next week than I was a week ago (see my last post). If these expectations hold out, I will consider buying some SDS tomorrow. I like this and its Nasdaq cousin the QID, since they let me short the market with a long position.

Monthly performance update: I am now 41.3% in cash, my highest level of the year. I finished April up 2.28% for the month, putting me up 12.1% year to date, which compares favorably to the Dow's YTD performance of +5.6%.

Sell in May? MAYbe not...

Here's an interesting chart on Investor Confidence Index from State Street Global Markets (http://www.statestreetglobalmarkets.com/en/ici/index.htm#cod)


I've seen some people citing this chart as an indication that investors are looking for a downturn in the market. However, if you look at the three places in this chart where there's a bottom (4/09, 11/09, and 2/10), they correspond neatly to lows in the Dow. The latest reading is lower than any of those. I'm currently over 36% in cash and was planning on "selling in May and going away". Now I'm not so sure.

In fact, looking at the last ten years of the Dow, the only time the whole "sell in May" thing would have helped you very much was in 2008, and that was quite an extraordinary year. Last year, it would have been a terrible strategy. As Jim Cramer said, it was more like "Sell in May, go hang yourself". So I'm going to continue looking for investing opportunites next month, but I'm going to tighten my criteria for suitable candidates and good entry points.

Market update: my overnight long ES trade last night paid off nicely with a 2 1/4 point gain and the market was indeed up today. I'm looking for more of the same tomorrow. Tonight, I'm taking a long NQ position at 2008.50 at 5:28 PM.

Sun Tzu and the Art of Trading

One of the most popular metaphors for trading is that it is like war. And one of the most famous military strategists was the ancient Chinese general, Sun Tzu. His work, The Art of War has become as much a staple at business schools as in military colleges.

If you haven't read this, you owe it to yourself. The whole thing is available online, for example at:

http://www.sonshi.com/learn.html

For a quick Reader's Digest condensed version of some of his more well-known quotes, you might check out:

http://en.wikiquote.org/wiki/Sun_Tzu

Here's one I like:

It is said that if you know your enemies and know yourself, you will not be imperiled in a hundred battles; if you do not know your enemies but do know yourself, you will win one and lose one; if you do not know your enemies nor yourself, you will be imperiled in every single battle.

The parallels to trading are obvious and the lessons are just as true.

Here's another good one:

Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.

When you trade, you are the general in command of your own army. Every dollar in your trading account is a soldier. The enemy is all around. I've found over the past two years that by learning to lead my troops more wisely I've come to achieve more victories and fewer defeats. And I owe a debt of thanks to Sun Tzu.

Market update: I'm looking for a rebound tomorrow. It may not hold, but I went long ES at 1182.50 at 1:39 AM. We'll see where it is in the morning.

Continuous Improvement

... or at least continuing improvement. One of my goals for this year is to implement at least one innovation every month that improves my trading. This month, I got three:

1. I discovered you can put pictures in Excel spreadsheets. Maybe everyone else already knew this, but I didn't. Now in my trading journal, I take a snapshot of the chart when I make a trade and cut & paste it into my journal. That way, I can go back and quickly see what the market looked like when I made any given decision. Everything is all in one place.

2. I learned how to use the Regression Trend Channel feature in eSignal. This turns out to be an interesting indicator. I'll be trying it out more next month and seeing how well it works.

3. I started looking at the Sharpe ratio and how I can use it as a performance metric.

Psychoanalyzing the Markets

My dad was a psychiatrist. He was also a very talented investor. I used to ask him how he was able to do so well and he told me that it was just a matter of "psychoanalyzing the market". He thought of the stock market as just another crazy patient badly in need of therapy. At the time I thought he was the crazy one.

Crazy like a fox, as it turns out. It's hardly a novel observation that the stock market runs on two things: fear and greed. Understand those, and you understand the market. I know, easier said than done. That's one reason I liked Dr. Brett Steenbarger's blog so much - he talked a lot about psychology there. "The market" after all, is just a reflection of the people who make it up. As a technician, I've recently come to believe that perhaps I should pay more attention to the psychology and the psychoses of the players.

Anyway, there's no shortage of proof on how this works. Consider the airlines. My dad deemed the airline industry to be "completely psychotic". He claimed that only a psychotic would get into such a business. And if you look at the lunacy going around the airlines these days, what with fares that change every five minutes and fees for all kinds of nonsense from pillows to carry-on bags, it's hard to disagree. I personally would not touch an airline stock with a 10 foot jetway.

Interactive Brokers First Quarter

Seeking Alpha (www.seekingalpha.com) just published a transcript of the first quarter 2010 conference call for Interactive Brokers, IBKR. This is of interest to me since I'm a customer. The whole thing is pretty long but here's a few highlights I found interesting (from http://seekingalpha.com/article/200629-interactive-brokers-group-inc-q1-2010-earnings-call-transcript?source=email&page=1):

"Year-over-year customer accounts increased by 21% to 140,000.
...
"This is evidenced by the fact that year-over-year equity per client account grew over 43% to an average of $119,000 per account even though more than 60% of our customer accounts are still small, having less than $25,000.
...
"Customer equity grew to $16.7 billion, up 74% from the year ago quarter and up 10% sequentially. The source of this growth continues to be a steady inflow of new accounts and customer deposits and, to some extent, customer profit." (emphasis mine).

IBKR took a huge pop after this, closing at $17.01 on Friday, a 5.33% gain.

It's interesting to note that over 60% of their accounts are under $25K, ie. they're not daytraders. It provides a nice benchmark for our own account siez, as individual traders. Of course, the average is $119K, meaning there's some heavy hitters in the mix. I'd love to see a curve of the account size distribution over there. I'd also like to know to just what extent "customer profit" contributed to their numbers. Remember, it's said that 80% of all traders lose money.

Anyway, I view all these numbers as positive news for the markets and the recovery in general. There's a lot of talk about us being in "a cyclical bull market in a secular bear market". That may be, but my own guess is that the bull still has some room to run. With "sell in May and go away" time approaching soon, I'll be moving my view to the longer charts to try and figure out when and if a correction might come.

Unorthodox Indicators of Improvement

Here's two indicators you won't find on CNBC:

1. The number of IFR (instrument flight rules) flight plans was up over 3% through the end of last year over 2008. This means more people are flying. Since the number of airline flights doesn't change that much, this increase is largely attributable to general aviation, ie. business and private individuals. Private planes being as expensive as they are, it appears that people are more confident if they can spend money on this activity.

2. I recently got an email from my broker hawking their low low interest rates and suggesting that I buy stock on margin, collect the dividends and pocket the difference. Hey - isn't that how the Great Depression started?

New Reading

With the imminent departure of Dr. Steenbarger, we're left with a big hole to fill for getting good market views. I'm going to start collecting the sources he cites, since it looks like before long, that's where I'm going to have to go look myself for information.

In today's blog, he cites these sources:

http://www.sentimentrader.com/
http://www.ttheory.com/
http://www.markettells.com/

(Don't know why the editor won't take these as actual links.)

RIP, Dr. Steenbarger

Today, Dr. Brett Steenbarger dropped a bomb on his loyal following, telling them that he's ending his enormously popular TraderFeed blog here on Blogspot. I am, I'm sure, among many who are sorely disappointed over this development. However, I have to say it's not entirely unexpected. It seems that whenever a blog gets too popular, it ends up going subscription-only. And that's a shame.

But can you blame him? Hey, money is money. If my blog ever got as popular as TraderFeed did (like that will ever happen), I'd probably do exactly the same thing.

Still, you can't help but having that feeling of sadness... We'll miss you, Dr. S.

On Goals

It's important to have goals when trading so you can tell how well you're doing.

When I first started trading, my goal was simply "to make lots of money". In retrospect, that was a silly goal. It was both unreasonable and too vague. After losing money for a few years, I revised my goal to "Make at least $50 every day". At least this wasn't vague. But it was also unreasonable. It's just not possible to have every single day be a winner. I still lost money.

So then in disgust I finally set up a new goal: "To not lose money". This sounds like a pretty weak goal, sort of like saying your life's ambition is to not be a crackhead. Oddly enough though, once I set that as my goal, I did in fact stop losing money.

Once I wasn't losing money, I picked a new goal. This time I decided that I should be able to achieve at least a 7% annualized return. If I couldn't do that, then I might as well just buy high yield bonds and spend all day watching TV instead of the markets. So far so good. Last year I achieved a 40% return. Of course last year was quite extraordinary. But so far this year, I'm just about at the same level.

Now it's easy to perform well when the market is up. The question then becomes, am I good or just lucky? So I also have one final goal: to outperform the Dow. It doesn't matter if the Dow is up or down, as long as my gains are greater and my losses are smaller. So far, that's working out too. I'm outperforming the Dow by around 2 to 1 this year so far.

ES Forecast for 4/19/10

"May you live in interesting times"

- Ancient Chinese curse

Well last Friday's action was certainly interesting, with the SEC on the one hand taking on Goldman, to what should have been the surprise of absolutely no one, and that volcano in Iceland spewing more ash than its name has vowels.

As I write this (1:25 AM EDT), I note that the ES is now down to 1185, down 5 points from the last close. I'm a bit surprised to see this, since looking at the SPX daily charts, we note that more often than not in the last six months, we've not seen a big down day followed immediately by further significant decline.

In any event, we're now near the 20 day MA in ES at 1180.50. If I had to guess, I'd say we could see a decline to that point early on tomorrow and then a bounce. If we go right down through that level, I'll consider going short. But note that there is a support level right around where we are now extending back to the beginning of April. The crystal ball just isn't all that clear tonight.

Recent trades: I took advantage of the sale on Friday to open small long positions in SLV at 17.38 and RFMD at 5.37. I'll consider adding to them tomorrow. In the meantime, I'm encouraged that my IRBT did not participate in the general chaos on Friday. I'm still waiting on that one to produce.

Trading Do's and Don'ts

Don't trade when you're angry, tired, depressed, distracted, or sick. And never ever trade when you're drunk (I just bought what?).

Don't trade based what on some talking head says on CNBC.

Don't trade what Cramer says just because he says so.

Never chase a trade.

Do let the market come to you.

Do have patience.

Do have goals, and make them realistic and reasonable.

Do keep meticulous records of your performance, every single day.

And most of all, do your homework. Every day.

Do good!

Preparing for Disaster

Dr. Steenbarger recently wrote about recovering from a disk crash. If you use computers for anything as important as trading, it is vital to have a rock-solid backup plan and stick to it. There's two main parts to this: data protection and connection protection.

Data protection

Here's what I do: I keep all my important data on the primary disk in my PC. This is all replicated on a file server on my local network. Whenever I change an important file, I copy it to the file server. Weekly, I copy the data to a separate laptop PC and make another copy on a removable hard drive. Whenever I visit my summer home, I take that with me and copy it onto the PC there. I have one more copy on a USB stick that resides in my safe deposit box. The key is multiple backups in multiple locations. Having two copies of your data sitting in the same room does you no good if you're struck by a fire, flood, or theft.

Connection protection

Just as bad is if you're about to sell some big position because the market is turning over and your PC crashes. That is very not so good. Here's what I do: I have my trading platform open on two different PC's during the trading day. Both are plugged into a battery backup UPS. I keep a lnadline and have a modem so I can resort to dialup if my cable connection fails. And I have my broker on speed dial so I can phone in an order if all else fails.

Of course none of this will help if Martians land on Wall St. and everyone in America is trying to exit their positions at the same time. But if you're trading for a living it's still important to do as much as you reasonably can to avoid that horrible "uh oh" sinking feeling when the screen goes blue.

Followup on storming the 11K level

Here's something I sent out yesterday to someone who asked me about market direction. I thought I'd share it here. Since I wrote this, we've seen two runs at the 10,850 support - both have held:

My last two trades were sells. I haven't entered a new position in a week now. I think the problem is a combination of the fact that we've had a long unbroken upward run that's running out of steam just before reaching a natural barrier (the 11,000 mark in the Dow). I think we're going to see a few attempts to push through 11K (see the last three days in the Dow) and they'll fail taking us back to the first support around 10,850. I think that will give the market a chance to rest and reload for the next charge. This sort of thing seems to happen a lot at these levels. Check out the action the last few times the Dow has tried to cross 11K (the first one was in 1999). Also, the VIX is about as low as it's been for a few years lately.

Assault on 11K

Well, it looks like the Dow, having closed at 11,973 today is gearing up for its initial assault on the 11,000 mark. The attempt is likely to come sometime this week, maybe tomorrow. And I predict it will fail. Just like it did in in early May 1999:

Note the similarities between then and now. My guess is that the Dow is going to spend some time bumping up against the 11K mark, then pull back to regroup for a second assault later this month that will be successful.

In the meantime I sold my stake in DRYS today at 6.19. I am now 32% in cash (mostly from appreciation) and waiting for some form of pullback to buy more. YTD, I'm up 11.1%

Near Term Dow Direction

With the second quarter just beginning, I thought I'd take a look at a larger view of the daily Dow going back almost a year (click on the image to get a larger version).

There's a few interesting points I see here:

First, notice how most of the lows are very sharp bounces (green arrows) but most of the highs are extended across several days before a pullback happens (red circles).

Next, note how today's up 70 point action put us back to the top of a now seven day trading range that is now peeling away from the upper Bollinger band.

Also, money flow peaked on March 17th and has been declining since then.

And we've gotten pretty extended away from the 20 MA. (I mislabeled this in the chart as "40" - it really is the 20 though).

What does this all remind you of? Doesn't this look a lot like the action we saw back in the beginning of last August? Notice how the RSI has been indicating an overbought condition for a while now, just as it did back then.

Of course, we can never be sure that history will repeat itself, but I'm starting to think we're getting due sometime soon for a pullback to the 20 MA, which now stands at 10,742. Oddly enough, that number is also exactly the support level established in the January peak.

BTW, notice how the stochastic provides a nice indicator of bottoms but not tops.

Dow Forecast for 4/1/10

Today's action played out about like I thought. Dow down 50 took us back to the bottom of the trading range established a week ago. With the ES posting non-trivial gains (up over 400) as of right now (1:45 AM EDT), I'm looking for some recovery tomorrow, though being the day before a holiday and with jobless numbers coming out, who knows. I think the Street has already baked in a good result there, so it's going to take some really good numbers to help out the bulls.

All in all though, I'm looking at the range bound trade and figuring that what comes down must go up. Also note that the Dow has been unable to pull in more than two consecutive down days (not counting small range doji days) since the tumble way back in mid-January. Nonetheless, I see no major buying opportunites right now. I did not trade today and don't expect to tomorrow either.

I ended the quarter up a respectable 9.6% YTD and was pleased to see that I had only three losing days in all of March, a new monthly record for me.

Dow Forecast for 3/31/10

As we approach the end of the first quarter of 2010, it is perhaps instructive to take a look at the weekly DOW chart:
Two things immediately stand out:

1. We have broken out over the previous peak of 10,724 set on 1/11. That level is now support.

2. We are rapidly approaching the resistance line at 11,000 (green line). This is significant both as a psychological level and becasue it represents the floor established in the summer of '08 before the big crash that fall.

Now comes the problem. After today's close of 10,907, we're also real close to the 200 day MA, at 11,133. If the Dow can make it past 11,000 and get to the 200 day MA, we should be good for another leg up. The question now is how much of a barrier will the resistance at 11K be?

Complicating the matter is that tomorrow is the last day of the quarter. One might reasonably expect some window dressing to go on, but that doesn't always materialize. But I also note that the daily Dow is only slightly above the pivot point of 10,887, so there's not much downward tug on that front. And the daily VIX is pretty much in the middle of its recent range on the way down with not much to suggest a reversal there. OTOH, the ES daily chart seems to be getting ready to turn over, having put in a doji yesterday and being down 325 in the overnight so far 2 AM EST).

And on top of that, this is a holiday shortened week.

My best guess is that not much will happen tomorrow. Of course, that's on a technical basis only. If our pal le president du ECB opens his mouth again, or if flying saucers land on Wall St., all bets are off. Right now I'm 26% in cash and have no plans to trade tomorrow. I'll just be watching and waiting to see how the attack on Dow 11K unfolds.

Latest Trades

I've had my eye on a few things since my last post, so here's a quick update.

C: I unloaded my 600 shares of Citi (C) last Friday at 4.36. So far, that seems to have been a good decision. It closed at 4.09 today. Keep in mind I'm a swing trader. I think that C has a long term potential to go higher, but with the US government threatening to unleash their 27 billion share tsunami on the market (at some unspecified point in the future), I'd rather wait til that's done before getting back in.

WFR: MEMC, maker of silicon chips for computers and solar panels. I bought this last fall, has spent the winter in the toilet, is finally moving again, looks like it may go higher. I'm finally in a profit position but holding on. I have a stop for half my position at break-even, letting the rest ride. Closed at 15.51 today, consensus target is 16.98. Should benefit from the alternative energy hysteria and the recovering economy.

GAZ: I took a flier on the natural gas ETF, GAZ last week at 10.28. It looked like it was putting in a bottom. I was wrong. I took a small loss after two days and got out. Glad I did too, since it went lower after that. Today, GAZ closed up 16 cents at 9.74. This stock (and the entire commodity) has been beaten down so hard for so long I really have to believe that it eventually has to rise from the ashes at some point. But since I now have another nick on my hands from catching the falling knife (again), I'm going to wait for some solid evidence of a turn-around here. I'm watching though.

AUY: Gold, gotta love it. AUY, Yamana Gold, is my favorite gold proxy, mostly because I can afford it at its present price of 9.81. It seems to be holding support in the $10 area, it's come way down from it's March high at 11.20, and I'm hearing noise about gold demand from China. I'm long AUY and looking to buy more.

SLV: the silver ETF. I went long last week at 16.57, sold yesterday at 17.03. I thought I'd get more out of it, but hey, you take what you get. SLV is at the top of its recent trading range right now so I'm not looking to get back in right away. But it's always a good play on a pullback. Silver never goes out of style.

IRBT: iRobot, the company that brings you the Roomba robotic vacuum cleaner, as well as bomb cleaning robots for the US Army. Being the lazy sort and a techno-geek, I love this sort of stuff. Plus, the Roomba actually works. It cleans my floors by itself leaving me more time to watch the markets. I took a flyer on this one yesterday afternoon at 15.58. They must have seen me coming because it promptly dropped 50 cents right after that. But it was up today a bit to close at 15.28, so I'm going to hang on a while longer. That's the beauty of swing trading - I can wait. I think it's going higher. It looks oversold on the stochastic, CCI, and RSI.

Disclaimer: I am long AUY, WFR, and IRBT. I have no other connection to any of these companies, other than owning some products from iRobot. (Hopefully it goes without saying that I am trading real money, not paper trading).

Weekly Performance Update

In a post in his wonderful blog today, Dr. Steenbarger asks the question

"Are you aware of the distribution of your returns?"

And I'm embarassed to reply, no I don't (or I didn't). Fortunately, I've been keeping very careful records of my daily results since last August, so I cut that data out of my spreadsheet, stuck it into Matlab and came up with the following histogram for 2010 so far (58 sessions). This represents the daily percent change in my net trading account balance (ie. I have accounted for commissions and fees):

Viewed as a graph over time, we see:

Overall, this isn't too bad. There are more up days than down days, and dispite one disasterous day (on 2/4, the day the Dow dove 271 points), this was still good enough to put me up 8.65% for the year. This isn't bragging or anything, just a point of reference. I'd be interested in hearing how that compares to other traders so far this year.

Dow Forecast for 3/24/10

Well, I sure blew that last ES forecast! At this point, after today's rally I don't see any real resistance up to the 11,250 level in the Dow. That's the big overhang from the killer fall of 08. I'll bet there's a lot of people who got caught in that and didn't sell on the way down. They're finally very nearly back to even. Once they get there, which shouldn't be too far from now, they're going to sell out of relief over having finally gotten their original investment back after having watched it sink like a rock through early last year. I'll be watching that level closely.

Latest trades: bought GAZ today at 10.28. I've been watching this for a while and it looks like it may finally have put in a bottom. Last Thursday's action looked like climactic selling to me, and the next three days put in three consecutive green candles, something it hasn't managed to do since last August. It's also reached oversold RSI levels on the weekly chart. At this point it's fairly speculative, so I only took a small position. We'll see how it plays out.

Meanwhile, gold and AUY continue to consolidate just above $10. I still think it's headed higher, so I'm just hanging onto it even though it's done essentially nothing since I bought it last week.

Performance Update

Many people post market forecasts. Even more like to tell us why what's going on is going on. But hardly anyone ever tells you how they themselves are actually doing. So I will.

As of last week, my trading account is up 6.57% year-to-date. I like to benchmark my performance against the Dow, and that is up 2.97% YTD. So I'm beating the Dow by a factor of a bit more than two so far this year, which I consider to be a respectable number. My daily win/loss ratio (number of days I make money compared to number of days I lose money) is 2.12. I am also 28% in cash right now.

The whole issue of performance metrics is actually worthy of a post or two itself. I'll try to write something about that soon.

ES Forecast for 3/22/10

Well, it appears that we have finally stopped climbing the wall of worry. As you can see from the daily ES chart below, it's been basically nothing but up since putting in that big hammer on 2/25 at 1055 (red vertical bar). Now look at the far right edge. The last bar is still being formed - it reflects the overnight trading into Monday morning as of 1 AM EDT. The two bars before are a classic doji, indicating a possible change of direction and a down candle confirming the doji. Tonight, all three futures are lower by non-trivial amounts. ES is now almost 6 point down from Friday's close.

The passage this evening of Obamacare no doubt had a lot to do with this, but it's all in the charts anyway. I will have my short hat on tomorrow.

ES Forecast for 3/18/10

Right now is a problematic time for charting ES, with the changeover from the H contract to the M contract. So I decided to pull the underlying S&P weekly chart, with a few extra doo-dads:


As you can see, the S&P has been on a three-week tear that has taken us convincingly above the January highs. Having broken above 1150, the next line of resistance is clearly the 1240 area that hearkened the sickening slide of October 2008. There's a long way to go from 1150 to 1240.

But - do you believe in Fibonacci circles? If so, check these out, centered on the March 9th lows. Each Fibonacci level has been followed shortly by a pullack. Only one level remains that has not seen a pullback, or should I say pullback yet - the 1.618. Interesting stuff.

Personally, I now refuse to go against the trend and am willing to just go with the flow until proven wrong. I think we'll break 1200 before long, but maybe not before another short sawtooth down first. Finally note that only seven times in the last 10 years has the Dow gone on a streak longer than seven days (where we're at now).

A pain in the gas...

Last week I started thinking about natural gas plays. Cramer has been trying to pump up nat gas for a while now. For me, there are two ways to play this: either the NG gas futures or the UBS ETF, symbol GAZ. Here's its daily chart:

Now, normally this is the kind of chart that gets my attention. This poor stock has been beaten down hard lately. And unlike a company like Eastman Kodak, its main product cannot be made obsolete overnight by computers. But I got singed recently trying to catch the falling knife in gold (I bought AUY at 10.17. Had I waited another day, I could have had it at 10). So I started waiting for a bottom in GAZ. And waiting... and waiting... I'm still waiting.

So what's up with nat gas? Here's a nice article from Seeking Alpha that helps explain why gas is on the floor. (Executive summary: oversupply):

http://seekingalpha.com/article/191972-gazprom-finally-realizes-it-s-a-shale-gas-world-now?source=yahoo" (for some reason, Blogspot doesn't want to insert links, so you'll have to cut&paste this - it's worth the effort).

As a long term investment, you could probably do worse than gas. Is now the time to buy? Not yet. Like I tell my tell my dog when we're out on a walk and she starts to sniff something smelly, "Leave it!" Even as a short, that bus left the station a while ago.

What Goes Up...

...just keeps on going up? After being badly wrong on the market direction two days running back on the 8th and 9th, I decided to give it a rest for a while. I wanted to say on the 10th it was due to go down again, but thankfully refrained from doing so.

I almost hate to say it, but is the end perhaps finally near? The Dow closed at 10,686 today. This means we have very nearly completely retraced that nasty decline from January. It also means that 10,720 marks the first line of resistance from here. We're almost there. To make matters worse (if that's the right word), my trading account is now on a 14 day winning streak, shattering my old record of 6 days without a loss. Either I've become a much better trader, or we're due for a turn-around soon.

On the other end, 10,575 has become a fairly substantial line of support (blue line).

At least my gold play is panning out. I added to my position in AUY at 10.12 and again at 9.99 while it was consolidating over the last few days. Today it started to move and I believe will continue to do so. The next thing I'll be watching is natural gas. More on that soon.