Not Looking Good

I don't know - I have a bad feeling about tomorrow. Tomorrow is options expiration day and this has been a really really bad day for 10 of the last 12 years. I see nothing in the daily Dow chart to make me think 2011 is going to be any different. Also, all three futures are down at least 0.1% right now (1:15 AM EST). So today's little 2.5 point loss still keeps us in the middle of the rising RTC and therefore the swing trend remains intact.

However, the indicators are still all very overbought (the RSI is actually more overbought than it was on Tuesday) and today's down volume was higher than yesterday. Although the shape of today's candle is a doji indicating indecision, I'm really not looking for any gains at all tomorrow and would not be surprised to see a drop to the 11,778 area which represents minor support for the Dow.

Note also as I mentioned yesterday how the action of the last three days seems to be replaying what we saw starting January 6th. From the peak on the 5th, we had two declining dojis, very much like we saw today and yesterday. If this pattern plays out, look for a hammer tomorrow, though still ending lower.

The one bright spot is that the VIX hit its upper Bollinger band today and then retreated from that. Almost every time when this happens (going back over a year), the VIX goes lower within two days, implying stocks go higher. So if tomorrow is in fact lower, and especially if tomorrow replays the action of the 10th and forms a hammer, I'd expect to see a rally start early next week.

Trades

Today I bough a bit more ANH at 6.86 for my low price/high yield portfolio. It has pulled back over the last three days and reached some strong support, forming a bullish gravestone doji today. Although the LP/HY portfolio took a 10% hit yesterday, that still leaves it above the level it was at just six days ago. I think its downside from here is limited regardless of tomorrow's broader action.

Possibly lower soon

In an article on marketwatch.com today, we read Michael Gibbs, director of equity strategy at Morgan Keegan opining

“Markets don’t move in straight lines, and to me, it looks like the normal course of a little bit of profit-taking kicking in. Does it turn into that pullback that everyone is calling for? I don’t know"

You and me both. Yesterday I discussed the possibility of getting a doji or hanging man soon and sure enough, the Dow formed a doji/spinning top today. But that is not necessarily the reversal everyone is waiting for. Indeed, we remain above the middle of the ascending RTC, thus the uptrend is actually still intact, even though I got a bad feeling from today's action. I even tried to hedge my position with some SDS around mid-day and naturally the market started going back up. I got out at break even and then watched the charts gyrate aimlessly the rest of the afternoon.The closest thing I can figure is that today looked a lot like January 6th, and that was followed by two more down days.

And check out this ominous warning from The Stock Traders Almanac:

January Expiration Week Horrible Since 1999, Dow Down Big 8 of Last 11".

This coming Friday could be really bad. And it would only take a 30 point drop over the next day or two to generate a bearish trigger.

At least I was right with my call that the 11,867 level was going to be tough to crack. Tuesday's high was 11,859 and today's was 11,861, with both days finishing off those levels. Where tomorrow goes, I have no idea, but I'm not as optimistic as I was at the start of the week and I don't see us breaking the 11,867 level once again, which means there's not much upside from here. And as of this writing (1:50 AM), all three futures (ES, NQ, and YM) are down slightly. I may try again to get a decent entry into SDS tomorrow to do some hedging if we're not up meaningfully by 11 AM.

Uptrend continues

The purpose of stock market forecasters is to make fortune tellers look good.
- Warren Buffett

So it seems. I really did not expect the market to be up at all today, much less the impressive 50 point gain we saw in the Dow. I'm not too disappointed though as I ended the day up 0.8%, fueled mainly by the 9.27% pop in CSIQ, my last remaining "trade that turned into an investment", left over from last year. But apparently I'm not alone in expecting lower. Even our local newspaper had a short article to the effect that "markets may be lower today based on futures action the night before". Yup, they got fooled too.

And if that wasn't enough, today I got an email newsletter from the great Dr. Alexander Elder. In it, he writes,

In summary, the US stock market appears poised at razor’s edge. While the trend is clearly up, both on weekly and daily charts, the NH-NL is flashing red warning signs. It reminds us that bull markets do not move in straight lines, and this uptrend is ready for a pause.

(You can read more from Dr. Elder at elder.com)

But if we look at the RTC in the daily chart here, it still does not look like this "pause" is at hand. But I now think it's coming soon. Note that today's close brings us very close to the 11,867 resistance level marking the top of the "summer shelf" of 2008. I think at this point there's only 30 more points of upside before the market takes a rest for the assault on that line. So although I'm going to leave the green swing trend arrow in place, my feeling now is that it might be changing before the beginning of next week. We'll be looking for a doji candlestick or a hanging man.

Weekly Review

After a few days off, it's time to review last week and look ahead. The markets had a good week last week with the Dow gaining 115 points. In fact, all of January has been good so far, as you can see in this weekly Dow chart. Too good, some are saying. As you can see, all of th indicators are quite overbought. However, going back over a year now, the indicators spend a long itme in overbought territoray before any correction. The last two major corrections were preceded by indicators saying overbought for seven solid weeks. We have only been overbought for three weeks now. So while the market may be starting to look toppy now, I don't think it's quite time to jump ship just yet. The RTC in fact is looking quite healthy. It would take three weeks at current levels to get a bearish setup, or a one day drop to 11,651. I don't really see that happening any time soon.

That said, tomorrow being "Monday" (OK, it's Tuesday but it's the first trading day of a holiday shortened week) and all three futures currently being down by non-trivial numbers (ES, NQ, and YM down 0.31%, 1.08%, and 0.13% respectively), I'm expecting some downside action. BTW, I think the Nasdaq futures decline is due entirely to Steve Jobs apparently not feeling too well. While I wish the man well, is he really so important as to move the market that much?

So basically, I'm looking for a pause tomorrow, followed by upside continuation later this week. Thus, I continue to claim we're in a rising swing trend and the green arrow remains in place.

Continuation

Not really much to write about tonight. Yesterday I said

[I] would not be surprised to see a bit of a pullback.

and sure enough, we dropped 23.5 Dow points today but remain just below the center of the rising short-term RTC. Thus, the green arrow remains up. I see no sign of a major drop for tomorrow. And we still have about another 160 points to go before encountering any significant resistance. Contrariwise, we have a support point just 16 points below our current level of 11,732.

Trades

No trades today. My Intel trade from last week paid off nicely today after they reported good numbers. My gold trade in AUY didn't fare quite as well and I'm down a bit, but I'm going to let that one continue for a while. Everything else continues to run.

Uptrend confirmed

Yesterday I wrote

[I'm] looking for more upside over the next few days.

Well we sure got it today with an 83 point gain in the Dow. This number took us right back to the top of the RTC going back to the beginning of last December. Yesterday's bearish setup is now completely off the table. This is the value of the RTC - it keeps you from getting faked out by the sort of incremental declines we saw in the three days before the last two. My long hat is now pulled down over my ears. That said, after today's gains I'm not looking for much more tomorrow and would not be surprised to see a bit of a pullback.

Trades

Today I bought some more AOD AT 6.09 for my low price/high yield portfolio. The LP/HY portfolio has been doing great and has returned over 15% in capital appreciation since I started it last summer, in addition to its 10%+ average yield.

I also took a speculative flyer in Windstream (WIN) at 13.35. We'll see if that can blow some profits my way. Finally, the Intel (INTC) I bought last week has started to move the right direction, closing up 1.2% at 21.30 today.

No bearish trigger; uptrend resumed

Today's 34 point gain in the Dow brought us right back to the lower edge of the rising RTC I had abandoned yesterday, Since this is also a bullish candlestick pattern, I'm going to take a chance that the three days of declines before today were not in fact the start of a new downtrend. Clearly yesterday's bearish setup did not trigger today. So I'm returning the green swing trend arrow and looking for more upside over the next few days.

Trades

Today I bought some Frontier (FTR) at 9.42. It's looking oversold on a short-term basis and bounced off its 40 day MA today. It doesn't hurt that it's paying an attractive 8% dividend.

I also think I've found the pullback in gold I was waiting for. I bought AUY at 12.31. Actually, I should have picked this one yesterday as it was just breaking out of its downtrend and looking very oversold technically. But today's action just confirms that and I think it still has plenty of room to run.

Bearish setup but no trigger yet

With today's 37 point drop in the Dow we closed below the lower edge of the rising RTC for the first time since the beginning of December. The more adventurous will call the uptrend over at this point. Technically, we need to see one more down day to declare the uptrend dead.

But note the shape of today's action, forming a nice hammer candlestick. That is a bullish sign. And note that volume has been decreasing over the last three losing sessions, suggesting the bears are having a tough time driving the market lower. Also, the indicators are off their recent overbought levels and all three futures are up 0.1% to 0.18% right now (1 AM EST). Also, tomorrow is Tuesday, which is generally a good day for the market. And the VIX, which gapped up this morning, hit its daily upper Bollinger band before retreating to close at 17.54, its low for the day.

All of these factors may combine to keep us from going lower tomorrow. So the best I can do at the moment is to call the current swing trend over but not declare a downtrend yet. Note though that we are still well within a longer RTC uptrend going back to last year's lows in June. Right now, it wouldn't surprise me to see the market go higher tomorrow.

No trades today

Weekly Review

With the first week of 2011 now in the books, it's time to review what happened and look ahead a bit. Here, submitted for your perusal, is a chart of six months worth of the Dow in weekly candles. I've drawn in two different ascending regression trend channels. The first starts at the lows of 2010 at the end of June. The second, narrower, channel starts only at the first week of December, when Santa Claus was still just loading up his sleigh with profits for all the good little traders. Note that the Dow at its current level of 11,675 is right in the center of both channels.

Lately I've been reading a lot of contrarian-style chatter to the effect that the market is "due for a pullback" because "everyone is optimistic" and "the technicals are overbought". I don't know how true any of those are, but looking at the RTC channels, I don't see this big downturn coming in the next few days. Which is not to say it won't happen at some point. I just don't think that point is at hand yet. The RTC is good at verifying the end of a trend. It does not call the top ahead of time.

In fact, the daily Dow is not looking as good as the weekly chart. Although with two consecutive days of losses in the Dow we're still three days from a bearish setup if we get sideways action, a one day drop of just 16 points could do the same. In fact, Friday's action took us below the lower RTC line intra-day. And as of this writing (8:30 PM EST), all three futures are down slightly. Also, note that Monday's are typically not very good in recent times. So given this divergence, while I'm not all that confident about tomorrow, I have to leave the green swing trend arrow in place and take a wild guess that the week will end higher.

Also of interest is this quote from The Stock Traders Almanac:

The last 37 up First Five Days (of the S&P in January) were followed by full year gains 32 times, for an 86.5% accuracy ratio and a 14% average gain in all 37 years.

That's pretty impressive. And in 2011 the S&P closed at 1271.50 with a gain of 14 points, s gain of 1.1%. That's good enough for me. Add to the fact that 2011 is a pre-presidential election year (which historically outperforms) and I'd say we're looking for some more gains by the time Santa Claus comes back to town.

Performance

At the start of every year, the numbers are all a bit askew because we're just getting going, but for what it's worth I finished the first week of 2011 up 0.52%. That would be an equivalent annual run rate of 27.2%, which is in the ballpark of what I've gotten the last two years (a bit over 30%).

Almost there

Today's lackluster performance in the Dow cost us 26 points but still keeps us riding along the top edge of the ascending regression trend channel as you can see in the daily chart. At this rate it would take four more days of sideways action or a one day close at 11,646 to signal an end to this uptrend. Given the recent action, I think this is unlikely tomorrow. Also note that today brought us just a bit under the pivot point at 11,706. And the Dow has not traded meaningfully below its daily pivot since last November, indicating a continuing bias to the upside.

It's also unlikely, with just one day left, that the S&P will close out the week below its Monday open. That would confirm the historical "first five days" indicator. We'll find out tomorrow. As of this writing (12:30 AM EST), all three futures are up modestly leading me to keep my long hat one and the green arrow in place. There is no indication yet that this uptrend is over.

Many people have commented that we're due for a pullback based on the indicators currently at overbought levels. However, in extended trends, the indicators eventually become "broken" and lose their predictive power. For example, the RSI has been showing overbought since December 3rd, and yet December was a terrific month. I think the RTC will be a more accurate predictor of the trend change when it comes.

No trades today.

3 down, 2 to go

Today's gratifying 32 point advance in the Dow, along with gains in the S&P and Nasdaq extend our 2011 YTD advance to three days. That leaves just two more days to conclude the "January early warning system" from The Stock Traders Alamanc. If we can finish the week up, that will be bullish for stock for the year. Since 2011 is a pre-presidential election yeat, that is even more bullish. As you can see from today's daily Dow chart, we are still riding the upper edge of the ascending RTC channel.

And as I mentioned yesterday, there is no resistance in sight for what is now another 100 points. Our TTBS (time to bearish setup) is now extended to seven days of sideways action or a dne day drop to 11,624. Failing that, the green swing trend arrow is still up and my long hat is still on.

Trades

No trades today, though I note that HIMX, which I dumped two days ago and rose higher yesterday, lost 2.33% today and put in a dark cloud cover. That is a bearish confirmation of yesterday's evening star doji. That's what I get for not waiting for the confirmation. Anyway, watch for HIMX to go lower tomorrow again.

Uptrend Intact

Well, they tried to knock 'em down shortly after noon today but the Dow got right back up and finished with a 20 point gain to close at 11691. And despite the S&P's slight 1.69 point loss today, we're still on track for the "first five days" of January indicator. The Dow remains at the upper end of its rising RTC channel. At this rate, it would take either five straight days of sideways action, or a one day drop to 11,558 to cause a bearish setup. I've been hearing a lot of talk about excessive optimism in the market lately and people calling for a pullback. I don't doubt it will happen at some point, but I don't think that point is the next few days. So the green swing trend arrow remains in place.

I see no real Dow resistance until 11,867, representing the top of the 2008 "summer shelf". Also, although we have now reached the upper Bollinger band in the daily chart, we are only 38 points above the daily pivot at 11,653. Staying above this number is bullish.

Trades

No trades today. My INTC buy last Friday was up 1.44% today, but I bailed out of HIMX too soon. Despite going exponential, there were apparently still enough people who wanted to get on this bus today to drive it up another 7%. Oh well - I'd rather leave something on the table than lose it when everyone runs for the exits.

I'm also watching gold again. I think there may be an entry point here by the end of this week or early next.

Off and running

2011 got off to a great start with a 93 point advance in the Dow. This keeps us at the upper end of an RTC channel established December 9th when the Dow broke out of its week long consolidation. Not only was price up but volume was higher than any point last month except for the first two days of December which saw those awesome gains. Even the short stochastic is giving a bullish crossover right now. And even after today's gains, the futures are all up modestly right now (1 AM EST).

So technically, there's really nothing to suggest we don't have more room to run. The green swing trend arrow remains in place and my long hat is on. Keep your fingers crossed that we can get five up sessions in a row. That would be a major bullish indicator for the rest of the year. And note that historically, pre-presidential election years, of which this is one, tend to finish positive.

Trades

Today I booted HIMX from my low price/high yield portfolio, not because it was too bad, but because it was too good. It basically became a victim of its own success. Check out this chart. Over the last four sessions Himax went exponential in a big way, ending up in a classical evening star doji candle today. That's a major bearish sign. Because of the parabolic run-up, I'm not even waiting for confirmation tomorrow. I bought it at 2.03 purely for its dividends, but after selling it today at 2.38 I made more in appreciation than the dividends would have paid. I'll consider getting back in after the pullback that's sure to come. It may still go higher in the long run, but we are swing traders and this swing trade is done.

The Week Ahead

The week ahead, the first trading week of 2011, is going to be crucial. According to The Stock Traders Almanac, when the five days of January were up, the rest of the year was up, in the last 32 out of 37 years. That's a pretty good track record. And while historically the first day of January is not so hot, the fact that right now (7:45 PM EST) all three futures (ES, NQ, and YM) are up about a third of a percent, following their sharp rise in the closing minutes of last Friday, I'd say the odds are good that we'll see some positive action over the next few days. Accordingly, I'm leaving the green swing trend arrow in place for now.

How to profit from the next flash crash

"In confusion there is profit"

Tony Curtis, Operation Petticoat

Looking back on 2010, probably the biggest event was the now infamous "Flash Crash" of May 6th, a mystery that still hasn't ever really been satisfactorily explained. The big question is how to protect yourself from the next Flash Crash. That one, fortunately, is easy: just don't use stop loss orders. If you have to put in some sort of stop order, make sure it's a stop limit, not a stop loss. That way, you'll be guaranteed of getting your price, though at the risk of not getting executed at all. However, as the Flash Crash of 2010 demonstrated, the risk of guaranteed execution provided by a stop loss order proved to be disastrous to many investors.

As for me, I just happened to have been out running errands that day. I didn't even know it had happened until I came back and looked at my charts. At first I thought it was just a bad tick - that happens sometimes. But then I noticed that everyone had "bad ticks". Then I read the news. Fortunately, I had no stop loss orders in so it was all pretty much a non-event for me.

But I digress. So how can we make some quick money from the next Flash Crash? Assuming there will be one, of course (and a surprising number of people think there will). Simple: just put in some limit buy orders for stocks you'd love to buy on sale at ridiculously low prices. They'll just sit there, like underwater mines, patiently waiting for some unsuspecting ship to come by and then ka-boom, you've got a bargain.

The only question is where to place your order. During the last Flash Crash, the SEC ended up busting trades that went through at over 60% price drops, so make sure you don't put in a number lower than that. No point in buying GE for a penny if the trade simply gets busted an hour later. And make sure you have enough cash around to cover the trade if it should ever happen to go off. You definitely don't want to do this on margin.

This is a low probability/low risk/potentially high reward play. At worst, you won't ever get your price, but then you're no worse off than now. Or the SEC might decide to bust 50% trades next time, but then you still don't actually lose anything.

The only real risk is in the case where a company really does drop 60% in a flash but for a good reason (the CFO is caught embezzling funds, the company goes bankrupt, etc.) Then you will have bought in at a price that's not likely to come back (although even then, stocks that fall off a cliff often have a dead cat bounce the next day, so you could still possibly at least break even). And that's relatively rare.

So the moral is to only do this with strong companies. Don't try this with drug companies that are always just one FDA ruling away from disaster, nor with airlines that face similar "sudden death" risks. Just a thought.

2010 Annual Performance Review

Back in the days when I was a wage peon for a large multinational corporation, we had annual performance reviews and God did I hate those. Invariably, I ended up not getting credit for the good work I had done and being blamed for problems I had absolutely no control over. Then I was told I was going to have to do better next year but not given any means of accomplishing that. I say foo on all that. That sort of nonsense is a big reason I just walked out one day and decided to make money in a way that I at least could have some control over and see the direct results of my decisions.

Ironically, my jump from wage slave to independent trader did not obviate the need for performance reviews. If anything, it's even more important. The big difference is that I no longer hate the prospect. If I do poorly, it's nobody's fault but my own and if I do well, I get all the credit and all the rewards. I don't have to sit through an hour of having to justify every decision I made all year to someone else who knows less than me but thinks he could have done better.

So anyway, let's get on with it. This exercise is primarily for my own benefit, but you may find it useful as a reference point to compare against your own results. I've divided it up into three convenient sections we'll call the Good, the Bad, and the Ugly (hey that would make a good movie title).

The Good

My total return for 2010 was 31.99%. I'm quite pleased with this because I not only beat all three of the major averages, but beat my own return last year which was 30.57%. This is important because last year was the first year I was profitable in trading. I lost 16.7% in 2008 and 10.8% in 2007. (I also lost money in 2004-2006, but back in those days I was so clueless I wasn't even keeping score. I think my losses then were similar to '07 and '08).

A 32% return also compares favorably to other benchmarks. The Dow finished the year up 11%, the S&P 13%, and the Nasdaq 17%. According to Seeking Alpha, Jim Cramer was up 31% in 2009 (I don't have his 2010 numbers yet). Warren Buffett, the ultimate investor, returned an annual average 27.7% in Berkshire Hathaway over the last 32 years (but only 7.39% over the last 10 years). Even Bernie Madoff's Ponzi scheme only delivered "returns" in the 13% to 20% range to his victims. And I understand that the Wall St. types consider anything over 20% excellent.

The Bad

I violated the Second Commandment of Trading a few times, "Thou Shalt Not Turn a Trade Into An Investment" (see the Ugly below for the First Commandment). In the spring, I took on positions in AKS, DRYS, CSIQ, AMD, and TIE. They started to go down. Then they went down some more. Then I was in deep. I decided to hang on. I was finally rewarded by AKS and DRYS which did give me my money back, but I'm still under water in CSIQ, TIE, and AMD, to the tune of a total of about $1,000. Now $1K may not even be sofa cushion change to ol' Warren Buffett or Bill Gates, but it's significant to me. These three stocks are my only losers for the year. The "bad" part is that they didn't have to happen.

The Ugly

Here's a graph of my trading balance on a daily basis for 2010. Those two Nixonian gaps in the middle are where I took some needed vacation time. While the end compared to the beginning is pretty good, there are two really ugly declines in there along the way. In the first, from May 3rd to June 8th, I took an ugly, nasty 13% hit. Now admittedly, the Dow was down even more during that time (about 15%) but still I'm afraid I broke the First Commandment of Trading, "Thou Shalt Preserve Thy Capital". You can excuse a one or two day drop that you didn't see coming, but there's no excuse for watching your account go down for a solid month without doing something about it.

And even worse, I did it again. From August 9th to August 26th, I lost another 10%. This was even worse because it happened over only three weeks. I'm going to have to think about that one.

The Rest of the Numbers

Here's a few other interesting numbers from my year:

* Win-lose ratio by day, 1.65. That's just shy of five to three, meaning for every three days I lost money, I made some on five.

* Maximum daily gain, 4.22%

* Maximum daily loss, -5.30%

* Longest winning streak, 17 days without a loss

* Longest losing streak, 6 days in a row

Happy New Year!

It's a wrap! 2010 is history and was my best year yet, finishing up a nice 31.99% in my trading account. I'll go over the numbers tomorrow. In the meantime, here's to a safe, prosperous, and Happy New Year to one and all!

Down to the wire

Well, this is it. 2010 is almost in the record books. With just one more day to go, it will be interesting to see if the tax loss sellers show up or if traders want to realize some gains tomorrow. The very last session of the year is historically a down one, according to The Stock Traders Almanac. But based on the recent good economic news and the sluggish pace of trading all week so far, I'm not expecting a major downturn. And I note that all three futures (ES, NQ, and YM) are up at this hour (1:30 AM EST). So the swing trend arrow remains green despite today's 16 point loss on light volume.

Over the weekend, I'll be posting my annual performance review of how and what I did this year, plus a look ahead to what technical analysis might tell us about next month and the rest of 2011. Stay tuned.

Trades

Yesterday, I bought some Intel (INTC) at 21.00. Intel has been beaten down lately and it is my "Dogs of the Dow" candidate for this year. The DoD theory holds that you can make money by buying the worst Dow performers at the end of the year. Technically it's not the biggest woofer, but I already own AT&T and Verizon and Intel is more affordable. It closed today at 21.02 and I'm planning on holding onto it for a while, longer than my usual swing period.

Drifting on...

Down a bit, up a bit, move along, nothing to see here. Yesterday's Dow hanging man did not have any follow through and we actually ended up 21 points today. In such a listless market, technicals pretty much lose their predictive power. But it's all pretty much as I expected. I'm just watching the charts and letting my longs run. The green arrow remains in place, mainly because I don't have a better clue as to what I might change it to right now.

There's really not much to do now but wait for the big players to come back from vacation and see which way they decide to push the market next week, next month, and next year. In the meantime, I'm just putting the champagne on ice and counting down the few days left until the ball drops in Times Square. No trades today.

Doldrums

Zzz... zzzz... zz... huh? Oh, sorry - I guess I must have dozed off after watching today's lethargic trading, where fewer than 77 million shares traded hands today, leaving us with another mixed market, the Dow losing all of 18 and the S&P and Nasdaq just barely positive. Whether it was the mega-snow storm or the usual inter-holiday slump, today was a real snoozer. Not much to say about it.

I don't particularly like the shape of today's candle, being a Hanging Man, but with such light volume, it's difficult to draw any conclusions about anything right about now. This candle also brings us under the RTC lower edge, which is a bearish setup. But again, I think we're more just drifting along so I can't read too much into it. So I'm still just standing on the sidelines and counting down to New Year's. No trades today.


Interesting Reading

Here's a story from the Seeking Alpha web site today that's worth a read:

http://seekingalpha.com/article/243555-thoughts-on-market-timing?source=email_investing_income

Short summary: the author expects a market downturn in the near future on contrarian grounds, citing growing bullish sentiment. I suppose that's possible, but I generally try to refrain from looking more than a week ahead. And I don't see a crash coming this week.