Link: Various Countries’ First Quarter Market Returns

Apr 4, 2007: 12:16 AM CST

TickerSense recently posted the First Quarter Stock Market Returns sorted by Country, and the good news is that the United States is in positive territory for the first quarter.

The bad news is that 65 (of the 87) countries (75%) beat the US stock market (S&P 500: up 0.18%) in the first quarter.

Topping the list: Zimbabwe at 600%. Can you imagine what it would be like to have your investment grow 6 times its initial value in 3 months? The only problem is that inflation grew at 1,000%, or 10 times your initial investment, so actually, your money would be worth less now than then, ironically.

It is always worth studying global markets, or at least giving international markets at least a cursory glance. How can it help? As globalization takes hold, the world is becoming more interconnected, where events (especially tragic events) that affect certain economies can now affect major economies across the globe.

Be aware that the United States is one nation among many, and we Americans tend to forget other economies are growing more rapidly than our own, and conditions overseas definately affect us at home. Investors are wise to study international trends and markets.  China’s Shanghai SE Composite rose 19%.

Check out the link and the TickerSense site. By the way, in the TickerSense Poll, bulls and bears (sentiment) are tied at both 30.30%.

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Dow Breakout of Range

Apr 3, 2007: 10:44 PM CST

We finally got the range expansion as expected in the major market indices, and the market has broken (again) to the upside as was also forecast, especially in light of the rampant negativity on the general state of the market. Is it surprising that, with all the negative sentiment around, the market rose yet again today?

dow-apr3.png

spx-apr3.png

From a technician’s standpoint, we are still in a confirmed uptrend, and thus higher probability plays come from trading the upside, especially given the recent pullback into “support”.

Viewing a swing chart of the Dow and S&P 500, we see the market may be making a new swing higher, as confirmed by the recent new momentum high in the oscillator. This would hint that new price highs are yet to come. I can see the market testing the upper limit on the Keltner Channels (about 12,650 on the Dow and 1,455 on the S&P). The “Impulse Buy” setup has already achieved its objective, with entry near moving average support and first target being the most recent swing high).

dow-swing-ap3.jpg spx-apr3-swing.jpg

When the fundamentals or the news/commentators are telling you one thing (that the market will go down and the economy is heading into a recession) yet price and chart analysis tells you another, a dichotomy exists, and it is difficult to anticipate the next move with confidence, given so many conflicting signals. StockBee recently posted a timely post regarding “Methods Trump Markets” that addresses the issue of headlines/conventional wisdom already being reflected in the price of stocks.

A great quote from the post: “While majority are busy waiting for the doom to take the market down, the market acts contrary to expectations and offers bullish opportunities.”

Also analyze the Swing Chart of the S&P on the weekly time frame (notice the momentum divergence as price creeped higher and the eventual correction):

spx-swing-weekly.jpg

This is where trading your own system and not being influenced by others becomes crucial to success as a trader.

Despite the volatility that occurred at the beginning of the month, price still is making reliable swings and allowing for opportunity, provided you have a system and emotional stability (confidence) to take advantage of the movement and not get carried away with outside analysis or second opinions of your own analysis.

 

 

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Dow… still trapped. Someone save it?

Apr 2, 2007: 10:22 PM CST

I am sounding like a broken record, yet so is the market.

We have reached a clear equlibrium point and soon price will break one way or the other out of the consolidation we are experiencing. Remember, the longer the consolidation, the larger the move, yet it is difficult to predict which direction price will eject when it is trapped in a range.

Gutsy traders can take a position now and place clear stops if wrong… or you can place a buy (or sell/short) stop to draw you into the market when this range breaks. Either way, my prediction is for a clean, clear break out of the recent indecision zone.

The “Mighty” Dow is still Trapped

dow-apr2.png

The Nasdaq is also Trapped.

nas-apr2.png

If you must take a position, go Long SPY (S&P) with a tight stop should it break below moving average support.

spx-apr2.png

Sometimes, the best play is to wait for the market to tip its hand and then enter, but beware a “wash and rinse” which means the market may thrust initially in one direction, then shake back and take out the weak hands and stops, and then rally (or fall) hard in the original direction. Beware this, to those who keep stops too tight to the market.

 

Either way, be prepared and best of luck, regardless of your trading style.

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Sector Rotation: Book Recommendations

Apr 1, 2007: 12:05 PM CST

Sector Rotation Strategy can help you view the larger picture on money flows in the market and possibilities of where strong sectors will emerge.

Regarding sector rotation, probably the best book I read on the issue, which helped me determine my strategy, is Peter Navarro’s “If it’s Raining in Brazil, Buy Starbucks.” Navarro introduces the concept of MacroPlays and contains the best logical description of Sector Rotation, Market Cycles, Economic Cycles/Reports and Interest Rate cycles.

I also recommend Peter Navarro’s “When the Market Moves, Will You Be Ready?” which is just a shortened, easier to understand book like his Raining in Brazil book.

As an aside, studying Intermarket Relationships can add to the larger picture. The aim is to identify relationships (and divergences) among the S&P 500, the bond market, currency market, and commodity market. This is more for the longer term investor, but even short term traders can benefit from studying overall market trends in markets other than the stock market. John Murphy’s Intermarket Analysis is probably the best book to begin.

There are three places I view sector rotation and intermarket analysis at a glance:

Sector Rotation Charts: Stock Charts Sector SPDRs
Intermarket Analysis: Stock Charts Intermarket Study
Prophet.net: Industry Group Analysis (also click on “Historical Trends”)

Position traders, as well as pure swing traders applying strategies that go beyond technical analysis can benefit most from these methods of analyzing the larger market.

Also, technical traders can benefit from assessing how far a trend is likely to continue, provided it has strength from a strong sector and the general market conditions.

Incorporating new ways of analysis can help if you are feeling stagnant in pure technical trading.

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How I Trade

Mar 31, 2007: 5:39 PM CST

lthough I predominantly act in the realm of intraday time frames, I use a top-down approach that funnels information down to individual trading decisions and am heavily steeped in technical analysis.My goal is to be a technical purist, yet I let fundamental and economic releases influence my overall bias.

Although I approach my investment decisions within the context of the overall trends of sector rotation, interest rate cycles, market cycles, and economic cycles, I will not discuss those here, but will instead focus on how I trade intraday and hold balanced swing-trading positions to supplement these.

I am heavily risk averse, and this part of my personality influences how I make decisions, how long I hold a trade, and how close to place my stops. I often err on the side of:

  • Stops placed too close to the entry
  • Trades not being held long enough to develop into great profits
  • Entry after confirmation of a move underway

Although I am working on these, it is important to note your personal weaknesses when assessing your strategy. As such, I seek strong stocks in strong sectors (based on sector rotation) and aim to balance these (if opportunity presents with weak stocks in declining or underperforming sectors. Overall market direction will be an indicator of how “imbalanced” to be (which is often to the long side).

No matter what your strategy is, it is crucial to know how you could improve, and this is done with analysis and journaling and studying your trades and whether or not you personally followed your system.

Swing Trading

After obtaining a watch list (study list) of selected stocks, I then use technical analysis on the daily time frame to establish my bias and read of the stock. Once I see a pattern or trade set-up I have tested and identified as profitable, I will determine simple factors from the weekly chart (support, resistance, momentum, trendlines) for possible profit targets OR obstacles my trade will have to overcome.

I further analyze the daily chart for profit targets, price projections (which I actually hand-draw on printed charts – I leave room on the right side of the chart to do this) and stop placement.

I rely heavily on trending stocks (on a particular time frame) and often use moving averages as entry zones, and thus my stop is placed slightly below the entry (moving average). If I am stopped out, I have adopted my own rule that I must repurchase the stock should it rise a set amount above the stop-loss point.

I heavily rely on price swings and swing charts that I create, and am looking to play for small targets based on the price and swing structure of the trend of the stock and the sector, and am always comparing momentum readings to new price highs or lows. I also look for “sweet spots” in various stocks that allow me to play for larger targets. Wealth is built by holding positions longer and taking on more risk when the need arises.

I am learning to enter my trades and walk away and not adjust profit or stop targets unless key information enters the system that compels me to do so. I typically do not hold trades over the weekend unless a strong trend is in force, and will re-buy Monday if no adverse news occurred during the weekend. I like to have my weekends clear of positions so that my analysis can be cleaner and without stress or biases.

Intraday Trading

While I consider myself a scalper, I am not one based on traditional definitions. I am also not your typical day trader, who sits glued to the screen and breathlessly watches news reports and has many watch lists up in anticipation of breaking momentum or increased volatility. I hate volatility and rapid price moves and avoid them if at all possible.

Rather than behave as most people view day traders do, I take my biases from my weekend analysis and try to play them out each day through classic chart patterns, momentum, support/resistance, and trend analysis. I do use margin and leverage on key “scalps”, which are nothing more than playing out the direction of the signal on the daily time frame as it occurs on a key buy signal on the 5 or 15 minute charts.

I seek to play price swings in the dominant direction of the daily trend and exit when a swing is complete. I will avoid the counter swing and will repurchase to play for the next swing, provided there are no warning signs from volume or momentum. I am technically using swing trading tactics on the intraday charts.

I display the 5 min, 15 min, 30 min and daily charts of the stock I am viewing. I use three monitors for my workspace and use TradeStation as my carting software and my broker.

During a typical day, I will have entered and exited 5 or more positions and held each for a maximum time of 20 to 30 minutes to an hour.

Indicators

Moving averages are absolutely essential to my analysis and trading decisions. I cannot live without them. On all time frames, I utilize the 20 period exponential, 50 period exponential, and 200 period simple.

I enjoy reading the stochastic and RSI indicators, but generally use them as confirmation/non confirmation rather than as trading signals.

I view price as king, and study price swings and how price traded around key zones. I use swing charts (color charts) based on an Average True Range function for the colors in my chart.

I also cannot live without the 3/10 Oscillator, which is both a momentum and trend indicator. Popularized by Linda Raschke, the indicator is simply a MACD oscillator with settings 3, 10, 16 and can be programmed into any charting platform. I seek new momentum highs or lows as trade ideas and confirmation of price swings, and I view divergences as trade ideas and confirmation of price.

Volume is crucial for any trader, and I look for volume as a confirmation/non-confirmation indicator. Exhaustion in price often signals the end of a trend, and so I am vigilantly looking for price exhaustion or capitulation.

I use the Breadth (Advance/Decline Issues) as a backdrop for market strength/weakness, and will (often) only take trades in the direction of the breadth unless there is a compelling reason not to do so. I also use the TRIN as confirmation and show the TICK, but make few if any decisions based on it (NYSE TICK).

I used to use a whole host of indicators, but they just mixed me up so greatly and increased my already existing anxiety, that I just wanted to run away from them all. Viewing too many time frames can do the same.

Favorite Set-Ups

I have described my two most frequently used setups in recent posts: The Impulse Buyand the Momentum Divergence play both setup tight risk-reward and allow you to play for high probability small targets.

I have also described The Four Types of Trades and most rely on the Trend Retracementtrades for the bulk of my trading.

Trading Vehicles

I often use major market ETFs (DIA, SPY, QQQQ) for swing plays and individual stocks for scalp plays. If I am feeling particularly bullish or bearish, I will trade the @YM futures (Dow Mini) for increased leverage.

I have also found minor success swing trading oil and gold futures, and probably will be expanding my knowledge and trading into futures more.

(“Optional” section on options)

I also do trade options, but sparsely and in unconventional ways. I will identify larger trends on higher time frames and if I feel like I could benefit from holding a position for a longer time, I will use either bull put (credit) spreads or bear call (credit) spreads. This allows me to collect premium from time decay, and allows me to rise above the ‘games’ of stops and holding individual stocks for a longer period of time than I’m used to.

This is sort of “lazy” trading and I place probably place no more than 5% of the portfolio in these “trades” – they tend to be income producing and have a clear risk/reward… although the risk is always higher than the reward, the probability of achieving the reward (through trend analysis and charting) can offset this risk. Nevertheless, without this edge, this has a negative expectancy (technically speaking).

Conclusion

There are so many more things I could discuss, but this is the most brief description I could provide. Nevertheless, I still advocate simplicity over complexity, and finding a strategy that works for you and you alone. Play around and see what works and above all, have fun and keep your spirits up and actively avoid getting overwhelmed.

I intend this to be a mini-work in progress, as I hear back from readers regarding questions and things I missed in this brief entry.

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