Let’s See Some Green! And bonus charts

Jun 13, 2007: 6:39 PM CST

Today’s action was nothing less than stellar.  The gap up in the morning led to a bear-flag like correction to the moving average (consolidation) and then it was quite literally off to the races when the Fed Beige Book hit the newswires.

First, two index charts showing price trapped (for now) below the rising 20 period moving average after a bounce off support:

dow-june13.png

sp-june13.png

It will be interesting to play the resolution of the ‘box’ in which these two indexes are trapped .

As a bonus, here are two potential impulse buy trades:  Google and Apple.  Remember an impulse buy occurs after a new momentum high is made (along with a new price high) and the price retraces back to the rising 20 period moving average.  You play for a small target, being the most recent price high and place your stop a bit below (depending on your risk tolerance) the rising moving average.  Study these charts:

goog-june13.png

aapl-june13.png

Here is a bonus chart of PotAsh, a company with a stock in a strong uptrend that has doubled in price since last October and tripled in price since December 2005!

Look at this runaway monster on the weekly chart:

pot-june13.png

For all of you who love strong updays, here is the polar opposite picture of the industry groups from StockCharts.  Remember, every industry was down – most by 1% – yesterday.  Today, we see the exact opposite picture.

industries-june13.jpg

By the way, if you want to see red, look no further than the Bond Yields.  My, this is an inverse of the last few trading sessions:

yields-june13.jpg

Remember, options expiration is upon us, so consider your strategies and decide how much (or if all) you wish to trade this wild market.

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Mid-Week Index Overview

Jun 12, 2007: 6:47 PM CST

Here are a quick charts of the Indexes:

dow-june12.png

  • Holding the Bottom Bollinger Band
  • Lurking above the 50 period EMA
  • Market making new momentum lows
  • Stochastic registering a buy signal
  • Volume increased today on the sell-day… distribution
  • Clear momentum divergence now unwinding
  • Support should be 13,200 until it fails

nas-june12.png

  • Has not reached bottom of Bollinger Band in months
  • Market recently bounced at rising 50 period EMA
  • We almost registered a stochastic buy signal
  • Momentum not making new lows and not clearly diverging
  • Price is clearly in a trading range now with support at 2,540 until broken

russell-june12.png

  • Market making new momentum lows
  • Price broke the 50 period MA – are small caps in trouble?
  • Nearing stochastic buy also
  • Price almost made a new momentum high recently – no price divergence
  • Price is also in a trading range – recently experienced a failed breakout (up)
  • Support should be near 810

Please see the Market Summary at StockCharts.com.  I could do a repost of an earlier blog entry where I pulled each segment of the daily action and everything was ‘in the red’ except bond yeilds.  This was the (almost) exact same scenario as occurred Thursday, June 7th.  Many such ominous down days (where bears take a swipe at everything) cannot be good for the overall market unless buyers find value at lower prices where everything is ‘wounded’.

Here is a teaser of the StockCharts page (each Industry was down):

indexes.jpg

Last time, the buyers found value and drove the indexes up after the “bloody” day.  The question on everyone’s mind has become:  Will it happen again?

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Link: Inupt for Overcoming Anxiety in Trading

Jun 11, 2007: 8:04 PM CST

Dr. Bruce Hong on his Trading Psychology blog recently began an engaging and interactive discussion on overcoming fears in trading.  Dr. Hong posts a recent email from a deeply capitalized, intelligent trader that is described as:

He now experiences such intense stress while trading that he frequently pulls his entry order, just before it’s hit. His heart rate is elevated and his palms sweat so intensely that he has to keep towels at hand so that he can use his mouse or keyboard!

What follows are various posts from readers and follow-ups from Dr. Hong all designed to help traders overcome their fears and hesitations.

Be sure to read the comment section, as traders share their experiences and tips for how they cope with stress in trading.  This is an expanding post and I suspect you should feel free to contribute if you have additional insights.

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Link: The 12 Rules of Value Investing – CANSLIM

Jun 11, 2007: 7:58 PM CST

GoldenTicker, a new site steeped in William O’Niel’s CANSLIM approach for finding value stocks for the long run, posts 12 quick rules for value investing that will be helpful to long term investors and position traders.

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Confusion in the Market: How to Understand

Jun 10, 2007: 10:27 AM CST

Have you been a bit befuddled by the recent stock market action? I admit that I have, but I expect such events and have experienced various strange scenarios in my trading career.

If you are new at trading, the current market environment must be difficult to comprehend and I wanted to state a few of my thoughts on this topic.

First of all, we expect the market to be an “anticipatory vehicle” wherein stock prices reflect all that can be known about a company and the general economic/business environment. This is in line with the famous “Efficient Market Hypothesis” academics teach us.

It is also stated that the market tends to anticipate (lead) economic conditions by about six months, such that economic reports of today are parsed with implications regarding trends in the future. An example would be “If the Fed raises rates today, then businesses will have a more difficult time financing projects and their profits will decrease, leading to decreased valuations in earnings projections.” The opposite is true, of course.

While this partially explains why the market can act contrary to the current news, it’s not complete.

Case in point, the surface explanation of the recent action was confusing. The Federal Reserve announced the economy would be stronger in the near future, and the general situation is better than first expected. As a result, the market fell around 3% in the days following the announcement. Why would the market not surge on this news?

Until this point, there were so many catalysts that would suggest that the market and economy was headed for recession (high gas prices, slowing earnings, low GDP growth, international tensions, rapidly decreasing housing market, etc). Why did the market keep rallying on this news? It was confusing on the surface level.

While this is the case on the macro-level, the situation plays out in individual stocks, further causing distress and confusion to entry traders and new investors.

While news will generally “explain away” the confusion by explaining that good economic conditions increase the chance that the Fed will raise rates, bond yields rise, and that is generally bad news for a market in late expansion. This is the reason attributed to the market’s quick fall, despite good news. There are a variety of reasons, many of which you can find from other websites and news sources.

What the market pricing mechanism comes down to is the mechanics of supply and demand. Major firms and major traders (funds) often need to unload a major supply of shares onto the market and they cannot do so when conditions are poor and every trader is united in thinking and selling positions. The price would move so far so fast against them that they could be put out of business.

Instead, large firms need good news to unload their positions to the ‘masses’ of traders and need bad news to purchase large amounts of ‘inventory’ at lower prices. Such large firms (in aggregate) may comprise 10% or less of the number of aggregate traders in a market, but their actions consume the vast majority of stocks/shares and thus the volume. They must be in ‘contrary’ mode by default to unload or acquire large positions.

Professional ‘smaller’ traders try to mimic the movement of these funds and this adds to the ‘contrary’ movement in price. Such ‘smoke and mirrors’ is absolutely necessary for profit, as trading (not investing) tends to be a ‘zero-sum’ game where there are winners and losers as part of the transaction. This is absolutely true for futures and options traders, but mostly true for stock traders.

It would be great if the market moved up slowly and nicely following good news, and down calmly and slowly on bad news. Everyone would rush in to buy good news and the price would rise and we all would benefit. The market would be easy and we all would be rich, having quit day-jobs and we’d probably be trading in the Bahamas or by the beach all getting rich together. There really wouldn’t be a need for blogs or websites, as we would trade for a few hours, then go enjoy our lives.

We all know – who have traded any length of time – that it doesn’t work this way. We enter a position, it frequently goes against us, sometimes we buy the absolute high-tick of the day or week, and then when we exit the trade in frustration, the market reverses and we sometimes sell the day’s or week’s low tick. We buy at the touch of a moving average only to have ‘support’ break, but price reverse as out stop is hit.

Professionals and probability keep confusing us and we keep participating (until we give up in frustration). Either way, success comes from learning to think in probabilities, realizing that (often) half our trades will end in a (small) loss, and thinking counter to what the media and popular opinion is on a stock.

Sadly, engaging in the market and ‘making mistakes’ is absolutely necessary for success. Instead of getting frustrated when you get confused, take the experience in stride and vow to learn from the situation and realize you are one step closer to reaching your goals as a trader!

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