Link: TraderFeed – Overcoming Performance Anxiety

Apr 23, 2007: 9:22 AM CST

Dr. Steenbarger recently issued a call for submission for readers to describe their personal methods for overcoming fears and performance anxiety in trading, and they responded with some wonderful responses.  Dr. Brett has arranged these responses in two posts (so far):

First Post on Reader Reviews on Performance Anxiety

Second Post on Reader Reviews on Performance Anxiety

He will soon be posting his perspective on the issue so be sure to check back frequently.

This is a post that you need to bookmark, print, and refer to to see which method – if you do not have one yet – is best for you to handle pressure and stress.  Each person is different and has different experiences and a different personality, and thus there is no one coping method that works for all people.  It is important to know this and to try different techniques to see which technique lines up with your unique psychological composition.

There are plenty of examples in those posts, and positive action often trumps positive thinking so get started today!

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What Happened?! Earnings Fade in GOOG and MCD

Apr 21, 2007: 6:15 PM CST

How is it that a company reports higher profits, yet its stock price declines intraday?

This phenomenon is quite common, where what a new investor expects (or even common sense expects) to happen does not materialize, and in fact, the opposite occurs.

Consider two examples from Friday, April 20th, where the Dow set new highs and rallied over 100 points (a clear up-trend day).

McDonalds posted Quarter 1 earnings that were 22% higher than last quarter. With such a surge in profits, wouldn’t you expect to buy the market (go long) at the open and ride your way to profits?

This was not the case, and in fact, had you bought the open, you would have grossly overpaid for your shares (open at $49.60 and close at $48.35, a loss of $1.25).

mcd-apr-20-15m.jpg

Here is McDonald’s (MCD) impressive daily chart:

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This is a classic case of “buy the rumor (of good earnings) and sell the fact (of reported earnings).” The professionals who took part in this “trade” bought in anticipation of the earnings release and “took profits” and sold to those who bought after earnings were released. And note I’m not saying price won’t go higher – I’m saying that if you bought the open, you’re likely confused and disappointed because your expectations were not filled.

The same event occurred in Google (GOOG) yet with 10x the potential loss.

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Google’s daily chart:

goog-apr-20.png

The same logic can apply to Google with the “buy the rumor” logic. New investors got temporarily burned by buying Google’s soaring profits. How’s this for unbridled bullishness: Google’s first quarter profits soared 70%, handily beating analysts’ estimates. Why not buy the open and ride your way to financial freedom? Because you would have lost $10.00.

After releasing earnings, Google’s price behavior opened at the high of the day and closed at the low. Not surprising behavior for the professionals, but befuddling and confusing (and fear inspiring) in beginners and those who lost money Friday.

Do not believe everything you read and be very cautious when all signs point in one direction (up or down). Chances are, you can make more money by fading news and earnings reports than by trying to profit when they are released.

(Disclosure:  I have no positions in, nor did I trade these stocks on Friday.) 

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Weekend Annotations and Charts – Apr 21

Apr 21, 2007: 11:55 AM CST

Every day last week, we saw price advances in the Dow Jones Index, and we witnessed new intraday and closing highs in the Dow.  I mentioned last week that if we broke resistance at 12,800 (likely), then we would see a hard rally off this point to the upside.  After “scraping” it last week, we had the hard rally Friday.

dow-apr-21.png

The Dow also made a New Momentum High, as well as a confirmed New Price High, indicating that (from a momentum standpoint) new price highs are yet to come (following retracement swings, of course). In fact, a potential “Impulse Buy” pattern is setting up when we get a corrective wave in place. The Red “trend-line” on the MACD 3/10 Oscillator is clearly pointed higher, and any pullback of the black signal line to the trend-line is likely to set up a trade.

HOWEVER, before you get too excited, realize that the large price thrust on Friday (and strong volume surge) was due mainly to three of the 30 Dow components: Caterpillar (CAT), American Express (AXP), and Honeywell (HON).

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So before you celebrate unbridled bullishness, view the technical pictures of the other Dow 30 components, as well as other leading stocks before rushing out to bet the farm on this market. Earnings season is registering “better than expected” results from major companies, most likely because the sentiment is so fearful/bearish on the Street (low expectations can result in large price moves in stocks that beat estimates, and short-covering exacerbates this process).

AXP and HON are setting up potential “Impulse Buy” Trades when their price corrects to the rising 20 period moving average. We see new price and momentum highs with these components.

To temper your bullishness, observe the charts of the Russell 2000 (small-cap) and Nasdaq (technology):russell-apr-21.png

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Both of these indexes, which compromise many more stocks than the “narrow” Dow, are failing to make new highs and – in fact – appear to be faltering to make new price highs and could be setting up a double-top pattern.

Notice the price divergence with the momentum oscillator – on the most recent swing to higher prices, the oscillators failed to make new highs. This is a red-flag for these indexes, yet the Dow is making new highs. This would be a more complicated divergence, known as an “Index Divergence” where larger (broader) indexes are failing to make new highs while narrower indexes are indeed making new highs.

This doesn’t mean “run out and short the market” but it does temper the bullishness and should cause you to be more cautious, yet still play the bullish side (as that is what the most recent trend has confirmed, and the trend is in tact until price proves otherwise).

In my analysis, odds do favor a slight retracement or lower prices temporarily next week, as it is unlikely price can continue to make new highs unabated. Wait for the retracement before committing new capital into the market, unless your particular stocks (swing trade candidates) are showing irresistible patterns.

Best of luck and skills out there!

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Bulls on Parade

Apr 20, 2007: 10:08 AM CST

The Dow and S&P 500 just made new and impressive highs above the February swing high and seemingly continue unabated, despite temporary overbought oscillator conditions.  In trending markets, oscillators are useless (RSI, Stochastic, etc) and people can get very whipsawed using them in positive feedback environments (where higher prices lead to short covering and new buyers which lead to higher prices and the cycle continues).

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S&P 500

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In these indexes, the bulls are (currently) in complete command, and we have experienced 8 commanding up days (7 in the S&P 500).  The last time we experienced 8 positive closing days was a few weeks ago and the time before that was four years ago!  This is impressive movement for the market, given the amount of pessimism still out there from a sentiment standpoint.

It seems like only yesterday, I was discussing whether or not the Dow could break resistance at 12,800 and now commentators are discussing “Will the Dow soar to new highs at 13,000?!” and the answer is that it is possible and perhaps likely, but there probably will be a few consolidation or down days before that happens.  It would be extremely rare for the market to experience 10 or more straight up days with no down days inbetween.

Also, just because something isn’t likely doesn’t mean it will not happen.  Traders must be open to all possibilities and closed from none – it’s still not about being right but about odds and making money.

If you are a bull, enjoy this stampede.  If you are a bear, get out of the way – there’s no sense trying to fight this rally.  A sell signal occurred yesterday by most people’s standards (oscillators, swing movement, etc) but was quickly erased/faded by the large gap up this morning and trend-day style price movement.

Keep up with the big picture and try to enjoy the action.

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Squeeze Plays in Google (GOOG)

Apr 19, 2007: 9:44 PM CST

Rule Four of the Guiding Principles of Market Behavior states “Markets Alternate Between Expansion and Contraction”, meaning that there are a variety of trade ideas you can develop based on this principle.

A weekly chart of Google (GOOG) illustrates this concept very nicely, with “Squeeze Plays” that could be entered with the volatility contraction easily identified by “Bollinger Band Squeezes.” Remember, Bollinger Bands measure volatility and are standard deviation functions, and so when these bands greatly constrict around (flat) price movement, a breakout is often imminent (though it is often impossible to predict the direction of the expansion).

Allow me to illustrate the point with a weekly chart of Google:

goog-weekly.jpg

I have annotated the “Squeeze” plays with arrows. Because the trend is up, one can assume the breakouts will occur to the upside, but it is best (from a probability standpoint) to wait until the break occurs and then enter with a tight stop (although entering before the break also provides for a tight stop, but lowered odds of success).

Also, the triangle consolidation provided a clear technical price pattern from which to base trade ideas and price assumptions, and required no indicators to identify.

Price breakouts – if your style is identifying them – provide little in the way of price targets, but do provide clear stops if the breakout fails. This is a key to the success of trend following, where many breakouts fail, but the profits from the ones that succeed far outweigh the small losses when they fail.

Trading breakouts from consolidation also provides an excellent means to play for a large price target, as moves out of equlibrium often tend to be strong and sustained.

Think of this concept when you analyze charts and you see strict volatility constriction – you can often expect a price expansion is nearby.

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