March 26 Brief Analysis

Mar 26, 2007: 10:12 PM CST

I often try to mark-up the “perfect trade zones” based on my system each evening looking back at the day’s action, and today offered very little in terms of trades I identify and am comfortable taking. Today, I was chopped around as I tried to play the short side because of the strongly negative breadth readings (which improved through the day) and took the afternoon off because of the slowly creeping trend which later became evident after the fact. It is very difficult to scalp or day-trade in a market that starts out negative and creeps higher, especially when your bias (because the market was overextended upwards) is to the downside.

Nevertheless, here are the 15-min and 30-min charts for the DIA (Dow Jones ETF the “Diamonds”):

I have added the Breadth (Advances and Decline lines) as a bonus, which shows the root of my frustration trading today. When the breadth is so negative, typically short sales tend to work out with satisfaction. Today, it didn’t.

Notice on the 15 minute chart how the market defied an “Impulse Sell” set-up (indicated by the red arrow). Although the trade gave 20c of satisfaction, the actual target was the most recent swing low which was not achieved. When an Impulse Sell or an Impulse Buy fails (remember these are set-up by New Momentum Lows or Highs), odds then switch strongly in favor of continuation in the direction of the failure.

Often, creeper trends sneak up on traders and catch both sides of the market leaning the wrong way, as was likely the case today. Markets can creep higher because short sellers are forced to cover at higher prices, which attract new buyers, and the cycle repeats. Creeping trends are difficult to predict and much more insidious to trade.

Here is a swing chart of the DIA on the Daily Frame.

My hat is now off to the bulls (buyers). They have managed to overcome immense technical adversity and now have proven themselves with a bounce off the daily 50 period moving average (to the penny). Although a lot of news is bad (with a possible recession on the horizon, as some economists and analysts predict), the charts and price are king.

Notice the momentum divergence with the two recent swing lows (red bars) and the new momentum high on the oscillator. Also, notice price has now crossed above the key moving averages. The techincal picture is much better than it was early last week, to say the least.

As such, we must respect the courage and strength of the bulls and recognize that – at extended technical price levels AND in the face of a sharp morning drop – the buyers have yet again pushed this market higher.

I still must remind readers that the market is overextended to the upside in the short-time frame (daily chart) and caution is warranted before committing new capital into the market, or getting overly aggressive now with initiating new long positions.

Stay safe out there.

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Chrysler (DCX) New Momentum High and Impulse Buy example

Mar 26, 2007: 1:24 AM CST

I wanted to point to a recent, clear example of the “Impulse Buy” trade I’ve been referencing. The chart ends March 23:

A few highlights:

  • Note the consolidation (base) preceding the move
  • The new momentum high drives price sharply up as news broke (Chrysler may be a take-over candidate)
  • New traders entered after the news broke and probably sold as price (naturally) pulled back
  • The “Impulse Buy” pattern places your entry when price retraces back to the 20 period moving average
  • A “Rinse” (perversion) trade occurred and likely took out stops of those who placed them too close to the average
  • Price quickly rocketed upwards in the intended direction for those who “held on” through the rinse
  • Target #1 is the most recent swing high ($74) which was achieved (a great place to sell half the position)
  • Price is now overextended to the upside, making new upside potential very limited

While this particular technical pattern was caused by news and rumor (private equity or an unknown company may be buying portions of Chrysler), the pattern played out as perfectly as an Impulse Buy pattern could unfold (with the exception of the “Rinse” into the area of tight stop-loss placement).

A few lessons:

  • Establish positions AFTER the retracement following a key breakout and new momentum high (new price highs are likely to follow)
  • Give the position a bit of leeway to avoid rinses and washes beneath your entry
  • News events often serve as the impetus for the Impulse Buy pattern, but cannot be predicted in advance

Trading Mental Attitude Link

Mar 25, 2007: 6:18 PM CST

I found the article Positive Trading Attitude at the Money Blogs to be particularly interesting.
A few quotes:

“…the right attitude helps create the conditions to reach your goals.”

“The acceptance of personal responsibility is a key difference between successful and unsuccessful traders, and success can be traced back to a positive mental attitude.”

“A positive attitude definitely is reinforced by past trading success, but when we ask which came first, the positive attitude or the successful trading approach, the positive attitude usually came first and helped cultivate the final outcome of trading success.”

Check out the article for more insights.

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Ride Out Emotions for Greater Success

Mar 25, 2007: 10:13 AM CST

Have you ever been caught in a trade and your emotions are overtaking you, causing you to make a decision based on your feelings? Was it a good decision after the fact?

Typically, if we trade specifically on emotion (greed makes us buy too late, and fear keeps us in too long… or prevents us from entering at all), then our results tend to be average at best and below average at worst. Often, the best trades are the ones that few people are willing to take and “go against the grain” of what appears comfortable.

People tend to play out their emotions in the market, and seek what is certain or comfortable. Unfortunately, seeking certainty takes time, and often causes us to miss low-risk entries into trades. There is no certainty in the market, only greater probabilities.

Recall the most recent market declines (in March 2007 and August 2007). It would have been profitable to buy after the decline when most people were in panic (as they watched their positions lose money and they heard the TV analysts predict a recession). How many people can trade against the TV news comfortably? Consequently, this also would mean paring positions and tempering bullishness when others are decidedly bullish.

The same can be said in trading on an intraday basis. Often, great entries come when a stock/future is declining, and you must take the opposite side in anticipation of a reversal (based on whatever technical decision you make). Needless to say, what is comfortable is not always what is profitable. Furthermore, we realize that almost every trader does what is ‘comfortable’ and those who can handle the negative emotions and uncertainty take money from those who are comfortable.

So how can you deal with fear and being uncomfortable before taking a trade or while in a trade?

Time your emotions, document them, and know that they shall pass.

Do not fight your emotions or deny their existence or seek to eliminate them. They can be powerful indicators if used properly, and they will pass if you allow them to run their course. Fear exists to warn us that danger is likely and that we must be careful. Understand this emotion, along with its purpose and time how long you feel its effects, but do not give in to its demands (do not hold on to a losing trade. Overcome your fear to put on a position).

If you are feeling greed and just cannot wait to jump into a runaway stock, time your greed and see what happens when you ride out your greed and trade based on your system. Is the trade part of your system? If not, wait just a bit and see what happens to the stock. Often, the stock will reverse and trap those that gave into their greed and you will be better for using your system, rather than greed, to enter trades.

Use a stopwatch! Document how you personally react to your emotions. Know that, over time, you can observe how the emotions occur for less time each time they are consciously acknowledged. You will always feel emotion while trading, and that keeps you alive and keeps the game fun and helps you to know you are achieving something worthwhile.

When you time your emotion (in seconds or minutes), you acknowledge it and – if you document it – you might find that the length of time you experience the emotion decreases each subsequent time it is felt. While easier said than done, this is a necessary practice to decrease the effect of emotions on you and increase the reliance on your system, which usually results in greater profits over time.

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Technical Decisions and News Announcements

Mar 24, 2007: 1:00 PM CST

By analyzing fundamental components of the economy and business cycles, you can gain an edge using technical analysis signals. But what happens when fundamental signals (or anticipated releases) thwart an otherwise good technical setup?

When I first started trading, I wanted as many signals to be in line with my analysis as possible, and as such, I analyzed far too much data before entering a position. I am inclined to short-term trading, and found myself overwhelmed by conflicting signals with fundamentals and chart patterns or indicator signals.

One of the greatest examples of my frustration came when I would refuse to take technical signals in front of major economic report releases or specific company earnings statements. I would allow my fear of sudden market volatility to prevent me from properly entering a trade based on a pre-established signal from my system. Many times, the stock would behave properly and would have resulted in large, sudden profits, and in the case where the event went against me, only a small reaction occurred and my stop-loss would have taken me out as predetermined. What I feared most were the rare occasions where a gap would blow far past my stop and result in very large losses.

No matter how clear or ‘perfect’ my technical trade entry was, fundamental news can destroy the best short-term technical trading setup. I have been frustrated many times when I entered short-term positions with clear and precise entries, only to have the trade destroyed by a news report I did not take the time to anticipate.

Because of this fear, I stayed sidelined and passed on far too many trades which would have resulted in possible profit. I regarded any sort of upcoming news as a “Veto” on trade ideas and I would literally avoid trading for the whole day, resulting in many missed opportunities. I have learned that trading is a probability game, and I must take setups offered by my style of trading and not seek external excuses to avoid placing trades.

I advocate each trader and investor consider this point for themselves, whether it is best for you and your strategy to avoid key upcoming announcements, or to hold patiently ahead of them, but do so on decreased position size and with tighter stops. No trader – however much of a technical purist – should be clueless of upcoming news, governmental, or earnings releases that pertain directly to instruments he or she is trading. One can benefit from knowing ahead of time of key announcements – however, one should not avoid trading because of these announcements.

Often times, it is just these very news events which drives price through key technical barriers, which result in technical breakouts from resistance. In fact, the news events and volatility (with volume) may sometimes be necessary for key chart patterns to occur! Shifts in supply and demand can occur rapidly when new information enters the system.

Always be aware of upcoming events, but do not fear them, and recognize them as part of the exciting game of trading!

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