Jul 312012
 

S&P500 daily @ 2:28 EDT

MARKET SENTIMENT

The markets are trading in a tight range for the second day in a row.  So far this is showing good support at these levels as the swing traders are unable to push the markets lower at the upper end of the trading channel.  They are selling into this strength anticipating the next swing lower, but the market is holding up nicely.  The recent rally chased off all the bears and tempted in a few bulls on the breakout, but adding further gains to this breakout will give a larger number of cautious bulls the confidence to wade in, pushing the market higher.

Of course we do have some downside risk if all those bears sitting on the sidelines decide to try again and pile on the shorts in unison.  If this happens, the key level to watch will be the 50dma to see if the bears can finally break the back of this rally.  But so far the bulls are still in control and the bears are licking their wounds.

Looking at the bigger picture, even thought we are close to 52-week highs, there is a large amount of bearishness in the markets.  There is a lot of cynicism toward this rally and that is part of the reason the market is holding up so well.  All of these cynics have already sold or shorted the markets, meaning they can no longer pressure the markets.  And in fact they are built in buyers if they end up covering their shorts or are forced to chase a rising market.  This is exactly what we saw this winter as the markets had the best first quarter in decades.

But the thing to be careful of is oftentimes the bears are right, just early.  Success in the markets is all about timing, so early is the same thing as being wrong, but just because the market is holding up doesn’t automatically mean the bears are simply paranoid and wrong.  NFLX was one of the most heavily shorted stocks last year at $200.  While there was still a lot of upside left in the name as it eventually rose to $300, any bull would have done himself a favor to at least acknowledge the risks the bears were bring up.

The market is holding up very well right now and we are trending higher in the face of all the negative sentiment.  Conversion of bears to bulls could fuel a powerful rally, but any bull at least needs to recognize the risks bears are bringing up.

MARKET PERSONALITY

The markets continue to be heavily influenced by the currency markets and technical analysis of the EUR/USD is far more predictive of the equities market than the actual equity market charts. This skew from the foreign exchange markets is making it difficult to read the equities markets based on traditional behavior.  Globalization is making it a challenge for investors to specialize in one market and ignore all the others.  The more intertwined the world becomes, the more diverse successful investors will need to be.

S&P500 daily @ 2:24 EDT

Right now we are at the upper end of the trading range, and if we keep the recent pattern of staying within in this 40 point ascending channel, we will see a sell-off to the 1340 level.  But this will be the 5th swing of this pattern and it is getting a bit obvious and the market hates being obvious.  And we can see that as we are holding up near the high of the trading range for the second day in a row.  Past reversals happened fairly quick, so this is a departure already from the previous pattern.  If we do in fact have a lot of swing traders shorting the market here, but the market is not going lower, that could indicate a move higher since the bullish demand is offsetting the swing-traders selling.

TRADING OPPORTUNITIES

As always the market can head higher or it can head lower.  Brilliant insight, I know, but the market is at a turning point.  Right now the market is setting up for a move higher.  Between all the existing bearishness and holding at the upper end of the range indicate the market is ready for another leg higher.

But there is still very real risk lower since we have so much air under us from the recent rally and being near a 52-week high.  But the market has proven that it is willing to rally in the absence of horrible news.  This means barring a major shock to the system, the market will hold up.  But if we do hit a downdraft, be prepared to pull the ripcord quickly because the down-leg has room to run.

Based on what I see, trade the long side, but proceed with caution and be ready to run for cover.

Some leading stocks are doing really well over the last few weeks as the weight of the market has been lifted off their shoulders.  But do be careful because the higher they rise, the harder they fall if the market gets sucked into a correction.  Limiting any new buy to no more than 5% past the proper buy-point and that will greatly reduce the risk of getting shaken out in a normal pullback.

Stay safe.

 Posted by at 2:33 pm on July 31, 2012
Jul 302012
 

I’m trying a new layout for these blog posts where I break it down into sections of Market Sentiment, Market Personality, Trading Opportunities, and Other Thoughts.

MARKET SENTIMENT

The markets opened higher this morning, but gave back those gains and traded slightly in the red for the rest of the morning.  Who knows what the news was, but it really doesn’t matter because the crowd is moving the markets, not the news.  Thursday and Friday’s strong rallies ran off all the bears in a powerful short squeeze.  Friday exceeded July 19th’s high, marking yet another higher-high.  You could see the last of the bears covering their shorts in the intraday chart as we surged higher after breaking through the previous high of 1380. These were the last of the weak-kneed bears running for cover.

With most of the bears already run out of the market over the last couple days, that source of enthusiastic buying will dry up.  To continue higher we’ll need bulls to step up and commit fresh capital at these levels.

On Friday IBD said the market started a new confirmed uptrend given Thursday’s powerful rally.  The interesting thing was reading the article’s reader comments to yet another change in the market pulse.  As I stated earlier, the harder it is to buy a breakout, the more likely it is to succeed.   Everyone was buying the earlier breakouts and they failed.  But here we are countless failed breakouts later on both the low and high side, and both bulls and bears are getting highly cynical and reluctant to be fooled yet again.  But the ironic thing is these breakouts going forward are far more likely to work than the earlier ones everyone was excited about.

MARKET PERSONALITY

The market has inched higher in a series of higher-lows and higher-highs.  While the ups and downs felt dramatic, the upward channel we’ve been tracing is only 40 points wide.  So far the best trade has been going against the market each time it reaches the upper or lower bounds of this channel.  But we are now working on our 5th swing in this channel and this pattern is becoming obvious to even the most inexperienced traders.  The market doesn’t like being obvious and chances are we are getting close to a change in personality, most likely represented by a breakout above or below the channel lines.

TRADING OPPORTUNITIES

If we are getting close to a change in market personality, that will create better trading opportunities than the 40 point chop we’ve been stuck in since mid-May.  The big question is which way will the market breakout, to the upside or the downside?  But as nimble traders, we can wait for the market to tell us before we commit our capital.

Plan A:  Being so close to a 52week high means there is a lot of air underneath us if some bad news comes along and surprises the market.  Most likely this will be a breakdown in the cooperation between the various European leaders trying to salvage the Euro.  A move lower could see a break under the 50dma, 200dma, 1300, and even June 4ths low of 1266.  Obviously this would be a bad time to be long stock, so it is a situation to be wary of.

Plan B:  The market could continue rallying in the face of all the uncertainty in the world.  In situations like this, it is said the markets climb a “wall of worry”.  This is because the markets are forward-looking in nature and are anticipating a positive resolution to the current crises.   It is this slow transition from a large group of worry-worts to a more positive outlook as the group slowly realizes the worst will not happen and bears turn to bulls one and two at a time. It is this slow transition from bears to bulls that causes the markets to rally.

Plan A & B are the two potential outcomes we need to anticipate and prepare to trade whichever one plays out.  We don’t know what the market will do next, but we can have a plan ready and jump on board the next trend.

OTHER THOUGHTS

Seems I struck a nerve with my criticism of gurus and systems.  The thing we need to remember is it doesn’t matter how much money WON makes in the markets, but how much money his students make.  If we are following his system, we need to evaluate the success of other followers in order to understand the capability of the system and the probability of our own success.  WON could very well have a 6th sense about the markets that lets him achieve all his success, but if he can’t teach that same intuition to his students, everyone else will fail to reach his same level of success no matter how closely they follow the system.

As always, stay safe

 Posted by at 5:36 pm on July 30, 2012
Jul 272012
 

S&P500 daily @ 1:17 EDT

The market continued yesterday’s rally this morning and is getting close to exceeding July 19th’s peak.  The last couple days put in yet another higher-low and we are looking at another higher-high if this rally goes a few points further.  The market’s gyrations continue to exhibit indecisiveness, but there is an upward bias as we are slowly creeping higher with each swing.

Fundamentally speaking, earnings seasons has been at best unimpressive.  This makes it highly noteworthy to see the markets holding 3% from its 52-week high.  Over the short-run the markets can ignore fundamentals as other factors dominate the market’s psyche.  Right now Europe and the exchange rates are front and center.  As we’ve seen, a declining dollar will rally the market even when all the marquee companies are lowering expectations.  The question becomes, what is more powerful over the longer-term, the economy or the dollar?  And of course this is not an exclusive either or situation.  A weak dollar can boost earnings and a strong dollar can dilute earnings.

If you trade the markets, the one question you must answer is “what’s my edge?”  The only way to consistently make money in this game is to have an edge over everyone else.  Maybe it is inside information, maybe it is lightning quick execution, maybe it is arbitrage, or maybe something else.  But without an edge, you are just throwing darts based on a gut feeling of what will happen next.  Why is your guess about the future any better than the next guys?  The truth is it isn’t and without a quantifiable edge your success is based on nothing more than luck.

Gurus would have you believe following their system gives you and edge.  But if it is a widely publicized system, where is the edge if everyone else knows the same techniques?  There is a saying in this business, it is far more profitable to sell advice than it is to take advice.  These gurus are not rich from trading, but from selling their system.  It is noble to think these gurus are wealthy beyond their wildest dreams from trading but are so unselfish that they spend half the year away from home living out of a suitcase simply because they love teaching.  Really?  I don’t know about you, but if I were loaded, living in motels is not how I’d spend my time.

Now don’t get me wrong, teaching and helping others makes people feel good, but there is a big difference between leading a local meetup group or teaching at a community college and spending months on the road selling multi-thousand dollar seminars.  Never forget these people are in the business of selling seminars and are not helping out of the goodness of their heart.

But that is not to say these systems cannot work.  In fact most of them do work………some of the time.  The key to trading any system is knowing when it is applicable and when it is not.  For traders without inside information or supercomputers co-located next to the exchanges, this is one of the few edges left to us.  Any system is like a tool and it has a time and place where it works great.  But using it somewhere any other time is bound to lead to undesired results.

CAN SLIM is a great system, but there is a very specific window where it works exceptionally well.  The rest of the time it will produce false buy signals and erode your account one false breakout at a time.  As I’ve shared many times before, I find it very easy to make money in the markets.  The hardest part is keeping those profits.

Back to the original question, what is your edge?  What makes you a better trader than the other people in our meetup group?  What makes you better than all the other CAN SLIM traders?  What makes you a better trader than other retail investors?  What makes you a better trader than all the pros on Wall Street?  If you don’t have a good answer to this question, how do you expect to beat all the other traders in the market and consistently out perform the market?  This is a game of skill and you need that edge to come out ahead.  If you can’t convincingly answer this question, you have two options.  First, study and learn the markets until you develop that edge.  Or if you can’t beat ‘em, join ‘em.  Buying and holding index funds is the easiest and most reliable way to make money in the markets.

Now some people will argue with me, but if you think I am wrong, will your trading account back you up?  Are you consistently outperforming the markets without an edge?  Proof is in the pudding.  If you find the market is easy to make money off of, then I’m wrong.  But if you struggle to beat the markets, that should be sign your approach is incomplete and you need to find that missing ingredient if you want to improve.

Back to the present, the markets are up for a couple days and then down for a couple.  We’re in the middle of two strong up days.  If we continue this pattern, we have one or two up days left before we pullback.  Up for a couple days, down for a couple days.  The best way to trade this market is cash in any profits after a strong day and then prepare for the reversal.  The only way to profit in this market is scalping a few percent at a time.  Wait any longer and your profits will evaporate.

The news out of Europe continues to be encouraging, contributing to this upward trend.  But what happens if we hit a rough patch when some of the anti-austerity leaders start asking for too much at these meetings and we hit another stalemate?  Things have been going smoothly for a while now, but remember these are politicians we are talking about here and they can only play nice for so long.  Given our proximity to 52-week highs, I continue to think there is material headline risk to the downside if we see one of these Euro meetings blowup.

Stay safe

 Posted by at 1:20 pm on July 27, 2012
Jul 262012
 

S&P500 daily @ 2:22 EDT

The markets jumped after a strongly worded statement from the president of the ECB saying they would do whatever it takes to preserve the Euro.  That sent the US markets up nearly 2% at the open.  But just a few hours into the day the markets gave up 1/2 of those gains.  For most of the summer the markets have been leaderless and subject to knee-jerk reactions to this comment or that headline.  This choppiness makes the markets difficult to navigate and no doubt chewed up anyone that got in the way.

Will the markets rally further on this verbal support from the ECB?  Or will this be a short-lived lift that quickly settles back to the 50dma?  Any guess is simply a toss of the coin and makes it very difficult to trade.  The smart money is sitting out this market and waiting for better trading opportunities.

The US equities market continues to be a derivative of the currency markets.  Early this morning the Euro shot up 2 cents against the Dollar after the ECB president’s comments.  Exchange rates are in the driver’s seat these days and this has completely changed the personality of the equities markets.  It is no longer about fundamentals or expectations of future growth, but a battle over whose currency sucks the least. At the moment the USD sucks the least, but Congress and the Fed are trying to change that.

AAPL daily @ 2:22 EDT

Is this currency correlation just a temporary phenomena, or paradigm shift due to increasing globalization of most companies?  This overlap and correlation between the various markets and assets makes it increasingly more difficult for a trader to focus exclusively on one market.  Going forward, the most successful traders will need to understand all these interactions in an increasingly interdependent world.

AAPL failed to wow the market the other day and fell back under its 50dma.  But what was the leader of the markets in the first quarter has lost some of its influence.  A few moths ago an Apple stumble would have taken down the markets, but now the new standard-bearer is the USD and the currency markets. For better or worse the markets are constantly evolving and as traders we need to stay on top of these changes.

Stay safe

 Posted by at 2:24 pm on July 26, 2012
Jul 262012
 

S&P500 daily @ end of day

Third day in a row we’ve flirted with the 50dma.  As with everything in the markets, there are two ways to interpret this price action.  Half the money in the market thinks we’ll head higher from here and the other half thinks we are headed lower.  The market price is the exact balance point between these two points of view and it is always moving up or down from day-to-day or even minute to minute as traders change their minds.  This is what moves the markets.

For the bulls, holding solid above the 50dma shows strong support at these levels as we are building a base to launch the next move higher.  But for the bears, failing to bounce off of the 50dma in a meaningful way shows lack of conviction from buyers to sustain a rally from these levels.  Both sides are exceptionally smart, savvy, and informed in their logic.  That is what makes trading one of the most difficult ways to make a living in the entire world.  We are attempting to outsmart and take money from people far smarter and better informed than we are.  That is the brashness required to be a stock speculator, but this is the game we chose to play, so lets try to figure it out and see if we can get an edge on everyone else.

If we bounce off the 50dma, that will continue the pattern of higher lows, a very constructive and positive pattern showing strength and health in this market.  But dropping a couple more points will trigger a wave of automatic selling at the 50dma, the July 12th low, 200dma, June 25th low, and 1300 level.  There are a whole truckload of landmines waiting for investors between here and 1300.  If we break through the 50dma, it could get ugly if we stumble into that minefield.

Three days hanging out near the 50dma concerns me because it shows a lack of follow-on buying that we’ve seen in recent sell-off recoveries.  This could indicate we are not ready yet to bounce.  IBD’s big picture is saying the market is in a correction and the conservative play is watching this unfold while sitting in cash.  I don’t foresee a big crash, but we could have some weakness ahead.  But this is a great thing for a CAN SLIM investor because it creates attractive prices for us to get in on some of the best quality stocks.  The summer is wearing on and we are getting closer to the next rally, so start looking for stocks showing unusual strength in these summer doldrums.  Many of these will be the next big stocks that show the best gains in the coming bull market.

Stay safe

 Posted by at 12:17 am on July 26, 2012