Watch Bonds and Utilities

Here's two trade ideas for the new year. Keep an eye on both bonds and utilities. They tend to have an inverse relationship and both are interest rate plays. Longer term bonds (and short term as well) have been pretty bearish lately and are looking like they are heading for a steep decline in the near future. Here's the chart for Barclays 20+ year bond etf (TLT): If that support at the 87.70 gets taken out, expect a sharp move. What's moving bonds lower? Long term interest rates are moving higher after hitting record lows. Bond traders are anticipating higher long term rates, creating a steeper yield curve. As long as bond traders believe this, bonds will fall.

Utilities (XLU) look poised to pop right now, which acts as confirmation of the short bond trade. Utilities have been incredibly strong during the month of December and now, after a little consolidation, they look ready for a move higher. Here's the daily chart of XLU:The bond market is saying that the stock market is heading higher and utilities are confirming the bond trade. I'm currently short bonds (via TBT) and I might take a position in XLU if it drops down to the buy zone that I highlighted above.

One thing that I want to touch on real quick is the relationship between bonds and utilities. I stated that they tend to have an inverse relationship and that this is because they both are interest rate plays. Don't just take my word for it, lets take a look at it. Here's a 1 year chart showing the relationship of TLT and XLU:I'd say that the above chart shows a pretty close inverse correlation.

As always, we'll see how this theme plays out. I hope everyone has a Happy New Year!

TLT

Mike Leach v. Texas Tech: Here's the Motion for a Temporary Restraining Order and Injunction

I don't talk about law very often, but this is pretty interesting. Mike Leach has decided to play hard ball (good for him IMHO) against Texas Tech over his current problem...being suspended right before a bowl game. An attorney that I work with went to Tech for both undergrad and law school and needless to say, he lives and breathes Tech...he had insight about this whole scoop before it came out in the media.

Leach has hired a local Lubbock attorney and they have filed for a Temporary Restraining Order and Temporary Injunction and it is currently being heard in court this morning. After reading the motion and the attached exhibits (one of which is Leach's employment contract) it looks like Tech might be in some trouble. They have laid the grounds for a Breach of Contract suit that will no doubt follow soon. Here are the 4 pages of the motion, without the exhibits.Good luck Leach!

TLT

***Update***

While drafting this post, it was announced that Tech fired Leach...wow. The attorney I work with just announced that he is through with Tech because of this! I wonder how many other gung-ho alumns are pissed off about this?

Weekly Relative Strength Rankings

Although it was a short week, there was alpha to be made and here's where it was.What to take away from the above list? Strength in commodities, semi-conductors and tech and extreme weakness in bonds and gold. We'll see if these themes persist through this week.

Hope everyone is enjoying the holiday season!

TLT

Market Overview

It's nearly Christmas and the markets have taken a slight pause today (some are up a little and others are down or flat). I thought it would be a good time to look over the markets in general and see where we stand. There's a lot of chatter about the annual santa claus rally, lets see what the markets say.

To kick it off, lets look at the S&P via SPY. As you can see from the chart below, the S&P has been stuck in a trading range since early November. The top of the channel has been tested several times in December but we still have not seen a meaningful break. I want to see it break and hold before getting too bullish on the market.

The recent break out in tech (qqqq) is good news for the bulls. Tech is looking incredibly strong and it will help move all the markets higher if it remains strong. I will be looking to enter a long position in either the nasdaq etf or the semi conductors (smh) if the S&P breaks out. Here's the chart for the Q's, note the break out:Okay, S&P is range bound, Q's are breaking out, what else should we be following for an indication...the small caps (IWM). The small caps have been the laggards lately but now they seem to be playing catch up. The Russell 2000 (IWM) is sitting (barely) at fresh highs which is another good indication for bulls. Here' s the chart:We'll go ahead and file the small caps under bullish for now, but this will change if it falls back into its prior range. Next lets take a glance at the VIX. The VIX has just fallen to some fresh lows and it actually closed below the 20 level yesterday...something that it hasn't done for some time. What does this mean? It means that worries are easing, at least for now. This is also a bullish sign for the short term outlook of the stock market.

So far, we have a neutral S&P that might break out (neutral), a breaking Nasdaq (bullish), a breaking Russell (bullish) and a falling VIX (bullish). That's 1 neutral and 3 bullish signs. Where's the case for the bears? Here it is, the financials.

Financials (XLF) have been a huge laggard and they will weigh down the S&P and the market in general if they don't perk up. Here' s the chart:There's the obstacle for bulls and fuel for bears. I don't know which way it will go and I'm certainly not smart enough to figure out how big of a mess the banks are (or are not) in. Furthermore, I can't even try to figure out the effects of the stimulus plan and whether that will provide enough cheap money to raise the market in general and make banks profitable, but there are lots of people out there that think the stimulus is merely going to provide profits to banks. I just watch the charts and try to determine which direction "order flow" is moving and then ride along.

One indication that can provide insight into whether banks will do well (and the economy in general) is the yield curve. The yield curve is currently steep, meaning short term rates are much lower than longer term rates. This is good for banks which in turn is good for the economy and markets in general. This is why the feds want the rates to remain low. Here are the current treasury rates and yield curve that are pulled straight off of Yahoo Finance's Bond Center. As you can see, longer term rates are much higher than short terms rates. This should help banks quite a bit and is indicative of good times ahead. However, there's always the concern that this time is different, especially considering that enormous stimulus plan and the worries of future inflation. We'll see how it plays out but for now I'm counting it as bullish.

So what else is there? The Dollar. The dollar has been in the headlines and has been talked about quite a bit lately. Most of the chatter has been about how bad the dollar is and that it's falling and going to lose half its value...blah, blah, blah. The dollar has actually been strong as of December and it appears that a reversal of some kind is under way. Here's the chart of UUP:Until recently, the dollar had shown an inverse correlation to the stock market, but that relationship seems to have changed as the dollar has been climbing with the market. I particularly like the long play in the dollar and I'm currently in it. One reason that I like it is that the dollar has been rising with stocks, but, the dollar also serves as a good flight to safety instrument that the world buys it when things start looking bad. Therefore, the dollar will likely keep rising in its current trend, and then if things get bad in the equities markets, the dollar will rally even harder. That's my current theory and like I said, I'm in this one.

Last but not least, Gold (gld). Gold has been on a bullish tear for quite some time, but now it seems to be falling back to earth. Why is gold a good short right now? Here's 3 reasons: 1) gold is likely in a bubble and bubbles break hard when they pop, 2) historically, gold has sharp climactic tops and long rounded bottoms and Dec. 3 sure looks like a climactic top to me, 3) the strong dollar will put pressure on gold prices. All of these things tell me that gold is a good (note not a sure thing) short right now and I'm currently in it. Here's the chart:Alright, here's a quick recap. The S&P is still range bound (neutral) and needs to break out, the Nasdaq is trending higher (bullish), the Russell is perking up and printing new highs (bullish), financials are lagging (bearish) but the yield curve is steep which makes it easier for banks to make money (bullish). The dollar is showing strength and gold is weak. These are neither bullish nor bearish (IMO) but they are very tradeable and I'm in both.

So what now? I'll be looking for a break out in the S&P with confirmation from small caps, financials and bonds (lower bonds). If this happens, I'll be looking to go long tech (QQQQ, XLK) and semi conductors (SMH) and short bonds (TBT). I'll also be adding to the long dollar position and the short gold position if they continue in my favor.

If the S&P doesn't break higher, watch out because we might see a substantial drop in the markets. For the bearish scenario, I'll be looking to short financials and emerging markets and look to go long utilities (xlu) and bonds (tlt). There's the game plan for the rest of the year and the beginning of 2010. We'll see how it plays out.

Have a merry Christmas and a happy new year!

TLT

Last Weeks Relative Strength Ratings

Here is last weeks Relative Strength ratings for the 30 ETFs (and an index) I track. Note that the current relative strength score incorporates the ETFs prior score into the ranking, thus you have Copper at the top of the list because it had superb strength the prior week. Also, I want to point out that all of these instruments are ranked against the performance of the SPY (S&P)...hence the "relative" in relative strength. Here's the list:
A couple of things worth noting about this week's rankings are the strong performance of both energy (xle) and oil (uso). Also, the weakness in gold (gld), silver(slv) and materials(xlb). Furthermore, the continued weakness in financials (xlf) is concerning for those that are expecting a rally. Personally, I can't imagine much of a sustained rally without the participation of the financials, but who knows, crazier things have occurred.

Once again, these ratings are just that and they are not trade signals of any kind. I just use this spread sheet to keep track of the macro picture of order flow.

Have a great day!

TLT

Weekly Wisdom Quote

"Most of the time, we deal with ... obstacles by persevering. Sometimes we get discouraged and turn to inspirational writing, like stuff from Vince Lombardi: 'Quitters never win and winners never quit.' Bad advice. Winners quit all the time. They just quit the right stuff at the right time."

Seth Godin
the dip

Crazy for Coach

Sunday my wife and I went to a Coach (COH) outlet store at the Allen outlet mall in Allen, Texas. She had received a 20% off coupon in the mail and wanted to get a couple of wallets. We thought we would just stroll in and grab what she wanted...boy were we in for a surprise! I'm sure part of the craziness was due to it being so close to Christmas, however, the Coach store was noticeably busier than any of the other stores at the outlet mall. First, we had to stand in a line outside the front door and wait to get in, like a high-end night club. Once the line got sufficiently long, it was at least 100 ft., and enough people cleared out of the store, presumably to avoid violating the fire code capacity limit, the door man let us and a lot of others in the store.

Once in the actual store, we noticed that it was still very crowded. Unfortunately for my wife, the wallets that she wanted must have been popular because they were sold out in the black and brown colors that she wanted. So instead of the wallets she picked out a purse, she had to get something since we went through all the trouble of just getting in the store. While she shopped, I noticed a line that wrapped around the store...the line to check out. I went ahead and got in line and then she met up with me once I finally got close to the check out counter.

I'm not posting about this experience to recommend buying Coach stock, I just think that the crazy demand for the purses is interesting and certainly worth keeping an eye on. Eventually, every woman who wants one will have their own Coach purse, whether it's an expensive one from the regular store a cheaper one from an outlet mall...what matters seems to be that its a purse that bears the distinct "C" pattern cloth. It will be interesting to see what happens to this company when the purses saturate the market to that level...could be an excellent short. For now though, the trend is certainly up and you'd be stepping in front of a freight train if you attempt to short this right now.

Here's the daily and weekly chart for COH, notice the strong uptrend:
Have a great day!

TLT

Where's the Alpha?

Here's a screen shot of half of a relative strength spread sheet that I keep up with:This spread sheet follows 30 different etfs and index funds that range from various market indexes (qqqq, iwm, oex, etc.), sectors (xlp, xlk, xli, etc.) and other asset classes (bonds, gold, copper, foreign stocks). It automatically updates itself every day and it helps me keep up with where the alpha's at.

The relative strength rating is a basic formula that tracks the daily return and compares it to the return of the S&P to generate a basic relative strength rating. I take this relative strength rating from the current day and then combine it with the prior day's reading and weight the current days relative strength higher in the computation...thus putting more weight on today's price action but still taking into account yesterdays, which in turn takes into account the prior days rating. This method of calculating smooths out the relative strength ratings but yet still provides quick enough signals to help see where the order flow is heading on a macro level in the short run.

On a different note, sadly, I lost my trial today. It's one of those things that happens but it always stings. There's always one side that has to lose in a trial and today was our turn. Enough of that though. I'll be back tomorrow.

TLT

Weekly Wisdom Quote

"If rule governance and conscientiousness in following rules is associated with market success, then traders want to use emotions to trigger greater attentiveness to plans and rules. This means creating associative cues between emotional arousal and the behaviors responsible for trading success."

Brett N. Steenbarger
The Psychology of Trading

The Market Continues to Chop

The chop fest continued this week as the major indexes, in particular the S&P 500, has failed make a meaningful move. We tested the highs of the range last week and briefly broke out but to no avail as the rally quickly sold off and the S&P retested the lows of the channel. Here's an hourly chart, note the choppy action of the wide volatility stops:Maybe we'll see a break one way or another next week...until then there's not much to do but to maybe fire off a few quick day trades and book profits pretty quickly. The swing trade in UTX got stopped out, barely, but out none the less. The only position that I'm currently holding is a trade in JNJ that I'm trailing a stop on. JNJ has had quite a run lately but who knows how much move is left...I'll let the market get me out.

As you can see, I haven't posted much in the past week or so. Mostly because there's not much to post but also because I've been incredibly busy with the law work. I'll be in court for a civil trial Monday and then will probably start posting more regularly after that. Hope everyone's had a good week.

TLT

Weekly Wisdom Quote

"The defining characteristic that separates the consistent winners from everyone else is this: The winners have attained a mindset--a unique set of attitudes--that allows them to remain disciplined, focused, and, above all, confident in spite of the adverse conditions."

--Mark Douglas
Trading In The Zone

Swing Trade Idea: Long UTX

Here's an idea for a swing trade for tomorrow. Long UTX at 68.25, which is the high of the last hourly candle of today's trading. Why not just jump in at the closing price of 68.15? Because you want to see it open strong and hold yesterday's lows...trading up to 68.25 will be an indication strength. The profit target is $75 and a stop should be placed at 66.80. This gives the trade roughly a 4.5:1 risk to reward ratio. Here's the chart:This trade offers a very tight stop which is important for this type of trading environment. If you're wrong on a trade, you want to pull the plug quickly. Furthermore, there is quite a bit of potential for this trade if it breaks higher...this stock's sector(XLI) is particularly strong as well. If the price rises, I'll be trailing my stop with the volatility stop (using 4.5 multiple and 20 period settings) on the 1 hour chart. Note that the trade plan has a profit target set for $75, however I will continue to trail my stop past this point, unless XLI is not still in a buy mode...if that's the case, I'll take half profits at 75 and trail the other half.

The important thing to take away is the stop...a hard stop. The market has been rather shaky lately, and all it would take is a small rally in the dollar, more Dubai-like bad news, or a nasty jobs report this coming Friday and this market could tank. As always, we'll see how this one turns out. Remember, it's just a probability, never a certainty.

TLT

Strong Market Today, Let's Take a Look At It

It's not too surprising that stocks are strong today as there were quite a few buy programs that hit the market in the last hour of trading yesterday. As of this writing, the SPY is up approximately 1.25% and IWM (small caps) is up 1.5%...which is significant because there has been a divergence between large cap and small caps lately. One notable divergence that is still in place today is with the financials (XLF) as it is down a little and not participating in the rally, making todays rally a little suspect. Here's a screen shot of my intra-day stock monitoring screen with the SPY and some annotations:As you can see, the SPY gapped up and is currnelty holding onto gains. It's currently in an uptrend on the 15 minute time frame, but there's some overhead resistance at the $111.75 level. We'll need to see that level taken out and for it to hold in order for the SPY to see higher highs...otherwise it will just continue to chop around in that 111.75-109 range that it's currently stuck in.

At the beginning of this post I mentioned buy programs...some might wonder what this means. I (along with most other traders) monitor the NYSE tick index or the TICK for short. Various people state that certain levels are important, such as 800, 1000 or 1250 and the corresponding negatives of these values. Others monitor an average of the values and watch that to see if there's more buying or selling. Personally, I just keep track of the number of readings above 1000 and below -1000 and I note if there are several readings that are close but not quite at these levels. I also keep an eye on the 20 and 50 period moving averages on the 5 min chart to look for consistent buying or sellling.

For example, lets look at today's 5 minute tick chart:There have been 6 readings of 1000 or more on the tick and there has not been a single reading at or below -1000, although there were a few close readings around -900. In fact, the majority of this morning's tick reading were positive as indicated by positive 20 and 50 period moving average readings. What does this mean? It means that buy programs have been hitting the market and the significance of this is that the big boys are trading to the upside, at least for now. This tells me to only trade to the upside and to let profits run because the trend is likely to continue...as opposed to a choppier day evidenced by extreme tick readings in both the positive and the negative that would warrant taking profits quickly.

This is how I follow and look at the TICK chart. Note that there are several interpretations on how to use and read the tick chart. Furthermore, this post has not gone into very much depth about the tick and it assumes that you are at least familiar with it. The tick index is merely the number of stocks on the NYSE that are trading on an up tick vs. the stocks trading on a downtick. If you're not familiar with the tick index and want to learn more, a good place to start for learning about the TICK index is Investopedia with this and then read some of the links as well.

Have a profitable trading day!

TLT

Popular Post Replay: 12-6-2008

This was one of the more popular posts of 2008, as measured by incoming traffic that was specifically linked to the post. Being that it's a holiday weekend and I'm not feeling like working on a fresh new post, I thought it would be fun to do a Popular Post Replay. I think part of the reason for the popularity of this post is that it involves the great Market Wizard Paul Tudor Jones...a guy that's always worth listening to.

Here it is: Four Bibles of the Trading Business According to Paul Tudor Jones

“When I meet someone who is interested in learning the trading business, I always refer them to what I consider to be the four Bibles of the business: Reminiscences of a Stock Operator by Edwin Lefevre, the fictionalized biography of the fabled Jesse Livermore; Technical Analysis of Stock Trends by Mcgee and Edwards, which was written in the first half of the twentieth century and whose tenets still hold today; The Elliott Wave Theorist by Robert Prechter and A.J. Frost, a classic, and finally Market Wizards by Jack Schwager, which is a compilation of interviews with great traders.”

--Paul Tudor Jones

from the forward of The Logical Trader

Weekly Wisdom Quote

"The person who stops studying merely because he has finished school is forever hopelessly doomed to mediocrity, no matter what may be his calling. The way of success is the way of continuous pursuit of knowledge."

--Napoleon Hill
Think and Grow Rich

The Lawyer [Prop.] Trader?

Well, the end of the year is coming soon and I've been doing a lot of planning for 2010 as we get closer to the new year. One thing on the agenda is to get more serious about my trading and take it up to the next level. I've looked into and considered several different options to obtain my goal and now I've settled on trading with a proprietary (prop.) trading firm. While prop. trading, I will still run my law practice on the side for a little while, I at least have to wrap up several cases, but then I will be looking to shut down the practice for good if the trading continues to go well.

I've had to do quite a bit of research to find out what prop. trading is all about. The good news is that there are several options for traders today who are interested in making the transition from being an amateur part-time to a full-time professional trader, as many firms now offer remote trading opportunities so you can trade from home. The bad news is that there are some not very reputable prop. firms out there and these guys tend to give prop. firms in general a bad wrap. I figured that I would provide a post and break down some of my findings and observations about prop. firms for those interested.

First, prop. firms can be separated into firms that require a capital contribution (risk deposit) and those that don't. The ones that do not require a risk deposit generally require you to take and pay for a training class ($3,000-5,000 is the typical price) or you must provide them with a professional and profitable trading record. From what I hear, some of them will still demand that you take the class unless you have a pretty good record. One benefit of trading with a firm that does not require a risk deposit (even though you pay for the training) is that this circumvents the SEC rule that requires a series 55 and 63 license in order to trade professionally.

Okay, so they charge you for a class...then what? Well they usually have a training period that lasts anywhere from several weeks to 6 months and then there is generally an amount that you have to make within the training period or at some point at the end and if you make this amount (which is often very low) then you can start trading firm capital. At this point, you begin trading a set amount ($50,000-$100,000) with a set risk limit (a daily loss limit) and the firm charges you commissions, software/seat fees, and they take a cut of your profits. Some firms allow you to keep up to 90% of profits and others can be as low as 50%, it just depends on the firm and the arrangement that you have with them. Sometimes it's possible and more profitable to give over a greater share of your profits in order to get lower commissions...this would be beneficial for scalpers.

The ones that require a training course and not a capital contribution are what I'll call Group 1 prop. firms. These are better suited for those that are either new to trading, don't have a professional track record, or feel that the training would be beneficial. The plus side to these firms is that they provide you training, mentorship, and they have an interest in seeing you make money because they want to earn money from you. The cons are that you usually have to take a class, they can be very restrictive on your risk limits and trading style, and it can take a while before you're up to the level where you can earn a living from trading the firm's capital. There are also a few firms that are less reputable and some in particular that are associated with some big names (that will not be mentioned here) that charge a big fee for the training and they have a reputation for not developing many profitable traders. Doing due diligence on prop. firms is essential as donig business in this area of the trading world is defineitly what we call "caveat emptor" or "buyer beware."

Examples of some of the better (note that better is only my opinion from my research...do your own DD) Group 1 firms are SMB Capital, Keystone Trading Group and Pro Trading Course. As I said above, Group 1 is more beneficial to those that are not already or have never been professional traders, but they would probably be very frustating to those who are already professional and can earn a consistent living due to the restrictive nature of the firms.

As for the firms that require the risk deposit, I'll call these Group 2 and these can range from firms that just require a deposit and let you start trading to ones that provide more services and training. Examples of these types of firms are Think or Swim or Cy Group. The benefit of these firms is that they provide you with the tools, leverage and direct market access that is often (but not always) required in order to trade for a living. Group 2 is ideal for those with professoinal experience trading and they generally offer discount to trading groups as well. As you can imagine, they are not as well suited to most non-professionals because a lot of them do not offer the intense training and mentorship that Group 1 provides, but some do offer more than others, you just have to do some due diligence.

The downside to some of these groups, but not all and not the ones listed above, is that some require you to trade a certain amount of volume because they make their money by charging you commissions. Now the commission part itself is not bad, because they usually offer lower commissions than are available at the retail level, its the pressure or requirement to trade a certain amount of volume that is not good. These are "churn and burn" outfits and they don't have much interest in seeing traders stay profitable, they just want their money from you and then they'll move on to others.

So there you have it...what else could you need to know...anything? Yes! This post has barely brushed the surface and anyone interested in pursuing the prop. trading path has to do much more research and DD. What kind of research and DD should one do? Start by contacting the firm, looking at the firm's websites and blogs, ask the firm for references and contact these people that have traded with the firm, read forums to see what's being said about them (although take what is said in forums with a grain of salt), and even visit the firm in person if possible.

Here are a few links to some helpful resources:

• An almost comprehensive (it's a little dated) list of proprietary trading firms,
• Here's a forum from Elite Trader that can provide some interesting info (with a grain of salt),
• Here's a couple of good blogs from two of the firms mentioned above, these are just good reading and they can be very insightful: SMB Capital Trading Blog and the Keystone Trading Blog
  
• Here's a couple of other firms to look into that are on the comprehensive list above that offer remote trading: Bright Trading, Soldier Capital, and Echo Trade,
• Here's a couple of links to Brett Steenbarger's TraderFeed Blog that are helpful: post on evaluating proprietary trading firms and here's one on avoiding prop. trading scams.

As for me, I've decided to go with the Group 1 option and get the intese training and mentorship. I feel that this will be beneficial because I've never traded for a living, just on the side, and I've never felt pressured to consistently draw a living out of the market as I have a law practice that provides that. The live mentorship alone will probably be worth the money. I'll probably begin in January or February of 2010, which is just a couple of months away now. I haven't quite narrowed it down to a specific firm yet, but I think I have an idea of which one I'll go with...I post on that at a later time.

I hope this post is helpful to anyone considering proprietary trading. Please feel free to comment or email me if you have anything to add. I'll post some updates once I have more to say.

Have a great weekend!

TLT

New 52 Week High 2 Days in a Row: FCX

I spent almost the entire day working on a Motion for Summary Judgment for a civil lawsuit that contains nine separate causes of action and the Petition (or complaint) is so poorly written that it appears to be drafted by a moneky. If you're not familiar with a Motion for Summary Judgment (MSJs) then consider yourself lucky because they are not fun...unless you're one of those sick twisted individuals that likes that kind of stuff...I knew a few of them in law school. Needless to say I didn't trade any today, which is okay, but I did manage a position that I already had on. I've been long FCX since November 10th and this stock has been on fire the past few days. Here's an intra-day chart with some comments on today's price action: FCX sold of with the market a little this morning but then it began showing strong relative strength as it was able to get into the green before the market did. At this point, I'm just trailing stops with this trade as it's in the money and making new highs. I don't want to add to it though as this market is a little shaky to be adding on too big a posistion...something I did just before the market made its dip back in October.

It will be interesting to see how the rest of the week plays out. The first two days of trading this week look a lot like the first two days last week--a gap and rally followed by choppy consolidation. This market tends to head higher when there's not any potential bad news (i.e. anything that could cause the dollar to rise), which leads to short covering, which leads to higher prices and then the cycle repeats itself. The only problem is that it's a game of musical chairs right now because the dollar will eventually rise, (due to rising rates, risk aversion, profit taking on the carry-trade, central bank intervention the fed even hinting about the possibility of raising rates in the future, you get the idea) and being long this market is basically a game of musical chairs for now, which is why so many pros and pundits hate this rally. Gotta love it. Although it can be confusing and frustrating at times, the market is never borring.

Hope everyone is having a good week!

TLT

Weekly Wisdom Quote

"...our visual and decision environments are filtered to us courtesy of our eyes, our ears, our senses of smell and touch, and the master of it all, our brain. By the time we comprehend and digest information, it is not necessarily a true reflection of reality. Instead, it is our representation of reality, and this is the input we base our decisions on. In essence we are limited to the tools nature has given us, and the natural way in which we make decisions is limited by the quality and accuracy of these tools."

--Dan Ariely
Predictably Irrational

The Rally Continues

Stocks gapped up this morning and then kind of petered out a little in afternoon trading, but the rally is still going. We all know that the weak dollar is influencing stock prices, in fact, the two markets are correlated pretty tightly right now. Stocks are trending to the point where I'm long and holding overnight positions again, even though everyone is suspect of this rally. The key is to trade the signals...not the opinions of others.

Here's an hourly chart of the S&P 500 index with the TLT Trender v2 and some annotations:Personally, I think that we'll see new highs by the end of the week and then probably a quick pop up as shorts have to cover, but take that for what it's worth as it's only an opinion that can change on a dime. Next up, here's the Eur/Usd hourly chart also with the TLT v2 indicator (green, red, blue bars) and some annotations:As always, the goal is to watch price action and let that dictate what the next move will be. I must admit, I've gotten quite bullish after seeing the market shrug off the unemployment numbers last Friday and then rally and hold those gains this week...smells like strength to me.

Happy Veteran's Day and I want to give a big THANK YOU to all those that have served and currently serve our country in the armed forces.

TLT

Compared to Last Week's Choppy Action, Today Was Smooth Sailing

Here's a 2-minute chart of the intraday action of SPY:Despite the smoothness in the indexes, one trade that I put on today failed to do much of anything...it rallied at the opening and then petered out. In fact, it didn't even get stopped out, it just sat flat. This can be frustrating on a day when the S&P is up 2.3% but I guess that happens every now and again. Just have to do my prep work for tomorrow and try again.

Hope everyone had a profitable day.

TLT

The Importance of Focusing on Things You CAN Control

Here's an excellent post by Gman over at SMB Capital Blog that discusses the frustrations created by High Frequency Trading and the importance of focusing on things that you can control. Take a minute and read it...well worth the time.

The SMB blog is one that I've been following closely lately and have really been enjoying it. One feature of the blog is the videos that they record for StockTwits TV, like this one.

I hope everyone's had a great weekend and is ready for a profitable week of trading ahead.

TLT

Weekly Wisdom Quote

"There are no certainties in this investment world, and where there are no certainties, you should begin by understanding yourself."

--James L. Fraser

A Quick Day Trade: MASI

Here's a quick day trade that I put on this morning. I went long MASI about 10 minutes after the market open. This turned out to be a decent little trade, although I left some on the table...my initial profit target was $29 but I booked profits at $28.20. I need to work on letting profits run a little more. Overall, I'll give myself a B for this trade. Here's the chart with my entry and exit:Like I said yesterday, I'm only taking day trades right now until the market gives a better indication of which way is the path of least resistance. The market will need to hit some fresh highs or lows in order to give that indication.

Have a great Thursday!

TLT

Quick Look at the S&P 500

It's no secret that I've been bearish lately and today didn't provide much for me to change my stance. My TLT Trender v2 is still in buy mode, as indicated by the green bar on the chart below, but it is dangerously close to giving a sell signal. I'm currently in cash and only putting on some small day trades and this will continue until the market provides an indication of which way it's gonna go.

Here's a looks at the daily chart of the S&P 500 with some annotations:We'll need to see a stong up move, like a 2% move, in order for me to get bullish again, and conversly, some fresh lows will keep me bearish. Those non-farm payroll numbers on Friday may provide the catalyst we need in order to move one way or the other.

Good luck trading.

TLT

Bearish Signs Abound

Despite closing in positive territory, the markets were unable to mount an impressive rally...not a good sign with the presently oversold conditions. The averages were unable to break the current down trend that's present on the hourly chart.

Several things about the present market environment concern me, including: the recent dramatic rise in the vix, the continued selling off after the release of good news (both earnings and economic), the ugly technicals (i.e. moving averages crossing over and falling and MACD divergence/MACD crossing zero line on daily chart), and the upcoming fed interest rate decision. All of these things concern me to the point that I unloaded most of my portfolio today with the exception of one small tech stock (tsys) because I don't feel like I have any edge in this market. Here's a hourly and daily chart of SPY with some annotations:The dip buyers may appear and turn this little scarry slump into a great buying opportunity, but for the reasons stated above, I'm sitting out for now. If anything, I might dabble on the short side, but will probably only day trade for now, at least until I get a short sell signal on the indexes from my TLT Trender v2 system.

As for the fed interest rate decision on Wednesday, I'm having trouble anticipating ways that it will be positive for the market. At best, it will probably leave market participants complacent and more likely than not, it will give people a reason to sell. I don't want to be in the market if the fed decision positively impacts the dollar, for whatever reason, and everyone heads for the exit at the same time...that scenario would be ugly. As always time will tell and it's our job to sit back and let the market dictate what to do.

Be careful out there.

TLT

A Different Kind of Quote this Week: Kerouac

"The only people for me are the mad ones, the ones who are mad to live, mad to talk, mad to be saved, desirous of everything at the same time, the ones who never yawn or say a commonplace thing, but burn, burn, burn, like fabulous yellow Roman candles exploding like spiders across the stars, and in the middle, you see the blue center-light pop, and everybody goes ahh..."

—Jack Kerouac
On the Road

Long Arch Coal

Victory! Despite a very good presentation by the plaintiff's attorney, we were able to ward off the civil claims against my clients and leave the courtroom victorious yesterday by a unanimous jury verdict...although we did not win our counter-suit, but that's not surprising, especially since we really only filed a counter-suit for leverage against the plaintiff. It appears that the market continued its nose dive while I was in court yesterday and the market was pretty oversold going into the open this morning.

I opened a little position in Arch Coal (ticker ACI) this morning at the open. This is a stock that I've had on my watch list for a couple of weeks and I've been waiting for it to hit oversold levels. I told myself last night that I would go long ACI if the market opened in the positive today, which it did following this morning's GDP report. Here's the ACI chart:
We'll see how this one goes...the whole market seems a little shaky right now, which probably means it's a good time to open a new long position. I've still got a position in FCX along with a couple of energy plays...name of the game is commodities for the time being.

Have a great day.

TLT

Preparing for a Jury Trial

I have a jury trial set for tomorrow. This trial has taken quite a bit of time away from trading this week and I'll be out of pocket for at least tomorrow and possibly Thursday. I have closed out a couple of open trades as they hit my stop loss points but I have also opened up a new position as a small starter position. It will be interesting to see if the market continues with this correction or if the dip buyers will appear and keep the "most hated rally" alive.

Wish me luck, this will be a highly contested civil trial and there will probably be some fireworks. I will be representing the defendants who are being sued for 2 different issues, but we counter-sued the plaintiff so we may be able to not only ward off his harassing suit (which is all it is), we might be able to stick it to him at the same time...that will depend on how good a job I do. I'll let you know.

Good luck trading and keep an eye on energy prices, oil stocks look pretty bullish.

TLT

Weekly Wisdom Quote

"Not risking is the surest way of losing. If you do not risk, risk eventually comes to you. There is simply no way to avoid taking a risk. If a person postpones taking risks, the time eventually comes when he will either be forced to accept a situation that he does not like or take a risk unprepared."

David Viscott, M.D.
Commodity Trader's Alsmanac, 1989

Failed to Pull the Trigger: WFSL

Here's a stock that popped up on one of my screens on Monday and it had a near perfect trade setup...but I did not pull the trigger. I went long several stocks yesterday as the market started pulling back a little and I nearly bought WSFL, but for some reason I passed it up. Don't get me wrong, I miss all kinds of trades, even ones that I look at closely, but this one stood out to me...probably just because of the major pop that it had today.

Here's the setup:

• the stock is in a confirmed uptrend in the daily timeframe as it is trading above it's Volatility stops (ATR stops) and it's moving averages (20-50-200) are in perfect order;
  
• the stock pulled back on the daily chart to the point where the stochastic registered an oversold reading and, very importantly, the stock stayed above its Vstop level;
• the weekly chart shows a long basing pattern with a breakout above the vstops, the macd is bullish as it recently crossed the zero line, and there was a huge spike in volume on a break recently.

All of the above provide a great setup for entering a long position. Here are the charts:About as perfect of a setup as I could ask for and then bammm...the price rallied from 15.60 to 17 and some change. Like I said, this actually happens quite a bit, I just thought it would be fun to point this one out.

I'll post sometime next week on how my other stocks are doing. One that should be interesting is FCX, one that I've held since August and it continues to make new highs. Others include an oil play and a tech company. We'll see.

TLT

Follow up on the Eur/Gpb

Last week I pointed out a potential trade in the Eur/Gbp pair and asked if the recent dip should be bought. The time has come for the trade as the pair has pulled back to the 50 day exponential moving average and the TLT Trender v2 has maintained a green buy/uptrend signal. To top everything off, the Stoch hit oversold levels and is now turning up...a bullish indication. Here's the updated chart:Remember, this is just a trade idea, not a forcast of the future. This setup tells me that the Eur/Gbp is likely to move up from here but there is always the possiblity that the pair will keep falling and for that reason it is important to use proper position sizing and a hard stop loss.

I'll post an update soon.

TLT

Stock to Watch: TEX

Terex Corp (TEX) is making new 52 week highs as it breaks out in a strong looking trend. As you can see from the chart below, TEX broke out of a range back in September, had a quick pull-back and is now off to the races. The weekly chart is showing a rounded bottom pattern and the weekly MACD has just crossed the zero line...both bullish signs. Also note that it is trading above it's 20, 50 and 200 day moving averages and the averages are in perfect order (short averages are above the long ones). Here's the daily and weekly charts:Bottom line, I like this stock. It looks very strong. However, take caution as it is over bought right now and is probably due for at least a small pullback. The stochastic is overbought on the daily chart and I will wait for the stochastic to pullback to neutral territory before buying in. One last thing, I put a potential profit target on the chart just above $40...where did it come from? It's the 50% fibonacci retracement level from the weekly chart...it also happens to be the nearest overhead resistance.

Overall, interesting stock and it should definitely be on your radar.

TLT

Weekly Wisdom Quote

"Anyone who is unaware of the fool in the market probably is the fool."

J.P. Morgan

Eur/Gbp: Buy the Dip?

Some interesting action going on with the Eur/Gbp. The pair pulled back sharply this week and now the question is: Do we buy this dip? The pair is still in an uptrend as far as my system is concerned...the green bars are my TLT Trender v2 indicator and green means uptrend. We're gonna have to watch price action closely on the intraday charts next week to get a read on this situation. For starters, I'll be looking to enter the pair as it nears the 90.00 level...gotta watch those round numbers. Here's a daily chart with the TLT Trender v2 indicator:Buying pullbacks can be a very rewarding strategy, the only catch is that you have to be disciplined in setting and sticking to a hard stop level...as the pullback might turn into a reversal and you should be out of the position long before a reversal is confirmed.

Have a great weekend.

TLT

And the Rally Continues...

Equities continued to move higher today and I pared back a little by unloading some long positions. Did I sell too early? Maybe, but I've still got some exposure, just not confident in the current risk/reward in the market right now (a combination of earnings release risk and being short term overbought is creating my uncertainty). Here's a daily chart of the S&P 500 with my TLT Trender v2 indicator (the indicator that paints the candles green for uptrend and red for downtrend):As you can see from the above chart and comments, the Stoch is overbought and the fisher MA is positive but failed to make new highs. One thing to remember is that the fisher ma is lagging, given that it's a moving average, so it might just be gearing up for a move higher...the important thing is that it's positive because a dip below zero is a good indication that the trend is likely over.

Happy trading.

TLT

Weekly Wisdom Quote

"I learned that there are only two points of view: The other person's and the best one. What I think is of no consequence. Mine must become the best one. Nowhere is this more true than in a zero-sum game."

Trader X

Dancing With Lions

Today's Market Leaders

Keep an eye on these four individual stocks...they are certainly some of the market leaders that the rest of the market tends to follow. Bottom line, if the market is moving higher, these stocks need to be moving higher also and, more importantly, if these guys start moving lower, watch out! The four to watch: AAPL, AMZN, GOOG and GS. Here are the daily charts: What's there to say about AAPL besides...it's one of the strongest and most innovative companies out there and the market loves it...thus, we need to watch it.America's retailer...this is the new economy and Amazon is where it's at.Google rules the world right now...period.King of the club is "Goldman." As I heard on Bloomberg radio the other morning..."Where Goldman goes, so goes the market."

There are other important market leaders and some etfs, such as the emerging markets funds, that are helpful for gauging risk appetite but these four stocks are worth watching closely.These four alone will offer clues and insight about the market...look to them for upside confirmations and watch them for warnings of market vulnerabilities. The warning signs will be very significant because if and when this market makes a move lower, it will be swift.

Have a great weekend!

TLT

S&P Rallying After Earnings

The market is liking earnings right now...some notable movers are AA, GS and FCX. Goldman is an important stock to keep an eye on because it is definitely a market leader who's price action tends to dictate the tone for the market as a whole.

The S&P has been rallying in the futures market since today's close...good for longs. Here's a 30 minute chart with today's action with the TLT Trender v2 and a nifty short term volatility indicator:We'll see what the follow through looks like for tomorrow and we'll have to keep an eye on the 1078 gap level that is quickly approaching.

TLT

I Bought the Market Today...

Went long with a leveraged ETF today as the S&P began pulling out of oversold levels. Will it continue going up? I don't know, but you have to be willing to step up and buy during times of uncertainty when you see a tradeable setup. For me, the setup is a pullback to oversold levels on the stochastic while an uptrend stays intact...the uptrend is indicated by the green bars painted by the TLT Trender v2. Here's the daily chart that shows the oversold level and the green bars:The daily chart gave me the signal to start looking for a long entry and a specific stop loss level. To determine this, I use the TLT Trender v2 on the 15 minute chart along with a volatility indicator to pinpoint the entry. The volatility indicator looks for rising short term volatility, which confirms a breakout. I'll post later on in the week about the volatility indicator and how I use it...don't really have time to right now.

Hope everyone's week is going well so far.

TLT

Weekly Wisdom Quote

"Anyone who buys or sells a stock, a bond, or a commodity for profit is speculating if he employs intelligent foresight. If he does not, he is gambling."

Richard D. Wyckoff

Action in the VIX

Watch the VIX levels. Look for the VIX to confirm moves in the equity indexes. It's at a pivotal rally point where it will either briskly fall back down (and stocks will keep rising) or it will break out of it's current range (and stocks will fall). All of the recent rallies have quickly fallen back down...will it happen again? Here's the daily and weekly charts:Have a great weekend!

TLT

Bearish on the GBP/USD

The Pound recently attempted to rally against the dollar--a rally that could have provided a tremendous break out but it failed. Now the Pound is looking rather bearish and I present these two charts to illustrate my opinion. The first is a daily chart of the GBP/USD with the TLT Trender v2 indicator (an indicator that paints the candles green and red) applied to the chart. As you can see, the TLT Trender v2 has given a fresh sell short signal which indicates that the trend is down for the time being (note that the TLT Trender v2 is a trend following incidator and as such, it can give many false signals when the market action is choppy because trend following systems take lots of losses while waiting for a big trend to emerge). As noted on the chart, I'll be looking for some new short term lows to confirm the bearish trend on the daily time frame.

Next, lets take a look at the 4 hour chart.The most important thing to take away from the above 4 hour chart (besides the red TLT Trender reading) is that the prior 3 rallies have sold off rather quickly. This indicates that the market does not have faith in the pound and traders have been fading the rallies. So how am I going to play this? I will look to short the pound whenever the stoch on the 4 hour chart hits the overbought level as long as the general trend of the currency is bearish as indicated by the TLT Trender v2, however, I will use hard stops to prevent losses in the event that the rally continues upward...always a danger when fading rallies.

I'll post another update on the pound within the next week or two.

TLT