Weekly Wisdom Quote

"There is a principle which is a bar against all information, which is proof against all arguments, and which cannot fail to keep a man in everlasting ignorance--that principle is contempt prior to investigation."

--Herbert Spencer

Looks like a Big iPhone and Sounds like a Feminine Product: the iPad

Apple presented their new tablet today and the market shrugged...although the market in general being weak could be to blame for any reaction or lack thereof (to be fair, AAPL, RIM and T got a little boost when AAPL announced the price). The biggest reaction I saw regarding the iPad was all the jokes being sent around the online trading room today when the traders heard the name of the tablet. The Fed is making their announcement as I type this so I better go and watch the reaction...gotta see if my short is still a good position.

Hope everyone's having a profitable day.

TLT

The Lines Have Been Drawn

The bulls made a good showing today, but the bears hopped on the intra-day double top and shorted all the way down to the close. The increasing volume to the downside in today's action combined with the technical damage that we've seen on the higher time frames...in particular the daily...tells me that the short side will probably win. That being said, if the bulls manage to trap the bears, there could be a big rally as the bears get squeezed. With Obama giving his state of the union tomorrow, I'd be very cautious trading to the upside, but then again, I'm short and probably a little biased.

We'll see if tomorrow's trading can get us out of the range.

TLT

Today's Action: ZZZZZZZZZZZZZ

Wake me up when something happens. I must say that the consolidation is not a good sign for the bulls...lots of people were expecting a big move up after the sell off we saw last week. The good news for the bears is that the S&P was able to stay above Friday's lows, at least as of 2:30 central time as I'm writing this post. Here's an hourly of the SPY to illustrate my point:Fortunately, inside days like today provide tight consolidation that leads to a good move whenever a break out/down does occur. We'll just have to wait and see.

TLT

Weekly Wisdom Quote

"If I had been a professor, I would have let Mr. Bernanke pass his exams, but I would have told him never to become a central banker."

--Marc Faber
Barron's-January 18, 2010 issue

***Barron's witty reply to Mr. Faber was, "He would have told you never to become a professor."

Trapping Traders: The Mid-Day (False) Move

Another day of earnings releases followed by selling in the market. Even in after hours today, Google sold off after releasing results. There was a lot of money to be made trading the short side this morning, at least for the first hour and a half of trading. After that initial move the markets merely chopped around and most likely chopped away a lot of day traders' profits from the morning.

A good example of why intra day traders get chopped up mid day occurred around 12 o'clock (central time) today. For this example we'll use the SPY index, but you can see this same kind of set up among several different indexes and stocks at various times through out the day. Around noon, the SPY finally looked like it was going to crack the lows of the day and head lower. I'm sure several traders were eager to add to their shorts or sell short again or even short for the first time because they missed the big move earlier in the day. SPY broke through the prior lows by 6 or 7 cents but then quickly retraced and continued heading higher for quite some time, which trapped traders and no doubt ate up some profits from earlier as traders had to cover their loser shorts.

So what caused this? Most likely, two things: 1) buy programs, and 2) professional traders. There are several algorithmic programs that are programmed to fade the highs and lows of the day, especially when the high/low occurs during the middle of the day when there's not a lot of volume. These programs are designed to trap short term traders and force them to exit their positions causing the stock to bottom/top and the program exits for a profit. Lots of professionals know about this because they've been doing the same thing for years, it's just that the algo trading has dramatically changed the moves, as they are much quicker and tend to last longer now.

Here's a 5 minute intra-day chart of SPY that illustrates what I'm talking about:So what can traders do to protect themselves from these kinds of traps? First, they can not be as aggressive to trade a breakout, especially when it occurs outside of peak hours in the market. They can also wait for confirmation. Notice that the new lows didn't even hold on the 5 minute chart above...just waiting for prices to close at the new levels would have kept you out of this trade. Another thing to do is to cut losses quickly. Set your uncle point and stick to it. Note that adapting to program trading is just part of trading these days and it forces traders to either cut losses quicker than before and wait for a re-entry or allow trades more room to breath and slowly build a position.

These intra-day high/low fades are funny to watch when your not in them, but they are awful when you're caught in one and you're not prepared to exit quickly. One last suggestion on how to deal with this is to examine your intra-day P&L levels. I've noticed that for the most part, my trading profits occur during the first hour and a half of the day and the last hour of the trading day. I tend to take mediocre trades and get chopped up in the middle of the day, unless there is something specific that is making the market move. Paying attention to your intra-day P&L will give you insights into what times you should be trading and what times you should not be trading.

I hope everyone is having a profitable week so far and is prepared for what will likely be a very interesting Friday tomorrow.

TLT

Popular Post Replay: Market Wizards

This was one of the most popular posts from 2008. It was originally posted on October 19, 2008. The popularity of this post is due to it involving two things that are dear to most traders' hearts: 1) the book Market Wizards, and 2) Ed Seykota. Check it out.


**********************************************************************************Ah, yes...it's a classic and we all reference it as being one of the best trading books of all-time. Well, I recently began reading the book for the 2nd time, after reading Market Wizards, The New Market Wizards and Stock Market Wizards. This series of books is excellent and I would encourage anyone who is interested in trading or even an investor, to buy all of the books and read them.

Tonight, I was reading the classic "Ed Seykota" chapter and I was struck by his answer to what his views of fundamental analysis were as to his trading approach. Here is his answer (emphasis is mine):

"I am primarily a trend trader with touches of hunches based on about twenty years of experience. In order of importance to me are: (1) the long-term trend, (2) the current chart pattern, and (3) picking a good spot to buy or sell. Those are the three primary components of my trading. Way down in very distant fourth place are my fundamental ideas and, quite likely, on balance, they have cost me money."

If you aren't familiar with Mr. Seykota, you need to be. Check out his website, it's filled with wonderful information.

Good luck out there.

TLT

Weekly Wisdom Quote

"If you're not making mistakes, you're not trying hard enough."

Vince Lombardi

Not Too Much To Do Today

There was not much to do today, especially after 10:30 a.m. (central time). Unfortunately, I was in court for most of the morning so I missed most of the good shorting opportunities. I did use today's strength in the dollar to exit my long dollar position (uup) because that idea didn't pan out the way it should have. The dollar and the markets seem to have started their inverse correlation relationship again, which indicates that the dollar strength at the end of 09' was probably just traders unwinding their carry trades for the year.

The selling in the markets stalled out this morning and almost all of the stocks that I have on my potential short list couldn't follow through to the downside...so I went long TNA this afternoon with a buy the dip trade. We'll see, BGU may have been a better call but the small caps have been strong lately.

Have a great long weekend!

TLT

Today's Heartbreaker: CHK

It was a pretty good setup going into the trade because oil and gas stocks have been relatively strong lately. CHK was on my radar this morning. It is one of 4 stocks that I'm tracking daily. This morning it gapped up above yesterday's high...very bullish...then it broke out of it's opening range around 9:10 (central time). This was the entry signal and a long was established at 28.27.

At this point, the trade's on and looking good and the main risk was the upcoming natural gas inventories report that would be released at 9:30. I tightened up the stop heading into the release and I established an "uncle point" back within the opening range (see chart below). This trade had some profit potential if the market reacted positively to the report. As you can imagine by the title of this post, it did not. Here's a 15 minute chart that breaks everything down:

Calling this trade a "heartbreaker" may be a bit of an exaggeration, as this was still a good trade, it just didn't work. There are a couple of lessons to take from this one: 1) be aware of economic releases...especially ones that specifically pertain to the instrument you're trading, and 2) respect your stops. Fortunately, I tightened the stop prior to the release and respected it. Had I not, I would be sitting in an underwater position that's going nowhere and tying up precious capital.

As for the market in general right now, I'm liking financials. In particular, I think there might be a good longer-term trade developing in WFC or several short-term trades. Keep an eye on WFC if it trades above and holds the $29.50 level.

Have a great day!

TLT

Weekly Relative Strength Rankings

Here's where the alpha was last week.

I hope everyone had a great weekend.

TLT

Weekly Wisdom Quote

"If you have a minute, I'll tell you how to make money in stocks. Buy low and sell high--now if you have five or ten years, I'll tell you how to tell when stocks are low and high."

--Jesse Livermore

Outta Gold and Into Utilities and Some Random Observations

I bailed on my short gold position today as it broke through my stop. It's showing quite a bit of momentum and it traded on decent volume today. I'm out for now and will look at going short again once (or if) it approaches the recent lows. Here's a daily chart:You can see that gold bounced off the 50% retracement level and then failed to make lower lows. We'll see if it chops around or takes off higher. One thing to note is that Silver (slv) has been very strong this week...it has been at the top of my relative strength list for 2 days in a row now.

I did manage to get in utilities (XLU) today. This is a support test trade which means I'm betting that the recent support will hold. The weakness over the past week has offered a good risk to reward entry and as always, we'll see how it works out. Here's the daily chart for XLU:Note that I labeled the support a zone, this is because I don't like pinpointing the exact price but rather a thin zone for support/resistance trades. The stochastic is in oversold territory, which is essential for this type of trade.

Other things to take notice of are the extreme strength in both energy (xle) and materials (xlb). As for materials, FCX and DOW have been particularly strong. There was some weakness in tech (qqqq, xlk, smh) but that's not surprising given the strength that the sector has shown recently.

Last but not least, the dollar (uup), which I'm still long, continues to chop around with little significant moves in either direction. Long term yields pushed higher today which helped my short long term bond (TBT) position. I'll be back later in the week with more.

I hope everyone's off to a good start for 2010.

TLT

Weekly Relative Strength Rankings

Here's the rankings for last week:My current open positions right now are long the dollar (UUP), short gold (DZZ), short 20 year bonds (TBT) and long AMAT, which is in the semi-conductor sector. Comparing my positions to the above relative strength rankings shows me that I've got good trades on for now. The only categories that I'm not exposed to that I will be evaluating are energy (USO and XLE), copper (JJC) and Materials (XLB) and I'll also be looking for signs of strength in utilities (XLU).

Part of what I do to determine trades is that I compare individual stocks with their sector ETFs. For example, with energy (XLE) I watch XOM, SLB, and CVX. In order to take a position, I need to see strength and buy signals in both the ETF and the individual stocks. Here's a snippet of the daily checklist spreadsheet that I use and in this picture you can see the difference between XLE (a little mixed) and SMH (strong): The above readings tell me that energy is potentially a buy, just not yet. Keep in mind that this is just my system, anyone who owned USO or XLE in the past week made some money...I'm just saying that there's not quite an edge for me in trading energy in general at this point. We'll see what next week brings as traders and investors come back from a long vacation.

Have a great weekend!

TLT

Weekly Wisdom Quote

"The only conquests that are permanent and leave no regrets are our conquests over ourselves."

--Napoleon Bonaparte