The market is like an ocean, with its beaches, currents and predators. To navigate, you must know your ship (your trading tools), the range of weather conditions, and the waters (your stocks). I like to work with a small number of markets, I know well and approach each trade in a disciplined manner:
No sooner do we discover a new apparently good method for trading, when it becomes obsolete and something new is needed. I was struck by how many Spikers and members were long at the beginning of last week. I did not enter a pick last week because I could not figure out what I wanted to do by the Sunday deadline. Somewhere Alex has written that “standing by” is a wonderful advantage we individual traders have over institutional traders.It’s easier said than done. One needs to learn to enjoy just sitting at the screen, relaxing and watching it all unfold without a penny in there (for the moment).I have found that the strong emotion of anxiety that one is going to miss a move is usually a prelude to a bad trade. That was why I did not enter a full position last Thursday in TVIX when it took off for the races the moment the market opened. In fact I bought only 10 shares premarket when I saw it was up 9% (it eventually closed up over 40% and added another
One of my favorite patterns is called a Slim Jim. The pattern usually forms as a high-range trend continuation/consolidation with declining volume after a major high-volume gap. MWW and NOV have formed the prototypical example of the pattern–huge gap up on high volume and subsequent sideways movement with declining volume. This tips us to the fact that buyers are content to hold their shares and sellers are scarce. Buy on a break of resistance driven by an increase on volume indicating buyers have decided to push the stock on a second trend leg. Stop goes either just below the point of breakout or at the bottom of the pattern. This pattern also works well on a second entry if the first one fails. Pay attention to the pattern if for some reason price drops out of the bottom and then returns to the consolidation. This pattern failure & return can result in an explosive move up. This pattern appears in all time frames and is easy to spot. Often the second entry is the best one, so be patient, don’t risk a lot and keep the stops tight. While I usually avoid breakout plays, these Slim Jims are more of a consolidation or continuation pattern of a trend move. If you miss the breakout, look to enter on a pullback, particularly if volume rises, which indicates that institutions have decided to launch the stock on its second and most profitable trend leg.
[ Percy C, a SpikeTrade Member, is a scientist.
[This post came from Kim B, a repeat winner of Bank Robbery Award – Alex]There is a piece of dogma in the stock trading world: “Never double down.” Never try to correct a “mistake” in taking up a positionby adding to it when the stock has gone the opposite direction to what you predicted.My experience suggest otherwise. Once you buy a stock, your attention become more intensely focused
[ there is a lot of communication going on within the Spike group, some of it extremely valuable.
[this post came from Percy C, a trader, a scientist, and a highly rated presenter at the recent SpikeTrade Reunion – Alex]Let us take a look at the violation of the upper Bollinger Band (20, 2) in SPY last week. As folks undoubtedly know, Bollinger Bands represent a demarcation of a (typically) ~2 standard deviation range around a (typically) 20-period simple moving average. There are a variety of uses of the bands: some use them simply as targets, others use them to initiate positions in the direction of the excursion, and still others use them as points to initiate countertrend trades. You can find any number of sites and books that comment on the bands, including Bollinger’s own site, http://www.bollingerbands.com/Let us compare the historical performance of SPY in the weeks subsequent to a violation of the upper Bollinger Band (20,2). I pulled the 2000 – 2010 data from a reliable vendor and the 1994 – 2000 data from Yahoo! (buyer beware!), and calculated the bands, identified excursions of the upper band, and looked at price changes subsequent to that time. These data are summarized in the table below and broken down into the entire time period tested (January 1994 – last week) and the past decade (January 2000 – last week). You can see the average and median percentage price changes 1 – 55 weeks after a violation. I’ve also provided the maximum and minimum prices changes, to give folks a sense for the best and worst cases, depending on whether or not you like to trade with the excursion or against it.As you can see, the average % changes are nothing to write home about. I was also impressed that although there have been some nice bullish moves in the 8 week period after the excursions, the analysis of maximum and minimum changes seems to indicate that there is some skewing to downside risk. The examples in the past three years confirm that: four violations in the April – May 2007 time period (when SPY was ~150), one violation in August 2009 (SPY ~101), two violations right before the April 2010 top (SPY 120 – 122), and two violations in the past five weeks. Just scrolling through the numbers, it seems that the excursions occur in all three places that you might expect: (1) in the middle of strong trends, (2) right before periods of consolidation, and (3) right before major topping patterns (e.g. March 2003, May 2007). I didn’t see an obvious edge, but it might be possible to construct a system that would deliver positive returns. [Note also the usual disclaimer: these are my personal observations, and you should personally verify all data before considering any trades.]Best wishes for successful trading!Percy C
As was pointed out last week, COST is working its way through a
A Spike Member asked for another example of the Squeeze play, and I happened on COST. After strong earning, COST has drifted sideways on the weekly chart, forming a nice tight, dynamic triangle as the price range compressed. Now on the daily chart a Squeeze is developing. Note this Squeeze or Slim Jim pattern should have at least 12 horizontal bars. This one has about 17. At the right edge of the chart, the 2-day RSI and 2-day FI indicators are getting ST/OS as MACD gets healthier and the Bollinger Bands tighten. I like to enter when the RSI & FI show momentary weakness, so COST is getting close. There’s really not a lot more to the pattern than that, except be sure to use good money management; price could go the other way. If you get shaken out, think about a second entry. Also, this pattern will show up in the front of earnings or news, but COST announced already. A news announcement is certainly possible. The key to the pattern are the Bollinger Bands. They compress together as the range in daily prices shorten. This squeezing together indicates compression, or a reduction of volatility, which will sooner or later revert to an extreme.
Either Tuesday’s election or Wednesday’s Fed announcement could trigger a major market move in either direction. However, overall, we are experiencing one of the most extraordinary events in financial history. There has been an unprecedented effort to inject liquidity into the markets. The central bankers are intent in preventing the current “Great Recession” from becoming the “Second Great Depression” and have launched a Herculean battle against deflation.The weapon of choice is the US dollar, the international currency for commodities–the basis for life and the raw materials for economic activity.As the dollar gradually declines, commodities rally providing a stabilizing effect for the economies of emerging nations. Of course, the dollars’ decline also creates rallies in silly things like gold, which as no intrinsic value except jewelry. The spillover for the stock market is that as more and more traders grasp this declining dollar/massive liquidity injection, the more embolden they become. When traders puff up, they slowly take on risk and their willingness to take on risk is the key element to pushing banks to lend, deals to get made, companies to hire, people to spend, and eventually to pull the world’s economy back from the brink of deflation and despair, first to stabilization, then slowly to growth.Currently, it looks like we’re in the stabilization phase of the world’s economy. It also looks like the US Fed and Bernanke have decided to push down hard again on the liquidity injection/dollar decline lever with a new round of easing. Probably, this is being done with the agreement of the G-20, since the central bankers appear to be working together against deflation. As traders we need to understand the dynamic, focus on the best vehicles to exploit the dynamic, and make logical, calculated trades. In this current scenario, we should be looking for stocks or ETFs that best react to the declining dollar/rising commodity dynamic.The first chart I’m posting shows the SPY’s rally (lead by stocks like FCX) and the rally in commodities (RJA) moving in the opposite direction of the dollar (UUP ETF). The movement has been almost in lock step since September. We are most likely at a pivot point in the market, depending on how the market handles next week’s events. October’s market was strong enough to break price out of the symmetrical triangle on the SPY’s monthly chart. Coupled with a monthly MACD that is gaining momentum (this is an old, and venerable market indicator that still works), it would be reasonable to conclude that we have entered a new bull phase.Some suggestions: For those looking to hedge long positions going into the election, the VXX is the ETN of the VIX or Volatility Index. Volatility tends to rise when the market has a sharp decline and this ETN is highly leveraged. Of course, index puts are also an idea. Personally, I drop my trading load to the bare minimum at times like these. If the dollar continues to decline, there are numerous ETFs available that track commodities, or mining stocks. GDX, XME, GLD are a few. Also, a declining dollar is good for emerging markets like so ETFs like EWZ, ECH, FXI are all worth a look.