I admit to recent inattention to a few stock groups–business demands, and more focus on ETFs and gold stocks being the culprits. Much has gone on in groups that had been appealing months, even years ago. In some cases, like the solar stocks, the Bear has trashed them behind recognition.WFR, a former high flyer in the 2006-2007 period, plunged from around 100 to the 12-14 level even as oil prices recovered to $80. In fact, almost the whole group of former solar stars–FSLR, LDK, HOKU, ASTI, SOL, ESLR–have thudded down from unsustainable highs. Now, months after sideways action, they are AFAs, or Alex’s Fallen Angels.As most know, these are former high flyers that have crashed and burned, yet still have a pulse in charred remains. Or, less descriptively, they have formed a really big ‘L” on the weekly charts, price is close to the flattening long-term MAs, and there are subtle signs of accumulation on the daily charts. Most of the solar stocks in my database fit this pattern, more or less, and I’m looking to buy them on weakness. The daily chart of WFR clearly shows renewed interest, or accumulation, in the FI and the upturned MAs. We have even managed to get to ST/OB and a break of the volatility bands, two signs that the game is on. I’m looking to buy on a bounce off the rising 20 EMA for a run to the 200 SMA. Generally, we should find resistance at the 200 SMA and another pullback and retest and eventually, we pop through and start a bull run.While I’m expecting some sort of market correction soon, it wouldn’t surprise me to see the solar stocks and probably the biotechs, morph into leaders for 2010.
[this just in from a SpikeTrade Member in Australia – Alex]There has been much talk over the last few months about a pullback on the S&P. It might be wise to keep one eye on the Baltic dry Index. Should it break the trend line; the pullback might become a fall back.Baltic IndexThe Baltic Dry Index (BDI) is a daily average of prices to ship raw materials. It represents the cost paid by an end customer to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. The BDI acts as a leading economic indicator.More information can be found at: wiki
Notice the BDI bottomed several months ahead of the stock market (march 2009 bottom), and then picked up strength. At the time of writing the BDI was at 3005, with support at 2700. Should support not hold, then all bets are off in the equity markets.Roger
[Jeff P is one of the winningest Spikers, a serious trader, and the programmer of AK47 record-keeping software – Alex]How Spike has Helped My TradingMy career as a Spiker began in Q3 2006, shortly after the Amish reunion. I had the misfortune of having quick success! One of my first picks resulted in a 30% return and I decided that I really knew what I was doing. Unfortunately, it was undeserved confidence!For a while in that quarter, I had a pretty big lead in points and equity. However, as the quarter wore on, my equity took nick after nick, along with my confidence. To make matters worse, Dave F. went on an incredible run winning week after week. I would up taking silver in points and equity, which was a big disappointment. If you notice, in this paragraph I’ve used the words “confidence” and “disappointment”. I have learned that such emotional responses are warning signs of dangerous trading. The warning was fulfilled in Q4.In the last quarter of 2006, I tried a myriad of approaches and as the quarter wore on, I became more panicked. Losing trade followed losing trade. Ultimately, it became obvious that I had no idea what I was doing! I finished the quarter down more than 25% and more than $150 dollars below the next lowest person! What a humbling experience. After that, Kerry and Alex implemented the first rules to deal with and hopefully control such extreme losses. In my emotionally weakened state, I asked if these rules were designed to get me out of the group. The both said “No, not at all”. I knew in my heart that while that may not be the goal, the idea was to prevent such inferior performance as I had shown. I decided that I would never have such a quarter again.Actually, 2006 wasn’t a total loss. I won gold in the Long Term Trading Competition, starting a trend which continues through this year where I’ve won some sort of year end medal.Each year since 2006 I have seen evidence of positive growth. My equity at the end of each year has been higher than the prior with 2008 and 2009 both being positive. My lowest quarter each year has been prior than the last, with all 4 quarters being positive this year. I haven’t had an excessive weekly loss in a long time. I got hit with a gap down the second to last week in 2009 and still lost just 2.99%.Contrary to the way this reads, I didn’t write this to pat myself on the back. While I’m more consistent and clear in my approach than ever, I still have the ability to do severe damage to my account and self confidence. Rather, I am writing this as a form of positive reinforcement to me and also in the hope that it will help some of you advance as traders. Rather than continuing in a boring stream of consciousness format, I’m going to hit the highpoints of the changes I made and continue to refine on my growth path as a trader.
- Control and Limit my RiskBefore the “Jeff Parker Warning Bench Rule of 2007” I would on occasion risk as much as 10% on a trade! Part of the reason for this is that I looked at taking a loss as an indication that I was “wrong” with all of the unpleasant psychological baggage associated that feeling. It took a long time to shift that paradigm but I am much netter in that regard. I understand that when I make a trade it is because I believe there is a better chance the stock will go one way rather than the other. However, a certain number of those trades will go against be and there is absolutely no way to predict which will win or which will lose with accuracy. Therefore, there is only one “wrong” type of trade and that is one which does not follow a defined pattern or one where I risk more than which is permissible according to my plan. In Spike, my limit is absolute at 3% per week and I prefer to keep it at 2%. If a logical stop exceeds those limits, I cannot trade it. In my personal trading my limit is 1%.
- Create a Trading Plan and Define my MethodsThis step was one I knew I needed to do but put off for months. A trading plan requires answering some hard questions and is a lot of work. When you are done, however your approach should be much more crystallized. I’ve done this several times and am starting the process again. My preference is to start fresh rather than edit an existing version in part because I want to keep my mind open. When complete, I then compare the new version with the prior to make sure I get the best of both.Defining ones individual trading methods is critical. You need to know exactly what you are looking for to trade, otherwise how will you know when you find it! I’ve found the more detail I apply, the better. For a given method, such as a “Pullback to Value” trade, I describe what it looks like, what gets me in, what gets me out (Stop and Target) and I also include examples. I also include what characteristics it must have and that which it must not have like upcoming earnings. My idea of a complete plan is one where I could give it to an equal or superior trader and they would have no trouble trading it as I would.
- Work with OthersTrading is a lonely, difficult business. If you can develop a relationship with another, or a few traders it can make a big difference in your progress. It is absolutely critical that the other traders can trust you and you can trust them. If it is not a safe environment, the relationships can do more harm than good. It is also important that each person contributes and each person gets something out of it. Time and schedules must be balanced so that continual progress is made and so that it doesn’t become an obligation.Other traders can give you reality checks on your trades, help clear up areas of misunderstanding and give you added incentive to reach your goals. They can be the trading equivalent of an exercise partner!
- Document Your Trades and Track Your ResultsThe final area that I want to suggest for improvement involves documenting your trades. Spike has helped me a great deal in this regard in that each week I know that people will be looking at my pick, many paying for the “privilege” and I want to make sure that my thoughts are as clear as possible. However, this isn’t purely altruism at work. This approach makes me be absolutely clear about my trade and as a result, my Spike picks have done better than my other trades. I almost always trade my Spike pick. I think I haven’t done so about 2 or 3 times over the last 3.5 years.If you are not documenting your trades, begin right now! Document why you are making the trade, what you have at risk and later, how it worked out. Don’t worry about having the perfect format. You can tweak it as you go.
I hope you find these tips of use in growing as a trader. I wish you the best in this process!Jeff P
Roger writes: I’ve done a little analysis on Gold.Gold has just touched on Fibonacci 76% retracement level. Could this be the current bottom in Gold?Looking back to June 2006, there was a blow-off similar to what we are seeing.Price rose from $540 to $725 in a very short period of time, only to retrace 100% of its previous gains. In doing so, it punched through the 200-day moving average. The 200 MA is currently around $1026. A punch-through could hit $1000.Long at $1030 wouldn’t be all bad.Have a Merry ChristmasRoger
2010 TRADING PLANNow is the
[ Jock is a professional trader and a SpikeTrade Member – Alex ]Last night PBS Newshour ran ITN’s excellent intro to rare earths. Nobody partying in Copenhagen seems to realize that “green technologies” greatly stimulate environmentally-ugly production of rare earths in China. Prius’es and wind turbines use huge amounts of rare earths.Also, Molycorp’s CEO (Goldman-Sachs-led group which bought Chevron’s Mountain Pass rare earth mine- the US’s ONLY past producing mine) “talks his book” about the importance of getting non-Chinese sources producing.China has 95% of the world market (having no internal “environmentalists” to contend with) and regularly cuts price to forestall competing exploration and production.http://www.pbs.org/newshour/bb/asia/july-dec09/chi…JockPS: A couple of years ago, I was lucky to get to know a sharp resource guy who has spent 4 years ONLY studying rare earths. He is now one of the world’s leading experts, having traveled to China (and Mongolia) many times, and attended conferences all over the world on the subject.He says he has yet to crack the code on rare earths as an investment. There was good speculation a couple of months ago, but the problem with the area is that most don’t know the true mix of light and heavy RE’s in a given deposit. (there are 16 RE’s) AND, the demand for each particular element is a function of where (fast-moving) technology is heading. Demand for a given element shoots up, then dies when a new technology replaces an old one.Then there is the tendency of the Chinese to cut prices whenever a competitor looks likely to develop a competing deposit or begin processing in competition with them. I’m told the lithium exploration plays are a scam.In Canada, the better “juniors” are CA:AVL, CA:GWG and CA:QUC on bigcharts.com – but the game, for the present, is merely speculation, as you can see from the runup a couple of months ago. There’s AU: LYC in Australia too. LYC is the ONLY one with enough volume to trade, but is only economical to buy through Interactive Brokers.Molycorp, referenced above, is still private. Their IPO will be a heavily promoted affair.
[ Jock is a very serious trader, a Camp graduate, and a friend.
Hello Everyone,I am a 35-year old SpikeTrade member from Denmark that just begun my trading career this year.Last year we went traveling in New Zealand for 3 months and it just so happened to be from 1st of October to Christmas – the exact time when the biggest financial storm of all times in the stock markets roared.I sold my business 3 years ago and invested a third of my profits from the sale in a mutual fund in the beginning of 2007. I did a lot of research on the fund before investing. They had 20 years of excellent history, including during the dot-com bust of 2000-2001 which they foresaw and survived in great style. I knew people who had been with them, and happy so, for some years which made me more confident in choosing them to look after my money, especially after I backtested some private banking stock suggestions that a few banks gave me (they were – surprise – not profitable). The mutual fund mixed bonds and stocks, so how bad could it go I thought. Their maximum expected loss over a 3 year period was 15% with a target of 90% profit over 5 years. Had I just known then what I know now about money management, I would have set a “stop” on that investment and withdrawn my money after it went X% down. But I didn’t, so to make a long story short, when we came back from New Zealand, the fund had done everything they could wrong in those 3 months, and only 20% of what I had invested in the mutual fund was left.During the trip it just so happened that I had read one of Dr. Elders books and with risk management being completely neglected by the fund while we were traveling, I sold all my shares in the mutual fund in January. And even though the huge rally since March this year, their shares are still at about the same price as when I sold mine in January – and I am still happy with that decision.A little background to the next part of the story: Denmark is the country in the world with the highest taxes. Our income tax goes up to 60% (yep!) and our VAT is 25%. Profits on stocks are taxed by 45% (one should wonder why you should even take the risk of the market if the upside is taxed by 45%!). Losses are deductible until won back.Luckily/wisely I kept enough of my money away from the stock market to still be able to live off that money for many years to come even after the money lost. And since I get taxed up to 60% on any job income I have, and my stock profits are not taxed until the loss has been won back, I set out to win back what I lost – and to do it myself rather than to trust someone else with my money. Having read more of Dr. Elders books and other trading literature, I decided that technical analysis and short term swing trading were best suited to my personality. I am actively trading and still learning, taking small losses and small profits. I am a perfectionist but have also done my part of mistakes (even stupid ones like placing the wrong order type!) that cost some but I am generally happy to be learning without it costing too much. Setting too tight stops are one of the things I am currently working on. A couple of recent examples: I shorted AIG and got stopped out just before it fell about 15% last week. I went long NYB on Thursday last week and got stopped out the same day. It went up 5% on Friday and 10% today. Doh!We have a saying here in Denmark (I don’t know if there is one similar in the US) that “Things take time”. And I’ve found out that learning to trade with consistent profits is just one more proof of that saying. But, if trading was so easy, there probably wouldn’t be so many people with a day job.As a new trader I have been through a lot of indicators, “played” with the settings of each, read numerous blogs and trading sites, back-tested different ideas of my own for automatic trading systems etc etc. And after a little less than year at it (part time), I have ended up with less than “five bullets to a clip” and no automatic systems that work consistently and with comfortable drawdowns. Thanks Alex ? And – besides SpikeTrade – I only read John Murphy’s newsletter (Market Message) and a blog called MarketSci. Everything else has been scrapped which makes trading a lot more simple, but I also feel that I had to go through all those things indicators etc. for my education as a trader – to find out what works for me and what doesn’t.Besides being a big fan of Alex’s books, another book I’ve really appreciated this year is Brian Shannons “Technical Analysis Using Multiple Timeframes” where he shares many of the same views/approaches that Alex has, plus a few others that – at least to me – have been very useful on top of what I learned from Alex.I’ve also learnt that trading is fun (and intellectually challenging) as long as I don’t sit in front of the screen all day and every day. To me, Michael at MarketSci actually hit the nail pretty well in a recent blog post; Wasting a good life trading.As you can see (if you’ve followed me all the way here and have not been bored to death by now ?) my education in trading the markets is ongoing – and I am not expecting to be done learning anytime in the near future. So to move on a little bit in my development as a trader, I have 3 questions to Alex/Kerry/Spikers/Members. Here we go:
- Force Index:Do divergences between a price rally and Force Index have to cross the zero line to the negative side to be valid (like breaking the back of the bear in MACD-H)?
- Trading MACD-H divergences against general market direction:Alex has written that MACD-H is one of the most powerful signs in technical analysis. If it really is such a powerful signal, should one trade negative MACD-H divergences (i.e. short a stock with such divergence) seen on a daily chart when the general stock market trend is up?
- Is this a bearish MACD-H divergence?I wouldn’t usually look for divergences on 30 minute charts, but this example is from a 30 min chart of Stec, Inc. during October. The stock now trades at $12, so quite obviously it wasn’t a long lasting bearish divergence – if one at all.
MACD-H made a high on Oct 14th, ticked down and then back up on Oct 15th. Then down again and up a couple of times to almost reach a new high on Oct 19th. Now, is there a bearish divergence from Oct 14th to Oct 19th or does it not count as such because of the few small upticks in MACD-H on Oct 15th?
Thanks for reading and I hope that you will help me by answering the questions .Best regards,Rasmus
Lately, there has been some chatter about a dollar rally; and Alex mentioned that he had sold his gold and was now looking to short foreign currencies. SInce I agree, I went looking for an easy way to short the precious metals and oil. Since I don’t know a thing about futures, I pulled up my ETFs and settled on a couple. For oil, I went with DUG, which is the inverse of the oil stock index, a nice clean way of shorting the big oil producers. For the precious metals I found ZSL, a ProShare Ultra ETF that is the inverse of the price of silver (which would be SLV for a long silver trade).This ETF is priced on the commodity, and in this case, a trader who is long the ETF is short the price of silver (not the mining stocks). There’s considerable concern that these commodity based ETFs are unsound and not accurate. They have had problems, and don’t work well for long-term holding; however, I find the ones like ZSL that trade over a million shares a day, easy to buy and sell with decent spreads and just fine for short-term trading. A word of explanation about my indicators. I prefer short-term trading, so I use a 2-day RSI, coupled with a 2-day FI and a 3,10,16 MACD, and look to hold for 2-4 days. I find this version of MACD very responsive and very good at showing profitable divergences on the daily charts.
As we closed out the month of November and head into the last month of the year, we thought we would post the equity performance of the leading Spikers. 8 Spikers have outperformed the SP-500 this year as the end of November. 11 Spikers are outperforming their peers. All 11 Spikers are in double digit returns and one has triple digit returns thus far for 2009.Lets look at the list and see the equity curves of the top 4 Spikers Year to Date…
We have one month remaining in 2009, my how time flies! Sergey leads the pact with a triple digit return of 142%, followed by Colin, Steve, and Jeff. We posted those Spikers that are outperforming the group average YTD along with their recent 4 week performance. 68% of the Spikers are positive for the year. 42% are outperforming the SP-500. This is all accomplished by restrictions of the Spike rules of one pick per week and bet the entire amount on that pick. Amazing Spikers, simply amazing!!!