Recently, a Spike Member asked me a few questions about my approach. Alex thought it might be of general interest, so I’ll post it. It started with a question about AAPL, which is referenced in the accompanying chart.While I think the market (1/13/2010) is short-term oversold, I don’t see a lot of potential profit left. So, I’m basically flat, having sold my inverse ETFs (QID, SSG, SKF, and a few others this morning). I also covered my shorts (except for MO) this morning as the market sold off early. I did this because I’m going to the airport and don’t want to let any profits (though some are small) slip away over the next few days. I dislike worrying about positions while I’m traveling or concentrating on my business. Over the years, I’ve accepted a style of trading that fits my personality–short-term swing trading, buy weakness and sell strength with multiple low-risk, small profit trades, and lots of action.So, I’ve come to accept the fact I can’t really trade with trailing stops supporting cumulative profits over long holding periods. I prefer to trade ETFs, but will trade large cap stocks that have high-volume and clearly defined patterns–1,2,3 Tops & Bottoms, or similar formations. I trade in the direction of the weekly charts, and use a 2-day RSI to pinpoint oversold conditions. I typically will buy when the 2-day RSI is around 10-15 and sell when it goes above 70. After many years of experimenting, I’ve settled on a short-term MACD that is 3,10,16.I use the MACD mostly to find short-term bullish or bearish divergences on the daily charts. I also look for higher lows on the MACD. I don’t day-trade–it makes me too nervous, but will look to enter longs during mid-morning slumps or usually at the close. I try to cut losses as fast as possible and never risk more than 1 percent of my account on one trade, usually not more than half a percent. Over the years, trading has been a fascinating hobby with enormous challenges, horrible disappointments and enough profits to keep me coming back. For 2010, I’ve managed to change my day job, and now run my business out of my house. I’m trying to concentrate more on trading these days, because I anticipate a volatile market in 2010 and look forward to the challenges. The upshot of all this is that Alex and Kerry are extraordinarily capable teachers and their ideas are practical and profitable. I’ve taken what they do and adapted it to my personality and it seems to work.

[Stephen A is an active SpikeTrade Member, one of only two who received a diploma for excellent picks in Q2-2009. He sent us this contribution today – AE]I encountered a situation yesterday morning that I’d read about but never really experienced, that of a big price move resulting from a volume burst in a very-low-volume stock. I thought it was pretty interesting and might be of value to other new traders.Steve AMy SpikeTrade pick for the week is NSTC, has been a relatively low-volume stock, about which I said in my pick sheet comments that watching NSTC was “like watching paint dry”. Although most of the time that’s been true, on Tuesday morning August 18 I changed my opinion.We’ve all read that it’s prudent to be wary of low-volume stocks, as price can be moved quickly by a sudden burst of traded shares. As a recent arrival to the world of trading, I hadn’t actually experienced this, at least to the degree that I did last Tuesday.The table shows the minute-by-minute action in NSTC from the open Tue Aug 18 7:30 am through 8:23 am MDT. During this period only a few hundred shares were bought or sold in any given minute, and many minutes went by with no trading at all. From 8:07 to 8:08 100 shares were traded, and from 8:08 to 8:09 another 100 shares were traded. A minute went by, and suddenly between 8:10 and 8:12, a two-minute span, volume rocketed to 54,690 shares.What happened to price?The chart shows, bar by bar, the languid activity in NSTC leading up to Bar 21. Prior to this bar there were few buyers and sellers; then suddenly there was a preponderance of buyers, and price took off. The stock rallied from about $5.35 to about $5.75 within two minutes, a rise of 7.5%, on a volume of 54,690 shares!I had gotten pretty bored watching the inaction on the screen, and at about Bar 19 I went to the kitchen to get a cup of coffee. I returned during Bar 22 and uttered an expletive. It is always a shock when a trading truism that begins as mere words in a book becomes a screaming reality. I hadn’t yet entered an order, since the behavior of the market was seeming (to me) so unpredictable and I didn’t want to get knocked about, and so I wasn’t able to reap the windfall.So, the lessons that I took away from this are:

1. Don’t take sleepy stocks for granted
2. Big price movements on low volume really happen
3. If I had truly wanted to enter, I should have been ready
4. Because I really didn’t want to enter into what I thought would be a risky trade, I shouldn’t brood over the missed opportunity, or begrudge the stock its spectacular jump.

Best wishes,Steve A

We should all be happy during this rally, right? Well, not so quick. In talking to trader friends and reading incoming emails, I sense a great deal of frustration. Today I would like to share with you two emails, one from a Spiker, another from a Member.Please post your comments, and later I will return with my own comments.Best wishes,AlexFROM A SPIKER:Dear Alex,The group beat indexes during the worst bear market, the group beat Indexes during the final phase of last bottoming on February , However the group has been beaten during last rally.How can you explain this phenomenon?To be honest, I have a negative return on my personal trading account since March 9, 2009.What happened to us?Have we grown into old and stubborn bears?Have we got a mental problem , imagining that we are smarter than the crowd and while we try to proof it for ourselves, the crowd earns money?For example, winners of last week were among bearish spikers and their results were modest, compared to Members who were bullish.Many of us have manically shorted Mr. Market from week to week, but it has been climbing and climbing.Based on technical and sentiment indicators , market is overbought and there are no ideas for professional traders to buy this market.Jason from sentimentrader.com has been neutral since beginning of April.Of course he didn’t participate in the last two weeks of peakining, however he saved his capital.May we need some rest?I think, some of us need a psychological advice.Best regards*******************FROM A MEMBER:Hello Alex,All the STOCKs that I have been followING for months have increased by 50% and more, some of them doubled or tripled.At the beginning of March, I was about to jump into the market and buy with both hands. At that time many signals told me a reversal could appear soon. I didn’t do it because that was not the way I learned: chasing the lows, red impulse, massive amounts of money into a few stocks, etc.Since then, I have been watching the market going higher and higher. All my friends, amateurs, are buying and making money. Even my mother is making money and everyone is wondering what’s going on with me, the most educated one on the topic. The greater fool theory works perfectly as Stephen M suggested it a few weeks ago. They buy far from the averages and their values keep going higher.I feel very stupid. In fact, I have never felt so dumB. I have the feeling that all the work I perform religiously on a daily basis is useless. In addition to technical analysis and psychology, you can’t imagine how much I read about the financial system, the economy, the complex relations between gold, Oil, USD and raw materials as well as Forex in order to understand the environment I had to face up, aiming at building a consistent system for monitoring the markets and trading in a professional way.Reading in your books that the market is manic-depressive is one thing. Living it is another story.I made some money with the energy sector capturing one third of the movement. However, you know how the beginner’s mind works: I can’t help calculating how much I could have earned if … and if … I’m trapped in mental loops of fictive profits with all the values I followed.You are a busy guy and you don’t have to answer me. I just want my shout to be heard by someone who understands because around me, it is the garden party. Regrets, sadness, bitterness, frustration, I feel very lonely. I can’t imagine the day I will be able to make a living with the markets. I’m ashamed of my poor performance. It is hard to stand back and to see this situation with a pinch of salt.Have a nice week-end.***************Thank you for your sincere emails.To all – please comment, and I will return with my own comments laterall the best,Alex

It takes buying to move stocks up, but they can fall of their own weight. GE lost more than 2/3 of its value in as many months as it took years to rise. In October 2008 the new low of MACD-Histogram identified the point of the maximum power of bears. In area B the stock rallied into its value zone, between the two moving averages, and MACD rose above zero, ‘breaking the back of the bear.’ In 2009 GE broke support and fell to a new bear market low – but take a look at MACD-Histogram. This indicator is only slightly below zero, much more shallow than it was in October. The moment it ticks up, turning the Impulse system blue, it will complete a bullish divergence, flashing a powerful buy signal.I use an indicator used MACD XOver, included in all Elder-disks, to identify the level at which that change of color would occur. It tells me that GE must close above $8.20 this week for the signal to occur.The purpose of this post is to open up a discussion about where we are in the market cycle.

• What are your arguments for being bullish or bearish?
• How will you recognize the bottom?
• Which stocks ddo you suggest putting on the shopping list?

I look forward to a discussion that benefots us all. Contrary opinions and arguments are welcome – as long as they are presented in a civil and collegial fashion.Alex

A common human tendency is to take what you see on trust, not ask yourself what is really inside, below the surface. This tendency simplifies our lives – you do not want to stop every minute and ask yourself deep questions – but it also contributes to the tendency towards thoughtless living. The powers that be exploit this tendency to take advantage of crowds.Here is a link to an article on another blog, exhibiting ‘the true skinny’ behind the Dow numbers:www.ritholtz.com/blog/2009/01/bianco-the-dow-is-distorted/Live with your eyes open! Thanks to Kerry for bringing this piece to my attention.Alex

I have been watching the Madoff affair with morbid fascination. I also bought and am currently reading a book on the original Ponzi scheme some 90 years ago – it is superb, and I will post its review here a few days later.Meanwhile, I just saw the best summary of the ‘affair’ so far in my favorite magazine – The Economist (<a href="http://www.economist.com/">http://www.economist.com/</a>). Here is an excerpt (AE):<strong>"There are no heroes in the Madoff story; only villains and suckers"</strong>On the face of it, the attractions were clear. Mr Madoff’s pedigree was top-notch: a pioneering marketmaker, he had chaired NASDAQ, had advised the government on market issues and was a noted philanthropist. Turning away some investors and telling those he accepted not to talk to outsiders produced a sense of exclusivity. He generated returns to match: in the vicinity of 10% a year, through thick and thin.That last attraction should also have served as a warning; the results were suspiciously smooth. Mr Madoff barely ever suffered a down month, even in choppy markets (he was up in November, as the S&P index tumbled 7.5%). He allegedly has now confessed that this was achieved by creating a pyramid scheme in which existing clients’ returns were topped up, as needed, with money from new investors.He claimed to be employing an investment strategy known as “split-strike conversion”. This is a fairly common approach that entails buying and selling different sorts of options to reduce volatility. But those who bothered to look closely had doubts. Aksia, an advisory firm, concluded that the S&P 100 options market that Mr Madoff claimed to trade was far too small to handle a portfolio of his size. It advised its clients not to invest. So did MPI, a quantitative-research firm, after an analysis in 2006 failed to find a legitimate strategy that matched his returns