If you like it, you may want to get your toes wet and add on a pullback/bounce.
7 years ago
Monday, November 8, 2010
CTCM
This looks like it's set up for a decent short sale.
If you like it, you may want to get your toes wet and add on a pullback/bounce.
If you like it, you may want to get your toes wet and add on a pullback/bounce.
Sunday, November 7, 2010
An interesting week ahead?
Quite possibly. The market on Friday took a very strong jobs report in stride, it did not bloom as some may have expected and as a result, as of now, Asian trade is mixed, unlike what we saw last week toward the end of the week.
The Fed has its last QE1 POMO of the year scheduled for tomorrow at $6.5 billion dollars. On the 10th of November, the QE2 Schedule will be released.With 3 hawkish new voting members coming into rotation in the FOMC next year, it may be interesting to see if QE2 turns out as promised. These 3 have been vocal critics of QE and as you know, most of the developed and developing countries in the world are not happy about it... G20 Summit coming up-could be interesting.
The Euro is quite a bit lower right now against the dollar, this taken with POMO should make for a somewhat volatile day I would think. Look how much ground the dollar has gained vs. the Euro.
The market moving “Healthy Banks can pay dividends” news in my eyes is a non-issue, but one that pumped the market significantly. I'd think with the foreclosure business getting ugly, the banks are more likely to hold funds in reserve then pay dividends. I still like the BAC short, on Friday I put out a trade alert near the highs but below the Trend Chanel, making for an excellent entry as the Trend Chanel's upper band is the daily stop.
The SPY looks pretty negatively divergent on this daily chart and the market by all means looks rather extended with the last two days kind of sticking out like a soar thumb forming both a hanging man and a star-either of which are fairly common reversal patterns, but a lot can happen over night with the FX markets, right now though there seems to be a pretty clear trend of dollar strengthening.
Above you can see, compared to previous tops, the recent two day action has taken the SPY rather far through the multiple Bollinger Bands, to me it's a bit reminiscent of “channel busting” which is when you have a nice trend trading in a nice channel and you get a big upside move through the top of the channel, it often signals an overbought reversal point. However, while there's nothing wrong with getting your toes wet or entering specific trade set ups, in this case we still want to see good downside reversal confirmation.
Watch BA this week, they are delaying the release of their 787, the news was out after market Friday.
From the looks of the 5 min chart above and the 60 min below, it seems this news has been being sold for awhile, especially note the lateral price trend.
Although I talk about it often, I don't know if anyone actually makes it to the risk management link, so I posted the risk management article below. If you have time, it's worth a read. Risk Management is the closest you get to a "Holy Grail" in the market.
Have a Great Week!
Risk Management!!!
This is a topic that I actually was published in the Worden Report and received an honorary title and an award. It's also the "Holy Grail" that everyone is looking for-risk management is it, you can stop looking. It's also a highly personal, variable and sometimes complex subject. We deal in percentages, not dollars. So I'm going to throw out a few ideas for you to absorb and I want you to promise yourself never to enter a trade without a risk management plan in place.
1 You should always think about your potential loss before any potential gains.
2 You must be consistent in applying it and disciplined in sticking with it, one bad trade can really hurt you. One bad trade has brought down multi-Billion dollar trading firms.
3 A few things to remember
- A loss of 50% needs a gain of 100% to get back to break even.
-"When you find yourself in a hole, stop digging"
-"Only losers average down losing trades"
-Never meet a margin call with cash-sell the position
-If you lost your money in XYZ, why would you think that loser stock is going to make it back for you?
-"Money in a losing position cost more then just money, it costs opportunities"
-"If you have a trade you lost 30% on and I gave you the equivalent of what value was left in the position in cash, would you buy that same stock again right now?" If the answer is "No", then why are you still holding onto that loser?
-The market doesn't care where you bought your stock or how much you have lost, only you do. If you find yourself saying "I'll sell XYZ when it gets close to my buy price" you are doing yourself a disservice. You are holding that stock out of pure ego, because you don't want to admit you were wrong. It's like saying, "I lost this money here, I'm going to make it back here"
-NEVER DOLLAR COST AVERAGE A POSITION-You are throwing good money after bad. This is a myth that Wall Street has perpetuated so brokers can keep their clients and make more trades that cost the client more money and put money in the broker's pocket.
-Think about it, is that stock you lost so much money in really the strongest stock you could own right now to make your money back?
-If you are out of sync with the market, reduce your position size until you get back in sync with the market-this happens to all traders, we get hot and then run cold. You want to turn it up when you are hot and back down when you are cold, but human emotion wants to do the exact opposite of that-think about that.
-Drawdown is not the same as a losing position, draw down is a reality of any trend trading system and trend trading systems are where the money is to be made.
-Look at the big picture, do not chase every move in the market, it's designed that way to take your money. Instead, look at the big picture, use a 5-day chart and see if your plan still makes sense.
-If you can't take small losses, you will take large losses
Now, "The 2% Rule"
The idea is, you never want any one trade to cost you a loss of more then 2% of your portfolio's worth. However there are many different interpretations of this. If you trade one stock at a time then it's this easy.
Portfolio worth=$10,000 and 2% of portfolio =$200. So your trade, if you get stopped out, should not cost you more then $200. When I'm not in sync with the market or it's a speculative trade, I will reduce my risk to 1% or even half of a percent. If I'm on a huge losing streak I'll take a month off from trading.
Now, here's the problem-diversification. Very few people trade only one stock at a time. I recommend not trading more then 6-10 stocks, depending on how large your portfolio is. Wall Street talks about diversification and generally the number they talk about is 20 stocks. Do you know why? Because the financial products that most Americans own in their 401k or IRA accounts are Mutual Funds and by law, a Mutual fund must have at least 20 stocks in it. So to sell you on mutual funds, they have to sell you on "over diversification". That's right, it's too many stocks and why? Because with good risk management you don't have to worry too much about losses, but with too many stocks, you biggest performers barely move your portfolio. A stock that gains 100%, that only represents 5% of your portfolio can only give you a 10% gain and with the inevitable losses you will have with 20 stocks, that gain will be a lot less. You need enough stocks to have good market coverage and you can do that with 8-10 stocks.
So if we have a 2% rule for 10 stocks that means we have 20% open risk all the time-it's way too much. So here's how you handle it.
I have $10,000 and I feel comfortable trading 5 stocks at a time. 2% of $10,000=$200 of risk. I divide that $200 of risk among my 5 stocks. that would mean that each stock can carry a total risk of $40. You may be thinking, "So I buy 100 shares of a stock and when I lose $40 I get out?" Wrong. Now we have to talk about Position Sizing.
When I am interested in a trade, the first thing i want to do is determine my risk. When you enter a new position it is better to have a wider stop most of the time to allow the trade some time to work. So I found XYZ for $10. I see that there is a strong support level at $9.75. We know that the market likes to take out obvious support levels to hit stops so we say I will place my stop just under that support level at $9.50. You are buying a $10 stock, and your stop is at $9.50, now you know how much risk per share you have-$.50. You already know that you can't lose more than $40 in any one position so you divide your risk $.50 into your risk per position $40 and that gives you the number of shares you can purchase which is 80 shares.
Now suppose your stop is very close on this trade, it's at $9.90 (the stock still sells for $10), your risk per share is now only $.10 and that divided into your risk per position ($40) allows you to buy 400 shares. The only problem with this scenario is 400 shares at $10 will cost $4,000 which is nearly half of your portfolio. There's one type of risk that is very difficult to deal with and that is the gap in the morning, when a stock you buy falls because of bad news over night and opens much lower. If you have nearly half of your portfolio in a stock that gaps down 20% (which happens everyday) you just lost $800. That's 20 times your proper risk amount of $40. So I always try to keep my portfolio position cost at 15% or so. This is one of the few ways you can lessen the impact of a bad gap, but still have a position that is meaningful in size. Sometimes I may take it to 20%, but I have a high tolerance for personal risk. So what do you do when you can buy 400 shares, but it's too big for your portfolio, simply buy 15% of your portfolio. In this case you can buy 150 shares of that stock.
Some people prefer to use the 7 or 8% rule, when you lose 8% of a position you exit it. If it works for the stocks you are trading that is fine, but I personally think it is not an objective rule. What if the stock you are buying has an Average Trading Range "ATR" of 7 or 8%-meaning it can swing that much intraday? You can't trade those stocks, you will be stopped out for a loss every time. so I prefer to have an objective rule, maybe a support level, maybe a moving average....
Here's my solution, it's called my Trend Channel and it is another indicator I developed and received an award for.
Here is AAPL, the Trend Channel is still long AAPL and has caught the entire trend from the Breakout in AAPL in Q1 2009 at $102 all the way to now ($259.27)-More then a double! If you have TeleChart or StockFinder I can give you this indicator, if you don't and would like to try this and 3C as well as others, click the links to TeleChart and StockFinder at the bottom of the page.
The way the Trend Channel works is to use a moving average and then to automatically,for each stock, figure out the average volatility of that stock over a certain period of time-usually 20 days. then it adds a standard deviation above and below the center of the channel. So if the stock moves more than 1 standard deviation away from it's average volatility, I know something big has changed. In a long position, the bottom of the channel's highest point is the stop. Currently the red arrow at $237 is the stop today. In an uptrend, the Channel will lock in gains higher every day. I always stop out at the end of day closing price, that is why the green arrow did not cause a stop, because that was an intraday violation, not an end of day.
When entering a position I can look at the channel and get an idea of where my stop should be, but I consider all things when placing a stop. In a short position/downtrend, the lowest level of the upper channel is the stop at the end of the day. This system will never allow you to catch the top or bottom of a trend, but it will keep you in a strong trend with objectivity. Human emotion, fear and greed would have most people out of this trade at 20%, maybe 50% but then they become very afraid of losing their gain. This channel takes all that away and replaces it with objectivity, it knows how the stock behaves and when the stock does something out of character and crosses the channel, you know the trend is about to end.
So when choosing a stop, try to match your stop with the stocks trading habits, maybe it always holds a 50 day moving average in the past and that may be your stop or maybe it has big swings so you know you need to allow for them and by less shares. This is all part of risk management.
By the way, you decide how many stocks you want to trade and you decide how much open risk you can tolerate. Maybe it's not a 2% rule for you, maybe it's a 4% rule or a 1% rule. Maybe you only trade 3 stocks at time, it's highly individualized, but what I gave you is the standard format. It may seem a little conservative, you can change it to fit your style, but I can tell you by experience, making money in the market is about patience, good risk management, building your wealth not try to create it in a week and most importantly, protecting it because it is a lot easier to protect your money then it is to make it.
Please, just never move your stop away from where it should be because a trade is going against you. You must be disciplined for this to work, but if you are disciplined, you won't be upset about a 30% loss in your portfolio. You will gladly take a 2% loss when a trade doesn't work out and it won't bother you. And believe it or not, you can take 10 trades, be dead wrong on 6 of them, have two of them basically do nothing and have one or two that are like AAPL and you will build wealth.
Sit down with calculator (I could give you the answer, but find it out for yourself and it will really be exciting) and figure out how much money you can make in a year if you make 7% a month and compound it. For example-$10,000 is what you start with, you make 7% in January, it is worth $10,700, you make 7% in February and it's worth $11,449, then in March another 7%=$12,250 and keep on going for 12 months. You'll be surprised.
1 You should always think about your potential loss before any potential gains.
2 You must be consistent in applying it and disciplined in sticking with it, one bad trade can really hurt you. One bad trade has brought down multi-Billion dollar trading firms.
3 A few things to remember
- A loss of 50% needs a gain of 100% to get back to break even.
-"When you find yourself in a hole, stop digging"
-"Only losers average down losing trades"
-Never meet a margin call with cash-sell the position
-If you lost your money in XYZ, why would you think that loser stock is going to make it back for you?
-"Money in a losing position cost more then just money, it costs opportunities"
-"If you have a trade you lost 30% on and I gave you the equivalent of what value was left in the position in cash, would you buy that same stock again right now?" If the answer is "No", then why are you still holding onto that loser?
-The market doesn't care where you bought your stock or how much you have lost, only you do. If you find yourself saying "I'll sell XYZ when it gets close to my buy price" you are doing yourself a disservice. You are holding that stock out of pure ego, because you don't want to admit you were wrong. It's like saying, "I lost this money here, I'm going to make it back here"
-NEVER DOLLAR COST AVERAGE A POSITION-You are throwing good money after bad. This is a myth that Wall Street has perpetuated so brokers can keep their clients and make more trades that cost the client more money and put money in the broker's pocket.
-Think about it, is that stock you lost so much money in really the strongest stock you could own right now to make your money back?
-If you are out of sync with the market, reduce your position size until you get back in sync with the market-this happens to all traders, we get hot and then run cold. You want to turn it up when you are hot and back down when you are cold, but human emotion wants to do the exact opposite of that-think about that.
-Drawdown is not the same as a losing position, draw down is a reality of any trend trading system and trend trading systems are where the money is to be made.
-Look at the big picture, do not chase every move in the market, it's designed that way to take your money. Instead, look at the big picture, use a 5-day chart and see if your plan still makes sense.
-If you can't take small losses, you will take large losses
Now, "The 2% Rule"
The idea is, you never want any one trade to cost you a loss of more then 2% of your portfolio's worth. However there are many different interpretations of this. If you trade one stock at a time then it's this easy.
Portfolio worth=$10,000 and 2% of portfolio =$200. So your trade, if you get stopped out, should not cost you more then $200. When I'm not in sync with the market or it's a speculative trade, I will reduce my risk to 1% or even half of a percent. If I'm on a huge losing streak I'll take a month off from trading.
Now, here's the problem-diversification. Very few people trade only one stock at a time. I recommend not trading more then 6-10 stocks, depending on how large your portfolio is. Wall Street talks about diversification and generally the number they talk about is 20 stocks. Do you know why? Because the financial products that most Americans own in their 401k or IRA accounts are Mutual Funds and by law, a Mutual fund must have at least 20 stocks in it. So to sell you on mutual funds, they have to sell you on "over diversification". That's right, it's too many stocks and why? Because with good risk management you don't have to worry too much about losses, but with too many stocks, you biggest performers barely move your portfolio. A stock that gains 100%, that only represents 5% of your portfolio can only give you a 10% gain and with the inevitable losses you will have with 20 stocks, that gain will be a lot less. You need enough stocks to have good market coverage and you can do that with 8-10 stocks.
So if we have a 2% rule for 10 stocks that means we have 20% open risk all the time-it's way too much. So here's how you handle it.
I have $10,000 and I feel comfortable trading 5 stocks at a time. 2% of $10,000=$200 of risk. I divide that $200 of risk among my 5 stocks. that would mean that each stock can carry a total risk of $40. You may be thinking, "So I buy 100 shares of a stock and when I lose $40 I get out?" Wrong. Now we have to talk about Position Sizing.
When I am interested in a trade, the first thing i want to do is determine my risk. When you enter a new position it is better to have a wider stop most of the time to allow the trade some time to work. So I found XYZ for $10. I see that there is a strong support level at $9.75. We know that the market likes to take out obvious support levels to hit stops so we say I will place my stop just under that support level at $9.50. You are buying a $10 stock, and your stop is at $9.50, now you know how much risk per share you have-$.50. You already know that you can't lose more than $40 in any one position so you divide your risk $.50 into your risk per position $40 and that gives you the number of shares you can purchase which is 80 shares.
Now suppose your stop is very close on this trade, it's at $9.90 (the stock still sells for $10), your risk per share is now only $.10 and that divided into your risk per position ($40) allows you to buy 400 shares. The only problem with this scenario is 400 shares at $10 will cost $4,000 which is nearly half of your portfolio. There's one type of risk that is very difficult to deal with and that is the gap in the morning, when a stock you buy falls because of bad news over night and opens much lower. If you have nearly half of your portfolio in a stock that gaps down 20% (which happens everyday) you just lost $800. That's 20 times your proper risk amount of $40. So I always try to keep my portfolio position cost at 15% or so. This is one of the few ways you can lessen the impact of a bad gap, but still have a position that is meaningful in size. Sometimes I may take it to 20%, but I have a high tolerance for personal risk. So what do you do when you can buy 400 shares, but it's too big for your portfolio, simply buy 15% of your portfolio. In this case you can buy 150 shares of that stock.
Some people prefer to use the 7 or 8% rule, when you lose 8% of a position you exit it. If it works for the stocks you are trading that is fine, but I personally think it is not an objective rule. What if the stock you are buying has an Average Trading Range "ATR" of 7 or 8%-meaning it can swing that much intraday? You can't trade those stocks, you will be stopped out for a loss every time. so I prefer to have an objective rule, maybe a support level, maybe a moving average....
Here's my solution, it's called my Trend Channel and it is another indicator I developed and received an award for.
The way the Trend Channel works is to use a moving average and then to automatically,for each stock, figure out the average volatility of that stock over a certain period of time-usually 20 days. then it adds a standard deviation above and below the center of the channel. So if the stock moves more than 1 standard deviation away from it's average volatility, I know something big has changed. In a long position, the bottom of the channel's highest point is the stop. Currently the red arrow at $237 is the stop today. In an uptrend, the Channel will lock in gains higher every day. I always stop out at the end of day closing price, that is why the green arrow did not cause a stop, because that was an intraday violation, not an end of day.
When entering a position I can look at the channel and get an idea of where my stop should be, but I consider all things when placing a stop. In a short position/downtrend, the lowest level of the upper channel is the stop at the end of the day. This system will never allow you to catch the top or bottom of a trend, but it will keep you in a strong trend with objectivity. Human emotion, fear and greed would have most people out of this trade at 20%, maybe 50% but then they become very afraid of losing their gain. This channel takes all that away and replaces it with objectivity, it knows how the stock behaves and when the stock does something out of character and crosses the channel, you know the trend is about to end.
So when choosing a stop, try to match your stop with the stocks trading habits, maybe it always holds a 50 day moving average in the past and that may be your stop or maybe it has big swings so you know you need to allow for them and by less shares. This is all part of risk management.
By the way, you decide how many stocks you want to trade and you decide how much open risk you can tolerate. Maybe it's not a 2% rule for you, maybe it's a 4% rule or a 1% rule. Maybe you only trade 3 stocks at time, it's highly individualized, but what I gave you is the standard format. It may seem a little conservative, you can change it to fit your style, but I can tell you by experience, making money in the market is about patience, good risk management, building your wealth not try to create it in a week and most importantly, protecting it because it is a lot easier to protect your money then it is to make it.
Please, just never move your stop away from where it should be because a trade is going against you. You must be disciplined for this to work, but if you are disciplined, you won't be upset about a 30% loss in your portfolio. You will gladly take a 2% loss when a trade doesn't work out and it won't bother you. And believe it or not, you can take 10 trades, be dead wrong on 6 of them, have two of them basically do nothing and have one or two that are like AAPL and you will build wealth.
Sit down with calculator (I could give you the answer, but find it out for yourself and it will really be exciting) and figure out how much money you can make in a year if you make 7% a month and compound it. For example-$10,000 is what you start with, you make 7% in January, it is worth $10,700, you make 7% in February and it's worth $11,449, then in March another 7%=$12,250 and keep on going for 12 months. You'll be surprised.
Saturday, November 6, 2010
Going Long the Dollar
Here's an article from Zero Hedge that some may find interesting regarding the $USD
http://www.zerohedge.com/article/confusion-continues-spec-dollar-longs-jump-while-investors-bet-commodity-inflation-and-treas
http://www.zerohedge.com/article/confusion-continues-spec-dollar-longs-jump-while-investors-bet-commodity-inflation-and-treas
Friday, November 5, 2010
Going into the weekend....
Today can't really be considered a follow through day from yesterday's move, so the possibility of the "Fed Effect" reversal is still a possibility.
As I said earlier this morning, "Should the XLF fall, then the correlation between the dollar and the market should come back into play and be the primary driver of the market."
Because there's such strong correlation with the dollar, the market is not in a great position at this moment with the dollar having gained strength, but the XLF didn't give up much ground today, even though many banks did in intraday trade-still XLF refused to budge.
XLF needs to break below the bottom arrow around $15.45 (support)
BAC 1 min today
GS 1 min today
JPM 1 min today.
It looks like the banks were seeing distribution today.
Here's what the currency chart-EUR/USD looks like as the Euro gave up substantial ground today.
Correlation between the Dollar and the market has been around 85%-90% so if this trend in the Euro holds, it doesn't bode well for the market.
Here are the 3C charts going into the weekend.
The DIA 1 min sitting at support
DIA 5 min shows distribution
QQQQ 1 min shows a large leading negative divergence
As does the 10 min chart-again, it appears to be distribution throughout the day.
SPY 1 min weakened significantly from the open on a negative divergence.
The SPY 5 min is also showing a negative leading divergence in the red box.
All in all, it looks like there was distribution throughout today's lateral price trend.
I'd expect we will see POMO front running into the close as Monday is the last POMO of QE1.
The key will be the submitted to accepted ratio at 11 a.m.
UUP on the 60 min is showing positive divergences, while GDX is showing negative.
As I said earlier this morning, "Should the XLF fall, then the correlation between the dollar and the market should come back into play and be the primary driver of the market."
Because there's such strong correlation with the dollar, the market is not in a great position at this moment with the dollar having gained strength, but the XLF didn't give up much ground today, even though many banks did in intraday trade-still XLF refused to budge.
It looks like the banks were seeing distribution today.
Here's what the currency chart-EUR/USD looks like as the Euro gave up substantial ground today.
Here are the 3C charts going into the weekend.
All in all, it looks like there was distribution throughout today's lateral price trend.
I'd expect we will see POMO front running into the close as Monday is the last POMO of QE1.
The key will be the submitted to accepted ratio at 11 a.m.
UUP on the 60 min is showing positive divergences, while GDX is showing negative.
MELI
Here' another short trade that is shaping up-MELI
3C shows white arrow positive divergence or accumulation on this daily chart, then confirmation of the trend right up until September. Right now, I'd just be looking for the break of the neckline although some people prefer to try to get in at higher prices, I just don't think the extra few percentage points are worth the risk:reward equation.
Since I'm of the opinion that conventional indicators are used against technicians, when I use them, I tend to use them in unconventional ways. For example, this MACD is set at 52/104/9 which better shows the trend without the noise and it's something that probably few if any other technicians are looking at. You can see it went up in confirmation of the trend and then went down in the H&S top pattern with a negative divergence. I think intraday it has some room to bounce a little, but when the trend line is broken to the downside, I would consider phasing into this short position. As it moves further away from the neckline and completes it's first lower low, lower high and starts down again, i would fill out the position as you then have confirmation that is pretty far out of reach of any black box manipulation. The first target is around $45, but the measured move implications often exceed the target more often then not. At that point you can re-evaluate whether you want to keep the short or use something like the stop channel to give you an objective stop out price.
A Few More Trades.
Back into MSPD?
Or add to if you already were short?
After that 18% drop in MSPD we saw a little bounce, right now it's in a negative divergence and threatening to break a support level (red trendline). It may be a trade you want to consider as I think it stands a very good chance of a continued downtrend
Euro/Dollar
Here's the Euro/Dollar chart
The first red arrow is where we were before the Euro gained, which is a large part of the reason we gapped up yesterday. As you can see presently, nearly the entire rally has been retraced. If the correlations that held yesterday, hold today, and the euro keeps declining, we should see the market move down fairly significantly.
The Q's did not react as strong late yesterday or this morning as did the SPY and I believe that is because of limit order buying being filled this morning on the XLF. Should the XLF fall, then the correlation between the dollar and the market should come back into play and be the primary driver of the market.
The Q's did not react as strong late yesterday or this morning as did the SPY and I believe that is because of limit order buying being filled this morning on the XLF. Should the XLF fall, then the correlation between the dollar and the market should come back into play and be the primary driver of the market.
Trade Alert
I have mentioned that I like the idea of starting a position short in JPM and either starting or adding to the BAC downtrend already intact. With this morning's XLF action , which I think is limit orders placed after retail saw the rally there, that are being filled, this may be a good opportunity for a low risk short entry.
Here's the Stop Channel on a 3 day chart for BAC-the upper channel line's lowest point is the stop, so it's near $13 while BAC is near $12.48-a little more then $.50 risk for a trend that has been in effect for more then 2 quarters. I showed this trade about a week ago and said if we got close to the upper channel, it may be a trade on the short side you may want to consider, the closer to the channel, the less risk as that is your stop.
I also showed JPM's trading range and said I'd like to look at initiating a position there near the top of the range, but I would not fill it out until it broke below the bottom of the range (confirmation), well here we are. A stop can be placed above the top trendline which lowers your risk on the trade so long as you observe risk management/position sizing.
I don't know if XLF will carry a much higher as I do believe it's limit orders being filled so if you like the trade, you may want to take a look at it.
I don't know if XLF will carry a much higher as I do believe it's limit orders being filled so if you like the trade, you may want to take a look at it.
