Tuesday, August 30, 2011

Dollar slide imminent?

A chart of the U.S. Dollar as the UUP dollar fund shows a bearish pattern. Notice the strong downtrend, the recent consolidation of prices over the last 4-5 months, and the tendency of prices to go to the floor. If the floor gives way there will most likely be a rapid slide down.
What will the result of a rapid decline in the dollar be? In the recent past when the dollar goes down the stock markets go up, gold goes up, commodities go up, etc... The stock market looks surprisingly strong lately despite a lot of gloomy news. That is bullish for stocks; bad news and strong buying, or at least little selling. I notice that lately the downdrafts on strong intraday volume are being met by buying.
Here is that chart of the dollar. This price pattern usually results in a continuation of the trend. The dollar has had many opportunitys to rally lately and hasn't managed to sustain any trend change....

At some point the U.S. dollar will need to be defended if the slide goes too fast. And that short treasury play may happen yet!!

Wednesday, August 24, 2011

Aug. 24, 2011

Big rally in the stock indexes yesterday. Good volume.
Gold down sharply today.
The talking heads think the stock indexes will go back down.
But the long bond is weak. Lately that means the stocks will go up.

Sunday, August 21, 2011

Trading 101-2

I have found it the most profitable to be a "trend trader". This means I make the surest profits when I trade with the trend. That being said, it is necessary to point out that everyone will find their own timeframe to trade in. My best trades seem to last about 3 weeks. So I have to call myself a "swing trader", because I seem to do well trading the swings in the market. However it is important to say that the highest probability trades will be in harmony with the longer term trend. That is another way of saying that it is not a good bet to pick tops or bottoms in any market. (Although I will do that occaisionally) Or to try to trade "countertrend". Catching the dips is a low probability trade.

I also find it best to trade "breakouts". This is when the price has been in some sort of range and then breaks out. The most profitable trades are with the longer term prevailing trends. And, the probability of a major move depends on the time that the stock or commodity has spent making the price pattern or range. If something makes a very short term pattern, say a couple weeks long, it will be more prone to false breakouts, ie, a breakout in price that quickly returns to the previous range. Time is a very important element!  When a market spends time in a range it gives market participants more opportunity to make their "bets" on the future price direction. Some will be buying at the bottom of the range, and selling at the top of the range. Some will be short sellers building up a position by trying to sell at the top of the range. Some will be those that are selling out long positions and "taking profits". (The strong move at the breakout is due to those that were wrong fixing their problem.)

The quality of the selling is very important in a price pattern that occurs in a larger uptrend. All I look at when looking at charts is the patterns that the price makes and the volume that occurs at the various periods in the pattern.  If a stock has risen, and then goes into a range, and the down days or down weeks are on higher volume I will conclude that some large holders of the stock are liquidating their positions. If the volume in the range quickly declines as the range plays out, I can conclude that the liquidators have either sold all they want, OR, there is not enough volume for them to sell what they want to sell without driving the price too far down. Some times this is the cause of failed breakouts as they sell into the increased volume on the breakout.

If a range goes on for too long however, and becomes too tight of a range, ie, in too small of a price band, then the quality of the breakout suffers.
In practice I like to see a range that is fairly wide, and that gets narrower with time, but the price holds near the top of the range. This means that all who want to sell get every opportunity to sell at top prices, but the price still holds up.
The most recent major breakout that comes to mind was in the silver market.

Silver had been in a long uptrend until late in 2008, then it went sideways until September of 2010. Notice that it hit $18 dollars an ounce about three times before finally breaking out to the upside late last year. The first flirt with $18 was in '07.
In practice when trying to catch these breakouts you may find that they break into new high ground by just a few cents, and then pull back. To limit risk, I always buy 1/3 of a position on the initial breakout. If it pulls back and is costing me about 5 to 8 percent, (depending on the width of the previous range, and the volatility in the stock) I will get out of that trade. I am looking for those trades that breakout and keep going. I do not want to risk much on any trade. If the trade keeps working, meaning the stock continues higher without reaching my stoploss, I will add another 1/3 to the position.  If it keeps going higher add the final 1/3. Often the last two buys are not far apart.
The important point to take from all of this is that you may get stopped out 2 or 3 times before the move starts for good. That is why it is important to not take any one trade to heart. You NEVER KNOW WHICH TRADE WILL BE THE BIG ONE. So, as long as you get prices breaking out of a range, get on board.
Think about it this way. If a stock is trading at $10, and eventually goes to $20. It has to go to $11, then $12, then $13.....etc. The price is never too high to buy! And the best trades are when you pay the highest price because the price is going up so fast and there are no pullbacks.
Study charts and look for the volume clues and pick out those spots to buy that would have shown an immediate and sustained profit.

Friday, August 19, 2011

Bookstore 101

 Here is a list of the reading that is necessary to get started in learning to trade stocks profitably.

 The neatest little guide is a good basic primer.

 Murphy's book is the classic on chart reading. It is a must.

Elder gives a good overview of the psychology behind the charts.

And Schwager shows what others have done, and that it is possible. Also full of pearls.

Wednesday, August 17, 2011

Is that a train I hear?

A few post back I related the anecdote told by Jesse Livermore about a train coming down the tracks. If you are standing on the tracks, you move off the tracks and let the train pass. And you don't even pat yourself on the back for being so prudent.
I think I hear a train.....
TLT represents the long U.S. Treasury Bond. It keeps going higher. It is recognized as a safe haven in the world. (I guess the U.S. still pays it's bills)
If the stock market was going to go higher from here, the long bond should be losing value, not going higher in price and lower in yield. The yield today closed at 2.17%. That yield represents the fear of an economic slowdown. If the economy was going to keep expanding, the stock market would be the place to be.
As I've said before, I look to the bond market to give an indication of the direction of the stock market. Inflation, in it's early stages, makes the stock market go up. Last year there was the expectation of inflation. Except for the last unemployment report, which was only a little better than expected, the economic indicators have been weak for months. And now there is the prospect of banks in Europe being insolvent due to the sovereign debt they hold on their books from Greece, Italy, Portugal and who knows who else.
I exited all of my long stock positions. I have a small short position on, with the intention to stand aside for awhile and let the direction of the market become clearer.
I even closed out a fairly large position I had in Umpqua Holdings (UMPQ). Of course it will go up now just to spite me! But in looking at this chart, I see the possibility of a move either way, and I don't like "hoping" for a move when I have a large position. Check out this triangle pattern. The last move was down, so the odds are for a continuation....
I was short gold. Who knows why! I got out on that little dip a couple days ago with a 7% loss. I have to guard against the urge to pick tops and bottoms in markets when things get volatile.
Gold also is the safe haven, and shows no signs of letting up on its strong run up.

Here is something to pass the time:

Always limit risk. gh

Tuesday, August 16, 2011

Aug. 16, 2011

The Sarkozy/Merkel meeting concluded in Europe about a half hour ago. The markets have declined since. But I don't see much urgency in the selling. The next few days will be important in defining the coming direction of the U.S. stock markets.

Friday, August 12, 2011

Market vs. public sentiment

The consumer confidence numbers just came out this morning. A low reading for August. Is it any wonder that the public would have low confidence. They have just watched congress shame the nation, and then last weeks plunge in the stock markets has certainly come to the attention of everyone. My expectation is that besides a small blip down, this consumer confidence number will not move the markets down in any sustained fashion. We are overdue for a rise, at least for awhile, as the attention will shift from deflation to inflation. Look at the price of silver. The prospect of a catastrophic world banking crisis caused only a small move down. Silver is a safe harbor of course, but is mainly still an industrial metal. It is the industrial component of silver that should have caused a hard down move if the world was on the brink of deflation.

And the head of the Federal Reserve, Mr. Bernanke, has pledged to keep interest rates at this level for two years. TWO YEARS.
In other words, he is going to be sure to get inflation before he raises rates. This decision will certainly constrain the Fed from raising rates, even if inflation or the economy picks up. It seems to me that the risk is to the upside.
I will still trade, ie, change positions on a short term basis, but at least for now my bias will be to the long side on stocks, and natural resources.

As always, limit your risk and the upside will take care of itself.

And the link to the book that made the light go on in my head many years ago. I highly recommend it to anyone interested in investing or trading macro.

Thursday, August 11, 2011

A lifetime in 5 days...

The last few days have been a rollercoaster. Mostly down though. After 1/2 hour since the markets opened this morning I am struck by the lack of selling volume. It feels like we may see some sort of large rally in the next day or so.
Of course I may be just talking my book, as they say!

Saturday, August 6, 2011

S & P downgrade of U.S. debt.

For the first time since the 1940's United States government debt is at less that AAA rating, at least according to Standard and Poors rating agency.

The implication of a rating downgrade is for interest rates on the rated debt to rise as compensation for the increased risk of holding said debt.
Many of the bond investment funds are required to only invest in AAA rated securities. What will be the response of these funds?
What will be the response of the rest of the world?
What will be the response of the speculators in the US Treasury market?
Yields started to rise on Friday, as the stock market was trying to find a bottom. Friday was the first day in several that had buying volume greater than selling volume. This was as the treasury market sold off all day. As I've said before, the US Treasury market, as represented by the ETF: TLT, is my tell for the future direction of the stock indexes. When TLT goes up, stocks go down, and visa versa. It seems to be a good indicator in short and medium time frames, from hours to days.
That is as long as Treasuries are a place of refuge in a world of uncertainty. What will happen if they lose some of their "safe haven" luster? Rising interest rates are generally bad for the stock market. But if bonds start to fall, where will the money that is fleeing bonds go? To dollars? If the dollar gets stronger, that usually means interest rates go down since the risk of inflation declines...

I usually put more faith in just trying to make a good trade than trying to predict markets and then placing a bet. I am short the U.S. Treasurys using the inverse bond fund TBT. And simply because bonds are a "back and fill" market, meaning they tend to not have strong directional short term trades for very long. And the UST is way to high too fast. I feel that the fear of the last week is overdone. The world is not coming to and end. At least not next week. So I expect some sort of stock rally, and some sort of treasury selloff. Both will happen because of the lopsided trades that were probably put on in the last couple weeks. The chart of TBT shows a large volume "reversal" day last friday. We will see if this "reversal pattern" fares any better than the one in the stock indexes last week!!
Long TBT....
Remember: always limit your risk!

Friday, August 5, 2011

Aug. 5, 2011

Jobs numbers out this morning. Better than expected. We will have to wait and see what the market reaction is over the day, and next week, but I expect some sort of strong rally in the stock markets. As usual it is imperative to limit your risk. Don't go all in. Wait to see which way the sentiment is going. That said, there are a lot of short positions out there that give the potential for strong upside when they cover.
I am still short the long bond through TBT, long a small CLF, bought some TSLA yesterday, and short the gold market.....I may be contrarily looking at some banks as well. Still long a small UMPQ position....

Wednesday, August 3, 2011

Where did all the fear go?

After an initial selloff in the U.S. stock market this morning, the fear seemed to subside. I usually discount the action in the mornings, since I ascribe much of it to the novice traders and the home gamers who put their orders in the night before. The price action in the afternoon tends to give a better indication of the coming days direction.
The chart in the S&P shows what is known as a "key reversal". Because it looks somewhat like a key, and it is often a key indicator of a reversal in trend. I also include the GLD gold chart with the same type of technical action, as well as some other stocks that are showing promise.
If it seems like I reverse myself often, that is because I do. I went into today short the stock indexes, took a profit midday, and have initiated a small short position in gold (GLL) and silver (SLV). As well as small postions in short bonds (TBT again!) and small longs in CLF and DAG.
 AS a possible short I am more encouraged by the action in gold than silver, and it is a top picking exercise, but I will have a tight stop on the trade.

Although the banks have been in a long downtrend, I don't see any panic selling in some of them, and these in particular show some signs of accumulation.

Tuesday, August 2, 2011

What the hell?

So I suppose I should slink back in here and give another view of where I think the markets may go now.
Things are looking ugly in the equity markets. In the same way that I use SLW as a tell for silver, I use TLT as a tell for the stock markets. When TLT goes up, it indicates a flight to quality/risk aversion. It usually moves up hours or days before the stock markets go down. And the price is relative, meaning that if the stock market appears strong, but TLT holds up it does not bode well for SPY...
Anyway, the recent Gold GLD trade was a classic example of buying a new high. It is often the safest spot to risk new money. The buy point was at 152.
And the bottom picking I was trying in TBT was a classic example of the dangers of bottom picking. All you usually get is smelly fingers!
I actually sensed danger and got out with a small gain, essentially a breakeven trade.
And TLT, this rally is scary in it's implications for the world stock markets.

The S & P.
Here is the antidote to a declining S & P: