Wednesday, September 30, 2009

Qs Headed To 41.05

The last time I had a post with that title was August 4th when the Qs were trading at 40.21. Certainly it was not a big stretch to project a move to 41.05 from that level, but then on August 9th, I demonstrated that the next move of significance would be to the 43.07 to 43.63 zone, which was reached intraday on September 23rd. Now, we find the markets in a pullback, the outcome of which will determine what happens in October. The next step is for the Qs to revisit the 41.05 level.

There are a couple of scenarios that could play out in October. If the current pullback holds above 41.08, then the next move up in the Qs could be a 5th wave. It would last no more than 2 weeks with a target of 44.50+/-. The second case would be if the Qs fall below 41.08 (closing basis) on this pullback. The move up would then be wave c of C with a target of 43.17 to 44.43. The last case is that we see 5 clear waves down from the September high followed by a lower high in October. Clearly this is the most bearish view. I don't think the latter case is likely since the current intraday pattern is not consistent with an impulse wave down in the Qs. However, we need to keep an open mind.

I think the risk to the long side will be increasing in October, so it's not the time to be adding long exposure. The market appears to be under institutional distribution at the moment. You don't want to be the last one standing when the music stops. If you doubt this, take a minute to think about the fact that the 3rd quarter was the best performing quarter since 1938 for the SP500 according to CNBC. With many funds closing their fiscal year, and after the collapse of 2008, doesn't it seem reasonable that a lot of players will be taking some money off the table? The fact is that I expected the Qs to hit 41.05 in September and 43.30 in October. Those targets have been hit. Without a strong impetus to move the markets higher to the 46+ level, there is no reason to expect now that we will see a sustained move above the 43.30 level until after a significant correction.

My long term view remains the same. After a correction to complete the 10 month cycle, we will see new rally highs in 2010. However, between now and then a correction of unknown severity will occur, and may be developing a little sooner than I originally expected. A large number of stocks are completing 5th waves, which is both long term bullish and near term bearish. So caution is advised. Shorting the coming correction is likely to be a difficult endeavor and not to be pursued lightly.

Oil appears to be forming a triangle that will lead to higher prices in October and November. Gold still appears to be heading higher. We need dollar weakness to support these and a solid close of the dollar index above 78.00 will derail the bullish prospects in those markets.

Tuesday, September 29, 2009

GMCR Due For A Correction

SMH Acting Poorly

The SMH is wedging up on falling volume and looks ready to roll over. This does not bode well for the continuation of the rally in October. Assuming that the Qs make a new high, if the SMH does not, this would create a negative divergence between the two indexes. Looking at the individual components in the SMH, most are either extended or beginning to move lower.

While I think the case for a continuation of the current rally into the end of October is still strong, the likelihood is that we are in for at least one more bout of selling before attempting to make new highs. The Qs will most likely retest the 41.05 level first unless they form a triangle. I will be using the next two to three weeks to lighten up as I do not like what I am seeing. Particularly the financials and credit card stocks do not look healthy. Many of the stocks in the Dow do not look healthy. We may be building a double top with a sharp selloff followed by a retest of the September highs in October. This is no time to be buying breakouts.

Remember the first rule of trading and investing is to preserve capital. The corollary to this is to protect profits.

Monday, September 28, 2009

The Breakout No One Is Talking About

The Qs have now broken out twice in this rally. The first time was the breakout from the downtrend channel of the 2007 to 2009 selloff. The second breakout occurred around September 14 and is above the downtrend line from the 2007 high. This trendline will likely be support for any correction that follows later this fall. The most likely support zone is around the 40 area. Be cognizant of this before you get overzealous trying to short this market.

I'll have more to say in the coming weeks on the timing of the 10 month cycle and my expectations for the coming correction, some of which may be surprising.

Why Trading In Individual Stocks Is Always Risky

SQNM down 46% after hours. CEO and other executives fired after mishandling test data.

This is also a good reason to keep positions in individual stocks small and use wide stops. Personally, I am gravitating toward only trading index and commodity related vehicles for this very reason. The allure of a ten bagger is not sufficient to offset the craziness.

Sunday, September 27, 2009

MACD Sell Signal For Qs

I may have forgotten to mention that there was a negative divergence MACD sell signal for the Qs as of Friday 9/25/09. While I suspect that this may prove to be a false signal, for those using the MACD, it is a valid signal. The long trade has yielded a return of 13.50%. The MACD system as I have described it based on Gerald Appel's work is up 31.19% YTD, in second place behind IBD's market calls. In addition, being a negative divergence sell signal, it is also a potential signal to sell short. I am not advocating taking it as a short signal, but should the Qs fail to make a new high and form a sell pivot, it would be a good setup to consider.

According to a couple of websites, the median hedge fund return YTD is 9.95%. While this doesn't tell us anything about the best performing funds, it makes it clear that mastering the MACD would be a valuable skill for every trader to have in their arsenal.

Saturday, September 26, 2009

The Dollar Is Key To Gold And Stocks

It is fairly clear that the action in the US Dollar will be the greatest determinant of the direction of gold and stocks over the next few weeks. As the above chart shows, there is a positive divergence buy signal for the dollar index as 9/24, but the question is whether or not wave 5 down is complete. Wave 4 completed as a symmetrical running triangle in my view. A running triangle indicates the strength of the downtrend, and suggests that the current low is insufficient to dissipate the energy that coiled up over a 3 month period. So far, wave i of 5 has only lasted 3 weeks, which is not even 1/3 of the triangle's length, making it too short. Of course, wave 5 doesn't have to go any lower, but we can extrapolate a couple of lower targets as follows:

Wave 5 = Measure of expanded triangle trendlines @ 73.81
Wave 5 = Wave 1 @ 71.95
Wave 5 = 0.618x(Origin to Wave 3) @ 71.96

Should the dollar index break out above both the upper channel line and the December 08 low at 77.69, we would conclude that wave 5 was indeed complete. We would expect declines in gold and stocks to continue if that were to occur.

On the other hand, if the macd signal proves to be false and the dollar index breaks down further, then we would expect one or both of the lower targets to be hit. This would most likely coincide with a top in stocks and gold in October or November. This may be the best timing tool we have at our disposal at the moment.

Friday, September 25, 2009

"The Top Is In" - They Say

Elliott Wave International has called the top of primary wave 2. This means that under their interpretation, primary wave 3 down is underway and will be a devastating decline lasting more than a year that will bring the major indexes down far below the 2009 low. They may be right, and if so, it will be the first time that they have had three successful market calls in a row since I have been following them.

However, while there may be myriad reasons why one could justify calling a top here, there are equally as many reasons why it isn't the top of the rally. The foremost reason being that from a simple price perspective the markets are still in strong uptrends. The second reason is that breadth has continued to expand with the rally. Finally, while overall sentiment is mixed, the small speculator is quite bearish.

As I stated earlier in September it may be prudent to take some profits and reduce long exposure as we move into October. This is a decision each trader will have to make. These are the times when significant realized profits can go up in a puff of smoke if you're not careful. It would not be surprising to see a bounce during the first part of next week. That may be a good time to take profits if you are planning to do so.

My view is that this is simply a minor correction in a still ongoing rally. It could easily last until the first week of October and end up being 8% to 10% in magnitude, although it will probably be more like 5% to 6%. Thereafter, markets should make new rally highs going into the end of October or early November. There are many stocks that are still showing bullish patterns, which doesn't fit with a top at the current juncture.

My opinion is just that - an opinion. Traders should follow their predetermined rules for exiting trades and not opinions.

Thursday, September 24, 2009

Not A 5 Wave Decline

The 5 wave pattern did not complete in the Qs. Instead, the Qs rallied in 3 waves into the close. The Dow and the SP500 did appear to complete 5 waves down. This leaves us with differing wave counts for the Qs and the Dow and SP500. With RIMM disappointing after hours, lower prices are likely. The question is whether or not one more 5 wave move down in the broader indexes will complete the pullback. The Qs may require at least another 3 wave move down. After those moves complete we can look at the subsequent rally to get a handle on whether or not the correction will extend.

If you are long RIMM tonight, the question is how to handle it tomorrow morning. You could just sell on the opening and be done with it, but oftentimes it pays to give a stock like RIMM 15 to 30 minutes to settle out. Then a stop can be placed below the opening range low. Sometimes the stock will recover and you will have avoided being unnecessarily stopped out. The most important point to decide ahead of time what your are going to do and stick with it.

Working On 5 Waves Down

A clear 5 wave impulse pattern down is nearing completion on the hourly chart of the Qs. This should lead to a reversal by late this afternoon or tomorrow morning. Either this is the first leg or a larger pullback that began yesterday of the completion of a flat correction that began 9/17. The former would mean that the correction would extend into next week. The latter would mean that the uptrend would resume as early as tomorrow.

The most bearish interpretation is that the Qs are in a 3rd of a 3rd down on the hourly chart. This would necessarily lead to much lower prices, but the same two interpretions above would still apply.

Perhaps the outcome will depend alot on the RIMM report after hours today.

At the moment, I am remaining long in expectation that the uptrend will resume. I would only consider the possibility that the rally is over if there is a sustained move below 41.05, which does not appear to be in the cards yet.

Wednesday, September 23, 2009

Post Election Year Cycle

Up until August, this year's post election year cycle, see at, was right on target. Since then the market has diverged from the typical pattern. This occurred in 2008 as well, which helped me anticipate the extent and duration of the selloff. I call this type of occurrence a cycle inversion. Now it appears that the cycle has inverted again. When it normally would be going down, it is going up. If the inversion holds, then the current pullback should end by the end of September and will be followed by a continuation of the rally into late October/early November with perhaps a couple more pullbacks along the way. We would then expect a more serious correction to ensue. The correction would likely bottom in January at the projected end of the 10 month cycle. There is no guarantee that the inversion will hold, but it is something to consider.

Pullback Probably Underway

Today the Qs came within 13 cents of our stated target zone of 43.30 to 43.60. With the expectation that this zone would not be penetrated on the first try, a pullback should be no surprise, although the timing has been difficult to pin down. One thing that is surprising is how quickly the McClellan Oscillator is moving to an oversold condition moving down ahead of the market just as it did in August. This would seem to indicate that the pullback will be of a short duration.

We would expect the August highs to hold as support if that level is even tested. The 38.2% RT of the September rally is 41.59, not very far away.

Monday, September 21, 2009

Consolidating Gains

It appears that instead on going down the market is content to consolidate recent gains by moving sideways. That doesn't mean that we won't see a more significant pullback in the near future, but it certainly doesn't look like the market wants to go down. The VIX and the QQV look poised to move lower, which should support a continuation of the rally.

Some stocks are setting up to breakout while others are nearing intermediate term tops. BWLD appears to be wedging up in a 5th wave. It would take a strong move above 50 to contradict that view. 50 is the point where the current 3rd wave would become the shortest wave, a violation of elliot's rules. Any spike above 46 that reverses on high volume would be a sign to exit long positions. Another reason to believe that BWLD may be topping is that CMG is in the middle on a long base building process and may be turning down in a wave C soon. If you already have a position in BWLD, one way to deal with this would be to exit on a reversal below 50. If BWLD subsequently breaks out above the reversal high, then re-enter the position. If it breaks down, then your out. If it continues higher without a reversal, then hold.

STAR may be attempting to break out, but this may be a b wave which means a retest of the 9/14 low would be expected. Nevertheless, I am long from 26 with a stop at 21.85. Yes, that is about a 4 ATR stop, just below the .618RT of the right side of the base. I have found the trend is easier to ride with wider initial stops of at least 3 ATRs. Just adjust the position size accordingly.

Sunday, September 20, 2009

A Change In Trend For GENZ

For the moment GENZ is displaying an excellent 5 wave pattern that indicates that the trend has changed from down to up. There is a slight chance that the recent triangle could be a b wave, but the overall form is more consistent with an impulse wave. Wave 5 may have a little more to go and then a correction should ensue. Once the correction is complete another impulsive move should follow.

The big picture for GENZ is rather muddled and difficult to decipher, so it is hard to project whether the current trend change will lead to new highs. Sentiment on GENZ has been rather negative which should support a rally.

My general strategy for this type of setup is to decide up front whether or not I am going to take a full position or partial position based on my confidence in the analysis and the broader market conditions. If I take a partial position, I will wait to see how the stock behaves to decide whether or not to add to the position. If it moves in my direction, I will take half profits at the end of wave (3) or (C), and move my stop to just above break even near the top of wave (1) or (A). At that point, I wait to see how the next correction unfolds. If it is a triangle, then I take profits as close to the end of wave (5) as possible. If is another type of correction, I wait to see how the next impulse wave unfolds. If it is a 3rd of a 3rd wave, it will usually break out above the upper trend channel on increasing volume. In that case, I will hold on for bigger gains.

A recent example is SOHU. I went long around 51 as SOHU broke out above its wave (1) high and a rectangle formation in April. I took half profits in June around 67 for a gain of around 30% and raised my stop to 51. A triangle has since developed and SOHU broke out of the triangle on 9/11. The ideal target is 82 to 85, but the breakout volume was weak so I'll be looking for signs that wave (5) is completing before hitting the target. Having completed 5 intermediate waves up from its low, I now have a ready made trade to take sometime later this year after SOHU corrects to the 50 to 55 area.

Friday, September 18, 2009

Expecting A Shakeout

With the SP500 up 4.7% and the Qs up 6% MTD for September, the bulls may be getting a little complacent. The rally seemed to get a bit tired toward the end of the week. It would not be at all surprising to see a sharp one or two day decline to shake things up a bit and get the bears frothing at the mouth. The elliott wavers are anxious to short this rally as they are expecting wave 3 down to begin any day now.

The problem with that viewpoint is that leading stocks are acting great and new bases are being formed even as the market has moved higher. Look at STAR. It has formed a beautiful cup and handle over the last 8 weeks. There are many more like this. This is not the type of thing that you see at tops. A few other names that are setting up nicely are AMZN, CMG, GMCR and JCOM. These last ones still need some more work, but they don't look ready to break down.

Another factor that has developed over the course of the last few weeks is a large number of stocks that have completed 5 waves up from the March low. This is extraordinarily encouraging for the bullish case as it implies more upside after these stocks finish correcting, and many have been correcting even as the market has moved higher. As an example, F completed 5 waves up on 8/03 and is correcting now, AMZN completed 5 waves up on 7/23 and MIL and SOHU are currently in their 5th waves. There is a rotation going on here which will provide a floor for any correction in the broader markets.

We also have oil service stocks moving higher. Oil has coiled up, just like gold did in August, for a move higher in October and will support the move in these stocks as well.

The Qs and the Dow are near important resistance. We shouldn't expect 43.30 in the Qs and Dow 10000 to be overcome on the first try. There will be setbacks, but for now there is little evidence that a major breakout is imminent.

Thursday, September 17, 2009

My Sentiments Exactly

I highly recommend this post by Martin Goldberg at Financial Sense:

(As I was afraid, this link rolled over to the next day. You can go back to Martin Goldberg's post history and see the article from 9/17/09).

This link should take you to his post for 9/17/09.

Wednesday, September 16, 2009

Followup On Top Potential

While I am content to ride the trend as far as it will take us, I thought it would be prudent to mention the other side. You can go to Elliott Wave International and check out free week (starts today 9/16) to see the short term updates for Europe and Asia. They are calling for some markets to be topping in potential ending diagonal patterns. I no longer subscribe to the US Short Term Update so I don't know what they are saying about US markets, but having been a long term subscriber, I feel confident they are calling for the ending diagonal pattern in the US as well. If I am wrong, someone please let me know. Anyway, at the same time they are showing some of the Asian markets ready to blast off in wave iii of 3 of C. I realize that all world markets are not synchronized, but somehow the thesis just doesn't sit well with me. It may very well be that we get one more down up sequence to finish an ending diagonal and fall hard, but I doubt Asia is going to be blasting higher with the US falling apart.

I still think it would be prudent to take some profits over the next few weeks in case we do get a sharp correction. There is no reason to over leveraged going into the middle of October, but I will still be committted to the long side until I see some definite price action that changes the picture.

I took partial profits in LVS today, long from 11.70 and out part today at 18.47 on reversal. I probably should have got out around 20, but I am still happy.

Near Term Overbought

The traditional McClellan Oscillator closed at 239.53 today which generally portends some sort of pause or pullback. Will we see a wild swing on the 18th as I indicated could occur on the anniversary of last year's September swoon and reversal? We will know soon enough, but with new NYSE 52 weeks highs expanding everyday, it is still hard to see how it could mark a final top in the rally.

The Qs traded as high as 42.48 today just shy of the 43.30 resistance level I have noted in the past. They don't have to hit that level, but have reached it much sooner than I expected. If that level was going to be the rally top in October, I would not have expected it to be seen so soon. If the Qs are able to take out 43.30 by early October, then all bets are off for a serious correction this fall. There will be pullbacks of course, but breaching that level convincingly would put the markets on a solid upward trajectory. I will be watching this level very carefully.

As a reminder, 43.53 is the 23.60% RT of the 2000 to 2002 decline in the Qs, 43.60 is the 61.8% RT of the 2007 to 2009 decline, and 43.30 is the July 08 swing low. So this represents a serious resistance level. Once broken, the Qs would be clear to make a run on the 07 high at 55.07 and the 38.2% RT of the 2000 to 2002 decline at 58.24. I know alot of traders may think that is crazy talk, but how many thought the Qs would be at 42.48 back in March of this year? Keep an open mind. The trend is still up.

AMZN Building A Base

The above chart of AMZN shows a very nice 5 wave advance. AMZN is currently working on a 2nd wave base that could take a few more weeks to complete, which should lead to a substantial move in the latter part of this year and 2010. EBAY has been in the news the last couple of days, but it is lagging AMZN in the sense that AMZN completed its first wave advance earlier.

The second chart shows how simply looking at the monthly 6 and 12 period emas can keep you on the right side of the trend. The weekly 6 and 12 period emas would have gotten you out of a long position in 2007 almost a year before the monthly trend turned negative. Following the monthly would have prevented a lot of whipsaws.

Monday, September 14, 2009

A Nice Close

While today's volume was light, I think the big take-away from today's action was GE closing decisively above its 200dema on higher volume. My observation from the last two weeks is that while the indexes are steadily grinding higher, leading stocks are taking turns at the point. This is perhaps giving some traders the impression that the trend is not as strong as it really is. A shakeout may be just a day away, but don't get caught in the misguided short crowd.

I had (made) an opportunity to sit down with one of my 13 year old sons this weekend and show him some interesting things on the charts. He is a math whiz, 3 grades ahead of his peers, and he asked me how I know what the stock market is going to do. I told him, the fact is - I don't. I have learned a great many methods for predicting turning points and cycles in financial markets, but they are not the basis for my trading. They only inform my trading. I explained to him that the key is not what we think the market is going to do, but what is it doing. I then showed him how we calculate exponential moving averages and a monthly chart of the SP500 with 6 and 12 month emas. I pulled out a 60 year old book I found at a yard sale that described how to determine the secular trend, and explained that is what we are doing with the moving averages. We then calculated the return from 1991 to the present of going long on a positive cross and short on a negative cross of the moving averages. It worked out to about 22% annualized with just 4 trades. He got it right away. Why bet on a bet, when you can just bet.

I know that it is hard to believe given what I just posted a few days ago about so many traders losing money, but it really is that simple, almost. Of course there is all of the mechanics of position sizing, risk assessment, targets, etc, but those can be learned.

Now, I am reading almost daily that the market is topping, that it is time to get short, ad nauseum. But take the time to look at a chart of the SP500 with the 6 and 12 emas on it without any other indicators. First look at the monthly. The 6 is just about ready to cross up the 12. Then look at the weekly. The 6 is greater than the 12 and pointed up. Then look at the daily. The 6 is greater than the 12 and pointed up. Sure, I'll grant you that momentum may be waning a bit, but with stocks like GE breaking out on a rotating basis, are you sure you really want to short this market?

Saturday, September 12, 2009

Wild Swing Anniversary - Shakeout Coming?

The above chart shows the period around September 18 and 19 last year. On those two days, the SP500 experienced a swing of 11.6% from low to high. Oftentimes there is a repeat or an echo of significant swing points one year later. I am not saying that we will see the same kind on extreme swing. Actually I doubt it because those tend to happen in bear markets not bull markets, but nevertheless we could see a shakeout attempt later in the coming week. If it happens, the key will be to sit on your hands. One big down day will probably not change the trend from up to down. We would need to see follow-through and continuation to the downside. So, if we do get a shakeout, expect an equally surprising reversal to the upside. If that doesn't happen, we will re-evaluate.

Friday, September 11, 2009

Economic Anecdotes

Today has been an interesting day. In conversations with business colleagues today, the general refrain was business stinks. An architect I do engineering work for said that he's giving it 3 more months. If there's not enough work by then, he's calling it quits and looking for other work. The accountant for a large HVAC contractor that has worked for me in the past told me that their scheduled work has fallen off a cliff in the last 3 months. It will be down 75% year over year by October. These guys do large multi-family and apartment complexes all over the southeast. Last year business was booming as developers were building apartment buildings in expectation of big demand from all of the people losing their homes. I guess there wasn't as much demand as they thought. Everyone is moving in with Mom and Dad. And lastly, a close friend that runs another HVAC firm breathed a sigh of relief as he was able to land a contract that will get them through another two months.

If I were to base my trading and investing decisions off of these conversations, I would be heavily shorting the market. But that would not be the best idea. The fact is that there are other forces impacting the market and we cannot rely on coincident economic reports or anecdotes to make our decisions. The best information we have is the price of a market, and today the price of the stock market indexes continue to grind steadily higher. Until that changes there is no reason to fight it.

I must admit that I have tried to short a few stocks since May with limited success. When the market gives an opportunity, I don't mind testing the waters with a couple of short positions, but they just haven't worked. At some point they will and I'll know that it is time to increase short exposure. Until then I keep watching my long positions go up, and hope the economy will too.

Thursday, September 10, 2009

A Look At Fib Levels

While there appears to be continuing skepticism about the upside potential for the stock market rally, the stock market indexes are holding nicely above their respective Fibonacci retracement levels.

The Qs closed today at 41.48. The retracement levels are:

50% - 40.06
61.8% - 43.60

The SP-500 closed today at 1044.14. The retracement levels are:

38.2% - 1014.14
50% - 1121.94

The Dow Industrials closed today at 9627.48. The retracement levels are:

38.2% - 9422.10
50% - 10334.03

At this point, it would appear that the SP-500 will continue to move higher toward its 50% retracement level at 1121.94 representing a 7.45% gain from the current close. The Dow would gain 7.34% if it hits its 50% level, and the Qs would gain only 5.11% if they make it to the 61.8% level.

That brings up an interesting problem. So far the Qs have outperformed with a gain of 61.84% from the March low, while the SP-500 has gained 56.59% from the same low. If the Qs were to maintain the same level of outperformance and the SP-500 hits the 50% retracement level, then we would expect the Qs to top at 44.84, which is higher than the 61.8% level for the Qs.

So that leaves us with three possible outcomes: 1) the Qs continue to outperform and move above the 61.8% level of 43.60 to 44.84 or higher as the SP-500 and the Dow move up to the 50% level, which would be quite bullish long term, or 2) the Qs begin to lag the SP-500 and the Dow so that they all hit their respective retracement levels together, which is not likely, or 3) the Qs top out first and then the SP-500 and Dow top out later, or short of the their 50% retracement levels.

I tend to think that it will be either 1 or 3. At the moment, I would assume that case 1 will prevail until we see evidence to the contrary. Today's advance on increasing volume is encouraging.

Wednesday, September 9, 2009

Constructive Day, But Not Much New

Until we break out above the August highs, there is not much to add to previous comments. However, today's action was very constructive as many leading stocks advanced strongly. In typical Murphy's Law fashion, all three of the laggard stocks that I sold yesterday gained more than 6% today. This may not be such a good sign, though. Oftentimes some of the laggards will pop as the market nears a top. I continue to expect volatile action over the next two weeks, but will remain bullish as long as the August lows hold.

Dave has posted some interesting comments on gold (see the September 4 post). The sentiment picture on gold is difficult to read as different surveys offer differing views. However, overall I think the sentiment picture is leaning toward the skeptical side. From a seasonal viewpoint, we can expect a strong rally in September to early October followed by a pullback into November and then another rally that could last into January or February. This picture fits nicely with the potential for a stock market top in October with stocks going down into January as gold tops out. I am looking to add to my DGP position tomorrow.

Tuesday, September 8, 2009

This Is A Hard Business

Mark Hulbert published a very interesting article today on CBS Marketwatch. As you may know, Mr. Hulbert tracks about 300 advisory newsletters and services with his monthly publication, "The Hulbert Financial Digest". I subscribed to the HFD for a while and it was very enlightening to learn that almost none of the paid subscription advisory services make money for their clients. While I have no way of proving this, I would not be surprised to find that most brokers that provide stock and market recommendations to their clients realize the same pitiful results.

Many years ago in late December, 2002 I was on the phone with my broker late at night requesting reports for my tax preparation, and we got to talking about active traders. I told him what a horrible year I had, and I was trying to decide if it was worth it to continue. I said it would be really helpful if I knew where I stood in relation to the firm's other clients. In particular, could he tell me what percentage of the firm's active traders made money that year. There was silence on the other end of the phone for a few seconds, and then he responded that they just don't give out that kind of data to the public. I pressed the issue and said that surely he had some idea. I needed to know how much effort it was going to take to become successful. He began whispering into the phone and told me he shouldn't be telling me this, but only about 3% had made money in 2002. I thanked him for the information and did not let on how elated I was. Perhaps that seems weird, but deep down I knew then that it wasn't me. Well, of course it was me, but the fact was that 3% of traders knew something that the rest of us didn't. I had done poorly because I had followed the herd. I just needed to learn what those 3% of profitable traders knew. At that moment, I committed myself fully to becoming a successful trader.

A few years later, I read in books and heard in forums various estimates on what percentage of traders were successful, and the numbers ranged anywhere from 5% to 15%. Today, Mr. Hulbert revealed that only 7% of the advisory services that he tracks have made money in both the bear market that began in October 2007 and the "bull" market that began in March, a number that validates all of the prior estimates. Now, when you consider that among active traders the turnover rate is very high, perhaps as high as 80%, then it becomes clear that over time, the actual percentage of successful traders is very much lower than the estimate of 5% to 15% because the successful traders are going to stick around. In other words, over the long term, say 10 to 20 years, probably only 1% to 3% are consistently profitable.

To become successful in this business, you must treat it like a business, be fully committed to it as a career, or as a serious second business. If you are successful, you are in an elite group of professionals. If you are one of the 7% that made money in both the bear market and the current rally, you are in an elite group. But never forget that it will take ongoing effort to keep you in that group. Don't rest on your laurels. If you are not one of the 7%, don't despair. If you are committed, you can become successful. Trade small until you have that eureka moment. Trade small until you don't react emotionally to big gains or losses. Trade small until you see consistent results, and then increase your size. If you stick with it, you will succeed.

Up Day As Expected, But Somewhat Disappointing

Markets were up across the board except for gold and the dollar (interesting). While the broader indexes finished higher, the action seemed to be fairly restrained. The Qs appear to have completed 5 waves up from the Sept 3 bottom. The question is, is this wave i of 5 of (C) or just part of a larger sideways correction that will take up most of September? Rejection at the August high, the high of the rally, would setup a retest of the September low of last week. This would still not be too bearish as long as the August low holds.

Because of the early morning selling on what I expected would be a more bullish day given the 3 day weekend, I unloaded 3 laggards this morning. There's no need to carry dead weight around if we are not seriously heading higher. I will continue to cull the laggards as September progresses, unless some definite follow-through occurs.

Friday, September 4, 2009

Taking A Needed Break

This was an exciting week all around. I know many are questioning how much farther this rally can go. There are so many potentially ominous signs: weak volume, rising wedges, gold breaking out, the extent of the rally, etc. But over and over again, I am learning that it doesn't usually make since to lean against the trend, and so far, the uptrend in the stock indexes has not been violated.

I do expect that next week will continue to be volatile. Past history suggests that the probability that Tuesday will be a big up day is around 80%, but this past September 1 was down against the odds, so perhaps Tuesday will be too. In any case, whether the trend continues to weaken or reasserts itself, I continue to believe that the top will be in October not September.

Today, a number of leading stocks advanced nicely. As long as that continues I will stay with the trend. Given this I may add one or two more positions next week before putting on the brakes. Of course these will have closer targets than earlier positions.

I am looking for a chance to add to my long gold position, but so far it hasn't appeared. Conversely, I am short oil again with the DTO and looking to add to that position. I am looking for a retest of the July low and an opportunity to go long again on the back of gold's advance.

This has been a long week for me - several 16 hour days to finish a project, so my next post will be Tuesday evening. Have a great labor day weekend.

Wednesday, September 2, 2009

Gold Target

While there have been many factors leading to the conclusion that gold would correct to below the October 08 lows, the breakout in price today was undeniable. That, coupled with the clearly bullish seasonal pattern in gold, argues that the bearish argument was wrong. But trading is not about being right or wrong, at least successful trading. It is about evaluating the trend and using any number of methods to position oneself with it.

Over the past few months, I have used my price based rules coupled with gold sentiment and dollar analysis to position myself for a downside breakout. At first it was not clear that a triangle would develop, so there was no reason to abandon the trade. Later, as the triangle came clearly into focus, the only question was which way it would breakout. Since there was no way of knowing, I maintained my position. Today that stance was proven incorrect. So I immediately sold my remaining short gold position in the DZZ and reversed to go long in the DGP.

That was all there was to it. I hope gold continues to climb to its projected target, but if it doesn't, if it breaks down below the wave E low, then there will only be one action to take.

The only thing that is bothering me is whether or not the DGP will still be in existence by the time gold hits its target, which should take about 4 months. For those who are not aware, Deutsche Bank will close the DXO ETN as of September 9 and buy back all outstanding shares. Surely, there are more such changes to come.

Gold Breaks Out - Finally

Gold has moved above the critical 972 level, confirming the bullish triangle formation that has been building since February. I am stopped out of DZZ, and have taken a half-long position in the DGP. By using appropriate position sizing and stop management, I was able to keep my loss on the DZZ position to less than 2% of my account. I can live with that. The only thing there is to do now is to go with the confirmed trend, which is up. I will be looking to add to this position on any valid pivot setups below the previous all-time high.

The measured move target for gold is around 1260, with a range of 1138 to 1454.

For those following Marketclub's signals, a three week buy signal triggered today at 963.40.

Tuesday, September 1, 2009

Market Sells Off To Support - Will It Hold?

While September is known as a bad month for stocks, September 1 is usually an up day, but stocks sold off hard. The question is how much more downside can we expect. Today's action brought the SP500 down to two levels of support: 1) the major median line, and 2) lower trendline of the minor median line. Below the 50dema and the 200dema are also strong support.

The bears were out in force today on CNBC. A bullish sign?

The McClellan Oscillator closed below -200 at almost the same level as the mid-August low, another possible indication that the pullback is nearing completion.

We are still are a long way from calling an intermediate term top, so patience is paramount.

Good News & Bad News

The markets did not make a new low for the pullback this morning, but rallied in the 3 waves instead leaving a 3 wave - 3 wave -?? pattern. The bad news is it looks like the pullback has further to run, but the good news is that it doesn't look impulsive. At the moment it looks like a zigzag abc correction, which may bottom soon. Of course, these things can extend, but it doesn't look like a start of a significant downtrend yet.