Monday, October 31, 2011

Keeping Us On Our Toes

Well, after writing a post entitled "Why I Think The Bears Are All Wet", they managed to dump a little cold water on me today.  Still, one day doesn't make a bear market and nothing that happened today changes what I said yesterday.  The first day of November is usually an up day, so we will see what happens.  I expect some choppy action for the next few days.  Only if we see a break of the August high of 1231 in the SP500 followed by a retracement and a break of the resulting swing low would I conclude that a more significant retracement or leg down is underway, and we are a long way from that happening at the moment.

It is also likely that the MF Global bankruptcy had some effect on trading activity.  MF Global acted as a clearing house for my futures broker, which was unable to process trades today.

Sunday, October 30, 2011

Why I Think The Bears Are All Wet

There are many different ways to look at the market, and different conclusions will often be reached depending on one's perspective.  Since the 2009 low, most people who have been looking at the market action through the lens of elliott wave analysis have been overly and persistently bearish, as have those that view the market from a fundamental perspective, for the most part.  However, sometimes the problem with either of these viewpoints is that they impose an expectation about what will or should happen as opposed to what is actually happening which leads to rigid positions.  Being rigid and being profitable are pretty much exclusive.  Personally I'd rather be profitable.  I'll save being right for engineering and academic work.

When we look at a long term chart of the QQQ Nasdaq 100 ETF, it is very easy to see that there are two key levels going back to 2000.  The first level which was a resistance zone for some time was from about 50 to 54. The Qs were repelled from this level 4 separate time over the last 4_1/2 years.  In January of this year there was a clear break above the 2007 high of 55.07 in January followed by a return to the broken resistance level in August and October.  Had the August and October lows failed a more substantial decline would have probably occurred, but the fact is that October has seen one of the best rallies in the last 25 years, which is clearly evident on the monthly chart below.  The median line for the Qs going back to the 2002 low has held in conjunction with the May 2001 swing high.  At this point there is very little reason to believe that the Qs will not move in a sustained way up to the next resistance level at the May 2000 swing low which is conjoined by the upper channel line around 70 to 72.

Trying to get a handle on the market's moves over the last 2_1/2 years has been difficult for most everyone.  It hasn't been anything like 1994 to 2000 or 2000 to 2002 when the trends were persistent and clear.  Even so, the overwhelming evidence is that the market wants to go higher despite the abundant economic and elliott wave evidence to the contrary.  I think it would be in trader's best interest to continue with a generally long side approach until there is a clear break of the August/October 2011 lows or there is clear evidence of distribution at the next resistance level for the Qs.  Overall, in my opinion the market is in a 5 year pattern described by Gann as a 2-1-2 where the market goes up for 2 years, sideways to down for 1 year, and then up for 2 more years.  It is not exact and the transitions are not always easy to navigate, but this puts the top of this rally at sometime between 2013 and 2014.  If that is correct, there is a long way to go.

Besides trading the indexes, how can traders take advantage of this rally in individual stocks? It is easy to waste many hours trying to find stocks to trade, and much of the services available and sold are designed to help traders make stock selections.  In my experience, costly experience, most of this is a waste of time.  There are really only 3 categories of stocks that make good trading candidates:  1) fundamentally undervalued stocks with rising earnings and revenue forecasts, 2) high relative strength stocks that are outperforming the market, but that have not yet reached a climax stage, and 3) high beta stocks that have exaggerated swings relative to the market.

In the early years of my trading I spent countless hours trying to find the best stock screens.  It was total waste of time.  You can find great stocks to trade in literally about 30 minutes once every 3 months.  There are different ways to find fundamentally undervalued stocks, but the simplest and easiest I've found is presented in the book The Little Book That Beats The Market by Joel Greenblatt.  I developed screens in TC2000 and in online stock screeners that come close to matching his methods, but the simplest way is to just go to his free site  I run his screen with 2 or 3 different levels of market cap about once a quarter and come up with a list of about 20 to 30 stocks I like.  I don't just accept his list.  I want to see expected earnings growth above 15% and a nice looking chart.

High relative strength stocks are easy to find.  Just setup up your stock screener to sort by relative strength.  I troll through the first 100 or so stocks and pick the ones that have strong persistent trends, then I see if they have decent ROE and earnings growth.  I usually end up with 20 to 50 stocks on this list.  This is how I found QCOR back in 2008, which I have successfully traded several times including the recent advance off of the September low.  I also use IBD, but you have to be careful as a lot of their stock lists have stocks that are in or are approaching distribution stages.  It's interesting that QCOR was not mentioned much in IBD until it exceeded $20.  I first bought it around $6.

Finally, I sort the Nasdaq 100 stocks by beta and pick the top 10 to 12 stocks.  When I see a nice setup like I did with WYNN recently, I trade it.

I just run these screens once a quarter.  There is little reason to waste time doing it more often.  It won't improve your results much and may hurt them.  There's no reason to pay for expensive stock picking services.  I just use Worden Brothers Stockfinder and TC2000 to do my charting and screening, and I subscribe to IBD.

Using these methods and employing the trading techniques I have described on this blog, I have reduced the total amount of time that I spend analyzing the market and picking stocks to around 15 minutes a day.  I spend more time writing this blog than I do trading.  Currently, my annual returns are running around 40% over the last 4 years.  It's possible to do better occasionally, but realistically few traders are going to do better than 20% to 40% on average, although some do consistently achieve 60% to 100% returns.  These are the stars.  It would nice to be a star, but consistency is the most important thing, and if you have enough capital, you can do just fine on 20% to 40% a year.

I hope this helps.  Have a great week trading!

Friday, October 28, 2011

% Stocks Above 50 MA Says Rally Has Legs

The % of stocks above the 50ma has broken out above a downsloping trendline after a rally initiation move above the lower swing high.  This fact suggests that the current rally has greater potential than it may have seemed earlier.  Notice how the indicator declined in a series of lower highs after the last two moves up from a major low.  It doesn't mean it will be pretty, but I think the bears are going to be disappointed.

On the other hand the # of new 52 week highs has not been very impressive compared to prior rallies.  This may reflect an underlying weakness, or it just may mean that the market more oversold than before previous rallies.

I am now fully allocated to the long and plan to remain that way into at least early December.  Positions that hit profit targets or get stopped out will be replaced with new positions until momentum begins to wane.

I will discuss my methods for finding stocks to trade this weekend.

Wednesday, October 26, 2011

So Much For Analogies

It is still very possible that the current pullback will extend for 2 or 3 more days, but the strength of the reversal today suggests that the pullback is probably over.  I took positions in the Qs and the IWM near the mid-day low.  We'll see how that works out.

Wednesdays are peculiar days.  They tend to be very neutral.  If they start out going down in the morning, they tend to finish up in the afternoon, and vice versa.  One clue that today might be a day that could complete the pullback was the very fact that it started out going down instead of up.  Had today been an up day as I thought it might, we probably would be looking at a continuation of the pullback.

Tuesday, October 25, 2011

2007/8 Analogy Continues To Hold

The analogy with the decline from the 2007 high into 2008 continues with the October 11, 2007 high aligned with the 5/2/2011 high and the March 17, 2008 low aligned with the October 4, 2011 low within +/- 1 day.  So far the rally has matched the 2008 rally with 14 trading days up, although the current rally is stronger.  I was expecting more of a pullback in the middle of the 14 day rally as occurred in 2008, but we did not get it.  However, I suspect we will see the 5-6 day pullback that followed that began today.  If the pattern continues the pullback should bottom by Monday or Tuesday at the latest.  Given the strength of the rally, the pullback may be shorter.  Afterward we should see a 30 TD rally into the first of December at a minimum.

I don't know why this analogy would work except for the current approximately 3.5 year +/- cycle that has been in force for some time.  However, until it breaks down I will presume that the analogy is correct.  The main point to understand about the analogy is that is to the turning dates and not necessarily the form, although so far the form is similar as well.

I am looking to buy this pullback with the view of holding into the December top.

Monday, October 24, 2011

Loud and Clear

The market spoke loud and clear today with a solid move above the recent pullback.  The current move up should be wave (C) of [W] or C of (W), which should last into the end of November or early December.  The next pullback to support should be a buying opportunity.  When it will begin is anyone's guess, but probably soon.  The October 20 low should not be broken.

Sunday, October 23, 2011

Pullback May Not Be Complete

The most notable feature of the market's action this week was that the Qs did not make a new high for the recent rally while the SP500 did.  This negative divergence suggests that the pullback is not yet complete.  I propose that the Qs completed wave b of the pullback or nearly so on Friday.  Wave c down should begin sometime early this week.

It follows that the SP500 and other similar markets are probably trading out an expanded flat or running triangle pattern.  The main point is that, barring a breakdown, the pullback should be complete by the end of this week with a target at the 50ma.

The equity only put call ratio shows that sentiment has not yet reached an extreme and the rally has further to go.  If history is any guide, the rally should continue into early December.

Thursday, October 20, 2011

%Stocks Above 50MA Confirms Uptrend

The breakout in the % of stocks of the 50ma above its recent swing high from an oversold condition confirms the current uptrend.  There is resistance at the downsloping trendline which suggests that near term upside potential may be muted.  A pullback to the 35% to 40% area would be in line with prior pullbacks.

At the moment the market does not appear to want to move to the downside, but rather trade sideways.  Even so, it is premature to consider the pullback as complete.  If it is a triangle, it has at least another day or so to go.  If it is a flat or expanded flat, then lower prices may be seen.  If it is only in the first leg down, then the pullback could last until the end of next week.  It is still too early to tell.

Wednesday, October 19, 2011

Be Patient

It finally looks like the pullback is gaining some momentum.  We need to be patient and wait for a clear indication that the pullback is nearing completion before taking any new long entries.  Of course, an upside breakout would qualify, but I don't think that is going to happen right away.  A better setup would be a pullback to MA support which is still below the market.

Tuesday, October 18, 2011

Still Looking For More Pullback

When a pullback or correction begins there is no way to know what form it will take.  Today the high for the Qs exceeded Friday's high, so the new high could end the first leg of the rally, or it could be part of a running triangle or expanded flat.  The fact is that the market is extended and the most likely next move is a pullback to the moving averages either by going down or moving sideways.  Of course, the market could continue to march higher, but we are due for some give back.

Monday, October 17, 2011

Pullback Underway

I am running behind due to recovering from computer problems.  Thanks for your patience.  It looks like the expected pullback is finally underway.  It should continue for 2 to 4 more days.  At that time we can re-evaluate the potential for further corrective action.

Thursday, October 13, 2011

Still Expecting A Pullback

The market has continued higher the last two days even as the number of new 52 week highs has declined.  The SP500 has retraced almost 50% of the entire decline from May, so a 3 to 5 days pullback would be normal and expected.

IBD has called the market in an Uptrend due to yesterday's confirmed follow-through.  However, this was not the most convincing follow-through as volume was not great, just higher than the day before, and the market closed well off the highs of the day.

Once the pullback is over, the probability of more sharp rallies similar to Monday's event is quite likely, so shorting is probably not the best idea right now unless you are going take very quick profits.

I am experiencing intermittent computer problems at the moment, so I may not post again until later this weekend or early next depending on how long it takes to get it fixed.

Monday, October 10, 2011

Low Volume Is A Problem

Since the August bottom, rally tops have been marked by very low volume with a top following in 0 to 2 days.  Given that the IWM remains below its previous high and is now approaching resistance at the 50ma with today's volume being the lowest since last week's low, a short term top is probably imminent.  We also have the 5ma of the TRIN at 0.65 with today's reading at 0.47, and the McClellan Oscillator in overbought territory.  A wave ii or b pullback into Friday's close is the most likely scenario.

I had to leave for a meeting at 2pm today.  With the low volume and an approaching top I decided to take profits in my ES position at 1186 just one point below the R3 pivot for a gain of 111.25 points in 5 days.  Instead of trying to short the upcoming pullback I will be looking for another chance to get long for a move to the 200ma probably around 1250 to 1260.  A 3 to 4 day pullback should do the trick.

Friday, October 7, 2011

How I Traded WYNN

WYNN provided a rare oversold long entry with two closes outside both the 12 and 50 x 2 SD Bollinger bands followed by a "doji" inside the 12 x 2 SD band.  With the market showing a desire to reverse Tuesday morning I went long WYNN at 110.00 and exited this morning at 134.72 when it became evident that the run-up was over.  When people say you can't buy bottoms they don't know what they are talking about.  This is a perfect example of how to buy a bottom in a stock.  The key is to buy when both the broader market AND the stock are both deeply oversold AND showing slowing momentum to the downside.

It looks like the expected pullback may be underway, but it is a little early to tell.  There may be another rally high before the pullback begins in earnest.  The 38.2% retracement target was not hit today for my ES position, so I am holding until either the target is hit, or there is a pullback with an opportunity to add to the position next week.  Currently my stop is at breakeven in the position.

Have a great weekend!

Thursday, October 6, 2011

Approaching Resistance

On Monday I said, "The question is not if a sharp rally will occur, but when will it occur?"  We got the answer by Tuesday morning after the Qs came within 0.17 of the 8/9 low.  I bought the ES at 1074.75 Tuesday morning.  If it hits the 38.2% retracement tomorrow, I may sell for a gain of around 100 points.  If not, I may hold and add on a pullback.  The risk is that given the declining volume a pullback may be sharp.  But the main thing to understand is that this rally should last well into December at least and maybe even January, so keep your eye on the prize.  It will probably be choppy, and this could make things difficult.

So far the timing of the current market correction has followed the pattern from the 10/11/2007 top extremely closely.  The initial decline into the March 2008 low lasted 107 trading days, which would have equated to October 3, 2011 in the current correction, so it was off by one day.  If the pattern continues to hold, the market will continue up one or two more days, and then pullback for 3 to 4 days followed by another surge.  This may be a good time to look for intermediate term long entries lasting 6 to 12 weeks as well as short term trade setups.

Tuesday, October 4, 2011

Putting In A Low

I think a strong case can be made that with the market's reversal today and close back above the August closing low that an intermediate low is now in place.  There are outcomes that would allow for another retest, but it looks as though the monthly pattern I showed on Friday, Familiar Pattern, has been fulfilled, and a 4th quarter rally is now probably underway.  At a minimum the Qs should exceed the September high by year end.  An immediate reversal that takes out today's low would invalidate this view.

Two Scenarios

I see two scenarios for the a potential intermediate term bottom based on this morning's market action.  The Qs are within a few cents of undercutting the 8/9 low.  The decline could end there, or it could fall to 47.45, which would make the decline from the 9/20 high equal to the decline from the 7/26 high.

The first scenario would make the declines equal in time, the latter would make them equal in length.  Unfortunately, the latter might alter the flat combination interpretation, but it will take a long time before we know that.  Again, although things look bleak right now, there is light at the end of this tunnel.

Monday, October 3, 2011

Qs Near Support

The Qs are very near support at the lower 50 week 2 sd BB, and at the same time the 5ma of the TRIN has reached an extreme level.  The question is not if a sharp rally will occur, but when will it occur.  It could happen at any time.  The SP500 closed below the 8/9 low on substantially lower volume than on 8/9 - another bullish divergence.  

Sunday, October 2, 2011

Outlook For October

The opinions about the market's direction vary across the board from the most bearish to quite bullish.  This is not surprising given the fact that the SP500 has been trading in a range now for over 6 weeks, and no one really knows when it breakout in either direction or form an intermediate term low.

I have seen comparisons made with a number of past markets.  Tom McClellan has shown a strong correlation to 1946 (65 year cycle).  I think there is a strong correlation to late 2007 and early 2008 (4 year cycle).  Both correlations seem to be saying the same thing:  there will likely be some type of bottom by the end of October.  I suspect probably around October 13, if not, then probably by October 28.  Others disagree and suggest that the downtrend will continue until the end of the year.  I don't think that is likely given the severity of the recent decline, but anything is possible.

The key is not to fall into the trap of believing that any one particular view must be the right one.  Let the market lead and only take high probability setups.  The current market environment is not conducive to trend following.  That will change at some point, but we will have to be patient.

Perhaps the best approach would be to use an indicator like the MACD to enter on a positive divergence buy signal.