Tuesday, March 22, 2005

When does oversold become too oversold? (Ride the trend)

Stephen Vita's excellent Alchemy of Trading blog has been pointing out how oversold we have been lately. He's salivating over the next bounce because he's ready to get long. This got me thinking about a very important issue that every trader should give considerable thought to. Do you try to fade overbought or oversold conditions, or do you use them to make most of your profits? Obviously every situation is different and it depends on what time scale you want to look at. Everybody wants to put the risk/reward equation in their favor, but the problem is that you can't fade extreme conditions and ride the trend within the same time horizon.

My preference is to make most of my gains when the market is stuck in an overbought or oversold condition and not try to fade it. I look for "two steps forward for each step backward" trend opportunities. Since January, when the market has been in decline it has been two steps, and when it has risen it has been one step. I don't know how Stephen plans to trade the long-side bounce, but it takes a lot more work to make money from the single backwards steps than it does from the two steps forward. You can do it successfully though and I'm not doubting Stephen. I may even buy a little bit of GRU if it looks like the market has run out of gas on the down-side and I can get some near its 50-day moving average.

My difficulties in trying to play the single step moves comes from the fact that it takes me two or three steps in the wrong direction to discover that I'm wrong to hold a position. So I'll probably be selling Stephen's step up as long as it is a lower high on the index.


UPDATE:

I read a great article by Gary Kaltbaum on yahoo finance today that is related to what I was talking about here.

Wednesday, March 16, 2005

Catalysts for a downtrend

In 2004 the IBD's "Big Picture" column was calling the up and down wiggles of the market very well. This year it is just noise. More talking heads and misdirection. I wouldn't be suprised to see the naz take out the low from January on volume that gets heavier and heavier over the next couple of weeks. If it happens like this, then odds are it gets even uglier as it will be a text book downtrend.

I see several possible catalysts for a downtrend in the near future. The chinese revalueing their currency to a basket of currencies, slamming the dollar in the process. Also watch for a crisis created by foreign countries committing to diversifying their foreign holdings. Korea and Japan have already jawboned foreign asset diversification in an effort to make Greenspan raise the interest rates at a faster pace. Remember at the last fed meeting, Greenspan said that government spending was under control. This was a message to these foreign investors justifying a mild rate hike. I wonder who's going to call the other's bluff first.

I'm not exactly sure where oil fits in to all this. I've heard rumors that OPEC is running dry. Cramer talked about this idea on his tv show Mad Money. I'm not sure if this is true or not, but if it is, oil will rocket up. Why would OPEC let the price get so high right now anyway? They permanently erase some of their demand market when people replace their durable goods with more energy efficient goods. This reason for OPEC running dry is more compelling to me than Cramer's speal about "OPEC are chronic liars, see they reduced production when they said they would increase it." Maybe it is game over for them. If it is, then guess what happens to the market? Maybe the Bush administration has known this for years, hence another reason to enter Iraq. Just speculation.

China has recently passed a piece of legislation that legalizes means of retalliation against Taiwan if they do not surrender sovereignty to China. Guess who Taiwan's sworn ally is? US. China wants Taiwan badly and if they see us crippled by a recession, they may move with force on Taiwan.

I'm short, so if any of this materializes, I stand to make a substantial amount of money =)

Wednesday, March 09, 2005

Accountability @ MSN Money's Strategy Lab

The one reason that makes MSN Money's Strategy Lab so great is that the participants are held accountable in real time for the positions that they pick. The commentary that the participants provide on their picks is useful for the readers within a learning context. So it is dissapointing to me that John Reese spends an entire journal entry plugging Walmart but he doesn't have it in his portfolio. I hope he is planning to put Walmart in his strategy lab portfolio the next time he rebalances it. If he doesn't, he just lost a lot of credibility with me because his journal space would have been much better spent analyzing one of his current portfolio picks that he is staking rep on, and it wouldn't have that sell-side SMACK to it.