Saturday, May 28, 2005

Why is the close price significant?

A couple of weeks ago I was talking with my friend Chris about why people consider the close price to be so significant. Chris is a "buy and hold quality small-caps" variety of investor, and I didn't have a good rebuttle when he said that we could chart the price of the stock at noon everyday, or any other time for that matter, and it would be no different than charting the close price. But the conversation got me thinking.

A few days later I brought the subject back up and we considered that people who hold overnight were often being compensated the next morning for taking risk through the period of illiquidity. Who would want to buy the night before the next black monday? People who want to sell to the chicken littles the next morning after they all discover that the sky didn't fall overnight.

I didn't think much more about it until tonite, there was an article on yahoo finance about a study done on the SPY going back to 1993 comparing a buy and hold strategy against buying at the open and selling at the close, and buying at the close and selling at the open. Guess which one outperformed? Buying the close and selling the open. The author of the study also points out that this stacks the odds against daytraders who buy in the morning and sell at the close, which was the worst performing strategy of the three with a negative overall return!

So going back to the original question, what is the significance of the close price on charts? The close price gives you the most information about how traders assess the risk of carrying the stock overnight. The stronger the close, the less risk the position is percieved to have. I'm curious to see how this changes as liquidity improves overnight due to electronic exchanges and a trend toward a 24 hours a day market.

Thursday, May 26, 2005

On money mangement style

Over at Taylor Tree Michael Taylor just wrote a post relevant to anyone who is studying the market for ways to improve their trading. His argument is centered around the idea that bloggers who talk about trading techniques are speeding along the extinction of their trusted tricks of the trade to arbitragers. He also draws interesting parallels to the history of martial arts, where certain fighting styles had edges over each other at times. The pursuit of an edge eventually led Bruce Lee to completely abandon all the known styles in favor of "the style of no styles" (I saw the special on the history channel).

I think there is probably an edge for people who are studious and disciplined enough to take advantage of the weaknesses in various prevalent trading techniques. However, like in fighting, rookies will be killed. At the end of his write-up, Michael Taylor admits that his own path in trading is leading him down the road of "the style of no styles". My friend Jarod is also very much in this camp. He feels that he can outperform any system for opening and closing trades by reading the tape on his own. He might be right, I don't know.

I have a very different opinion on the subject of trading style. The way I see it, the most successful money managers are always increasing their influence on the market as a side-effect of their success, and the less effective are always decreasing their influence on the market. The consistently successful money managers will have more money to employ with their techniques. Knowledge of this emergent effect is one of the biggest edges I can think of. My style is just to be one step behind this group of influential money managers because I think this is their style as well. Since their style is to be just one step behind each other, this is really the only limit on their size and influence, but they coudn't be so big any other way, hence the limit. These money managers are constantly probing for opportunity, and when any of them get a bite, it is almost simultaneously exposed to the entire group, who will then take as much action as can be profitably taken.

Another way to look at what I'm trying to say is that if you are consistently trading in tandem with the market, then you are trading alongside the most successful money managers, and by extension, that makes you one too.

Tuesday, May 24, 2005

Swing setup: CVO


CVO's chart is shown here. This is about as nice of a swing setup as you can ask for. I think part of the reason that these types of setups are as reliable as they are is because it is fairly evident to institutions accumulating the stock that it probably won't be getting any cheaper for a while, and they get into a buying panick. We'll see how this one plays out over the next few days.

Also check out traderhr's free swing pick for Tuesday: BOOM.

Friday, May 20, 2005

Playbook for 5-20-05

All of these are long candidates except SBUX, which could go either way.

DPZ $21.67 - Huge breakout from a saucer with high-handle pattern. DPZ has IPO'ed within the last year and is on a tear in blue skies. A buy off the 10-day moving average is low-risk. DPZ has been featured on the website of one of my mentors, market stock watch

MSCC $19.84 - Sits on top of a beautiful base, but is extended. A buy off of the 10-day moving average might be profitable.

UPCS $7.35 - Nearing the end of a beautiful base. Watch for a breakout. Buying now is low risk as long as it stays above 10-day moving average.

CBG $37.22 - Huge volume breakout above its upper-channel line today. CBG will probably pause when it tests its 52-week highs. This will be a good opportunity to observe how it reacts and may set up a buy opportunity. CBG has been featured on the website of one of my mentors, market stock watch

CYD $11.10 - traderhr free swing trade pick of the day. CYD will probably launch above its upper-channel line tomorrow. CYD has a lot of overhead resistance, notably at $12.50. CYD was featured tonite on the knight trader.

AIRT $16.01 - Set up to break out above upper-channel line. Lots of overhead resistance.

CVO $7.17 - Nearing 50 day moving average, but no discernable pattern.

ANTP $18.86 - Testing resistance at $20. Might make an island bottom. Volume pattern is constructive.

TZOO $29.30 - Might short squeeze. An "island bottom" is possible here. Lots of overhead resistance.

SBUX $55.08 - Testing recent high near $55. May roll over and make a good short.

Thursday, May 19, 2005

A bull campaign begins

Yesterday the qqqq and naz comp both made an intermediate "higher high", which was the last signal I was waiting for to cover my QQQQ short position. The rest of my shorts have stopped out, I've only got 1 short position left. On the other side of the table, I have been accumulating long positions left and right over the past week. I've been trading much more actively lately, but that is about to slow down. The reason is that when the market is so close to confirming a movement in either direction, your risk is unusually low to be taking on any new positions whatsoever because the market will quickly tell you whether you were right or not to take the position.

So I wanted to post about my current long positions because my original intentions for this blog were for timely discussion of highly speculative (and lucrative) issues, and to keep a trading journal. I don't like talking about shorts, but now that I'm net long again I will probably be making a lot more posts about individual stocks. All of the following positions were accumulated over the last couple weeks at times when I felt that the risk was about as low as it could get. It is a good idea to view the chart of each of these stocks with its 10 and 50 day simple moving averages to see why I bought.

SybmolEntryDateAvg costNotes
ARRS5-6-05$7.51I really liked the base that ARRS broke out from so I bought some on a pullback to its 10-day moving average.
NSI5-12-05$10.76I had originally purchased NSI at $6.85 but sold on 5-11-05 at $11.33 because it kept rising on very thin volume. Well it fell after I sold alright, but the volume was even lighter! so I bought NSI back when it held its 10-day moving average.
FORD5-16-05$16.95Currently the biggest winner of the batch. I bougth at the open at $16.50 and added to my position at the close at $17.84.
MSO5-16-05$25.89I caught the very beginning of the break-out from a bull flag that formed after a short-squeeze, but the stock has lots of overhead resistance. I will be closing this position out at the first sign of trouble.
SIRI5-16-05$5.46The sellers have really dried up SIRI and it looks like there has been some recent accumulation judging by the recent saucer shapes on its daily chart. I was anticipating a short-squeeze/breakout from its upper-channel line but that hasn't happened yet. I may cut the position in half or wait on the sidelines if it drops much further.
SPTN5-16-05$12.11I love the really tight price action in SPTN, but it does have occasional candle whicks that clear the stops out. Some old man is trying to buy all the stock so he can control the company, but lots of people like me are making it expensive for him. This stock could run away from these big bidders if the market catches on fire.
IRIS5-18-05$16.94Iris actually fell below its 10-day moving average for a couple of days before I bought it, but the volume was very light so I bought when it was clear that it was moving back above the 10-day moving average.
TZIX5-18-05$12.51I bought a bull flag sitting high above one of the most beautiful bases I've ever seen. There have a been a lot of these triple-cup looking bases lately (ARRS, SIRI), which is part of the reason I've been a pretty aggressive buyer over the past couple of weeks.

Tuesday, May 17, 2005

Reminiscences of a Stock Operator - Paperback or hardcover?

My sister's boyfriend Brandon lives in St. Louis, so my sister is in town for his birthday party a couple of months ago. I'm there too, because we're all going out for drinks, and I noticed that he got a hard-back copy of Reminiscences of a Stock Operator by Edwin Le'Fevre as a birthday present from his parents. Brandon was interested in the markets and had made some money late last year during the rally. I think he asked for the book as a gift because I had talked so highly of it. A hardback edition is definetely gift-worthy!

I picked it up and started reading the first paragraph and realized right away that it was different from the first paragraph of the paperback edition! I started flipping around trying to find where the paperback book picked up, but this only deepened my confusion because I found a lot more passages that weren't familiar throughout the entire book. So I'm frantically flipping through Brandon's book trying to find where the paperback edition starts while everybody's yelling at me and heading out the door. Blast off! Its party time. And I forgot all about it for a few weeks.

It wasn't long until I was at a bookstore and couldn't help picking up a copy of the hardback edition for myself to see what I was missing. All was soon made clear by the introduction to the hardback edition: it was a reprint of Le'Fevre's original articles that were published in the "Saturday Evening Post", including the original artwork. Also included in the hardcover edition was a foreward by William J. O'Neil and brief commentaries from a financial historian preceding each article.

Larry Livingston is narrating to the reader in the paperback edition, but the narrator of the first article in the hardcover edition is talking about Larry Livingston in 3rd person. In fact, the entire hard-cover edition is written this way. The reason is because in the original "Saturday Evening Post" articles, Le'Fevre is the narrator! As I read through the hardcover edition I could see how Larry Livingston's narration from the paperback was constructed almost word for word from all the quotes we get from Le'Fevre's interviews with Livingston.

In between interviews with Livingston, Le'Fevre describes encounters with all sorts of people, some of them well connected in the stock market, some who talked all about the articles without even knowing they were talking to the author himself, and others who were so inspired by Le'Fevre's tales of Larry Livingston that they had forsaken their careers to form a trading guild. Through all this, Le'Fevre keeps coming back to his central theme for the articles: the game gets everyone in the end, and that outsiders ought not to be speculating. He tries to warn all of these gentlemen that they don't know what they are getting into and are bound to fail.

But this central theme is delivered quite differently in the articles than it is in the paperback edition. The final article differs completely from the end of the paper back book. In the final article, Le'Fevre gives us a history of the greatest speculators of all time. He relates some of the famous exploits of these traders and their eventual demise (often at the hands of each other). However, in the paperback edition, Livingston gave descriptions of some of his own bull campaigns and stock manipulations, which, unfortunately were absent from the hardback edition.

Livingston's conclusion in the paperback seemed much more thought out by Le'Fevre than his conclusion in the final article featured in the hardback edition because he makes an attempt to identify some of the reasons why the vast majority of the public lose in their speculations. Inconsistencies in human condition, the apeals of greed and fear, conflicts of interest inherent to the stock market and its participants, and most emphatically, laziness manifested in the public's apetite for tips and explanations.

If I had to recommend one over the other, I would recommend the paperback edition. But if you are like me and you re-read the paperback edition every 3 or 4 months, then you should consider picking up a copy of the hardback edition because there is quite a bit of new content. In closing, my favorite new part of the hardback edition is the first article, where we haven't been introduced to Larry Livingston yet, but we get to witness one of his bear raids from a frantic brokerage office!

Sunday, May 15, 2005

On naz, and a long candidate: SIRI

Well, I was going to describe why I haven't covered my QQQQ short position yet, but Trader Mike says it all. A strong close or two above all of that resistance he talks about would probably have me flipping my entire QQQQ short position that I've accumulated since January right into a big long.

And I still think SIRI looks strong. In fact, it looks like a breakout is imminent. Unless SIRI is down tomorrow morning, I'm going to take a position in it. I'll start small since I'm expecting the major stock indexes to roll over next week. But if a SIRI breakout does happen, I'll double down in a hurry. I'll run just as quick too if it closes below its 10-day moving average.

I've seen a few other decent looking charts tonite that I wouldn't mind being long of, but I'll give you a hint: none of them are tech (except NVDA). I don't think INTC or DELL can stay up where they are without taking quite a fall. I'm saying this because they haven't gone through the kind of consolidation prior to breaking out that would make them buyable by shrewd money managers like me =)

Friday, May 13, 2005

So I'm on the phone with Jarod the other day and not much is moving in the market. We have this game we play when there's no movements of interest in any of the stocks we follow. Its called "the dow jones minute bars game". We bring up the intra-day 1 minute bars on the dow, and based on where the dow is currently, we each take a guess at whether it will reach 10 points higher, or 10 points lower first. Often it is pretty tough to tell because when we start the game everything is dead in the water. Usually we're in agreement about where it will hit first, and this time we're both betting on the 10 points lower mark. It started to head a little higher at first, but clearly if you were already short (and you should have been) the best move is to sit short through the updraft. Before long the dow hit the 10 points lower mark, and just blasted waaay down through it, falling about 50 points in 2 or 3 minutes. So Jarod calls a switch to long at the bottom of the spike. At this point we know something is afoot because the volatility just went nuts. The dow bounced back up 40 points, and Jarod is taking profits along the way. The dow paused just a little too long, "SHORT!" He flipped back to short, and the dow tumbles another 30 points. "Long" and it coasts back up. "Flat, walk away." So I picked it up, "Long... sell half... sell another half... short... long... flat, done." We didn't find out until later that day that the volatility we were playing like a fiddle was caused by the off-course airplane and whitehouse evacuation.

Thursday, May 12, 2005

Confusion

Remember that New Order song at the beginning of the Blade movie? Yea thats my theme song today. I'm listening to it right now. So are my neighbors =)

I had 2 "Eureeka!" moments over the last 3 days about where this market is headed. The first was when I tried to short more QQQQ's on Scottrade the day before the 103 point down day on the dow. Guess what happened? They rejected the order because there were none available to short! At that point I had just bailed out of most of my longs and picked up a few more shorts in a flurry. But getting that short order rejected put a stop to my selling. After pounding away at the order a few times and getting rejected every time, I realized something. If every Joe on Scottrade is short, who's left to sell? There is talk abound about non-specialist shorting being at the highest level in years, and I believe it. Once the public is in on a move, you can bet its days are numbered.

Ok, confusing so far. But it gets worse. Today I started trying to hedge myself long and bought the TZOO breakout this morning and the NSI dip to its 10-day MA. About an hour and a half later, at almost the exact same time, I got stopped out of TZOO and CYCL. I had bought CYCL yesterday on a low-volume, gentle dip taking it close to its 10-day MA, but as you can see on its chart, the volume picked up substantially today and it couldn't hold the 10-day MA.

So I'm looking at this raft of shorts, and two small long positions (ARRS and NSI) when TRID starts to break out. It was on my playbook list from last night. The breakout looked suspect, but if you're in a position to put a stop about 1% below your buy price, its hard to go wrong. Well sure enough, I got stopped out and TRID continued lower, making a bearish reversal candle on big volume. So this is when I had my 2nd epiphany: don't be trying to get longs because the market is telling you its not going up yet.

A little later in the day, the market started falling more rapidly, but firmed up at the close. Very confusing behavior. It wouldn't be hard to make money right now if the easy squeeze money in stocks like TZOO, TASR, MSO, GRU, ANTP, and DCAI wasn't already taken off the table. Well, there's still SIRI and probably a few others I need to hunt around for, but in the mean-time I'm probably not going to be adding any more shorts until the market has a NASTY day (except maybe XOM =). It is too unclear what direction the market is likely to take for me to be risking much. Bill Cara is confident that the fed will continue raising interest rates, the speculative money has dried up, and bond yield curve is flattening. Best to lay low I'm thinking.

Playlist for 5-12-2005

I had some narrow escapes yesterday morning and the following afternoon I put on a few shorts. It seems the speculative money has dissapeared, and so did I. As of today's close I'm out of all of the longs I posted the other day except for ARRS, but I did pick up some shares of CYCL just above $13. Watch those bond yields! The spread is back to the narrowing game again, and it follows that money is flowing out of equities and into bonds. Speaking of game, here's my game plan for tomorrow, and note how we're sitting between the 10-day MA and 50-day MA on all the indexes:

Opening notes for 5-12-05

Nasdaq 10-day MA @ 1949.29, 50-day MA @ 1987.45.
QQQQ 10-day MA @ $35.52, 50-day MA @ $36.21
Dow 10-day MA @ 10280.76, 50-day MA @ 10,453.26
S&P 10-day MA @ 1165.92, 50-day MA @ 1177.79


Potential bounces:

GRU: 200-day MA @ $12.81, it may bounce up from there.

SIRI: Slowing down its fall, sellers drying up. May push up through 50-day MA @ $5.33

ADVS: Up on declining volume in a contracting range. May roll over!

MACR: In a small contracting range near new highs. A buy between $37.30 and $38 would be low-risk. Stop just under $36.45 for a maximum of 4% loss.

FORD: Drifting down to lower-channel line near $15.25. Short if it breaks down on heavy volume. Dangerous to sit short here though.


Potential breakouts:

MXRE: Cup & handle on weekly chart. Pivot near $24.35. Watch for breakout!

TRID: Resistance @ $19.00 since the end of 2003. Watch for breakout!

UPCS: Old high is $7.75, watch for breakout! Choppy daily chart.


10 Day MA opportunity plays:

IRIS: Watch for a drop to the 10-day MA @ $15.75 on volume less than 500,000 shares. Average volume is 265,000. Biggest day is 1.2M. Far from any base, but volume is ballooning.

DJO: May roll over and drift down to the 10-day MA @ $26.78. Buy if volume is less than 500,000. The base it sits right above is very good.

Monday, May 09, 2005

The Knight Trader

I stumbled onto this Knight Trader blog over a month ago but I didn't put it in my blogroll links because I wanted to check it out for a while first and make sure the guys running it knew what they were doing. I can now testify that these guys are on point. It seems like any gold I find, these two guys have already been talking about it. But what else would you expect from two sharks nick-named Gordon Gekko and Budd Foxx, who can be found hanging out at the boiler room message board? Ok cool.

There are two reasons I brought this up. The first is obvious: I added a link to my blogroll on the right. The second is sort of what I was posting about last week. Speculative money is coming back into the market. It doesn't really matter why, but if you pay attention to the right things you can feel it. When this money is moving into the market, you are statistically invincible on the long side if you are carrying a wide enough array of prospects. Consider my own long positions mostly accumulated last week: TASR, TZOO, GRU, ARRS, NSI. But I couldn't quite pull the trigger on a few other tempting setups, like the GEOI layup trade I talked about last week.

When buyers realize that prices won't be this low again, they get into a panick and you'll see stocks that were already too high go way higher, like BLUD, PTC, and NSI. Its absurd, but we're only trying to make money here. And when the ducks are all lined up in a row, you'll see the monster squeezes come into the highly speculative issues like MSO, DCAI, ANTP, and TASR. Just take a look at those charts, you see the sellers dry up last week? All we need is an excuse like a bunch of bond money coming in via a new 30-year note issue. Another great tell is when 2 month's worth of decline in WMS is retraced in a single day after earnings. Yes I was short going into that earnings release, and by the end of the following day, I wasn't! And last week SBUX releases another single digit SSS number, which 4 months ago was enough to drop the stock 10%, this time we move up and close at the high! Fact is, the hot money is behaving differently. I don't know how long this move will last, today could have been the end because the hot money can go away as fast as it came, but in the mean time guys like the Knight Traders are a good way to tune in to what the speculators are going after. To make some money you just add patience and risk management skills.

Wednesday, May 04, 2005

An article on yahoo finance says that the government will likely be offering more 30-year treasury bonds for sale sometime next year. This explains why the spread between the 3-month and 30-year bonds jumped up 16 basis points to 188 since yesterday. I'm not yet sure what implications this has for the economy.

Instead, I've been looking through a lot of charts tonite. Because the market has been advancing over the past few days I've been looking for long candidates. Unfotunately I'm not seeing a lot of stocks finishing off handles. A notable exception is RX. RX is at the end of the handle on a cup & handle base beginning in February 2004. I may put on a small long position in RX if it can clear $25 on heavy volume, but if the market isn't rallying at the time then I probably won't take the trade. It bothers me that the yahoo finance numbers are so funny for this thing. It shows a return on equity of 143.99%, revenue growth of -3.2%, but earnings growth of 140%. There are other inconsistencies too, like $2.02 cash per share, book value of $1.116, but a debt/equity ratio of 2.451. However, the worst part is the huge float: 227 million shares outstanding and basically no insider ownership.

I'm a lot more inclined to get into some long-side scalps in a few of my favorites from last year that look ripe for a squeeze. TASR, TZOO, and AIRT all look like another big green day on the naz could pop 'em up 15 or 20%.

I've got a few other interesting candidates on my radar for later this week but I'm only going to talk about one more because its another one of those layup trades like the GRU trade I posted up here a few days ago. I'm going to try to get a position in GEOI somewhere between $7.50 and $7.75. I haven't studied the bid-ask spread in the stock, so I'm not sure exactly where to put the stop, but with a 1% spread and an ask at the March 30'th range low of $7.44, the bid could be about $7.37. Market makers could take the stop order shares that go down to $7.37 without dropping the price below $7.44, thus keeping the range intact and not setting off a panic. If my assumptions are correct, a stop at $7.35 might be a good place. So my projected worst case scenario would be a loss of 5.5% (7.75 / 7.35). I think a long fill at about $7.55 would be optimal because this would keep the risk under 3%. An $8.90 target (17.8% gain) is reasonable because it is well within the contracting range that has formed over the past month, but I wouldn't necessarily close out the position just because it got to my target. The target is just my place to get real defensive on scalps. Just to clarify this, I don't use targets for trending positions like my NSI long or QQQQ short, those get to run.

Tuesday, May 03, 2005

The market: I know this dance

I've had this song going through my head for about a week now. In fact, I've completely rearranged my winamp playlist around it. I can't stop listening to it. Funny thing is, I just realized why. Guys like me, we obsess, and strange the way the brain's subconscious finds ways to manifest itself.


I say, we can dance, we can dance
Everything out of control
We can dance, we can dance
We're doing it from wall to wall
We can dance, we can dance
Everybody look at your hands
We can dance, we can dance
Everybody takin' the cha-a-a-ance

Safety dance
Is it safe to dance
Is it safe to dance

S-s-s-s A-a-a-a F-f-f-f E-e-e-e T-t-t-t Y-y-y-y
Safe, dance!


Its obvious. The market has been doing the safety dance for the past two weeks. Any day now, its going to stop this wall to wall nonsense and finally it will be safe to dance (probably on the short side).

Trader Mike has written a useful technical analysis of the indexes, post-fed meeting. I'm also watching that downward sloping upper-channel trend line Mike has so clearly illustrated. A persuasive close above that line this week would likely cause me to start tossing short positions out of the airplane to lighten the load.

An interesting phenomenon happened in the last 5 minutes of today's close. Bill Cara's post-fed meeting discussion includes commentary on the Fed chief's 3:55PM EST post-script remark: "Longer term inflation expectations well-contained." Is Greenspan bailing out the stock market? You would think he would know better. A more likely explanation is he's doing more of what he's been doing all year: buying time. Meanwhile, institutional money is fleeing to bonds as fast as possible without wrecking the escape hatch on the way out. At the time of this writing, the spread between the 3 month and the 30 year U.S. Treasury Bond has narrowed to 172 basis points. As I understand it, there are two main reasons why this spread is narrowing. The fed rate hikes are pushing up the short-term yields, and investors buying the longer term bonds causes their yields to contract. Regardless, we still might see the market get squeezed higher because of Greenspan's remark late this afternoon. It may be that he was trying to push the market above that downward sloping trendline and cause a squeeze ahead of Friday's jobs report to soften its impact? Its really anybody's guess, but it boils down to one thing for me, soon it will be safe to dance.

Monday, May 02, 2005

I've been talking bullish on GRU for months...

I figure there's a reasonable chance that the market gets run up ahead of the fed meeting tomorrow because it seems to happen every other time. This is my GRU launchpad, the wind at my back for this patient, calculated trade. The window of opportunity is small only to the unprepared!


I've been talking bullish on GRU for months but I never took a position in it. Today I decided to hedge my shorts a little heavier and got a GRU fill at $16.74. Stoploss @ $16.24. The idea behind a $16.24 stop is that if it falls through that price, odds are it is making a run at the lowest low in the range, near $15.50 so I can try to get shares at the cheaper price if the old low holds. Worst case is I get shaken out for a small loss (or I could get gapped).

If the GRU trade works out for me and GRU advances, I expect one of two things to happen. If the volume is light, GRU will probably stall out near $22 at the top of the range. However, if the volume is heavy enough, it may not even stop going. So when I sell this thing really depends on whether or not I feel the volume is enough to propel the stock out of its range.

This is one of my favorite kinds of long plays. My risk/reward ratio is way stacked in my favor: 3% downside ($16.24), 30% upside ($22). This is what I like to call a "layup trade". They're really the only kind worth taking.