Tuesday, June 28, 2005

Bullflag steak

There are three MONSTER bull flags setting up right now I'm watching. Although I'm mostly selling and shorting, these three aces are the filet minon. Without further ado:


They're all flagging in tandem. They'll probably all break up or down together too. There may be some other mad flags forming, but I haven't seen 'em. If you have, feel free to throw me a bone.

NSI revisited (NTRI)

I'm trying to be more aggressive about selling rallies so that I can buy bullish dips. Jarod reminds me "its better to sell when you can than when you have to." I think a trader from the Market Wizards book series said that. Maybe not, maybe it was just Jarod. He's right though.

I posted on this blog here on April 7'th that I was making my first long buy of the year, NSI. Since then it has moved from the amex to the nasdaq market and renamed to NTRI. I've done a little bit of trading in it during that time, but I carried my original one-lot position this whole time, letting it ride the trend. This position was my best one so far this year, more than doubling. But I sold it today because it looked dicey. Better to let the window dressers carry the risk while the market is vulnerable. Although it made a new high today, the volume was not impressive at all. But just because I closed out the position doesn't mean I'm done with it though. If NTRI sets up another low risk buying opportunity, I'll take it. I'm still bullish on the stock, but right now it looks pretty ripe.

Every now and then I bump into ex-traders from the dot-com days. When I explain to them how I trade, I often get asked how I can take so many losses. Well, NTRI is a perfect example of why cutting losses and letting the winners ride is a really good idea. You can pay for a lot of small 2-5% losses with a win like this.

I put the NTRI chart up here with the 20-day and 50-day simple moving averages for a reason. Notice that NTRI ran up for months, almost 100% advance before even moving below its 20-day moving average? It still hasn't even closed under it! If I had a larger position I would still be carrying half of it, with a stop a little under the 20-day SMA. If it closes below that line though, it may make a good short-term short play. Whether I short it or not depends on the market at the time.

In closing, I don't know if I made the right decision to sell NTRI or not. The best part is that I get to find out without losing any of my new capital =)

Monday, June 27, 2005

Keeping an Eye on the Big Picture

It pays to give the major indices attention every day. When the S&P failed to make a new high before rolling over starting last Thursday, it set the stage for a head and shoulders top. This means the market is incredibly vulnerable to any sort of financial accident right now because the smart money is on the run. If the S&P does not make a new low near 1135, then a bullish cup & handle (bear trap) may form instead. On the attached chart of the S&P500, I'm looking at the 50-day moving average and the lower-channel line I've drawn to act as support for this possible cup & handle pattern to form. Also note the volume at the bottom of the chart. Although the recent volume is big, signaling distribution, it hasn't ballooned like it did during April's sell-off.

I'm adjusting my exposure accordingly. Its a juggling act, but you can't rest on your laurels and expect outperformance. Three trading days into the sell-off and I've went from ~140% net long to ~35% net long. The selling comes two-fold, I'm selling stocks short and I'm organically stopping out of longs. In some cases it is tempting to buy the longs back at the close if they haven't collapsed but I have not been doing that yet. If the identified support on the S&P fails, then I'll be moving to a net short position, otherwise I think we're be looking at a buying opportunity after the fed meeting this week.

Stephen Vita, over at the Alchemy of Finance gave a somewhat more bearish sounding assesment of the market this Sunday, right here. Its worth a read if you haven't seen it. Stephen is privvy to better information than I am, so I pay attention when he's got something to say.

Friday, June 24, 2005

Watch list for Friday 6-24-05

Most of the long candidates are attractive because they sit just above their 50-day moving averages, so a close below the 50-day is a nice, close place to stop out if the stock fails to bounce higher. If I make any of these buys, I will try to get them as close to the 50-day as possible to minimize my potential losses.

Long candidates:

Short candidates:

New candidates for the weak-rally watch list:

Thursday, June 23, 2005

Ouch if you're long like I was

I was heavily long going into the open this morning. I actually thought those bottom patterns all over the charts might actually have a positive resolution.. today! Well I'm a lot less long as of today's close. And just as a reminder that anything can happen, have a look at the intraday chart for KRB. Yea I shorted it just minutes before that huge (relatively) spike into the close.

Its my fault though, for leaning too heavily long before the breakouts began in earnest, so I didn't have adequate capital to do the usual hedging I like to do at market turning points like nasdaq 2100. So now I'm chasing shorts at a less than optimal time =/ I was almost smart enough to do an intraday short of FORD right after I stopped out of it @ $19.80. Would have been an easy 2 points...

Anyway, if the market keeps going down from here, yeah I'll lose a little more money at first, but it usually doesn't take much more than a week or two for my exposure to rapidly move from ~150% long to ~100% short if the market is falling on volume. But thats the problem with a lot of the stocks I had my eye on for shorting, they lacked volume throughout today's slide-off. If the market really is putting in a top here, the volume will start to balloon on losing stocks, and this is probably what I'll be spending my "homework" time in the evenings looking for. Those avalanchers that rally on pathetic volume make some of the best short candidates after their next rally crests.

On distribution days like today, it pays to have a look through the results of a "strong volume decliners" screen. I use the one on stockcharts.com's stock scans page to make a list of symbols to watch over the next few weeks for bear flags.

Tuesday, June 21, 2005

An argument for trading many small positions

I've been trading large quantities of tiny positions for quite a while now, but I haven't always done it that way. I like William O'Neil's methodology, but I think his advice on portfolio concentration has caused quite a few followers' stock trading efforts to end badly. If you are an IBD subscriber, you can see for yourself on the IBD message board (my handle there is "tr0p", but I haven't posted in over a month).

I want to put forth the argument that reducing trade size and increasing trade frequency carries many hidden benefits. I did not realize many of these benefits until I had traded this way for a significant length of time. I thought I would share what I've learned from my experiences and hopefully have a chance to learn from readers who want to take the time to share their outlook on this important topic.

I'm currently reading Mark Douglas's book "Trading in the Zone". This book is centered around a similar argument to the one I'm about to make. The numerous effects that follow a loss of confidence caused by equity drawdowns are the most common cause of trading failure. So in the interest of our long-term success as traders, we should seek to minimize equity drawdowns. It follows that fear-based trades and missed opportunities will also be minimized. We pull out the weeds by the roots.

When I was trading larger positions and carrying far fewer at a time, I was still doing what I do now: making trades based on things that I knew would statistically give me an edge over time, but the outcome of any specific trade was uncertain. On any given day, my odds of having a drawdown day were far higher than they are now because it takes a high quantity of trades for any statistical edge to be properly reflected in account equity. Trading with fewer positions meant that at any given time, my account equity showed a less accurate representation of what I should expect in the long run. This lays all sorts of emotional traps for the unwary trader.

It is worth rephrasing simply: "When your portfolio is composed of a larger quantity of smaller trades, you are leveraging your edge by making your account equity at each moment in time a more accurate reflection of how you will perform in the long run."

There are both good and bad side-effects to trading this way so I want to identify a few of them.

  • Higher commission. Many people trade too big because they are afraid that commission will cut too much into their profits. This is a real problem for people with small accounts. The best thing you can do is switch to a lower cost broker and trade the smallest lots you can without cutting out your edge. In Jack Schwagger's "Market Wizards" book series, many of the best performing traders in the world were asked what they thought the most common mistake beginning traders make. A common response was, "trading with position sizes that are too large for their equity."

  • Easier to hedge against market direction. More positions are being traded, causing a higher turn-over. As the weaker positions stop out, capital is made available to hedge the stronger positions while the market temporarily moves against whatever edge is being exploited. The hedging will further reduce equity drawdowns. Doing this had a profoundly positive effect on my trading.

  • In order to up the frequency of trading, sometimes the quality of the trades must sacrificed. Some edges just don't offer opportunity very often. When this is the case, the trader should seek to identify new edges that can also be exploited. Don't put on bad trades though ;-)

  • Carrying more positions requires more work. You can't be a pro without doing work, and rookies get skinned. Its up to you which you want to be.

Monday, June 20, 2005

GOAM cup & handle

The way I'm probably going to play this GOAM cup & handle is a probe buy in the handle, and I'll follow up by doubling down if it breaks above the upper-channel line. Obviously I drew the upper-channel line on the chart much higher than what it really is to keep the chart from being cluttered. It is interesting to me how the price action of GOAM has really tightened up this year. I've noticed the same phenomenon happening in SIRI, which I've also got a position in.

My watch list for Tuesday, 6-21-05:


A watch list for Monday morning

Back from vacation. Luckily I missed a dull week in the market. I saw on CNBC that crude made a new high, yet it was my shorts that stopped out, not my longs over the last week (the only long I stopped out on was TZIX). The longs I've got look bullish right now and the naz has shown some resilience, so this coming week will be interesting. I thought I'd get back into my groove by posting my watch list for tomorrow. The long candidates are all near key moving averages and look like low-risk setups except for DSTI. And by low-risk, I mean if you think the nearby moving average looks like support, you could get long and put a stop just under the moving average so you won't lose much if you're wrong. The moving averages I'm looking at on the charts for these stocks are the 10-day, 20-day and 50-day simple moving averages. I may not make any trades tomorrow, but I'm prepared either way =)

Long candidates:

Short candidates:

Friday, June 10, 2005

Vacation time

Crystal and I are going down to Florida for vacation tomorrow morning so I won't be posting any updates next week. I plan to do a lot of reading and writing while I'm down there, especially if we catch the storm that's all over the news lately, so look forward to some trading book reviews and trading theory posts when I get back.

If you haven't seen it yet, check out Bill Cara's "trader wizard" speech, which is Bill's rendition of Gordon Gekko's classic speach in the 1985 movie Wallstreet. I just picked up this month's edition of Fortune magazine, which features Gordon Gekko on the cover. Grab it while you can so that you can be just like Charlie Sheen, holding "the bible". I wonder if we'll find GG's birthday inside? I have a feeling I'm about to find out.

Vacation time

Crystal and I are going down to Florida for vacation tomorrow morning so I won't be posting any updates next week. I plan to do a lot of reading and writing while I'm down there, especially if we catch the storm that's all over the news lately, so look forward to some trading book reviews and trading theory posts when I get back.

If you haven't seen it yet, check out Bill Cara's "trader wizard" speech, which is Bill's rendition of Gordon Gekko's classic speach in the 1985 movie Wallstreet. I just picked up this month's edition of Fortune magazine, which features Gordon Gekko on the cover. Grab it while you can so that you can be just like Charlie Sheen, holding "the bible". I wonder if we'll find GG's birthday inside? I have a feeling I'm about to find out.

Tuesday, June 07, 2005

SIRI forming handle

SIRI has set up another low-risk buying opportunity after bouncing off of resistance a little above $6. Over the past few days the price has drifted down to the 10-day moving average on light volume, forming a handle. A buy at this point should be re-evaluated if SIRI closes below its 10-day moving average. Notice how the price and moving averages are all positively aligned and the 50-day has started sloping upwards. The RSI and MACD have also just turned bullish. Not to beat a dead horse, but it looks to me like SIRI may be at the very beginning of a long up trend. It is currently my largest long position, but if it drops below its 50-day moving average I will probably be out of it entirely.

It is important not to forget at this juncture the huge implications if the market rolls over right here. Stephen Vita has outlined where the S&P currently stands in relation to a head-and-shoulders top formation here at his Alchemy of Trading blog. The implications I'm refering to is the fact that the market will be vulnerable to a crash if it starts to point down. I hate to oversimplify, but from what I've seen, more often than not crashes will be preceded by downward moving prices that have already crested and rolled over. As long as prices aren't pointing down, the odds are much more favorable for your long positions.

My dad was a stock broker in the '80's, sort of like Bud Fox in Oliver Stone's Wallstreet, but without the corruption. He was getting his clients out of the market in the fall of '87, he had spotted the head and shoulders top among other things. He told me about a guy in the office who had over $1 million in options positions before the crash. My dad was with him when he went over what it would cost to liquidate the options, and the guy decided not to do it. When the crash happened, in less than a week's span the poor bastard had about $100k left. To this day my dad's favorite pattern is the head and shoulders top.

There are plenty of opportunities emerging for shorts right now. I shorted AAPL just a little below its 50-day moving average on the day that it gapped down. I'm about 2 points in the green on the trade in 3 days. Another short setup I'm watching is SBUX. SBUX is making an arch on the daily chart that often resolves in a waterfall slide-off. I'm watching for a convincing fall through the 50-day moving average to enter a short position.

Monday, June 06, 2005


Nobody can rant like Stephen Vita does over at the "Alchemy of Trading" blog. Check out his Sunday night write-up. Stephen and I are both long, but hedged with a large QQQQ short right now. I got mine at resistance ~$38.47.

As Gorden Gekko pointed out at The Knight Trader, the Chinese stocks started breaking out last week, bigtime. I entered into PACT this morning, but I may cut and run if it looks like it will give a better entry at a later time.

I tried to short GOOG on Friday, I got a fill ~$279. Covered this morning @ $290. Thats what I get for trying to pick the top. It wouldn't look like a rookie move if I was right though. With everybody so bullish on GOOG, the contrary view has a strong appeal. But as with everything in the market and in life, timing is everything.

Friday, June 03, 2005

UPCS looks to be finishing up a triple-cup consolidation that began in March. This is one of my favorite bases because it is so hard to scan for with computers. I've got a small position in it already and will probably add to it if it breaks out. The base is probably invalidated if the price drops below the recent lows around $6.85.

Wednesday, June 01, 2005

Time to get busy again

There's a nice technical analysis writeup of the major stock indexes over at the CANSLIM investing blog. I don't have time to do a full write-up of my own analysis tonite, been too busy trying to figure out why yahoo finance's historical data is broken, but suffice it to say that I agree with the CANSLIM investing blogger's analysis.

I would like to put forward one further idea: now is the time to get busy hedging long, short, whatever you want. This is a great time to be putting on new trades because you get to find out whether you were right or not without risking much by watching the behavior of the major indexes and leading stocks at this key turning point. My activity picks up at times like this on both the long and the short side, and it works because I dump the losing trades and ride the winning trades for however far the market will take me.

There are plenty of low-risk "layup" trades setting up. Jarod and I define a layup trade as a trade that is so low risk its a no-brainer to take. They are usually based on a thesis, such as: "stock ABC is pulling back to within 1% of its 10-day moving average on light volume after a huge runup; it will either bouce at the 10-day MA or else the trade must be closed at a loss of no more than 3% because the stock will probably give a much better buy opportunity at a later time." If a likely outcome is a potential gain of 10-30% with a chance for a homerun, and you're only risking a 3% loss, its a no-brainer to take the trade.

Here's my watchlist for tomorrow (Wednsday, June 1):

Speculative long candidates:

Near new 52 week highs long candidates:

Short ideas: