Wednesday, August 31, 2005

I'm buying strength here

There quite a few compelling looking charts popping up on my market homework software tonite. I've found that you can make a lot of money in a short time by not ignoring when the market is flashing strength like it did today and there are plenty of good setups to choose from. Whenever there is news that credit is loosening, the speculative money goes to work, even if just for a short time. The feel of the market right now reminds me of earlier this year right before we got a quick breakout caused by news of a new 30-year long bond being issued in the near future. This time it is the hurricane relief money that is the catalyst. I'll probably be doing some buying to cover and buying longs tomorrow, but I don't anticipate a market advance lasting very long with the bond market acting the way it has been; the yield curve is rapidly narrowing these days.

Here are the highlights from my software scan for low-risk buying opportunities tonite:

Another one worth mentioning showed up on my scan a week or two ago that had a positive reversal today is GIGA. I've got a small position in it already, and if it picks up strength and volume I'll probably add to it. You've got to take profits fairly quickly in stuff like that though, and that's what I plan to do.

I've still got my DSTI position from about 3 weeks ago and I'm glad I do. It looks like it has good support around $13 (about where I got in) and may see a short squeeze if the market is able to advance.

Something not related to the markets, but possibly interesting to some readers on here, my girlfriend just started her first semester in vet school at Mizzou and is blogging about her experiences. Apparently she's got about 40 hours a week in classroom time and labs! Very intense, but the program sounds cool because it is structured to have a very close-knit group of classmates through sponsored and non-sponsored extra-curricular social events. I have attended a couple of these with her, and it has been fun. It's sorta wierd to work on getting drunk while trying to glean cattle contracts insight from rural farm-boys! Her classmates almost all have their undergraduate degrees, so the maturity level of the people is high. After meeting the classmates, there's no doubt in my mind these people are committed to working hard over the next four years. I'm proud of my girlfriend for getting to where she is, and it looks like she'll be a part of a good community.

Monday, August 29, 2005

Watch list for week of 8-29-05

I have no idea what to expect from the market this week because of hurricane Katrina, but being way net-short the market I am well positioned to deal with a thrust downward by the nasdaq composite. The T-bond yield spread has narrowed further last week, which has bearish implications for the market, however there is a good chance that the fed will not raise interest rates anymore this year due to the impeding New Orleans crisis. My plan is to play it by ear, and when positions get too risky I'll reduce my exposure by passing them to someone else. The market really does work like a game of hot potato.

Here are the interesting charts spit out by my market homework software this weekend:

I'm going to try to do some book reviews and trading tactics discussions on the blog over the few weeks to keep things interesting while the market gets cheaper. If anybody wants to discuss anything in particular, post a comment or drop me an email.

Friday, August 26, 2005

VLFG back on the radar

VLFG back on the radar. The software spit this one out tonight and I thought it looked good enough to make a blog post about. I may or may not buy at the points drawn in green on the chart, it depends on how strong the nasdaq composite looks and the behavior of VLFG. Other notable charts to check out: FOXH, SYNX.

An old friend of mine called me up out of the blue last night to talk about how to trade stocks. He came over around 7 PM and we got some Taco Bell. By the time we realized it was late, it was 4:30 AM and we had run the gamut about the stock market. I didn't get to bed until 5:00 AM, and got back up around 7:30 AM this morning... So I've got to get some sleep! We had a great time though and I would do it all over again without a second thought. I really enjoy talking with intelligent people about the markets even though I know in the back of my mind that some of them will be net losers.

One last thing though, the Nasdaq composite is right on its 50-day moving average and looks like its ready to make a significant move up or down any day now. I'm fairly well hedged, carrying some longs and some shorts so we'll see which positions I get to fold out and which ones I get to stack the chips on soon. Over the past couple days I closed out PACT (long) and BMHC (short) for losses, so I'm feeling like anything can happen. So tired... maybe those Budweisers tonite were a mistake...

Sunday, August 21, 2005

Watch list for 8-22-05

Most of my buying power is tied up in short positions, but I think it is a good idea hedging with a few select longs while the longer-term uptrend is intact and the major indices are not in free-fall. In fact, the major indices are right on their 50-day moving averages which will bring in some buying while there is no serious selling pressure.

Here are the interesting stocks that my market homework software identified this weekend:

Bill Cara gave some good advice this weekend in his Weekly Market Review:

  • "Armageddon on Wall Street gets a little closer month by month, so I
    continue to advise readers to protect your portfolio. At the very least, do
    not chase stocks higher on rallies."

  • "The U.S. equity market is dead in the water, while, until this week at
    least, Japan, Canada, the U.K, etc, had been flying.
    As I noted a week ago, and for a few weeks now: 'So why bother buying U.S.
    equities or bonds or real estate today when tomorrow there will be many
    bargains to choose from?'"

If you haven't read his review this week, its worth checking out for his comprehensive arguments backing his position.

Gorden Gekko at The Knight Trader dropped me a mail this weekend with a heads up on a few stocks. I thought ALY in particular looked interesting. I'm sure he'll be covering ALY and the others this week in his blog.

Wednesday, August 17, 2005

BMHC - a model short candidate

BMHC - a model short candidate. I shorted a small position in BHMC today. If it makes a new low, thereby completing a shift from an uptrend to a downtrend on the daily chart then I will probably add to my position if the volume pattern shows distribution.

One of the most ideal characteristics of this short setup is that a high volume sell-off took the stock under the 50-day SMA, after which it rallied back up to it on light volume and began rolling over before making a higher high.

Sunday, August 14, 2005

Watch list for 8-15-05

Back with another brief watch list for the beginning of this week. Last week's watch list had only one out of five stocks end higher on the week, which only helps confirm my impression that the nasdaq has put in an intermediate term top near 2,220. I'm way short right now, and my only long is the same 2 lots of DSTI I mentioned last week. This is no time to chase longs, but it pays to stay on top of potential opportunities at all times. Without further ado, here is the list (click a ticker to see its chart in a new window):

I wanted to mention one more that didn't show up on my market homework software this weekend: MNTA. MNTA is coming in to its 50-day moving average and the volume is drying up nicely so far during the pullback. If it continues to develop constructively over the next few days I'll post a chart analysis of MNTA on the blog.

Also, the Visual Trader posted some interesting charts worth looking at.

Thursday, August 11, 2005

On Jim Cramer

There's a lot of Cramer bashing on message boards and blogs. Stephen Vita at the Alchemy of Trading calls him the perfect fade of all time, and Roberto at Roberto's Nasdaq Trader just pointed out that some of Cramer's recent picks have bombed. But I have to say, after seeing his special on speculation yesterday I really think he understands how to play the game.

I don't pay any attention to Cramer's picks or take the time to track the performance of his picks. What does interest me is talk about strategy, speculation, and money management. I almost taped his special last night when it re-ran because I thought he did a great job of covering a lot of basics in speculating in the sub-$10 space. What caught my attention is when he said, "sell when volume expands because that is profit taking." He was talking about low-float stocks in particular and it makes a lot of sense if you consider a stock with a 2 million float that trades 5 million in a day. There HAS to be profit taking going on no matter which way the stock is moving. The savvy know this, but rookie momo's think its time to buy at any price when the stock is racing up on ballooning volume. This is great speculation advice from Cramer. When the volume expands and the stock moves in either direction, it's often time to take some off the table and wait for a better entry when the volume has dried up.

He also did very well addressing the difficult topic of when to take a profit (not too late, but not too soon) and when to take a loss (not too late, but not too soon). When he is educating his audience like this, I think he's being a real hero. Does his often biased stock specific advice negate this? Maybe. But this is how I look at it: if you're savvy then he's helping you round up the sheep. If you see it another way then you might be a sheep. Cramer is on your side either way, and that is a quality I can appreciate.

Motivations and resolutions

I've been purposefully trying to occupy myself with things other than stock market opportunities because I know that the market is cooling off and I will have more opportunities in the future than I do now. It looks like there are some good daily-chart setups forming in the bio-pharma groups, but it is too soon to act. Over the past few weeks I've flagged a lot of stocks making new 52 week highs that were featured at The Visual Trader but I haven't mentioned anything about this on the blog until now because I feel we may be right around the corner from some compelling low-risk buy opportunities.

In the mean-time, my commitments in the market are very small right now so it is a perfect time to revisit my motivations for trading in the first place. Futurist Ray Kurzweil has published a commencement speach he gave this summer on his website that does a nice job of briefly relating an informed vision of the future in an inspirational format.

Ray's ideas about technological progress and exponential growth are the main reason that I'm concerned with rabidly amassing wealth at an early age (24 years old in less than a month). While I do think that all of humanity eventually benefits from technological progress, only the few super wealthy are capable of fully taking advantage of all that medical, computer, comfort, and entertainment technology have to offer. And even more important, the super wealthy are the exclusive key players in advancing technological progress. A few years ago as a student in college, I knew there were two ways for me to make significant contributions to technological progress: either by jumping through hoops to compete with everybody else who isn't capable of creating the wealth they need to make key research and development work happen, or to create the wealth myself and do things on my own terms. I think it is obvious which path I have committed to, but I have a long way to go yet. Therefore it is important to periodically make sure the ultimate goal is still in sight.

I've heard it said that 60% of all trade volume is not even manually initiated by human beings any more. This means we've got computer programs trading against each other most of the time. Kurzweil mentioned in his speach that we can expect computers to be powerful enough for the earliest forms of strong ai near the year 2030. Can you imagine how much trading volume will be from manual trading 25 years from now? I suspect that opportunities in the financial markets won't be as easy to identify by humans at that time. A backing argument is that trading really is just an optimization problem: make this pile of bones as big as you can as quickly and safely as possible, and computers excel at this type of work. Do you know what happens when you have computer programs fine-tuning and re-writing other computer programs? It is going on right now, but these types of programs will be more prevalent and far more mature in the future. I'm a computer programmer, by the way.

Another important trend in the financial markets is that transaction costs are getting smaller all the time. It isn't just competition that is driving this trend, otherwise commission cost would already be just about negligable. It is the communication networks, computer processing efficiency, and database technology between all of the members involved in transactions. Transaction costs are also an optimization problem for everyone involved in the market.

In closing, here are some quotes from Ray's speach that I linked to above:

  • Now, people say you can't predict the future. And for some things that turns out to be true. If you ask me, “Will the stock price of Google be higher or lower three years from now?” that’s hard to predict. What will the next wireless common standard be? WiMAX, G-3, CDMA? That’s hard to predict. But if you ask me, “What will the cost of a MIPS of computing be in 2010?” or, “How much will it cost to sequence a base pair of DNA in 2012?” or, “What will the special and temporal resolution of non-invasive brain scanning be in 2014?,” I can give you a figure and it’s likely to be accurate because we've been making these predictions for several decades based on these models. There’s smooth, exponential growth in the power of these information technologies and computation that goes back a century—very smooth, exponential growth, basically doubling the power of electronics and communication every year. That’s a 50 percent deflation rate.

  • And finally R, which stands for robotics, which is really artificial intelligence at the human level, we'll see that in the late 2020s. By that time this exponential growth of computation will provide computer systems that are more powerful than the human brain. We'll have completed the reverse engineering of the human brain to get the software algorithms, the secrets, the principles of operation of how human intelligence works. A side benefit of that is we'll have greater insight into ourselves, how human intelligence works, how our emotional intelligence works, what human dysfunction is all about.

  • I was told that commencement addresses should have a vision, which I've tried to share with you, and some practical advice. And my practical advice is that creating knowledge is what will be most exciting in life. And in order to create knowledge you have to have passion. So find a challenge that you can be passionate about, and there many of them that are worthwhile. And if you’re passionate about a worthwhile challenge, you can find the ideas to overcome that challenge. Those ideas exist and you can find them. And persistence usually pays off.

Wednesday, August 10, 2005

Make sure you have a chair

"There are a lot of momentum traders in the market who shoot first and ask questions later and if you follow them often you end up without a chair when the music stops."

Brandon Fredrickson said this in a post he made today. What a great quote. I thought it would be good to post here in case anybody is reading this blog and putting on any trades that I talk about, because I do identify good opportunities every now and then on this blog.

I try to spend way more time talking about strategy and technique than specific trades, and when I do talk about specific trades it is almost always to illustrate a technique. I don't know if anybody noticed, but I rarely talk about how I plan to get out of something, because most of my trades end in one of two ways: it becomes clear to me that the price will most likely move against my position significantly, or hanging on any longer will cost me more than I'm willing to lose (which isn't much). Anyway, the point is this, make sure you have a chair. Make sure you have a chair!!

TASR and EWC: stocks and nature repeat

I was reading this post at Bill Cara's blog today when I noticed an uncanny resemblance between EWC and TASR. Like I said, I've got TASR's daily and weekly charts seared onto my brain. I'll never forget TASR's price movements and I recognize similar charts instantly. The wierd thing is that the TASR chart pictured here is a weekly chart, but the EWC chart posted on Bill's blog is a monthly chart. Are you sure all is well in Canada Bill?

Sunday, August 07, 2005

Watch List for 8-8-05

Here are the interesting stocks from my market homework software this weekend. It's no coincidence that the list keeps getting shorter and shorter, the market is extended to the upside and probably right around the corner from a significant correction. Anyway, check it out:

I did find an interesting short setup. Its worth mentioning, but maybe not worth trading. Anyway, SPTN has had a strong volume sell-off, followed by a weak volume rally. The shape of the recent rally is very "arch" shaped, Jarod and I call this the "waterfall" pattern because stocks will often get completely blown away for days when this pattern resolves, and it looks like a waterfall.

XOM and GOOG are also at technically interesting spots, so I'll be watching them this week too.

Finally, an update on the market homework software website. I've been out of town to attend weddings for the last two weekends and spent last week with my girlfriend, so I haven't made much progress lately but its not on the back-burner or anything. I'd like to have it finished by the end of the year, but the site could go live much sooner, it depends on a lot of things.

For any new readers who don't know what I'm talking about, I've written a piece of software that I use to make my watch list each night. I tell it which stocks I'm interested in trading, and it tells me everytime one of them is basing, or near a low-risk-buy price area. Almost all of the stocks I talk about on this blog come from the watch list I make from my market homework software. I'm turning this software into a website so that my friends and readers of this blog can use it too, but it is a big project so I've decided to post my watch lists each weekend until the website is finished and everyone can easily make their own.

Eye on the big picture: Nasdaq weekly chart

I started aggressively shorting the QQQQ on Thursday of last week because we are at the top of the channel illustrated on the chart above. I anticipate being short all the way down to about the 2000 level on the nasdaq composite. However, if the nasdaq is able to break above the upper-channel line I'll be forced to cover. I've already dumped almost all my longs, and I'm not aggressively buying anything long at this time with the possible exception of energy stocks.

More on my VLFG sell

I had no target when I sold VLFG. I was preparing to short the QQQQ in anticipation of the market dropping off after hitting 2220 on the nasdaq composite, and like Gorden Gekko said, 3/4 stocks follow the market direction. I had so many reasons to sell this stock, I guess I just got lucky it was near the top. Sometimes I sell too soon though, like with XWG, it continued to move straight up after I sold it in the high single digits. I don't mind though, I'm only trying to make money.

Wednesday, August 03, 2005

Discussion on exits

"what strategy do you use to determine when to exit a stock like VLFG?" -- JWU

I thought this question was worth a whole blog post. A couple other people have written about exits lately, Trader Eyal on exits, Taylor Tree on scaling out of positions. If I missed anybody, feel free to post the link in the comments.

I sold my VLFG today near $6.40. I said last night it felt extended, but that is only part of the problem. I study the nasdaq composite chart every day, and when I feel like most of the upside is gone I get real antsy and I can't add to positions or take on new longs except in rare cases. I'll also sell when lower-channel line support is broken on the downside regardless of what the averages are doing.

I always watch the 10 and 20 day moving averages on every position I carry, I'll trail stops under whichever one looks like the best fit. Slower trenders like UPCS and SIRI work great with trailing stop a stop just under the 20-day SMA for example. For some of the stronger trenders like VLFG and XWG, trailing under the 10-day SMA works much better.

But some of my best sells come from advice my friend Jarod gave me about selling, and we've sort of got a running joke about it. Whenever any one of us starts talking like Boris in the James Bond movie "Goldeneye", that usually means its time to start selling. I'M INVINCIBLE!!! Yeah right.

In choppy markets like we're in currently, the "Boris sell" is the way to go. Its ok to let some other Boris carry the risk, especially if it looks probable that you'll be able to buy it back cheaper at some future time.

Tuesday, August 02, 2005

Watch list for 8-3-05

Here is the latest watch list from my market homework software:


Not very many stocks are consolidating right now at all, which makes a lot of sense if you're looking for a speculative blow-off market top. If we gap up tomorrow I'm going to sell and short like crazy. Every time I've tried to short in the last two weeks I've lost money, but sooner or later I'll be right and make it all back and more. I could have done much better if I wasn't so cautious, but I'm up about 20% over the last month playing a lot of the stocks I've written about here, and I figure a lot of other people are looking to lock in similar gains when it becomes apparent that they will be able to buy back at cheaper prices later in the year.

Sooner or later in a rally, the risk vs. reward for carrying a long position gets out of whack, usually right about when you start to feel invincible. At that point its not a bad idea to take some money off the table. I've been doing this a lot lately and it feels even better than carrying naked paper profits. I've got to stay focused and keep my eyes on the ball.

I wanted to thank Gorden Gekko at The Knight Trader and Budd Foxx at The Visual Trader for linking to some of my coverage of VLFG over the last couple of weeks. And for whatever its worth, I'm probably going to be dumping my small VLFG position soon, it feels extended. Remember, its all about risk management :0