Monday, November 28, 2005

Watch list for week of 11-28-05

Last week's watch list fared quite well. This is the week we get to find out if light holiday volume was masking a fakeout of the upper-channel line break on the nasdaq composite. I drove around a bit on Friday and didn't see much traffic for what was supposed to be the biggest shopping day of the year, but the market might not care anyway. Too many of the confirmation indicators I follow suggest not to be short of the market right now. The new highs / new lows ratio is fine, and the nasdaq summation index still shows an uptrend.

Here are the highlights from my market homework software this weekend:

There are a couple more from last week's watch list that I am still watching with interest. I suspect that breakouts in these stocks will coincide with a nasdaq breakout confirmation. If these stocks turn sour, I would expect the nasdaq to do the same:

  • ALY (triple-cup base on daily chart)

  • CRUS (cup & handle base on weekly chart)

I'm still making these blog post lists by hand, but not for long. It takes a lot of effort to take a software prototype like my market homework software and turn it into something user friendly. Sometimes it feels like my time would be better spent writing new software rather than refining something that I've already got functioning at a level that satisfies my basic needs, but I remind myself that I've made it a personal goal to build a refined set of tools that will be a foundation for cooperation with other traders and programmers.

Thanks to all the people watching this project with interest. My original goal was to have the first version of the website online by the end of the year, and I'm on pace to meet that goal.

Monday, November 21, 2005

Early 90's Nikkei crash compared to Nasdaq dot-com crash

The above chart is the early 90's Nikkei crash compared to the Nasdaq dot-com crash. You can click on the image to enlarge it. I wanted to post this up here as food for thought for the people who believe that historical precendent has at least some predictive value. I am one of those people.

I have lined up the peaks of both booms to make it easy to see that the two bubbles have behaved similarly. It is interesting how many characteristics the price movements of the two bubbles have in common. Most importantly, after the Nikkei had an "echo boom," it crashed again, ultimately surpassing the lows of the original crash. By comparison, the Nasdaq is at the heigh of its "echo boom." Will it crash even lower than the 2002 lows? I don't know but it is certainly one of the more likely scenarios in my opinion. If next year's Nasdaq follows the Nikkei precedent, then this is not a bad time to begin building short positions (not advice).

Watch list for week of 11-21-05

The nasdaq has rallied right into a major multi-year resistance area. I wanted to post the weekly chart illustrating this but the chart uploading service seems to be down right now. I'll try again later. With that in mind, the highlights from this week's market homework software scan are also right at major resistance. If the market breaks down instead of up here, these stocks may make better shorts than longs. Here is the list:

Those links are all the daily charts, but I also look at the weekly charts. Of particular interest is the cup & handle pattern on CRUS's weekly chart. CRXL's weekly chart shows a long uptrend. ALY's weekly chart is interesting because you can really see the price action tightening up as the stock becomes more liquid. If you look back at the price action in TZOO before its monster runup, the price also tightened up in a very similar way as the stock gained interest. It is easy to see lots of volume move into both of those stocks.

This week will be an interesting one. At key turning points like this one, my activity goes way up as I make bets in both directions. I build on the positions that work and quickly cut the ones that don't. The trading range the nasdaq has been in since the beginning of 2004 has got a lot of people in short-term trading mode because it has worked better than anything else for so long. For example, Trader Mike switched exclusively to day-trading after being a swing trader for years. I'm also guilty of shorter term trading more than usual over the past 6 months or so, but I'm trying to orient my thinking more towards a longer term approach where positions are built over weeks and months.

I'd also like to shout out a special thanks to Gorden Gekko at The Knight Trader for giving me the heads-up on an amazing chart: SWSI. I'll be watching this one with interest.

Sunday, November 13, 2005

Watch list for week of 11-14-05 and website news

In case anybody was wondering, I'm not dead, and this blog is not dead. I haven't posted much over the last couple weeks because I've been spending extra time working on getting together the website I talked about earlier in the year. After dozens of painful hours researching and testing, I've hammered out almost all of the technical problems that I expect to encounter with the hosting service and web technologies I'm using, so expect to see some very cool stuff soon :D For example, this watch list that I manually post each weekend. It is going to be automated, and available fresh each day in an even easier to view format. No more tedious posting by hand for me. That will free up my time and blog space for dissecting charts, doing book reviews, and discussing some of the more interesting contents from the links on the right. I will also be open-sourcing the api that I am designing as a foundation for a backtesting and automated trading platform. This api makes it trivial to scan and manipulate ohlc and tic data, and to generate trading simulations in java. The advantage to doing it this way rather than using something like tradestation or wealthlab is that you can incorporate neural networks, genetic algorithms, and any other advanced algorithm you can conceive into your data mining. In the java environment, time and personal creativity are the only limits.

Not only am I a blogger, but I am also an armchair philosopher, moonlight gamer, and pillager of science for my own benefit. I forsake mathematics in favor of the more functional computer programming descriptions of science. Academic longbeards despise me, but that's ok. I like to do things on my own terms, and that is what my up-and-coming website is going to be all about. I hope to inspire people to do great things in the markets, and in all other endeavors of life. I feed off of that energy. Just like this blog, don't expect ads or subscription fees (until I sell out, fickle remember?). Everything I have ever studied with a passion culminates here and will continue to evolve over the coming years. The website will be the beachhead of my campaign for a more satisfying life. It isn't about money, it is about achieving a mastery of the fundamental dynamics governing our reality. Here is a website by somebody who has done just that. This is also the path I am on, but I'm only 24 years old so I have a ways to go.

I hope that tirade was bearable. Here are the highlights from my market homework software this weekend:

There are some pretty decent bases, but the nasdaq only has about 60 points to the top of the channel it is in on its weekly chart. Buying at the tops of channels is dangerous business. I did that in TRE last week and got shook out right at Friday's low. I bought at the top of the channel a few days prior, expecting a gap-up breakout the next day. It didn't happen, and my mistake was to hold when my expectations for the trade were not fulfilled.

Sunday, November 06, 2005

Watch list for 11-7-05

No compelling bases were reported by my market homework software this weekend. There is a good reason for it though. At this point in the rally, the strongest stocks have already responded to the market strength and began making new 52 week highs again, but my software is only scanning for bases. So here are the best of the laggards that haven't broken out yet but are worth watching:

I should mention that I'm carrying a position in LKQX.

And so that people don't accuse me of only talking about winning trades, I got long a small position in XWG on Thursday at $10. It closed Thursday at $10.90, a 9% gain on the first day. But management decided to blow out the stock in the conference call that night and the stock opened at $6.70. I got out at as quickly as I could assess the situation, and filled at $6.50 for a 35% loss in one day. This loss wiped out much of my gains from trading XWG earlier in the year. So where did I go wrong with my XWG play? The reason I bought it was because XWG's chart was decent from a technical analysis of price and volume perspective, and I wanted to be long stocks because the nasdaq has been strong in the short-term and probably will remain so for the intermediate term. It was a small part of a much larger basket of stocks I bought last week. XWG was an example where fundamental analysis might have prevented the loss and maybe even profited from the price drop. But that doesn't change the fact that losses are inevitable, and having a plan for dealing with them before they happen is vital.

It is also important to remain emotionally and psychologically stable at all times as a trader. One of the exercises I do is to pretend that I have a crushing loss like this one, only across many positions that I have all at once, and imagine what my equity will look like so that it isn't such a shock if it actually happens. Then I mentally rehearse assessing the situation and doing what I need to do to exit the positions in such a way as to minimize the damage. The most important part is cutting my risk exposure as quickly as possible so as to contain the damage. I know from experience that if I can live to fight another day, I can make back any amount of lost money, but experience also tells me that I need to take my time about it.

Wednesday, November 02, 2005

Long candidates for a potential bull run

If the market really is going into a bull run, I want to have positions in the current leading small-caps. Here are my favorites:

I'll also be closely monitoring the symbols on my watch list from this weekend. I have already put on long positions in several from that list already.

Gorden Gekko at The Knight Trader and Budd Foxx at The Visual Trader alerted me earlier this week to a couple of compelling buy candidates: BEAS, and a very interesting stock chart that may turn into a great mover, TRE. The coverage these guys provide is very helpful to me during bull runs.

Market turning point

This is where the bears' last stand will happen. Check out the included nasdaq composite chart. I hope to see a resolution tomorrow so I wanted to lay out my plan here. I mentioned this weekend that I felt it was probably a good idea to stick my toes in on the long side and I've done that. However I still haven't covered any shorts. This is my primary concern at this point.

I see the QQQQ is up in after hours. Typically when the market gaps, I will fade it, but it has been my experience that gaps through key trend lines will tend to continue in the direction of the gap. And the line I've drawn on the chart above definetely counts as a key trendline. An example of this gap follow-through behavior is GOOG. On the GOOG chart, I start the upper-channel line on the peak in July, and cross over the peaks in September and early October. Clearly it was not profitable to fade that breakaway gap!

If the nasdaq does gap up significantly tomorrow, I will cover half of my QQQQ short position in the morning, and if the close is going to be higher than the open, then I'll cover the other half at the end of the day. I also have a bunch of individual stocks short, so I've identified the most dangerous ones to be short of as CERN and SBUX. If the nasdaq makes me think at any time that it will close above that line on the chart above, then I will cover these two shorts immediately, even if it is at the open and I have to really pay up :D

I'm not too worried about most of the shorts I have in the retail sector though because they are in solid downtrends and quite a ways from my entry prices. These shorts are: SPTN, DECK, and HOTT, which is currently down about 7% in after hours on dissapointing same store sales numbers. I'm a firm believer in cutting your losses short and letting your winners run.

I was going to talk about my long candidates for the rest of this week, but I just got a call from my friend Jarod to play a game of DOTA for Warcraft 3 with he and the rest of the crew so I'll do it later tonite.