Tuesday, May 30, 2006

Watch list for week of 5-30-06

Sorry this post is about 10 hours later than normal, my internet went out last night so I could not finish my weekend market study until this morning. It looks like we are in the middle of the rally attempt I suspected we would be last week, so my analysis has not changed. If this rally stinks, I will begin shorting weak stocks. As for now, I am keeping only my outperforming stocks.

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

Sunday, May 21, 2006

Watch list for week of 5-22-06

I don't have any new market commitments lined up for this coming week. The recent sell-off has been on huge volume, which is a big negative. Market breadth is terrible now, which you can clearly see on the Nasdaq summation index ($NASI at stockcharts.com). There are also more stocks making 52 week lows than are making 52 week highs. Still, I can't help but think that we're at a short-term market bottom. The most compelling evidence is found on the weekly chart of the nasdaq. 1) There is a decent wick on the bottom of last week's candle, 2) it sits very close to the long-term lower-channel line, and 3) it sits close to its 50 week moving average.

I'm net long right now, sitting in a little more than a half dozen outperforming stocks. All of my weaker holdings have been cut over the past three weeks. This means that I'm in a good position to watch how any rally behaves over the next month or two. If it craps out without my stocks moving to new highs, then I'll dump them, hopefully at an optimal time and probably start to pick up some short positions if the trend on the nasdaq weekly chart changes to down. Basically, I'm going to play this just like I played the market in Q1 2005 right after the naz cracked in the first couple weeks of January.

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

Monday, May 15, 2006

Watch list for week of 5-15-06

Over the past couple of weeks I've sold most of my underperforming positions. As a consequence, I'm sitting on more cash than I've had since late 2005 but I'm not probably not buying much next week based on what I've seen so far. All the stocks from my watch list last week have taken big hits except for PTMK. Thus, the breadth of stocks on my watch list has taken a turn for the worst. This is a big deal because it means that stocks that are trading near support prices are not being bought like they should be. The reason I track more stocks on my weekly watch list than I could possibly own is for this very reason.

A further warning sign that I consider to be particularly important is the $NASI (nasdaq summation index) breaking support on the daily and weekly chart.

So this week, I'll proceed with extreme caution. I'll settle only for the very best prices if I do decide to proceed with my campaign in PTMK, and I'll be quick to sell if support fails. I won't be shorting anything yet because the stocks I'm still long of are all still in aggressive uptrends, and the overall market trend on weekly charts is still up. If we do experience a rapid and extreme market crash in the next couple of weeks, my plan is to take profits on longs, and step aside so that I can be in a great position to be a buyer near the bottom. However, if the transition to a downtrend is slower and more obvious, then I will initiate some short positions. Regardless, the most likely event is that I will have to do nothing, sit in my long positions while the market continues its uptrend.

It goes without saying that the highlights from my market homework software this weekend is a very short list:

Wednesday, May 10, 2006

May 2006 Journal Musings

I picked up Tool's new record "10,000 Days" this weekend and I've had it playing non-stop since. While there isn't as much philosophically interesting lyrical material to comtemplate as their previous record "Lateralus", there is an amazing track towards the end of the disc titled, "Right In Two." The chilling story that unfolds over almost a full nine minutes is told from the perspective of angels who are puzzled and amused as they watch the monkeys that they blessed with free will, logic, and opposable thumbs use these gifts to kill each other in a battle over resources, all while there is plenty to go around. "Monkey killing monkey, killing monkey, over pieces of the ground."

Not a lot has changed over all of history. Bloodshed over resources is still common to this day. Meanwhile, guys like me sit in our ivory towers while manuevering for more pieces of the pie. When is enough enough? Bud Fox posed this question to Gordon Gekko in the "Wallstreet" movie. Gekko is correct that it isn't a question of enough, it is a matter of monetizing the wastefulness and carelessness that inevitably results from humans being humans. Laws are levied, wars are fought, and lines are drawn for the rights to the spoils of any given group of people.

I too am puzzled and amused by this seemingly fundamental human character trait because it is both the holy grail and golden goose. Occasionaly I concieve some darwinian experiment that I can program into the computer and tweak, like Maynard's angels have done. What else can be their motivation? Are they not like me, selfishly curious? As for my more wasteful and not so curious fellow human beings, well... perhaps they might be interested in trying their luck at a game of chance. I'd be glad to arrange something ;)

I got caught in my first nasty gap down for 2006 this morning. On April 17 I bought a small "probe" position in AVII @ $6.73. AVII opened about 25% down this morning. I got out right at the open @ $5.22 for a 23% loss realized on a little more than 1/30'th of my buying power. Despite this loss in AVII and moderate pullbacks in a few of my other positions over the past few days, my account is up 61% overall for 2006 (no deposits or withdrawals). I've got 10 long positions on right now, some of them I've had for about 6 months. It's nice to think that a few of my big winners are half way to being long-term capital gains. Those who are quick to take a loss, but not so quick to take a profit are probably enjoying similar performance this year.

I had a really interesting conversation with my friend Jared earlier this week. I should begin by telling you that having Jared around is like having my own "market wizard" to talk to. The other day, he said that when a stock is late in an extreme move, most of the people who are getting into it are making a poor risk/reward decision and if you own that stock it is important to get some of your shares into their hands because their buying is incorrect. While this goes against pure "trend following," I believe Jared is absolutely on the money here. My response to his statement was something like this, "Well, most people aren't going to hold for more than one leg of a move either, so there is an exploitable niche managing that risk too." Pretty obvious I'm more in the trend-following camp than Jared is even though we came from a similar background. Regardless of the differences in our outlooks, we both agree that the psychological component of trading is the most important.

Monday, May 08, 2006

Watch list for week of 5-8-06

Here are the interesting bases flagged by my market homework software for the upcoming week:

Dave Johnson asked in the comments last week how I use these weekly lists to trade. There are some good examples of how I look to trade these emerging bases in my blog archive from July 2005. The answer is that I use this list to make discretionary trades in a specific fashion. I've been buying longs exclusively since October of 2005 (no short positions since then) due to the slight up-trend on the nasdaq that began at that time.

I pyramid into each position a little differently than is convention. I start by trying to buy as closely to support in the base as I can. Sometimes this takes a few tries to get the best price. For example, I bought PTMK on Friday when an intraday surge of volume came into it making me think it was going to have a very short-term breakout. However, it did not follow through, so I may sell the shares I purchased at $10.58 and put a limit order to re-buy them around $9.85. The price may follow through on Monday though, so I may be good to sit and do nothing. The 50 week SMA line is $10.36, the 10 day SMA is $10.42, the 50 day SMA is $10.46, and the low on Friday is $10.30. If all of that support is broken, then I will stand aside while the shares get cheaper, and as long as they stay above the recent low near $9.60 I'll try to get long. I'll add more to my position if the stock breaks out past $11.50 on volume. This means I've already got a profit when activity comes into the stock. I like to play from a position of strength and this is the best way I've found to do it.

I buy in such a way that I don't need stops. There are three reasons for this. When I make my first purchase, I buy in such a way that a close below a clear support line is my que to abandon my campaign for that stock. This recently happened to me in NDAQ, which I sat in for 4 months before realizing the loss and abandoning my long NDAQ campaign. The second reason I don't use stops is that I've only got a fraction of my position on while I'm waiting for the stock to decide whether to break up or down. An upward breakout out of a base I've bought is my signal to add to that profitable position. The third reason I don't use stops is that I have the discipline to pull the trigger to unload each and every time my campaign doesn't work out as I expect and while my losses are small and managable.

Monday, May 01, 2006

Watch list for week of 5-1-06

Once again, I'm sitting on a lot of large long positions in my trading account, some of them since last October. The nasdaq sits right at the support provided by its 50 day moving average and also the lower-channel line for the most recent rally. Not much interests me in the market right now because I feel that a lot of the low hanging fruit has been picked. I'm not chasing this up move because I got in position months ago and I have patience and the discipline to hold my winners. Still, this isn't a bad spot to add to consolidating longs. I added to TASR on Friday morning, but I have a limit order to sell some at the nearby resistance.

Here's my software generated list of consolidating and possibly bottoming stocks that I'll be keeping an eye on throughout the week: