Some update

We moved to Columbia, Missouri yesterday. Not settled in yet. We opened one checking account in Commerce Bank but when we went to the Wal-mart we found that they have a branch of Bank Midwest inside Wal-mart which gives 1% interest interest on MM account as long as you maintan a balance of $1K and is open longer hours and the weekends. Compare that to the Commerce Bank which was offering 0.5%. The two outfits are only 2 blocks of each other. We will close the commerce bank account. Meanwhile, I have been too busy and too tired to really follow the stock market till just now. I missed all the fireworks in the market. Technically, the stock market is in a really dangerous zone --- I can't tell (even Fibbonaci is not working on SPY chart) how far the market will go on the upside. From the technical standpoint there is considerable problem with the upside movement since there are major gaps from Aug/Oct 2008 directly above us. Oil is on fire and the gasoline prices are also rising too fast. Just the other day, price had changed between the time we went to shop and when we returned. Sounds really crazy, but thats what happened. If the price of gasoline really goes to $4/gal this summer I don't think it would have the same effect as $4 gas had last year. People seem to be just fed up and don't care if they don't have money they will just live their life as they want to live. They appeared to be tired of doom and gloom. This time we will need $5/gal gas price to break the demand. So, I don't know what catalyst will cause the stock market to come back to the ground. The stock market should be trading in a trading range of $800 $ 1030 till the emplyment picture clarifies the economic situation. the market action overshot 800 on the downside to 666 and maybe it will overshoot 1030 by 200. so, we might see 1230? Thats a whopping 25% from where we are today! That would give a very wide trading range. The danger of this kind of range is that it will suck in all the money that goes for MA200 signals and will whipsaw them making that strategy not pay off like it has done for the last 25 years. Every market strategy eventually must yield to the Central Limit Theorem. We were told that commercial property loans were going to be big problems for banks. But banks are flush now with all the money they need. Even the equity offerings went quite well. Most freakish thing: on the day that we saw the largest bankruptcy in the US, the market rallied to new highs! Wow! Who could have predicted that? I have been out on the sidelines in my own trading portfolio. I also did not have time to day trade for the last week. Based on the charts of the last couple of days that was a good thing for me since all the action was over within the first hour which I tend not to participate in while day trading. Sell in May and go away may be the best advice. Summer is a beautiful season to relax away from such nerve raking markets. Have fun and don't bet much on even a "sure thing" because nothing is ever sure!

On vacation from trading till June 2

I am taking few days off. Good luck trading. The market sentiment is now turning negative but global economy appears to be recovering. See nice analysis of current state of affairs in the economy: http://scottgrannis.blogspot.com/2009/05/green-shoots-turn-red-hot.html. So, be careful out there. If the market corrects then I will be out there with a boatload of high dividend paying international companies to buy. If I can get 10% on the dividend from solid companies, whose dividends have been safe over decades, then who needs more and who cares where the stock prices go? That's a really good return on my equity. Over the next six months buying sharp sell-offs will be profitable. Probably 820 on sp500 will prove to be difficult to crack. Only when economy shows further weakening that buying on sell-offs will stop working and we may go down and stay down for a long time. But I don't believe that this coming sell off will be that kind of irreversible event since the economy is flooded with so much liquidity. With that much liquidity, the value of cash relative to other goods is bound to go down, i.e. share prices and commodity prices ought to go up. For the purpose of the portfolio in the blog here, I will keep the strategy intact - buy 1/3 SDS when we crack 875 and then buy the last 1/3 when we crack 850. And then, sell the position at 820. I don't think we are going to go much further than that in the coming sell off.
Sami.

What a day!

The market really got ahead of itself today. I was very sure that market would go down today. Judging from the up volume vs down volume, the block trades were mostly to the downside and yet the market went up big time. Obviously the big boys were selling in the rally. This says to me that some of the big boys eg Goldman Sachs et al had much to unload. This unloading kept going till around 2:00 Eastern time and then it slowed a bit. I watched money flow at the site: http://online.wsj.com/mdc/public/page/2_3022-mflppg-moneyflow.html. They update market data every hour and for volume on the downtick was way higher than the volume on the uptick all day long on SPY. This was complete opposite of what happened on Friday. I am so sick of such flagrant manipulation of the stock market. It makes me sick and want to leave stock market and instead buy me a rental property instead or maybe start my own business, anything but this totally manipulated market. The volume of trade that Goldman Sachs and couple of other big investing firms do is astounding and they are able to dictate when the market will be brought down and when the market will be made to rally. They jammed the market initially to give themselves higher price to exit the sale side of the trade. I just don't get it: who is buying in this market? I can see buying for dividend. That totally makes sense. Actually, if you buy 100 shares of VZ at $30 and sell 100 shares of VZ puts st30 Dec 09 you would get $600. Cost for your 200 shares will be at most 6000-600 = 5400. You will get 8% yield on your 200 shares almost for ever since VZ, although heavily loaded with debt, is not going to go bankrupt - too big to fail? So, I do get the buying for dividend. But where is the proof that economy is going to turn the corner? Today's excuse was just ludicrous and they all know it. The consumer "hopes" to see a better future for himself but his is not seeing it in his life now. What kind of logic or excuse is that for a monster rally with below average volume? You can't even short this market because you don't know how much more these big guys need to make before they are done. And why would they be done if they are raking in all this money everyday? I believe the rally will not end utill the money managers of pension funds and other small investors actually run out of their investing money. Only after the big boys have suckered these people in and there is no one left to buy, then they will leave the market to its device. I wish common folks invested their money in an index fund and I wish there were no money managers to eat into your savings. How can these money managers be so easily manipulated? I just don't get it.

My plans

33% SDS

Today was a reversal day and I will start to wade in the troubled waters of investment by placing 1/3 into SDS at tomorrow's open. If we do get a break through the 20DMA I will then add to this position another 1/3. Later I will add the last 1/3 when we are below 820. I am trying to play this cautiously. I will give myself room to exit the trade if we somehow rally past 1030 mark.

No change

Market is non-directional right now. I am going to stay 100% Cash for now. Market sentiment is very bullish but there are not enough bulls with money to commit to this market (look at the volume). None of the bad news is making any impact on the market and that is very strange to me. Of the face of it, it looks like the market is simply manipulated to stay afloat. So, whoever is ablt to manipulate the market, must have a purpose in mind and until that purpose is achieved the market will remain afloat unless the entity runs out of money. It is too dangerous to trade in this market. This market can stay like this for a long time. Or it can shoot to the moon anyday. Or it can tank big time. So, you can't play this market even with some options play. Suppose you buy out of the money calls and puts and the market does not go anywhere. Best thing to do is to stay on the sidelines. But, if I were forced to play the market, I will play on the long side and be willing to withstand volatility of plus and minus 10% on SP500. The upside may be 1000 on SP500 while the downside may be limited to 820 for now. The P&F 3-box reversal charts have the next target as 935. Who knows.

Market neutral?

Are there profitable market neutral strategies where you do not have to worry about whipsaws or trend? A simple minded example of (Buy stock plus sell covered call) is not market neutral. It is profitable only in a narrow range about the strike price.

Money management and risk quantification

Suppose I earn $x/yr and have a total savings of $y. Suppose I have expenses $z/yr. A good rule of how much you should invest in cash, stocks, bonds, home, or whatever is that you should think of your needs $z/yr first! Your $y is reliable but your income $x is not. A conservative estimate is that you should at least keep one year's expenses in cash savings. So, first you should stash away $z from $y in a secure in 4 rolling CDs: (1) z/4 a 3 month, (2) z/4 a 6 month, (3) z/4 a 9 month, and (4) z/4 a 12 month. You need to keep renewing them as they mature. So, at the end of 3 month period CD#1 will be placed in another CD of maturity 1 year so that you will have 4 staggered CDs. Try to get as good a deal on them as you can - usually online banks such as ING are better. If your job is absolutely secure then you may not need this much protection and a 6 month's expense may be enough. Now, what you need to do with regular income $x? Every month government gives you approximately 30% return on a part of your money if you deposit it in a 401-k or 403-b account. That is really good deal. So, if ($x-$z) has enough money to max out, say $w/yr, on the 401-k go for it. Check IRS website for the upper limit of your contribution or ask the human resources officer at your workplace. You can get the money deducted from your paycheck and deposited directly in some investment account that your employer is supposed to help you set up. Usually the firms allow you to invest in only mutual funds. Best way to handle this investment is to use broad index fund such as SP500-based index or Russell6000 based index. Put roughly 1/2 in US equities 1/4 in Europe and 1/4 in Asia. You need not look at the return till you are 10 years from retirement. At that time you can start moving 10% each year into bond funds, most liely Tips. When you are done with these you will have $(x-z-w)/year as saving. So, your left over bank account $(y-z) will be growing from your saving #(x-z-w)/year. Of course as your x increases, your z and w will also. So, what are you supposed to do with this growing pile of money p = $[(y-z) +(x-z-w)]? This is a real problem for most working people. They already have their job to worry about and they do not have time to day trade with this money. Neither do they have time to start a business with this money. Many people just leave the money in bank savings account. Some others try to leave them in mutual funds. Some others try to play the wall street Russian roulette - some times they win some times they lose. As the money $p grows one gets more impatient with trying to find a way to make use of it. Maybe donate some of it to good causes. Of course some of this money will be used in the time of retirement or maybe towards expanded expenses z some year.

How to manage extra money $p? Note that if $p were to suddenly vanish it will not affect your life one bit. In that sense $p is really an extra something in your life and it could be used to speculate at least conservatively to grow it at as reasonable pace as possible. We would like to grow it judiciously so that we can pass it on to a good cause or our children or use it in our old age. It turns out that whether your are conservative or aggressive on average you cannot expect to grow money much in excess of the market or economy as a whole. And with the demands of our jobs we really do not have time to follow the market too closely. May be we can spend 1/2 hour each night. So, what should we do? Stock market perhaps is the easiest financial vehicle to utilize for growing a pile of money. I have a reasonable suggesstion how to do that based on the observation that market signals are not always clear cut. The stock market is either trending up, trending down, or vacillating - neither trending up or down. There are many ways to tell these, but a simple trendline on DAILY CHART OF 1-YEAR period is sufficient to tell trend. One can draw the support and resistance lines and pretty much know that there is a trend going on or not. But sometimes one is not sure. Sometimes one is only partially sure. Thus , there are five results we come up with - (1) definitely up, (2) probably up, (3) probably down, (4) defintely down, and (5) can't tell. These are five decisions of how to allocate money in the market. Therefore, let us divide our money into two parts (p/2) + (p/2) and use broad index to invest. SPY and SH are good enough vehicles. We don't need leverage. Depemding on the trend of the market we buy or selll 1/2 position of SPY or full position of SPY or half position of SH or full position of SH or remain outside the market. That way you will be using all of $p and you will get most of the up trend and most of the down trend. Your return should be more than simply using SPY of you do it right. Now, the main question is how to tell the trend. Draw trend lines and do not doubt yourself is the way to do it. But your trend lines will depend on the period you take - 1 year or 3 year. Probably 1 yr daily is good enough. If you try smaller periods then you can catch faster trends. You may also try resistance and support horizontal levels for your decision. In that case it does not matter what period you are looking at. But whatever period you choose, stick with it. Most people get confused because they are looking at different periods in different websites by different people. I like the one-year period for both looking at trendlines and support and resistance. I hope money management will be useful to you.

The market behaved technically correctly

Now, let us not complain about the way market behaved today. In the first hour I thought the market was going to tank. I was ready to pull the plug on SSO and go to SDS had the market gone below 875 on SP500. But boy o boy that 880 is a good support. Thats what the charts are telling us. On the upside 905 is also a good resistance. I will sell all of SSO at the open tomorrow and go to the sidelines and wait. This market is not trending in any direction. So, no point in trying to guess what the next move will be. Technical analysis works only in a trending market. My day trading did not work today. I lost one clear opportunity to get long on FAS. I just doubted myself too much and the market ran away from me too far to enter the market. Thats how day trading is. Either you act fast and take the risk or you don't get to play. By the way, my returns since Feb 27 are almost the same as just buying spy and holding it without doing any of the readings or trading. That is a stunner! I always thought it was possible to beat market just by following the market trend lines. But the present market has me completely fooled. Maybe market timing does not work after all. We will see. Let the second part of the contest with SP500 begin.

Derelict to my blog

Sorry I have ignored my blog for a while. I have been spending a lot of time at xTrends blog. I think its a good portal for sharing ideas. A lot of people post links to their own blogs which I enjoy reading. Also, this day trading has got to stop for me. It is taking away much more time than I can afford at this time in my life. So, I will go back to my regular portfolio of SSO and SDS. The up trend in SP500 did not get borken today. Maybe tomorrow. I expect we will have a move up tomorrow and probably retest the highs before being sent home later in the month. I don't see any real stimulus sentimentwise for the bears to prevail. So, I will just stay put in SSO for now. Didn't get kicked out of SSO holdings today sine SPY did not touch 88.2 today.

One more day of day trading FAZ

Today FAZ was a good vehicle to trade. It remained range bound between plus and minus 2% of the opening price which was about 10% above Friday's close. So, it was a really very risky vehicle to trade for large gains and I went for small gain trades only. I made three round trips. Bought 10000 FAZ at 4.84 and then within 5 minutes sold for 4.86 making $200. Then I tried again at 4.77 but I did not like the trade and immediately placed sell order at 4.77. Then I tried at 4.72 and sold at 4.75 for $300. This gave me a total of $500 minus commissions of $60. While I was doing this silly thing I missed a real good signal to enter at around 4.75 and exit at 5.10. That would have given me a much better return. Well, tomorrow is another day. The best method that has worked for me so far is: (WARNING: Do not just copy this method. It just works with my personality. That is a big part of it. I get nervous when the prices go up rather than become greedy which is what I am supposed to be. I am very fearful when the prices start to go down and I am really really quick at taking a reasonable loss. I will not go beyond 10c loss on any of these trades since I know it will be very hard to make up for larger losses. What I am saying is that everyone has to figure out their own method that would suit their personality. Although I am following these rules, I am not rigid about them and give myself a little bit of flexibility, which would seem to go against what you read in books that one has to be rigidly disciplined. But so far I am positive for the week granted the first day was a really an outsized gain and I have not been able to repeat that performance. Still it has been OK. The best part of this trading for me has been that I do not have to worry about whether we are in a bull market or a bear market. The bad part is that this is a day trading. I think I can limit my trading to between 10:30 to 12:00 and maybe make enough for the day. That is my next goal.)

(For 2 or 3 cent moves use 1-minute chart and for larger moves use 5-minute chart.)

Step 1: Look at the slow stochastics for oversold condition. You know when it is coming. So you don't have to look at the screen all the time, just around the time the stochastics are down.
Step 2: Look at the momentum - make sure it is increasing. If negative then becoming less negative would be an increasing momentum. Must have positive slope.
Step 3: Look at MACD - confirm that it also has a postive slope.
Step 4: Place LIMIT BUY order at the highest price H of the last minute's candle. I tried with the closing price of the last minute's candle and it did not work couple of times. The price ran away from me and gave me a huge opportunity cost.
Step 5: See what you paid for the prices.
Step 6: Place a LIMIT SELL order at H+x, where x is obtained by some reasonable rule - (a) today I just used 1-minute tick spread which was between 2 and 3 cents. (b) A better one is to wait till the stochastics AND the momentum AND the MACD all tell you that the up move is over. On average you get 10 cents on FAZ nowadays in method (b) before retracement starts but along the way there are a lot of back and forth on a 1-minte chart and the Level II ticks will scare you and it is easy to get nervous about losing the gains.

I think step 1 can also come from a breakout point. But, there, one has to act really really fast. I tried to do that today and I couldn't. My limit orders were not filled. So far, my little trades are yielding good enough returns. I learnt to play this game by reading and watching the currency trading - they do it for steps of 0.01 cent, i.e. 1 pip. Entry has to be timed right in the upward momentum changing phase using 1-minute charts. The fluctuation in 1-minute charts is 2 to 4 cents on FAZ and the bid/ask spread is 0.01. So, when you buy, you are immediately 1c behind. The market has to move up 1c before you can breakeven. Therefore, you have to time your trade really very precisely in the increasing positive momentum phase. Probably the risk of losing is quite great unless you stay alert and cut your loss within 5 cents. I think one can trade between 10:30 AM and 1:30 AM with this method. You have to watch the overall market trend and the trend of FAZ or FAS whichever is tranding with the market. You definitely do not want to trade against the broader market. Also one has to make sure the size of the position is large enough that the tiny gains are not given away to the broker. Thanks Max for suggesting Interactive Brokers. I have openned an account there and maybe within 1 or 2 weeks I will be able to trade at a lower cost. Tomorrow I will try to see if I can do more 2 or 3 cent trades. I will try to limit myself to between 10:30 and 12:00 unless I see special circumstance developing. ALWAYS TRADE WITH THE PREVAILING TREND/SENTIMENT OF THE OVERALL MARKET!!!

Day traded using Breakouts in FAS/FAZ - terrible idea

I day traded using FAS/FAZ pair, this time using break outs of bases with a tight stop loss order. This method yields a profit of $700 on 6 round trips with 7 winning trades and 1 losing trade. The only losing trade today was when I tried to use FAZ in a counter-trend rally what looked like a breakout which quickly fizzled out. I would have lost even more had I not had a tight stop loss in place. This method compared vary poorly to my watching the stochastics for entry and watching the stochastics+momentum+volume+MACD for exit. The main reason for the poor performance of the breakout method is that after the breakout follows the consolidation period which often gets you back below the breakout. But this also signals failure of the breakout. So I needed to protect myself against that and that made me take really small profits. Sizes of winning trades were 0.01+0.09+0.11+(0.02*3/5 + 0.01*2/5) + (0.03*1/5+0.01*4/5) and the losing trade as -0.11. NEVER TRADE AGAINST THE MAJOR TREND!!! That is one lesson learnt this week. All through the week the counter-trend rally gave very small gains or outright losses. But, hey $700-Cost$120 = $580 is not bad at all on approx. $30,000 account plus the margin. That's like 2% net in one day. If I got 2% everyday then compound yearly return will be humongous: (1.02)^(250) for 250 trading days, basically doubling every month!! Clearly unsustainable. My first day with approx. 10% gain must have been really a fluke since so many large trades worked out. Today I found myself really being TOO CAUTIOUS and I will sell too soon only to find myself buying FAS at a much higher level since FAS was making the staircase every 1 hour or so. I would have made at least 10% had I just stayed in FAS regardless of drawdowns along the way. I was too fixated at limiting the draw down to no more than 1%. On Monday I will go back to my first method.


Meanwhile the hypothetical portfolio of SSO is doing incredible. There I am not arguing with the tape. My gosh even with lower than average volume we have explosive moves. From the bullish sentiment manufactured by the Obama administration I was expecting a 500 point day today. So I am a little disappointed. Remember jamming the tape and tape painting are old tricks of wall street. That's how they make money - just give a higher valuation to their assets and that means they have more money. Incredibly easy game - its real surprise how they can ever run out of money?

Not a good trading day in FAS/FAZ pair

I missed the big move in FAZ in the morning and spent the rest of the day fighting the tape with 21 trades, two of which were made by mistake on the order entry ticket. (Hey with that many trades you are bound to have a mixup. I want a system that has no more than 6 trades, and has >50% of what I catch here.)

Trade # 1s (sell): Mistake from yesterday unclosed FAS gave a surprise bonus to start the day with +0.55. Without this surprise I would have 1/2 the gain that I got today trading the market.
Trade # 2b/s (buy and sell): FAZ gave a puny +0.04. (I have got to learn to take profits in this method. I let a huge run disappear watching for the signal to show up.)
#3b/s: FAS gave -0.13. (I had to cover in a hurry to prevent more loss.)
#4b/s: FAZ gave +0.05. (Same happen again!)
#5b/s: FAS gave -0.07. (Decided that I am not going to play FAS today since overall market was bearish.)
#6b/s: FAZ with a tiny loss -0.03.
#7b/s: FAZ with another tiny gain 0.05.
#8b/s: FAZ with a really good midday rally +0.19. (Could have been >0.3 but I let the tape run down till it gave me a signal.)
#9b/s: FAZ with another small gain 0.075.
#10b/s: Made a mistake in placing buy order on FAZ, it should have been 5.92, instead I placed it on 5.85. I had to manually stop the loss at 5.70. Lost -0.15 points.
#11b/s: Tried to go back to FAS - a BIG MISTAKE - violated my earlier decision not to touch FAS today. Lost -0.13.

I played with 10 shares of FAZ for ever 3 shares of FAS to have the bearish bias of the day in addition to my deciding to stop playing with FAS altogether. The ratio of 10:3 FAZ/FAS made the money difference of approximately 3:5 since FAZ was around 5 and FAS around 10, which is a good idea when you are betting, i.e placing bets on the side expected to have higher win rate (poker anyone?). Therefore, today's haul was 3*0.22 + 10*0.225 = 2.91 units. I was playing with 1000 share units, so my take was $2,910. I am fully out today. Hey, not bad for a day's work. But it was really terribly frustrating and intense. Definitely not for the faint of heart. I also made some changes to my method.

1. Slow stochastics to get the signal to enter the market. But that was not very helpful today, so I used resistance on FAZ to place an order on the breakout to re-enter the market on FAZ. But there was no other resistance nearby to place an exit order. So I lost at least 0.2 points on FAZ exiting too late. There was a support on FAZ which I used once to limit my loss once I found my error in entering FAZ at 5.85 instead of 5.92, which would have been safely above a resistance at 5.84. I better relearn the Fibbonaci stuff, which will at least give some expectation from each move. Right now I don't have any expectations and I have to watch the market and charts and at the same time fight myself (like try to be fearful of losing the gains and greedy for getting a better price of entry - just the opposite of what you are supposed to feel.)

2. Exit was decided on the overall picture gained from looking at momentum, MACD and volume. Did not work out, since my return is definitely worse than yesterday's. Then I went to look at really more or less non-trending market after the initial push on FAZ. I found good support and resistances and used them to enter on breakout on FAZ and to limit loss.

I am going to do some more studies tonight. I definitely need a less strenuous system. I had to look at the screen practically all day again. I want to have a system where I can place some entry and exit orders and then forget the market for hours. Also I need another measure of how many points is enough for taking profits. I was watching the market and I noticed that after a rally of 1/2 hour or so the market takes a breather. Probably the average range of the sizes of these rallies will be the best indicator of the amount of profit to expect with each intra-day rally. Got to figure this out before tomorrow.

Day traded FAS and FAZ today

I day traded FAS and FAZ for a little bit of extra money since I had all day to myself today. Day trading is really hard. I will be using the same setup tomorrow. I had two windows with real time (5 minute - one day) graphs from Ameritrade, one for FAS and the other for FAZ. The secondary indicators are volume, momentum and slow stochastics (3,3). When the stochastics gives an oversold or overbought I check with the momentum and volume to be sure of the reversal and jump in with two orders in equal dollar value - one to buy FAS and one to sell FAZ or the other way. I started with a buy on FAZ at 10:15 AM ET, and then followed with sell FAZ at 10:40 AM and buy FAS at 10:41 AM, and then I continued this game. My gains on FAZ were +0.25, +0.05, -0.10, +0.05, +0.30 in share price and on FAS were -0.1, 0, +0.15, +0.85, +0.4 in share price. I ended the day with selling at the end about 10 minutes before close. The total number of trades was 5*2*2 = 20. My e-mail inbox was filled with confirmations. That will pose problem when writing tax return will come next year. The method generates too many trades, but the percentage of winning trades is decent and will prove to be useful. When you add up the gains then I got 9% from FAZ adn 12% from FAS. That is a really terrific return, but I had to watch the market every single minute. That's no way to live. Clearly +0.05, 0, and -0.1 returns are from false signals, but you do not really know at the time. Any idea to trim my signals will be very helpful. I will also try this on other pairs BGU/BGZ where you can play both sides. I was thinking you need a lot of fluctuation for this method to give good returns like today. I wouldn't mind trying this on SPY/SH pair since I found liquidity to be problem. My big orders were broken into too many smaller parts each time they got filled. Also with 20 trades Ameritrade made $200 from me, so have to play with large enough pool. Today was too much motion in FAS/FAZ and that is why the return is so high. I am not expecting this to repeat every day. I would be content with more down to earth return if it is consistent. I would be looking for other violent pairs to play this strategy on. So if you know of some, I will greatly appreciate it.

Money management in investment and the real return of a portfolio

1. First, the trend in the market is up. So, here I am 100% in SSO. My own real money portfolio does not use SSO. I use SPY and I went in today and brought up my SPY holding to 10% of total portfolio with a stop at $88.20. The rest of the portfolio is made up of permanent holdings of all kinds of dividend yielding large stocks, where I have been adding steadily. I always keep 50% of my total portfolio in SP500 mutual funds or cash when the market is below 200-day MA. I play with the other 50% in stocks. Right now the SP500 mutual fund part is totally in cash ever since we went below 200 day MA in Nov 2007. I didn't go short, which is a mistake in the hindsight. But hindsight is always 20/20. I was afraid of getting whipsawed, so I stayed out. I thought of getting back in when we crossed 50day MA but the economic condition really looks bad to me. I will wait till we cross 200-day MA before risking my solid base part of the portfolio.
2. Second thing I want to talk about is how net return of people's portfolio is way less than simple market return. Here is why: I have found that if someone has $X in savings, then he does not have all of X in the market. People usually play with a fraction of r*X and the rest (1-r)*X languishes in a bank account. Suppose they get a return y from the market and z from their bank account, then their return should be: y*r*X + z*(1-r)*X. I will bet that their return is less than SP500.
3. Third - Another problem that I find with people's fake portfolios is that they are nothing like their real money portfolio. Unless you put real money your portfolio does not count.
4. Fourth - Say, you have X dollars that you do not need for a long time (at least 5 years). Then I consider that investable property. Now, the cardinal rule of investing is: Do not lose more than 2% of the total portfolio (ie X) on any trade. How do you make sure of that? Suppose you have $100,000 to invest. Lets work out the example with SPY, which is around $90 right now with a supprt around $88. Now, 2% of 100000 is $2000. Therefore, if you were to put a stop loss order at 88, you stand to lose $2/sh. Therefore, you cannot have more than 1000 shares of SPY. I work with even more conservative scenario and don't place bets that have more than 1% loss in any trade. But, I will go up to 2% if the market is strongly trending.
5. A fifth aspect of trading is trying too many stocks. I have found that one or two is enough for trading and I will treat the rest as non-trading portfolio. I cannot keep track of more than 10 stocks. My trading portfolio has just SPY 500 which I sometimes short also. I haven't used SH since it has less liquidity.

6. Sixth item I want to talk about is: Recently I have started to learn spot currency market which trades 24 hours. They give you a lot of leverage, but you don't have to use the leverage and only trade EUR/USD or USD/CAD stable pairs. Say, you open an account of $10,000 then if you just trade 1 mini-lot you wouldn't be using any leverage. Clearly you should never go beyond 1:2 leverage, which will allow you to trade 2 mini lots. People trading with 1:10 or higher leverage easily LOSE all their money. Unless one has $100,000 or more in an account, they shouldn't even think of opening a standard account that lets you trade in regular lot of size $100,000. That is what I have been studying. The 24 hour liquid market is appealing to me. But I have not decided to give it a try yet. I am also afraid of really shady brokers. I have been looking at some, dbFX and fxcm are two that I have been looking at closely. I have a practice account with dbFX. Also a website www.babypips.com is a great place to learn currency trading or any kind of trading. I found their presentation educational and entertaining.

Plunge time as the Boy Plunger Livingston would say

Today, I plunged with both feet into the market. My first 50% was filled at 24.50. And then I immediately placed another order for 25.00. Even that got filled to my surprise. We are chasing the market now. The next stop would be 200-day moving average which I believe we will go through without any stop. There are a lot of bullish economic signals from all over the world. Even the bears are nimbling on stocks. Probably the market will keep going up for the month of May.

A WORD ABOUT TIMING THE MARKET AND BEATING THE MARKET: To date the performance of Simple SPY investing completely matched my in-and-out with 2xleverage. That totally defeats the work I put in to trade in and out. It appears that I have not been able to beat the market just like every body else who tries to time the market. I would be curious if anyone else has actually beat the market in this market.

No new action today

Nothing new to report.

Changed my mind after reading the MACD/PPO chart

Sorry I changed my mind after I went back and read SP500 chart again, this time I took a close look at the MACD, which captures both the momentum and trend in a nice package. Since MACD has also crossed the signal line and they are hovering together I will be staying out of the market. I don't think we have a clear go ahead signal yet. It may come tomorrow.

We pushed through 880 today!

I will put 1/4 at open tomorrow in SSO. And if the market behaves I will go another 1/4 etc. At $23.74 I will be buying 123,000/4 divide by 23.74 round to round lot = 1200 shares. I will place a limit order for $23.74. I think too many people want to participate and everyone is waiting for a pullback. Of course, in that environment there will never be a pullback. What we have seen over the last few weeks is a consolidation. Despite several bad news and some real efforts by bears, the consolidation continued without any meaningful correction. Consolidation equates correction here and if you draw a line from the March low you will notice that we are close to 45-degree rise which is a healthy rate for rebound from a low in the market.

Unimpressed by volume

The up move today is a suspect. Bulls don't have the participants and are being driven every time they approach the 880 line. I don't know how long the bears can keep the levi against the tide of desire to break through 880. Almost everyday we have terrible news and the market seems to want to test the resistance. I would have though that with 6.1% annualized drop in GDP you would not have seen cheering on the wall street. But that is what we saw today. This tells me that we have not reached the eventual bottom of this bear market. This is not a behavior of people who have been subjected to massive losses. So, I don't know where these punch-drunk people are coming from? However, it would be a mistake to not participate in this upward move if the market goes through the resistance with high volume.

Importance of low volume

I cannot believe how confusing the environment is. Despite several bad news the market stayed afloat, budging just 1%. But that happened in a light volume. The market needs high volume to go up. It does not need high volume to go down - just disappearance of buyers is sufficient to make it go down. Technically, if a market has been going down for a while and you get a big volume down day, that is significant - that's the exhaustion and market will most likely turn around next day which you have to confirm before placing any bets on the long side. The situation now is just the opposite. The market has been going up for a while. You need low volume down or up days - that's significant and may mean we might see some more down days. It may be that there are fewer committed bulls and they are hesitant. At the same time bears have gone in hibernation - this time too scared to come out and play against the Fed.

The low in this market near 800 is supported by the Fed buying treasury. Fed is manipulating the yield curve which helps banks with their balance sheet which helps keep the SP500 afloat. That is the game right now. So, when will this game end? I don't think it ends anytime soon. So, I believe that playing the long side will be profitable in the near and mid term. Buying on pull backs to the uptrend line will work. That would be around 840 on SP500. But a big political question is: how important is the health care to Obama people? The game of keeping the market afloat will end when Fed wants it to end. Fed will end it if Obama people put pressure on them. I continue to believe that the second stimulus package will be about health care - thats how Obama will get money for the health care reform. Need one more scary story and all campaign promises would be fulfilled. Obama does not need to be a 2 term president. He would have done all he came to do in 1 term alone. Education reform, health care reform, defense department reform, and foreign policy reform. He can retire early. Of course, he wants to be 2 term, but even if he does not get reelected, it would not be any loss in terms of his contribution to the evolution of USA. He has to assume that he has only 1 term to achieve whatever he wants from this job. It would be foolish for him to put off anything on his agenda since most likely he will not be re-elected, current poll numbers not withstanding.

Finally I have my head cleared up

Recently I got too confused by the market and strayed away from my normal routine. Then I went back to John Murphy's excellent book on technical analysis (of the futures market) and I am now calm as I should be. The opportunities in the stock market are not always there and it is very easy to get frustrated waiting for opportunities to emerge. Forcing myself to trade has always caused me problem. Nontrending market or trading against the prevailing trend is always dangerous. Evan when you are right, the whipsaws will kill your performance. Anyway, I took some time today and did some charting. I will make this a regular feature of my blog, updating the chart every now and again when the market deems necessary. The long term trend is still negative. So, we are in a bear market for sure. On an intermediate term we have just broken past down trend, so we are in a quasi-bullish domain. The short term is definitely bullish although the rate of ascension has decreased a little bit to more realistic rate. In such a market, you want to buy on the pullbacks to the trendline and/or above the resistances, but each buy has to be based on confirmation from the action on the volume. Since the trendline is really pushing against the resistance at 880, I think buying on the pullback is more risky and I am not going to participate in that activity. Most likely we will move upward and meet the resistance sometime in May and depending on the economic news we may start the anticipated leg down or move up and test 1000. So, we will get our share of the move up if that happens. Participating in the down move is much harder at this level. We have to wait for a break through a strong support at 800 level. But if we do, then we might even take out the 660. The economic news as well as political news has to be really dire for that scenario to play out. Obama seems to be very wily character and manages political fallouts quite well. So, I am not looking for another leg down anymore. The big guys also looking to make more money on the long side so they should keep the shares afloat by whatever means necessary. ALWAYS TRADE WITH THE PREVAILING MEDIUM TREND, WHICH IS UP-BIASED, NOT REALLY CLEARLY UP!!

Day trading or patience

That is the question. In this market, you can make a trade for a quick 1 or 2% profit and RUN! That is really high risk venture. Once I lost big on trying to do that. So now I wait with patience for stress tests. My hunch is that there are a lot of people feeling bullish now, but are a little bit afraid. Some of them are chasing the market every now and then. That is why the market is not able to make a decisive move down. I was watching cnbc today (Fastmoney) and someone said the same thing on the show that people are really only chasing and the shorts don't want overnight positions. There is no way to consistently predict the gap up or gap down next day. But if you see the tone of the market before open, there is a way to make a little money between open and close position 1/2 hour later. But I am usually at work in that time. So no good for me. The rest of the day is really impossible to play consistently.

No clear signal on 2MA/13MA

Since we do not have a clear signal on 2MA piercing 13MA (see picture) we continue to stay on the sidelines. My sense is that we will have some clarity when the results of the stress test are released.

Whipsaw time

The market is at a juncture, and it could go either way. Volume is strong in both directions. If we had the bull rule as it has ruled for the last 5-6 weeks, we would have came roaring back today and erased all the losses of yesterday. That did not happen. So, I am not clear on what to expect next. If the market goes down then I expect real support near 800 on SP500 and real resistance near 900. Therefore, you have only 50/850 = plusminus 6%. I will remain on the sidelines.

Stopped out of market today

Both legs of the 200% long position got taken out today at reasonable losses. We did make a little bit of profit in the last trade. I don't know if its really worth playing the market like this. One day we are up by 30%, the next day we are down to 23%. This market is really tricky to play. Then next support is around 800 on sp500. From 830 to 800 is only 3.6%. If you double up with SDS then you are looking at potentially 7%. On the other side is the risk - if the market goes against you, it could easily go to 865 before pulling back - that is about 4.2%. That will risk a loss of 8.4% if you use SDS. Therefore, the risk:reward ratio is 8.4:7, while you should not trade unless you see a risk:reward = 1:2 ratio. For intermediate-term trend traders this is time to be on the side lines.

New trading strategy

Original strategy:
My traditional trading strategy is not working very effectively in the current market. My original strategy is based on the principle that "the confirmation or believability of an up or down move is a strong function of the volume". It used to work like charm before and worked all through the bull and bear markets except in the present bull rally phase. I think government interventions in the last 6 months have changed the trading landscape in an unknown way and there are many cross curents in the market and that is why we cannot use traditional tools any more for some time to come. [I will not be ababdoning my tools for good. I will be following the price and volume actions, especially around the resistances and supports, but I will not use them to trade with any more this year.]

Cause for conern:
Recently I have found that even a low volume up day can have a high volume down day the very next day, and a high volume up day can be followed by an equally high volume down day. This kind of thing is expected only during a turn around phase. That would mean that we should interpret the current entire 1000-600 (minus 40%) and 600-1000 (plus 70%) on sp500 as some kind of battle zone between the bulls and bears, which can be carried back and forth over a time period of say 6-to-18 months. The battle will not be decisively won by either camp until economy either goes south for good or gets a real footing. Another interpretation is that the range is actually narrow, may be between 700 (plus 14%) and 800 (minus 12.5%) on sp500 but the bulls and bear are overdoing the move in both directions. Usually the range of back and forth between the two camps is narrow, plus and minus 15%. The so-called the bottoming process will see several moves in this range and it is usually very hard to make any money in this environment since before you enter a trade the trend is usually too far along and too close to the resistance in that direction.

New strategy:
That is why I have abandoned my long-term approach and gone strictly to 2 day simple moving average piercing the 13-day moving average. I am actually tinkering with 13-day simple MA and may try the 10-day SMA. On the shorter time side the 2day SMA seems to blunt the gap up or gap down enough without losing the significance of gap up or gap down; may be a 3 day will work better - I haven't tested that. This comes from my belief that the rally in either direction is probably lasting 3 month right now and should show up within 2 weeks of inception. If the rally lasts longer than 3 months then so much the better. And always keep a tight sell order in place. Limit sell order at 13-day SMA seems to be working out right now. I will try to be flexible with that and if we are above some support then I will not use 13day SMA but instead the support level minus 2% as the get-out-of market price.

RISKS: (1) The danger for current trading rule is that if we enter a phase near a major support or resistance following the rule blindly will subject me to severe whipsaws. Therefore, I will not follow it blindly near the resistances/supports and will remain out of the market if kicked out. This should protect me somewhat against the whipsaws. (2) Staying out of the market in times near the resistances or supports has a risk that if we do go through the resistance/support then I will have to buy the same shares for a little bit more. I am willing to take that risk in the present climate.

This is how bull market works!

We are in a secular bull market! I am so impressed with the positive spin that all the bad news gets now a days. Today volume was very good. I would not want to be on the short side of this market. People are feeling that they will miss the rally unless they participate. Therefore market keeps going up. I will be adjusting my SSO sell order to 22.00. That will be break-even for me. I bet the market will go past the resistance now. It backed off today. But come next week, I expect the rally blow past the resistance. The next resistance of any significance will be 200 day MA which we will reach in mid May. There is a yearly cycle of low return between May and Sept. After we reach 200day MA, we will sell off to 50-day MA and after Sept we are going straight up to 1300-1500 range on SP500. That will be a second opportunity for the retirees to get out of the market with profit in their porfolio, but I don't believe people will take advantage since greed will be present in public sentiment. I am also impressed by how gold has been behaving lately. Isn't dollar supposed become worthless? What happened to those arguments? That is why technical analysis is superior to fundamental analysis. But keep your technical analysis simple. Most traders make mistakes by following complicated rules. I never found complicated rules to help in consistent return. Only price/volume action is reliable in any market.

Bullish pattern continues including volume

Market behaved nicely today - moved up higher brushing aside all the bearish news. The short-term resistance is less than 1% away while 50-day support is (870-770)/870 = 11% below. I will be make the sell order at 13-dayMA which is 833 on sp500 and 21.63, which will still be selling for a loss if it materializes. All other indicators in the overbought range. The market is sentiment driven and who knows how far it has to go before fundamental reality starts to make a difference. Luckily, we can trade on the market action alone and not on the fundamentals. Happy trading!

Mixed signals in the market

Once again market went up higher for no particular reason whatsoever with a lighter volume than yesterday but still a decent volume. Probably a lot of money is coming in the market through retirement funds, some of which kicks in around April. I couldn't get my kickout price today so I remained 100% invested - a really bad mistake considering what is going on with my indicators. Since volume is turning out to be of no use in this market we can only trade on short and less short term price trends. I looked at charts of past 6 months since the market went into turmoil, and I could find that only 2/13 was consistent enough to have avoided whipsaws and still make money. Otherwise I am giving up all my gains in the whipsaws. I will keep my exit at 13-day MA and adjust to $21.44 for tomorrow. I will be adjusting the kickout price everyday to the 13-day MA. If market takes me out then, thats fine, and I will try buying SDS if volume is convincing. I am not going to worry about it too much. I will just do technical trading of SMA 2 piercing SMA 13 in either direction. I don't want to use complicated indicators since they have disadvantage of being complicated.

Fully on the long side at SSO 22.00

I don't like the volume being high on a down day. I will take 1/2 off the table tomorrow and leave 1/2 on play. My exit order for the next trade is 13-day MA which is $21.36 on SSO. If we go below it then it may be wise to stay away from whipsaws. Just too difficult to trade this market except may be day trading. I may have to go back to small gains on day trading on the days I have some free time.

Couldn't get in today

The market didn't go down 2% as I had anticipated. My SSO limit order was unfilled! We will see tomorrow. What a joke Goldman Sacks was today: we (i.e. tax payers) gave GS $10B through AIG (THE REAL ROBBERY OF THE AMERICAN PEOPLE - scare them so that they don't stop their government from stealing their money on behalf of GS and others of their ilk) and they show a profit of $5B. Now try figuring that out as some kind of profit. Plus why is Goldman selling its own shares if the shares are cheap or undervalued? Clearly they know some suckers out there will pay them top dollars (i.e. current price) for them. It is hilarious how "savvy money managers" are just as gullible as everyone else - the main reason for money mangers to buy this crap from GS is that its not their money they are using to buy GS. No one should be allowed to be money manager unless they have 100% of their assets in the fund. Same goes for people managing retirement funds. Basically, when people manage these funds, they have gambling addictions, except there are absolutely no consequences for them. Great job for gamblers. They ought to be required to be members of Gambling Addict Anonymous. When you have bullish sentiment everything looks rosy and great. The actual economy is stuck because people are just too scared to let go of money on frivolous stuff the don't need.

Forgot about Good Friday

Market was closed Friday. We are now in a medium-term bull market in the stock market despite misgivings about the economy and I will be acting accordingly. For the portfolio on this blog I will be placing 100% into SSO with a market order $22 (which is 4% below market price on SSO corresponding to 2% on SP500), but if, at Monday morning, the market looked like it will not give me a chance then I will just go ahead and change the order to market order at the open. ( With limit order I am taking a chance here that my order will not be executed but after last minute rush upwards on Thursday, there is a good chance that there will be at least 2% intraday pullback on SP500 before heading back up again.) Next stop is around 880-900 on SP500. From the volume momentum it is likely that we will blow past 900 and head to 200day MA, which is around 1000 on sp500, which is only 16% from here. With SSO we will squeeze 28-30% from this move and then wait before shorting with SDS if the market cannot stay above 200-day MA. If we are lucky we will make all the way there. That would be a great sell signal because the actual economy will become center stage at that point, which I believe has at least one more leg down since there is still no capitulation and there is too much confidence in general public. It is difficult to see how such huge (real) losses can be recouped by fake money and not actual (physical and service) output of the people.

A great buy signal

Price movement, volume, and sentiment are all aligned. I will put in 1/2 of cash into SSO at tomorrow open.

Nontrending market

Look at the pf-chart of 2% 3 box reversal chart and you will find no real activity recently. The bias is to the upside. I will wait a while longer before committing any funds to trading. If the market goes above 860 I will try the long side. The volume today was not impressive. I think that market went up too fast in March, even for Bulls, and people are taking a breather. Now we have to wait for some market moving news to show up. I can think of two types of news that is pending - one is a resurgence of news about zombie banks - that will drive the market lower, and another is orders are up - that will light a fire under this market. If I hear that news during the day time I will jump 3x leverage full steam even I lose 2 or 3 % before I am able to get in. SP500 will be going 1000 in no time with that kind of news. If we get bad news first then I think we are going to around 750 before bouncing right back up. Those are my hunches. Will I trade the short side? I think not. We are too close to the bottom in this cycle and it is probably not much return for the risk to be taken on the short side. Think of two factors that favor an overall bull run this year - (1) Stimulus spending will start to show up in the economy during summer and (2) Fed's guarantee to not let a washout of bond holders. So, if you want to play, it is safer to be on the long side this year unless you start see scare news start up again. Buy the dips and sell the highs probably will be a good strategy for really short-term traders. I am trend trader, so I will like to see some trend develop. Right now there is no trend and I will wait it out.

Chasing the market is never a good idea

Market went down today on a relatively unimpressive volume. People are waiting for the Earnings season to give some "news of recovery". My guess is all bad earnings news, such as Alcoa, will be considered old news and market will not move much but if there is any mildly good news like that of RIM, bulls will make a lot of noise and push the market higher. The low volume today is very instructive - the market wants to move higher. It just needs more participants. The bulls have to suck more people in the game. The mantra now is that recovery will be in the second 1/2 of this year and by some magical reason stock market should move ahead now so as not to be left behind. What happens if the recovery does not materialize in the second half? These naive bulls will be destroyed. Stock market is not a forward looking indicator but rather a casino for these people. you place a bet, and may lose everything if the bet does not pan out. I am watching the 50-day Moving average, which is around 795 on SP500. There will be a trade if we pierce 50-d MA. Probably you can trade between 800 and 760 on the downside and between 800 and 850 on the upside. Or, you can stay out of the game because trading range is not wide enough. I am staying pat for now. The P/F chart is showing warning signs.

No change in outlook - bias to the long side remains

Impressive rally from mid-day on. I will be looking for a follow through tomorrow. Amazing how market is setting aside all "bad" news. Look at the logic: When IBM was buying SUN, both were up because it would be so good for IBM. Now, when IBM is not buying SUN, they are cheering that IBM will not be saddled with SUN. Wow! Which is right? These are the irrational behaviors that markets are made up of. When the market "wants" to go up nothing can stop it. It will see good in all news, bad or good. Bulls are definitely not exhausted although volume was not impressive today. Buying will not stop till bulls get tired of moving the market up. The bears are stuck because the downside is so limited due to FED "guaranteeing" no loss on bonds until some really really bad news of the forward indicators such as durable goods orders start to deteriorate. But those indicators are not getting worse. So, PARTY ON, GARTH! I am very tempted to put 1/4 of my position on the long side. But I must wait for now. Probably short on 850 and long on 810 on sp500 is working for some folks. But that is too narrow a range to play for everyone except for the day traders. Not recommended. My guess is that this new leg up coming up tomorrow may take up close to 900. But I am not sure about the probability of that happening and that is why I would stay on the sidelines. In my opinion, a good trade will be to put a limit buy order for sp860 and then ride to sp900. However, there is too much danger of being whipsawed. Sometimes I use 2day/13day MA crossing, I kind of missed that this time. If the market pulls back then I might try to get back in when 2day again crossed the 13-day. Patience is the name of the game now.

Market has caught up with us

In the last 4 weeks the market had an unprecedented climb. I bet the market has beat everyone who was not 100+% long or who was short. My own performance vis-a-vis market since the bottom is negative 10% although my portfolio since 2/27 is +10% when compared to sp500 all of which can be attributed to the good fortune of shorting the market before this run and using 2x leverage on the long side which made the loss also 2x when I did go short. Ever since I started to write this blog I have not practiced patience. I felt pressure to always be either long or short. Patience is very difficult to have when you are trading a market, especially when you have just beaten the market handily. That is why people tend to lose to the market almost all the time. Current status: The market is currently in a non-directional phase with a slight bias to the upside and a 50day simple moving average support. The upside is limited by an overhanging resistance not far from the current position and a lack luster volume on the up days. So, if I tried to chase the market on the long side, there would be considerable risk for a limited return. The risk/reward factor is not in my favor as far as I see. Although fear of missing on the run is always at the back of my mind if not front and center and the urge to chase the rising prices is strong, I will try to be patient and stay on the sidelines for now. Trading is a lot like farming: when you look at fruits on a tree it is tempting to pluck them for a quick profit, but you have to be patient if you want the fruit to ripen, and everyday you wait, continuing to wait gets that much tougher.

Patience is needed here

Market is making higher highs and higher lows at less and less volume! That is a strange way to start on a bull market run. This pattern happens only at the end a bull market. I just don't understand how a sustained bull market can take hold if you have decreasing number of new participants. That is why it is difficult to participate in this run. Recently I got whipsawed couple of times and when that happens it is time-out time. Today the action in the last minute was surely short-covering. There is a positive bias to the market and short-term traders don't want to hold their short positions going in the weekend. SP valuation is PE 18 and if you give a really rosy scenario of 40% gains in earning over the next year then you will get a PE of 14, which is the average long-term PE. I heard someone making this argument to suggest that SP500 is undervalued at this level. I guess it is possible that the world economy will bounce back really fast but it appears quite an unlikely event given the stress in the US economy. At no time the PE of this market has gone below the long-term average despite all the carnage in the market. (Thats how much the market was over-valued before and how much the earnings have come down.) That bit of information is also puzzling, since almost all naturally occurring systems tend to overshoot in both directions of the average. We know P part of PE but have we changed the way E is calculated so that E calculated according to present-day formulas gives us a low value and hence large PE? I don't know. But it is strange that we haven't gone below the long-term average in this bear market while we had done that in ALL prior bear markets. Maybe someone could comment on this.

SP500 failed to hold on to intraday gains

Once again sp500 is not able to decisively move up and close on high note. The down volume towards the end of the day was impressive. With sp500 near 850, the PE is about 18. That is way too richly valued under current economic climate. The hilarious move up today was based on news about the G20 communique and FASB rule, mainly the FASB rule change. Actually yesterday's move was also from the expectation of the FASB rule change. The rule change by FASB will do two adverse things: (1) make banks less likely to part with toxic assets - there goes Geithner plan bye bye, and (2) create uncertainty about the truthiness of the Banks' Balance sheet. How can a bank lend to another bank if they don't know the quality of the institution they are lending to? Beats me! The commonsense economics says that anything is worth what a buyer freely competing with other buyers is willing to pay for it and not what a seller wants. To say that the assets of the bank will be evaluated by banks themselves - really hocus pocus economics. They also say that there is no market for these assets - we also know this for ECON that there is no market for any asset that is priced wrongly. Plenty of people will buy these assets if they are priced right such as $0.20 on the $1. So, if they lower the price they will discover a market through the good old ECON 101 price discovery mechanism. But if they insist that they will not sell unless someone pays 0.80 or more, then of course there is no market like that. Now, FASB will allow the morons to keep these assets on their books marking them 0.80 or $1 or even $2 or whatever they need to show that they do not have capital problem on their balance sheets. This will make balance sheets of the banks worthless and no one will know which banks are ZOMBIES. No trade for tomorrow. I am looking to get on the short side soon.

A bullish day

We got another bullish day today. Not clear where the incentive for bullish sentiment came from today. But you cannot argue with the market. The 50day MA is clearly holding up quite well. But that is not the reason for today's market move. Banks did spectacularly well today and so did the tech sector. Trading in a trendless market is always problematic. Thats why I got out of the market in the morning today. I remained on the sidelines and at around 2 PM bought a put option on my real money portfolio for SPY MAY 80, which cost me $4.10 per contract. Market went up even more after that and so I do have a losing position there. I will put my options trade in the options portfolio with a multiplier factor to my actual position. I will be waiting on the sidelines till I get a clearer visibility for the market.

Market is in distribution mode now

From the chart action you notice that today was not very bullish even though market went up about 1.5% overall. The volume was lackluster considering today was last day of first quarter of the calender year. There was a lot of effort to push the market higher but not many people seem to be buying the bull-side story. When I woke up today I was not expecting the market to be up but when I turned on bubble vision around 8am, the futures looked much higher than I had anticipated. I was still not bullish so I decided to change the order for SDS to a trading order, but actually I placed a limit order at 96% of SDS closing price, which turned out to be $77.30. I checked at midday and order had not filled in yet, but the pattern was there for a blowout day on sp500 and I was sure my order will be filled in sometime before close. The price went past my trigger price and then some. But then people tried to lock in their profits and sp500 lost momentum. It bodes well for the bears. The day actually closed at a down note. Since my SDS is working I will put the rest in tomorrow if nothing major happens. The BGZ trade will be done by adding the second 1/3 of the installment. But if the market looks favorable to the bears I might go in the rest 2/3. We will see. I have not given up on the options yet. Probably the best time to trade options is when the trend is already set in and not when you are looking at profiting from change in trend, which is what we are doing right now.

My orders today

After getting up I checked the markets and determined that rather than place market order I will place trade order (you can do that in Ameritrade): if the price goes up by 2% on SP500 then we buy SDS 1/2 position. This is in reaction to markets in Europe.

Lessons

The current market is too volatile for my strategy to give consistent results. We got stopped out and now we are completely out of market. There were two mistakes made in March - (1) I came late to the party on the long side, and (2) I tried to extract all I could from the long side. In the hindsight I should have let go of the long side much earlier even though my performance would not have changed much. You can't live in the past, so we have to ask what now? Today the volume was better than yesterday, but nothing to write about. Technically, it appears that the 700-800 range is the new trade. (1) Tomorrow at the open I will establish 1/2 position on the short side with a buy of SDS with a stop loss order of 2% above 50-day S&P500. (2) On the 3x portfolio, let us enter the trade with 1/3 BGZ. Looks like I don't have time to work on the options portfolio. Basically I was going to look for April/June out-of-money put option and buy to creat 1/4 position.

Starting an options portfolio today

I am starting an options portfolio to get practice on trading options. The link will be next to my stock transactions worksheet. I will keep the option trades simple and hold or sell no more than four options at any time. I will be using options on SPY that have high volume and whose spread are no more than 5% of the price. I spent this weekend reviewing my books on options trading and a lot of help from Sean, and I came to the conclusion that fancy strategies are not my cup of tea. I will be using single option buys or sells, just like stocks SSO and SDS. All the straddles and butterflies are out. My trades will be clean. When I determine that I need to be long I will buy a call option (in three or four steps of 1/3 or 1/4 each trade) which has a chance of giving me a decent leverage and is not too expensive when it comes to spread. I will be using steps to get in the market just to make sure that my trades are keeping sync with the current trend of the market. I will be using 20% of my current net worth on this site, approx. $20,000 towards this activity. So, in the end my options trades will not have too much of an impact in case of total loss. I will be looking for options on www.yahoo.com. I will not analyze my options about their intrinsic value and other fancy parameters since I will be using price and volume actions of SP500 for guidance with a little bit more reliance on MACD than before since I believe that may help me from running into a disaster. With options, it is more important to aviod disasters than with regular stocks. I will be experimenting with all three types of options - out of money, at money and in the money. A good question is whether my performance will be better if I use 3x leveraged BGU and BGZ as suggested by Stockboss. I don't have time today, but I will be inclined to get that going also as an experimental stuff. In that case it may be desirable to trade 1/3+1/3+1/3 ladder up and 1/3+1/3+1/3 ladder down rather than 1/2+1/2 I have been using with SSO and SDS. With options the leverage can be even more if I use out-of-money options. I will see how these speculative stuff work out.

Current position of trade in SSO and SDS portfolio: Lighten up from the long side by selling 1/2 position. That will keep me market 1x long rather than 2x long, aligning the portfolio to the mood of the market.

No conviction for the short side or the long side

Although I had suspicion yesterday that number of bulls in the market willing to play the market at this level had decreased I didn't make any money off this suspicion. Such is life! Ok, so what should we do now? Volume was too low today for me to call that the upside is over although upside seems to be limited. I will be lightening up my position with any rally now. From the actions of the last few days it appears that further upside potential is limited and not worth the risk. The downside is also limited because US govt has already guaranteed positive returns to the bond holders. Unless some major thing like some country in Europe goes bankrupt I don't see much movement in the market. There is a lot of noise at this livel. Basically 800 on SP500 is the bottom of 2002 bottom and we are just hanging there for roughly 5 months now. This is what is called churning at or near the bottom trying to get a foothold. Short-term traders like me will be clobered getting whipsawed in this market for the next 2-3 months (maybe even longer, maybe years) when it will become clear whether we go another leg down or we move up from here. We just have to keep our eyes open and try to get out of the market if it goes below 50-day MA or take a few chips off the table if it rallies at a lackluster volume. If the market goes up on Monday, then I will sell 1/2 my position in the rally, other wise I will get out at the open.

Bull showing signs of tireness

All the signs remain perfectly on the bull side except the pattern of VOLUME (see chart) and VIX below 40. If the volume on SP500 went further down then I will be taking 1/2 of my position on SSO off the table. And if the market went below 5% under 50 day MA I will be out fully (I will show these numbers in my transactions table on the left). We will see if those people who are excited about the long side of the market are showing up to work and actually putting money into the market and not just talking about it on the bubble vision aka CNBC. As for me I don't have opinions about which way the market will decide to go. I only can surmise from the action that the market is more likely to go up right now even with an untested resistance around 840 and a tested resistance at around 880.

Once again fully on the long side

The 50-day MA held on again - very very bullish sign. Actually the market came roaring back from the 50-day MA support. Probably automatic technical buy orders got the recovery today- they were very large orders when you look at the volume and sharpness of the late day recovery rally. I will keep the sell order in place even though I do not think it is needed any more till we reach 900 on sp500 or so. You never know what news lie ahead. Thats why you need to keep a downside protection. My protection is not good in the event of a large gap down. For that kind of protection I need to use options. Options are insurance policies - they cost money to have in your portfolio just in case you need to use them if the market gaps up or gaps down too much and kicks you out of the market at the open without any chance of getting back during the day. Right now my portfolio is susceptible to a big bad down day. Suppose some terrible news comes out at night, then I cannot get out the next morning. It may be that the market goes down steadily from there on and I don't get a chance to get out of the market in time. Even the minimal loss will be too much. Another scenario that is unacceptable to me is that news depresses the market below my stop loss order and I get kicked out of the market at the open, but then the market recovers during the day when I am at work and when I return at night I find myself out of the market with a huge loss although market may have actually gone up that day. That is why you need protection of option and not that of stop loss order. I will post more on this type of trade more in the future. Clearly SSO, SDS and Cash are not enough if you want protection in your portfolio.

Bullish signals everywhere

I had though that 20.20 on SSO will be taken out today, but that turned out not to be the case. 50 day MA on SP500 also held like charm. The volume was quite low (see the chart) - not the beginning of a leg down. All of these are bullish signals in the market. Even the relative elevated level of VIX is there to support another leg up. I will place the order to buy at the open tomorrow for the remaining cash position to nearest 100 shares. I will also modify the stop loss order to go below the 50-day moving average. The market has to be convincingly go below 50day MA to reverse the trend that has now been set up.

Spectacular short covering rally

Today's action was really incredible. When I returned from work I was happy with the results for my portfolio. I did not know what to expect going in today, but what a day! Everything looks very bullish except the VOLUME which was very tepid, less than Friday's volume, and very instructive when you think of the size of the move. The only logical explanation is that there were a lot of short coverings going on, especially late in the day - all those folks who are short on banks rushed in the cover their potential losses since they can see the writing on the wall that these banks will not die for a while as they should. There may be some pull back tomorrow, but if the pullback is anything more than 2.5% on SP500, then it is time to colect my chips and go to the sidelines and wait for more definite signal. Therefore I am putting a tighter stop loss order on my SSO positions - 5% below today's closing price.
Random thooughts:
On a fundamental basis the latest plan by the Treasury cannot manufacture the demand. This is yet another way to steal people's money. First was to scare everyone in rescuing the AIG to steal the money for Goldman Sachs and other cronies. The current plan is to steal money on behalf of the same group of folks. Where is the outrage from common folks? The truth of the matter is that the economy is in the tanks because the consumer is simply tapped out and cannot keep borrowing to buy more useless goods and services. You cannot create demand by simply stealing money or printing money. If people don't stop these robberies and unnecessary expansion of government, it is quite clear and relatively easy to show that the US government will become bankrupt (i.e the capacity of US government to pay its bills either through taxes or through taxes plus borrowing will not match its bills) in ten to twenty year period as Senator Judd Gregg of New Hampshire predicted last weekend. Under the current global system US consumers provide a very solid base for economic growth worldwide and it would be shame to lose this stability in the worldwide economy. Instead of practising good conservation of resources and living-within-your-means finance, which would demand we cut entitlement programs in a major way and bear the pain now rather risk ruining everything, the Obama administration is seeking prosperity through credit gorging as practised by the Clinton Cabal. Look what happened to the Bushies when they tried to play Clinton's games with the credit market especially in the year 2005 onwards allowing expansion of credit in the housing sector in a unrestricted way..

Uncertain times

Because of the significant uncertainty in the market I would prefer to be out completely and wait. Here are the data: Fed action is extremely stimulative. Think about it - Fed is guaranteeing a bull market for treasury. That should make borrowing much easier for everyone. If we had a bull market in stocks then people would be borrowing money to get into stocks. But since we have just gone through a brutal bear market in stock, very few people are courageous to borrow to invest in stocks. Now, regular companies will borrow at lower rates to either buy back their shares or improve their plant or services. But there is significant deterrence for that too - demand has dried up. So, in the present macro conditions it is hard to predict the real consequences of the Fed's action on Wednesday. Market action is also directionless. Volume dries up quickly in either direction. That means there is no conviction either in bears or in bulls. The volume in the upward move of the last two weeks have been impressive. And the volume in the last two days of down movement have been OK but conflicting - the volume on the second day was far less than the volume on the first down day even though we had 4-witching on Friday. You normally expect larger volume on 4-witching days. That would foretell that downward movement is limited right now. But a sustained upward movement is blocked by the macro conditions. There are no safe places (except maybe between about 825 and 900 on SP500). So, I would prefer to wait in Cash to wait for an upward move or a decisive downward move or new downbeat news. My current standing order of selling remaining SSO (market long) is sitting at roughly 4% below current value which will be reached if SPY goes down 2%. I will leave the order as is. If I get kicked out of the market I will then think about whether to go short or not or stay in Cash and look for an entry point. Macro dialogue on SP500: From where we stand buying 3 mo 850 calls may work out better or even 6mo 700 puts may be OK too. I don't think market will remain at the present value too long since there is neither a support nor a resistance nearby. Its a no man's land. People think SP500 should be 800*12PE/18PE = 530 based on 12 PE. See more detailed projections in the links under Portfolio and Transactions section on the left panel. The long term average is 14PE which would make SP500 to be 620. Even these may be too high estimates since the earning may come down more than expected (a likely scenario).

Time to reduce long position by 1/2 and wait

My analysis of 50-day moving average, stochastics, support and resistance, and level of resistance as indicated by volume of trading of sp500 trading index leaves me concerned compared to yesterday.
Yesterday the Fed action was so stimulative that I had thought that the market will easily clear 50-day moving average, but it failed. The stochastics are clearly overbought in the short term although I don't pay much credit to stochastics. Its just one more data for me, not something I can use to trade. Due to these factors I will be selling off 1/2 of my position in SSO and then leave the rest with the stop loss order. IF SP500 MAKES THROUGH 50-DAY MOVING AFERAGE then I will get back in fully otherwise I am now on cautious side protecting some of the gains. One can never be 100% sure what the market will do, we just play the odds. The odds are that market will stil go higher and in the intermediate term trade between 800 and 950 for SP500. But if Geitner is forced out by Dodd and company, then it will be a real game changer. Dodd will try to save his skin since he will be facing a really tough reelection challenge based on what is happening with regard to the AIG fiasco. My God, why dodn't they liquidate the company? They just wanted to steak money from taxpayers to hand it to Goldman Sachs, etc. through AIG. That's such a blatant robbery of the treasury that somebody should be hanged for such high crimes. Be prespared to act on the news if that comes about, first on the short side (even if you dont catch initial 5% move still it would be worth it) and then ready to get on the long side You wouldn't get a lot of time to benefit from this kind of news.

Bull market in stocks continues

Today's action on the back of Fed's decision to inflate the Treasury bubble even more is very instructive. I am impressed with the participation level of the crowd, and that the presence of so many people on the long side of the market (see the volume on today's trade) is bound to attract more people. The avalanche is coming and only very bad news now can stop this train. I remain long with much more conviction. There are some short term technical hurdles of 50-day moving average (kind of meaningless number used by some people) and about 900 on SP500 (a more meaningful number called resistance) coming soon. It appears that 50-day moving average will be passed easily with this many people convinced that bear is now done with for at least another 1000 Dow points and the worst crisis is over. I am not sure about whether Dow will make that far in this rally or what will become of the current crisis since I do not trade on these kinds of pie-in-the-sky expectations and I do not make any such predictions. I only look at what other people are doing in the market at the moment albeit one day late. My stop loss order now is profitable even with -5% of today's SP500.

Lower volume strongly up day

I would believe that this is a beginning of a bull market if we had a higher volume today. But because the volume is not commensurate with the outsized gains today I am skeptical of the staying power of the move today.
I will stay on the long side to benefit from this incredible momentum in what can only be called "f--k it rally" with new stop loss price on my SSO to $17.17 which is still below my purchase price $17.79. Not a free ride yet but I am enjoying the ride.
Definition: "F--k it rally" was coined by William Fleckenstein, my favorite stock analyst. This refers to a rally in a bear market which people do because they are so tired of market going down every day. So, people figure "F--k it" I am going in, and therefore market goes up even though nothing has changed.

Another wild day

Today's trading was anything but quiescent as opening and closing prices would have you believe. First half of the day the market was up substantially on a regular volume, and then the last half was down on a larger volume. But the bears in the late day action didn't have enough punch to prove anyone of their potency. This lets me to believe that there are enough bull-heads around that a tepid onslaught from bears will not be that much effective. For bears to succeed in the present mindset of the market they will need a surprising bad news and talking heads piling on - something like all the stimulus package was stolen by some people. Baring that kind of news cycle I remain on the long side since the bias now is on the long side. I will stay on the long side until I get driven out by a 5% move down on the SP500 which could happen. I am keeping my stop loss order for SSO at 16.29.

Market psychology and how to trade in the present market

What drives market prices? There are many forces but the most potent one is the psychology of market participants. There are basically three participants - traders/investors/companies, middleman (investment banks/brokers/market makers) and government. Normally government always wins in the long run (over a 2-3 year period). But we are not living in a normal economic times and government's actions may not have the desired effect in a reasonable time. Furthermore, government's actions may lead to unintended consequences such as hyperinflation and currency devaluation. We cannot use government actions to trade short term except its news value on the traders. Now as far as the traders and middlemen are concerned, their behavior are easier to figure out from the market action. In the bull market the supply of shares is infinite since companies continue to issue shares to easily raise funds without any dilution since they seem to be getting more money for the new shares than they are worth. On the other hand, in the bear market the number of shares is finite and relatively constant. Large holders also tend to hold which makes the shares available to trade limited. This tells you that the bear market will be influenced by the demand of a product that is in short supply which no one wants at the moment. On the other hand a bull market is influenced by supply of easy money that can be used to support higher prices. That is why you ought to look at the volume of trades (=participants) in the bear market and the level of ease of credit in the bull market to sustain itself. During the bear market the short term run to the downside is always accompanied by exhaustion of people who wish to sell. Since the supply of shares is limited any lack of selling pressure is accompanied by a violent upside reaction. In a bear market end of a short term upside is readily spotted by the disappearance of people (i.e. demand) who will pay the current price. Bear market does not end until easy credit makes it possible to overpay for shares and still make profit. Bull market, on the other hand, does not end till government pulls the plug on easy credit. For last several years easy credit was made possible by foreign govts, especially china and japan, buying treasury which US govt was using to funnel into the credit market. Now it appears that chinese govt is becoming more careful with its money and there is significant realization on the part of chinese that their money may not be safe with uncle sam, it is quite possible that easy credit will not return soon. But my belief is that easy credit will return when the sky becomes clear again since american govt and public are addicted to easy credit until they make the american govt bankrupt. Thats a realy scary scenario whose probablity is better than 50%, i.e. it is more likely to happen than not. For now, since we will not see easy credit any time soon (less than 1 year) we should not expect a sustainable bull market. This does not mean there is no money to be made on the long side. Volatility can be exploited to make some money on both sides of the trade. Happy trading.

Bull is back (for now)

All my indicators are bullish except with a question mark on the trend of decreasing volume. I started my day with a limit buy order on yesterday's closing price, which did not meet at the open but was bought sometime during the day. Now, I will watch the market's price action and volume. There are significant resistances coming soon. So, keep an eye on that important thing called volume which is proxy for participants. In an auction market it is the participants who make the market and keeping an eye on them is probably the only way to make money in the short term trading. I have also placed a limit order to sell SSO at 10% loss from present price, viz. $16.27 since the daily fluctuation in the market is about 5% in SSO and I don't want to be whipsawed everyday.

My mistake in earlier call

You may remember I was looking for a low volume down day. It did occur on March 9th but I missed it on a yahoo.com chart. Normally I look at charts on stockcharts.com. Here is the turn in trend signal.

(I cannot upload the chart for some reason. Go to stockcharts.com and click on SP500 and then click on the image of sp500 today's chart which will take you to a longer term chart. You can look at the volume in a separate window.)

With this signal there was no reason for waiting in cash on March 10th. I should have dived in SSO fully. Therefore, I learnt a lesson - don't be lazy and use yahoo.com, stay with stockcharts.com. Even with 10% gone I will put all my chips in tomorrow morning in SSO.

Long side is tempting

The sentiment of the market has turned more bullish. But if I were playing into the options world I might buy a long straddle at the current price. But it is not possible with SSO and SDS. The best I can do is to stay in Cash and wait for more clear opportunity.

What happened today?

I g0t kicked out of the market and my order to fill SDS at the open with a limit on previous day's close was not executed. I really got lucky today. I also got kicked out of the other SDS shares at the open with a loss of around 4%. The total portfolio now is in cash. The question now is what to do next? I think it is very hard to participate in counter trend rallies - they are usually fast and furious. I am going to place limit order to buy SDS at $85 at the open tomorrow, i.e. still planning to play on the short side if the market gets ahead of itself. Why 85? Right now SDS is at 101 and it has a support around 85. Another reason is that bear market rallies last for 10 to 20%. I will see if my order gets filled. Then I will place a loss limiting sell order about 10% lower, which would correspond to 5% on the SP500. Do I believe in these pseudo rules? No, but I need a reasonable guess for placing a limit order and these rules seem to be best that I could find. I will be adjusting my thinking based on volume on the expected follow through tomorrow. Meanwhile I am totally confused from the market. Vikram Pandit is a liar - he told people only 1/2 of the story and everyone got excited. Someone said today that I have $50 million dollars in the bank excpet for the part that I also owe $60 million dollars to the bank. So, if I tell you I have 50 million dollars in the bank is no excuse for celebration. Thats pretty much what Vikram did today and all the shorts got blown out of water. I don't know why shorts are so nervous and decided to get the hell out at any cost. The only other reason is that according to some stupid stochastic indicators market was "oversold" but those indicators are not very helpful since no one can make any money following them. I hate losing 4% in a day. C'est la vie.