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.

Bulls fail again

Today's action speaks volumes about the weakness in the conviction of bulls. The bulls had succeeded early in the day but could not hold gains without any follow through of the last minute rush on Friday. Everyone seems to be looking far lower than 666 level. Based on the earnings anticipated in sp500 you could envision it trading in 550 area, but that may be too scary a scenario. I think bulls will put real fight first at 650 and then at 600. Probably it is neither safe nor desirable to squeeze all the down points. The risk for bears is increasing each day. For now the risk to reward is on the bear side for 30 more easy points which is about 15%. Therefore I will be putting back my cash to work from the short side tomorrow. The low volume on sp500 I was expecting did not materialize and government actions are not making impact on the psyche of the market. That makes me not take spending bill seriously. The consumer is simply too scared.

Update

Market was volatile today without much movement in VIX. But if you just looked at the opening and closing prices of SP500 you would think not much happened - in the candlestick chart Koji is easy to see. But Koji hides the fact that market was initially up (actually gapped up in the open) and then we went down considerably but in the last hour we had what looked like tape painting. I believe the last hour buying was simply short covering since there was not as much volume as I would have liked and probably a lot of traders do not trust the government and are nervous holding the short position throug the weekend. I remain cautious on either direction of the market just like the Koji pattern on the chart. Therefore, I will leave my portfolio in the position of 1/2 cash and 1/2 on the short side which has a stop loss order already in place. My guess is that next week we might see a bid for the market since the chattering class is getting loud and the Senate will be voting on the spending on Tuesday which will be spun by some folks to get a bid going. If you look at the SP500 long term chart there is some support around 660 and we kind of couldn't break through that level today. Even that will be used as an excuse of "why the market has bottomed." I will see if it is worth participating in this short-term counter trend rally next week. I will like to see the situation on Monday before I take the position on the long side. I am traveling on Monday and will not have time to check the market during the day time but will try to catch up on the scene in the evening.

This bear leg is getting tired - protect your gains

Today the market action was totally brutal. But the volume was not commensurate with the outsize drop. That would mean that this leg of bear is almost done and there are fewer and fewer participants. Any "good" news such as passing of the bloated spending package in the US Senate will move the market in the upward direction for a while. But I am not convinced that any upward movement is sustainable because of how VIX behaved - it didn't budge much. That means the unwinding is orderly and it has further to go before people who are stepping up to buy in this market are forced to give up. They seem to have given up 25% since the beginning of the year and still not convinced. There will definitely come a time when the buyers will no show up. A day when you get really outsized drop in a light volume, I will load up on the long side. Till then I am going to protect the gain from this week. My gain so far is around 14%. I will lighten up my position in SDS by cutting my position to 1/2 tomorrow at the open and leave the other 1/2 run with a stop at my purchase price.

On this blog I will be posting my trades based on stock market trends. This is not a recommendation for anyone to buy or sell stocks. I am not recommending that you put your real money based on what I say here!! Do your own due diligence. I just want to share my results with the blogging community and perhaps show that it is possible to beat the market by making buys and sells at the market opening. To keep it simple I will be holding only Cash, SSO (Long) and SDS (Short) positions. My method is simple: Look at the crowd and gauge the market direction from the prevailing trend in the market and market action. I will be using my proprietary Technical indicators.

I will be announcing my decisions on this site at night, may be on a regular basis unless I am out on vacation. You can follow the progress of my positions by using the opening price of next trading day. I started my hypothetical portfolio with a $100,000 cash on 2/27/2009 and bought SDS at the close that day that gave me 1,000 shares plus $1210 in cash with $10 in trading cost. As of March 4, 2009, I am in a hold position. ( I am going to buy/sell multiples of 100 shares.)