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.