The Good Times Are Here... your govt says so.

Just a thought, but if things are so encouraging, so improved, why did the Senate just pass an extension on job benefits and new home sales credits this morning? This is one reason (among many) that I'm shorting into this rally.

WSJ reports the Senate passed legislation that would give tax breaks to big companies hit by the recession and expand a credit for homebuyers, while raising other corporate levies, particularly for multinationals. The proposed tax increases are aimed at offsetting the cost to the government of the breaks, making the exact impact on individual businesses and industries difficult to judge. But business leaders worry that the measure could be a sign of more taxes to come, as lawmakers seek ways to pay for new measures without adding to the gaping federal deficit. "We clearly are going to have tax increases going forward," said Bruce Josten, executive vice president of the U.S. Chamber of Commerce... The new tax break for businesses, estimated to cost about $10.4 billion over the next decade, would give large companies bigger refunds to make up for recent losses. Specifically, it would let large firms claim cash refunds on taxes they paid going back nearly five years, to offset current losses. Previously, the carry-back period for large firms was two years. Similar carry-back rules already apply to small businesses.

Since the socialists are playing it very close to the vest (read "you'll never know") market participants just place bets these days as opposed to a little fundamental analysis. It doesn't matter, does it Timmy G.?

Greed IS good.

I have been in the markets ever since the earth's crust started cooling and the first "exchange" was created. Back then participants threw rocks at each other as a way of expressing bullishness or bearishness. It had its merits.

Fastforward to 2009, if "greed captures the essence of the evolutionary spirit" then Adam Smith's "invisible hand" will prevail in spite of the war on capitalism and anything that smacks of profit.

The most galling comment I heard during the recent meltdown was in a street interview by a large news network who happened upon a 30-something male:

Question - "What do you think about what's going on?"
Answer - "The drug companies made billions of dollars in profits, there's PROOF enough they're ripping us off!"

Maybe this yuckapuck can develop a life saving drug on his allowance money, drug companies invest billions in developing new drugs. Oil companies spend billions developing oil fields. Maybe the rising socialist star can do it better and cheaper with a pick and shovel.

The question of "ripping off" aside, why was this rising communist not aware of the fact that the sole purpose of a company IS to make profits? Presuming this putz had a job, why was he not aware that if his employer doesn't make profits ultimately he has no J O B?

Gordon Gekko in the movie "Wall Street" DID have it right when he said, "... greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA."

I was asked by a student once if I traded out of greed. The question arose as I explained support and resistance levels on a stock chart. I mentioned that another word for support is greed and another word for resistance is fear. The student incorrectly inferred that the greed I was speaking of was the "bad" greed we all hate.

The greed that Gordon Gekko spoke of was the same greed that I spoke of relative to a stock chart. It is a greed out of the basic human attribute of a desire to get ahead and a willingness to take risks to achieve that end.

It is the same greed that makes people, knowingly or unknowingly, take risks whether they are trading or starting a business.

Whose greed is greater and which is the one with the "bad" type of greed, the entrepreneur's or the government's?

Don't Tell!

Please don't tell Obama and the socialists what comes after a trillion!

Yesterday, we had yet another instance of buyers failing to show up where they should be the most aggressive. This is a bearish divergence that’s starting to take on importance.

The two reports due this morning as well as Friday's reports should continue to show improving results which of course will get a bullish rally... however, they are already anticipated, already built into price, thus I'll be using any rallies to continue entering short positions until Sep. 29th when month end window dressing should abate any pullback. Going into October is where I would expect the correction, the pullback that breaks uptrend lines and throws real fear into the market.

So far, it appears the SPX has carved out a sideways range over the last 5 sessions between the 1060/1075 zone.

Wednesday's reversal off fresh highs left an "outside day" with the major indices closing on their lows. TRIN, which measures the volume of advancing stocks over the volume of declining stocks, managed to close above the 2.0 level as a result of the aggressive afternoon selling. Typically, a close above 2.0 leads to a "bounce" day sometime during the next 1 or 2 days.

The first key support level to watch on the SPX is the 38% retracement of the current Sept low/high, which falls near 1046 level. If price drops to that level, the 20-day exponential moving average should rise up to meet price in that zone as well. Next support below those two points of interest would be the 50% retracement (1035) which runs along the late-August highs in the 1035/1040 zone.

I'd like to see some weakness down to support zones going into the weekend which can set up some buying opportunities early next week for a month-end rally. If prices manage to shrug off today's sell-off and push higher above the current 5-day range highs, I'd be cautiously bullish...meaning Long for a daytrades only.

Change Everything?

Sometime when trading the stock market, as in life, the only thing that needs to change is everything.

I've watched many students trade over the years. I've watched some succeed, and I've watched some fail. This is written for those of you that are on the verge of failing. In trading that means on the verge of blowing up your trading account.

Let's start with the obvious thing that must change- STOP trading.

Now that you can't do any more damage, let's examine what you may have done. The general reasons for failing fall into many categories:
++ No trading plan, no rationale for the trade
++ No discipline (since there was no plan)
++ Holding a losing position
++ Adding to a losing position
++ Taking too large a position
++ Over trading, too many trades... no patience
++ Revenge trading... going back to the same security one time too often
++ Home run trading... only going elephant hunting
++ Overly concerned about the reward, disregarding the risk
++ Playing penny stocks
++ Trading options without knowledge of options
++ An insistance on being "right" vs. taking what the market will give
++ Too much fear... in too soon or out too early
++ Not enough fear... out too late or in too early
++ Too much greed... over confident for no reason
++ Not enough greed... too fearful and miss opportunities

To be sure, there are more reasons one could think of, but you get the idea.

Trading can be a mind-numbing psychological game whereby traders beat themselves and yet look to the market as the reason things didn't work out. Of course the market is the cause of the action in price but it is not the cause of a bad trade.

What's a bad trade? One that not only didn't go your way but was doomed from the start. The odds were against you and you didn't know it.

As mentioned above, sometimes the only thing that has to change is everything. Considering the items outlined below, if you're not brutally honest with your response, you're just setting yourself up again.

Let's start with:
1) stop trading. No, really- stop trading.
2) review rationale for trading the market at all (not everyone is meant for this business. If you're all about making a killing, making a million, and you don't really know a stock from a rock... you're in trouble).
3) do you understand money management in trading? Learn how to manage what you have. If you lose it, you can't trade any more.
4) do you know when the odds are in your favor or working against you? If not, get a trading coach.
5) do you really understand market dynamics? If not, get a trading coach.
6) can you really read charts or do you just think you do?
7) do you have a plan for the trade? No? Then why are you taking the risk?
8) do you appreciate economic announcements and their impact on markets?
9) can you spot a change in sentiment, more importantly; can you position yourself and take advantage of it?
10) are you tracking sector rotation or not? Do you know what it is?
11) are you on top of daily market events and happenings to make a truly informed, calculated, rationalized trade where the odds are in your favor? No, why are you taking the risk?
12) can you spell discipline?

The items listed demand that you review your knowledge in those areas. If you're weak in something, find a way to turn that weakness into a strength. Don't let a weakness kill what could have been a potentially good trade- if it wasn't for that one weakness. Make the time to learn if you really want to trade.

There are many many variables to consider when trading. Yes, it's more than a handful but they are manageable and they have a pecking order of importance. Learn that order.

You got it; get a trading coach or mentor.

Moo.. That Herd Instinct

I suspect good news from today's Durable Goods and New Home Sales reports will prod the bulls higher still, since this would support talk that the market is underestimating the strength of the recovery. However, a failure to react, if today's reports are "better than expected," I would then expect a sell off. No, I won't be holding my breath on this expectation. However, I will be watching the financials (BKX, XLF, IYF, KBE, RKH) closely for clues.

One argument for a continuing up lift is the month end window dressing. A student mentioned yesterday that those windows must be awfully gaudy by now. That may be, but who's to say how much is enough?

The price chasing money managers already know they're overpaying for stocks. They're buying, among other reasons, so they can point to their portfolios when their directors meet, and say, "See, we own those stocks... like everyone else." Money managers are the herd you keep hearing about. What do we know about herds and herd instinct? They sometimes run off a cliff, which is my expectation of this stampede... I just don't know how much land lies ahead of them, but neither do they.

While the market has lost momentum over the last few days selling pressure remains at bay with the SPX essentially forming a range (1022/1021 to 1036/1037) most of last three sessions. Support under the range floor if the weakening momentum begins to roll over on a short term basis is at 1018 (early Aug high/breakout point) and 1013/1012. Resistance above the high is in the 1042/1044 area (Fib extension targets/congest/Oct reaction high).

Logic vs Momo

Momentum in the market is a very powerful force as current market action shows, but it is often wrong because it defies logic. Logically we know this market is and has been overextended, overpriced, and ready for a fall.

Even educated, knowledgeable money managers are bidding up price out of fear of not owning an already overpriced stock. Forget the fact that earnings are not from core growth of operations.

So why isn't it falling?

Why is the market not pulling back:
recent economic news has been demonstrating "better than expected" reports, a litany of "not as bad as expected" (read improving) economic reports, a contrived manipulated market that the government wants only to go higher, a bazillion dollars on the sidelines, a falling dollar that benefits the U.S. debt and thus the S&P 500 in currency translation, earnings not as bad as expected, etc.

In the end, the market action draws a net net conclusion, based on millions and millions of independent decision makers risking real dollars every minute of every day. When I take a trade, after due diligence is complete, I only have one thing to worry about- do enough market participants see things my way to push price in my direction or not? I should add a second consideration here too; will they act on their conclusion today as I have?

Logic is compelling in a trader's approach to a trade. At the same time, if momentum is having its way, any logic that suggests being a contrarian to trend momentum is potentially useless. Ultimately I may be right, but exactly how long will I have to wait for the market to see things my way?

If you trade near term options you can't wait too long.

The battle in the market is not only between bulls and bears. When momo (momentum) is king, the third market animal appears. Pigs tend to play here as well. The adage "bulls and bears make money in the market and pigs get slaughtered" may be true, but when the big momo is the driver, pigs are making money... until that day of reckoning.

What makes traders crazy? The mental confusion that comes from the inability to distinguish which argument is the controlling factor: bullish or bearish based on fundamentals, or, bullish or bearish based on fear and greed in high gear, i.e. momentum.

Each one, fear and greed, panic buying, panic selling, throws logic out the window. The low of March 6, 2009 saw extreme fear and then extreme greed in one day. The highs of August 25th have been reached by an extreme fear of missing out which in turn brings in the greed of the pig traders all of which is served up as momentum.

As usual, the market always moves on fear and greed, sometimes extreme fear and greed. As always logic at major lows and major highs does not apply, in other words calling market tops and bottoms after huge moves is an action in futility.

There will be a top. Traders just need a sufficient reason to exit. Of course pigs will just overstay and overbite their trades and get crushed when momo fails them and logic takes control.

Momo may move on herd mentality, but reality (logic) eventually shakes out the excess and the market reverts to the mean.

Remember another adage, the market can be irrational longer than you can stay solvent betting against momentum... assuming you've identified it correctly.