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.

Dress those windows?

There are five trading days left for the month of August. And what, boys and girls, have we learned about end of the month window dressing? It's bullish, or at least it is generally bullish. This month the question becomes- is everybody in at this point? There was hesitation yesterday.

I await the reaction to Obama's release of the new and improved deficit numbers today. It's a known issue, it should be built in to price at this point. But markets react to news. I think this market would like to correct a bit thus providing an opportunity to those who refused to chase price. As usual though, markets need a reason to move counter-trend. Maybe I'm the only one who thinks increasing the deficit by 2 trillion dollars is a bad thing. I could be wrong about that,, but I doubt it.

Monday's weakness set up possible trading ranges or topping patterns on many market groups, including chips, transportation and retailers, that did not break out last week.

On the calendar today, another setback for consumer confidence would increase attention on the jobs market and the outlook for consumer spending. Tomorrow's Durable Goods and New Home Sales are the biggies for the week.

Why Do We Trade?

The obvious answer to the title question is, of course, to make money. The not so obvious rationale behind risk taking is another matter.

A neophyte day trader seems to act as a result of an adrenaline rush and is usually wiped out after taking shots, and missing, helter-skelter, based on Cramer or CNBC hyperbole, or some such nonsense.

A neophyte gunslinger acts on fear and greed. Oddly, an experienced trader does the same except that he or she is monitoring the neophyte's fear and greed. The difference is a function of interpretation of the same data that both traders use.

An experienced trader, knowledgeable in the fact that trading is not about getting an adrenaline rush, seems to be more predictable in his or her course of action. The irony is that he or she is watching the predictability of the neophyte.

Mr. or Ms. Experienced has a plan and they execute the plan. They stalk their potential trade. They make observations and generally connect the dots regarding the why of market action.

Experienced traders know they must have the odds in their favor before entering a trade. A hip-shooting beginning day trader is already spending the profit he or she doesn't have, oblivious to what can go wrong.

Experienced traders know that reading the charts, as helpful and insightful as that talent is, is not the Holy Grail of trading. The beginning gunslinger only sees the one indicator, out of many, that is favorable to his predetermined expectation of direction. The beginner sees that one bullish or bearish indicator and shuts out all others because that's the way he/she wants to see it. Experience knows to look at the entire graph, many indicators, plus the general market, the sector charts, and those items off-chart, i.e., news, sector, industry, etc.

The new market fodder, our neophyte, must carry with him/her a neck brace for the whiplash that surely follows. Our experienced traders, healed from their own whiplash days, know when and why to hold a trade and when to cut it loose.

Both types of traders are acting on fear and greed. Both types are acting on observable data. Yet, one will survive and one will not.

We trade to make money, but appreciating the risk and working with it is a learned attribute.

Beginners, if you're going to take the risk, why not learn everything you should about trading before you need that neck brace?

Horny Bulls

The stock market did another one of its levitation acts Thursday, trading higher on low volume and following the lead of the financial sector. The bullish bias was consistent with most days of late, as was the market's tendency to ignore bad news and to latch on to hopeful news. Specifically, the market looked right past the awful initial claims data and the report that mortgage delinquencies hit a record high in the second quarter. Remarkably, 1 out of 8 mortgage loans is either behind in payments or in the foreclosure process.


No matter what happens before Bernanke speaks I will be on the sidelines. I will watch carefully every twitch in the futures market as he speaks. The steroid bulls may try to get this market higher still. The fact that it is options expiration should be a non-event, meaning no extreme volatility, as we might usually expect. Why? Because the last two days have shaken out most of the unwinding. Friday should yield a quiet session, made even quieter by thin summer volume.

In any event, The stock market pushed modestly higher in opening trade as it followed the lead of the overseas indices and disregarded the higher claims data (576K vs. consensus of 550K). The better than expected Philly Fed (+4.2 vs. -2.0) and the fourth positive Leading Indicators report in a row (now highest since 2007) elicited a positive response with new session highs established in mid-morning trade. Limited consolidation near the highs persisted into the afternoon, reflecting continued muted selling interest, with a run to new highs noted in late trade. Sectors strength came from Finance (XLF +2.4%, RKH +2.6%, KBE +2.7%, IAI +1.7%, Insurance +1.7%), REITs IYR +4%, Casino +2.5%, Airline +2.1%, Rail +1.9%, Networking +1.9%, Internet +1.7%, Steel +1.6%, Healthcare +1.5%, Oil Service OIH +1.4%, Housing XHB +1.3%. The limited list of losers included: Biotech -0.5%, Trucking -0.2%, Retail XRT -0.1%.
Market Averages

The rally brings the recent winning streak for the averages to three days but the volume has remained low during what is traditionally near the height of vacation season. It is an option expiration which will lead to a pickup in the pace but does not necessarily mean any substantial prices swings. There is housing data at 10 ET with the recent leading Financial sector a key as a few ETFs (KBE, XLF) are back vacillating near recent range highs. The S&P is facing a solid short term resistance zone in the 1010/1012 area and after a three day run on a summer Friday, it may prove difficult for much near term follow through to develop. Support is at 1003 and the 999/998 area.

August 14th explained... traders have memories.

On August 11th, I posted the following: "Market types like myself are prone to make predictions. We don't start off wanting to make predictions as we realize the danger, indeed the folly, inherent in doing so. After all, we could be wrong.

Nevertheless, the challenge is there, it's always there- daring you, sucking you in until you just blurt out something that, as soon as it's said, you immediately hope won't come back and bite you.

Ever since Aug 14, 1982 I've made the same prediction... that on or about that date, August 14, (give or take a day) the market will break big one way or the other. This year is no exception, I expect the market will break downside on or about August 14. There's the prediction. I wish it were a forecast, it would give me some wiggle room like a weatherman. A prediction must come true.

On the 15th or 16th I'll explain how I arrived at that conclusion."

AND SO HERE'S THE EXPLANATION:

1982, it was my first full year as a stockbroker, and the recession at that time was severe in the U.S. It began in July 1981 and ended in November 1982.

My firm at the time, Prudential-Bache Securities, was absolutely bearish on their outlook for the market. August 13th came and the SPX bottomed at 101.44 and as the market usually does it started to react positively to continuing bad news, meaning that all the bad news was known and built in. Not unlike March 6 thru 9th of 2009.

(As an aside, Prudential-Bache missed the 1987 crash as well. The WSJ said they were so bullish they drove the herd right off the cliff. Just because a Wall Street firms says something, doesn't mean they know what will happen next. Maybe Goldman is an exception since they seem to be the de facto 4th arm of the government. That's why you want to learn to trade, have a plan and trade the plan.)

By the end of the period from the 13th thru 19th of August the SPX had boomed a whopping 10%. Back then a big move in the SPX was 3 points, it's all relative.

I distinctly recall, ignorant newbie that I was, the discussions back and forth between N.Y. corporate office and all the branch offices. The question being thrown to our then market gurus in N.Y. and all other guru types who missed this turn in the market was the same, "How could you idiots miss this turn?" The language on our squawk box was just laced with screaming profanities and name calling as brokers pummelled N.Y. until they finally said it, "We f----d up, okay?!" You could have heard a pin drop.

My lesson learned back then was pay attention to market bottoms and market tops. Pay attention to over-bullishness or over-bearishness.

I've been bearish for the last month on this market. Early last week I went back to 1929 on the SPX chart on a daily basis. I looked at every week that included August 14th. I concluded, as I have before, that when the market has had a lead in trend (regardless of bull or bear) to mid-August that the trend will reverse during that week.

Non-believers will simply have to look at the SPX chart to confirm.

But there's more. The market, going into a known horrible month, September, tries to shift into a defensive mode more often than not. At the end, or towards the end of a run as we've had since Mar. 9th it didn't seem too unreasonable that it couldn't keep up it's momentum; that if previous August history was an indication, and in keeping with tradition, the market would use this time to pullback 5%, if not outright correct 15%.

I drew my trendlines, Fibonacci retracements, Fibonacci fans, checked and rechecked support resistance prices and overlaps of all of the above. I read volume on DIA and SPY. I noted the QQQQ was breaking down. I fit as many pieces of the puzzle as I could onto one chart, paid close attention to behavior for the last week or so, noted what usually happens mid-August and made my prediction.

And recall that it was a prediction, not a forecast. I can't recall trying to absolutely call a reversal date as much as I did on this one. But then, that's we market types like to do. Well, at least that's what I like to do.

It is always about odds and probability as well as fear and greed.

October is known for crashes, but September is more consistenly bad for the market since big money looks to start dumping losers they may have held for the past 6 or 9 months. This fits in with the tax loss selling that starts in October as well. If you throw in an unexpected economic event of any type while that normal market behaviour is going on... you have the elements for a crash.

If you need more clarity on all of this, contact me.

Lest we forget...

The toxic assets are still held by those banks that have received 2 trillion dollars .. the same banks that the govt says are safe and secure. How safe and secure are they if they had to get 2 trillion dollars and THEY STILL HOLD THE TOXIC ASSETS? And those assets, primarily mortgages and derivatives, are still an unknown, unquantified, unverified, unmarketable asset.

Govt can only hope you believe all the lies, it's that simple.

Just a thought!

EXCERPT FROM THE US CONSTITUTION, Article I, section 10: No State shall ... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts....

FROM THE US TREASURY WEBSITE: "Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything. The notes have no value for themselves, but for what they will buy."

A LESSON FROM HISTORY BOOKS: The past 300 years have proven that ALL fiat money experiments ended in complete devaluation. From Rome to Britain: every empire vanished into oblivion soon after it went off the gold standard. It is time to recognize the obvious: Unbacked money has never worked.

Augst 14th ... two days away

Market types like myself are prone to make predictions. We don't start off wanting to make predictions as we realize the danger, indeed the folly, inherent in doing so. After all, we could be wrong.

Nevertheless, the challenge is there, it's always there- daring you, sucking you in until you just blurt out something that, as soon as it's said, you immediately hope won't come back and bite you.

Ever since Aug 14, 1982 I've made the same prediction... that on or about that date, August 14, (give or take a day) the market will break big one way or the other. This year is no exception, I expect the market will break downside on or about August 14. There's the prediction. I wish it were a forecast, it would give me some wiggle room like a weatherman. A prediction must come true.

On the 15th or 16th I'll explain how I arrived at that conclusion.

Every year I point to Aug. 14th as a big change day in the market. This year shall be no different... Aug. 14th... big change in the market.

If Goldman says "higher" than higher it must be... not.

There are fears of a big down number in Friday's labor report, but that won’t tell us anything about the 2010 economy, which the current rally is trying to discount. Our PCRATIO has just about turned bearish http://cboe.com/data/IntraDayVol.aspx, though this can change quickly one way or the other.

Jobs means income and spending money. We're still losing jobs. However, if you wish to ignore that fact just keep watching television and know that everything is okay. Jobs are a good thing even though the government now wants to take care of us ... see jobs: http://www.bloomberg.com/markets/ecalendar/index.html

A 5% pullback on the SPX would bring us to 954, a very easy number to get to in a matter of days. The pullback number I'm interested in is 928 and 878. The 928 number is the right "shoulder" top of the failed head and shoulders of May. The 878 number is the neckline of the same H&S which would be about a 12.5% correction, also doable with a week or so. In order to avoid the typical October crash, it seems to me it's important that we pullback or correct well before tax loss selling kicks in, which usually starts in October. A typical postrecession rally historically has given us a 46% advance AFTER the recession. We've had a near 52% advance since March 9th. Furthermore, Goldman is suggesting another 10%advance from here by the end of the year. Notice GS didn't say in a straight line up from here.

Better odds

I am a directional trader. I'm either bullish or bearish. When I enter a trade I must be right as to the future direction of price.

When you think about that the odds are roughly 50/50, or a little less since price can also just move sideways. I'm also a short term trader (2 weeks is a long time for me).

If the odds were always around 50/50 my net return would be determined on the performance of each individual trade. The net return could be good or bad depending on how good I am at exiting a losing trade.

The one thing I know about trading- it is a numbers game pure and simple. The more I trade the more I expose myself to limited risk and unlimited reward (again, if I'm good at taking profits and exiting losses).

Does it make sense that if I'm reasonably good at reading market dynamics, sector rotation, industry demand, chart reading the candles and indicators and am patient in stalking a trade that I can increase my odds?

Yes, it does increase odds and probabilities and that's all I can ask for from the stock market.

Goldman Sachs and the real world.

It's not that I don't have anything to do in writing this, but this headline just came up and my mind snapped.. this is the result:

Here's the mind snapping item:
Goldman Sachs CEO tells employees to avoid making big-ticket, high-profile purchases - NY Post (164.10)
NY Post reports co CEO has warned his employees to avoid making big-ticket, high-profile purchases as the gold-plated Wall Street co hunkers down amid a firestorm of public and political anger over outsize bonus payments. According to sources at the bank, Blankfein says purchases should be toned down in light of the billions in bailout money that banks, including Goldman, have gotten from Uncle Sam. A source within the bank said Blankfein first began calling for an end to the conspicuous consumption late last year, but has stepped up his campaign in recent weeks as the White House has sought to rein in compensation and as the co has gotten dinged by a pair of high-profile magazine articles. "This is a sensitive time for us, and [Blankfein] wants to make sure that we're not being seen living high on the hog," said one Goldman exec.

What's interesting about it, you ask? The following is dialogue from the movie Goodfellas starring Robert Dinero... notice any similarities? Dinero and his gang had pulled a huge heist just a few weeks before Christmas. The scene is at a bar and one of Dinero's boys walks in with his girlfriend sporting a new fur coat and a new Cadillac outside:

(bad guy) Come here. I want to show you something, Jimmy. Isn't she gorgeous? I bought it for my wife. It's a coupe. I love that car. (Dinero) What did I tell you? I talked to you, didn't I? Didn't I say not to go buy anything for a while? The f**king car. (bad guy)It's a wedding gift from my mother. It's under her name. I just got married.- I love that car.
(Dinero) - Excuse me for a second.
(bad guy)- I just got married

(Dinero)- Are you nuts? (bad guy)- Why are you getting excited?
(Dinero)Are you stupid? We got a million bulls out there. Everyone's watching us.
(bad guy)It's under my mother's name. It's a wedding gift.
(Dinero)I don't give a f**ck. Didn't you hear what I said? Don't buy anything. Don't get anything. What's the matter with you? (bad guy)What are you getting excited for?(Dinero) Because you're going to get us all pinched. - What's the matter with you?(bad guy)- I apologize. I'm sorry.(Dinero)- What's the matter with you?!
(bad guy)I'm sorry. It's under my mother's name.
(Dinero)What'd you say? You being a wiseguy?!
(bad guy)- I'm sorry. I apologize.(Dinero)- What did I tell you? What did I tell you?! You don't buy anything. You don't buy anything. (bad guy)I'm sorry, Jimmy. (Dinero)The fat f**k ought to wear a sign.I can't believe this. Are you stupid? (Dinero)Take it off. Take it off. (referring to the mink coat) Didn't I tell you not to get anything big or attract attention? One guy gets a Caddy andone gets a $10,000 mink. (bad guy)I'll return it.
(Dinero)Bring it where you got it. Get it outof here. Understand? Get it out of here!
Now if you just replace Dinero's name with Blankfein and we have the same scene in real life. Funny how life imitates art, isn't it?