9/30/2009 - Market Update

Some strange movements have been going on in the market the last couple of days.  We saw a 100+ point move on the DOW based on one of the lowest volume trading days I've seen, and then retrace just about all of that today.  Seems manipulated to me, but we'll save that for a different blog.

With that said, I do expect a fairly large move to occur within the next few trading days based on a couple of reasons.

1.  Symmetrical triangle on the 15 min chart.
2.  Market is now trading at the very tip of the rising bearish wedge.

The market can break out either way.  The coming movement will determine the direction of the next leg.

Advanced Micro Devices (AMD) - Buying Opportunity

This stock has recently broken out of a multi year down trend.  Enter in long positions at the 50 EMA.

Freeport Mcmoran - Buying Opportunity

CVG Convergys (CVG) - Potential Short

Keep an eye on this one.

Research in Motion (RIMM) - Short-term Short Opportunity

Good short entry at around $70-71 if stock retraces on Monday.  Cover shorts if prices break through 73.50.  When a stock gaps down hard like this on extreme volume, we will generally see a continued short term downtrend.  Good support at $63-$65 area - good area to cover if support holds and go long.

9/25/2009 - Market Update

The market got a much needed pullback this week and has presented some very nice trading opportunities.  If we take a close look at the SPY, a couple of important events occurred.

1.  The SPY filled the gap left from last October at 107.
2.  The SPY just about touched the 50% fibonacci retracement from the 150 high in 2007 to the 66 low in March.
3.  The SPY is sitting right at the support trend line going back to late June. (60 Min chart)
4.  SPY is sitting right at the 20 day EMA.

Monday will be a very important to day to watch, as many stocks are now sitting at their 20 day EMA.  If we break the trend line support on Monday and close lower, a retracement back to 100 - 101 area on the SPY is definitely on the table.  That would put the SPX at around 1010 - 1014. 

Nevertheless, today was a great buying opportunity to see if the 20 day EMA holds.  If you have been long for a few months, then the most logical play is to stay long until the sell signal is given.

Moody's (MCO) & Mcgraw Hill (MHP) - Potential Shorts

Both are now in confirmed downtrends, with high volume selling going on over the past week or so. Wouldn't recommend starting a short position right now - wait for the retrace back to 20 EMA.

MHP has even broken the $25 support - there's really not much there to hold it up below that point.

MCO is $3 away from the march low - also very weak support.

Eastman Kodak (EK) - Buying Opportunity

Update: The 50 EMA held on Friday despite being broken earlier. Will see on Monday if it continues to hold or break down and start another down leg.

VIX - Crucial Support

The vix has been stuck in a bullish falling wedge since since late last year and broke out of it in August, and is now actually resting on the upper trendline. The 23 area is now serving as key support, and if that breaks, then the market will continue with its rally as expected. If the vix breaks out to the upside, then a pullback of moderate strength could take place as the SPX is currently 30 and 60 points above the 20 and 50 day ema, respectively.

With that said, the market has built up a very strong buffer at this point, and the SPX could very well retest the 980-982 area before I would even consider a change in trend.

Investing Psychology - Herd Mentality

I have listed "trading alone" as one of the rules to follow, and here's an excerpt from psychologist Irving Janis on "Groupthink".

Irving Janis describes groupthink as, "A mode of thinking that people engage in when they are deeply involved in a cohesive in-group, when the members' strivings for unanimity override their motivation to realistically appraise alternative courses of action." Eight symptoms of groupthink include:

1. Illusion of invulnerability: Feeling that the group is above criticism.
   
2. Belief in inherent morality of group: Feeling that the group is inherently "right" and above any reproach by outsiders.
3. Collective rationalization: Refusing to accept contradictory data or to consider alternatives thoroughly.
4. Out-group stereotypes: Refusing to look realistically into other groups.
5. Self-censorship: Refusing to communicate personal concerns to the group as a whole.
6. Illusion of unanimity: Accepting consensus prematurely, without testing its completeness.
7. Direct pressure on dissenters: Refusing to tolerate a member who suggests the group may be wrong.
8. Self-appointed mind guards: Protecting the group from hearing disturbing ideas or viewpoints from outsiders.

This type of behavior is inherent not just in trading, but all aspects of life - workplace, gangs, religion, cults, drug addicts, political parties, the list goes on. It is human nature to be accepted into a group, to think and act as a group, regardless of whether or not if it's the most logical path.

In trading, a group will often feel attached to a particular view on the market or a particular stock that they feel is destined to go down or up. Generally when this is the case, this group of people will seek out bits and pieces of information / articles that only support their view, while ignoring articles and charts that state the contrary (rule 3). Even when the charts are clearly pointing down and outsiders/some group insiders are starting to think maybe we're trading in the wrong direction, the sheer power of herd mentality and groupthinking will override any opposing thoughts, no matter how correct it may be - even the contrarian thinkers will start to doubt their own beliefs. This is why people ride stocks from $100 all the way to bankruptcy. I have seen it time and time again, and it will continue to happen for as long the market trades.

The sooner one frees him/herself from a group, the sooner he or she will start making winning trades. Trade alone and you will prosper.

Danger in Shanghai ($SSEC)

The Shanghai stock exchange ($SSEC) recently shed 25% since its highs on early August at 3478 to 2639 in early September, before bouncing back above the 3000 mark last week . The sell signal has been given on the SSEC, as the 20 EMA has crossed below the 50 EMA.

While it is possible for the US stock market to continue its rally in the near term despite the fall in Shanghai, the continued breakdown of the SSEC will inevitably drag down the US markets along with it. The conjoined twins of US and China have wed themselves into an economic partnership - till death do them apart. China needs US to buy its products, and US needs China to buy its debt.

Leap Wireless - LEAP

Missed this excellent short opportunity yesterday when it touched the 50 EMA...may not be too late. Close position if 20 EMA holds (19.00) or breaks above 50 EMA (21.50).

STEC - Buying Opportunity

Entry - $34 or lower. Exit position if stock does not close above 50 EMA by today.

Update - Closed position at $32.40. 20 minutes left and it still cannot hold 50 EMA.















Updated Chart: STEC broke key support levels on record volume - next support is at $28.45. There's really not much else below that. There also appears to be 2 unfilled gaps around the $6 and $11-$12 range - those could potentially be filled in the future.

9/17/2009 - Market Update

The S&P 500 index has decisively broken out of the bearish rising wedge to the upside, and has now cleared all major resistances. There is very little reason to be short in the market to this point, and I restate my believe that the market will continue higher with minor pullbacks. Another reason why I believe it's headed higher is because certain sectors such as shipping and airlines are just starting their run.















I've seen people claiming the market is overbought and how the P3 EW is right around the corner. Folks, there's nothing wrong with making a prediction, but if you're constantly wishing for an event while the opposite is happening, it means you're not trading on the right side. Predicting the market is a dangerous game, and that's not what trading is all about. It's about being on the same side as the market (following the trend), and changing sides once the trend reverses.

ENER - A disaster of a stock

ENER was a great shorting opportunity with the signal to short given back in Oct 2008. If you had shorted back then, the signal to cover is still not given. This is another example of why averaging down is a sucker's play. You don't buy a stock because you think it's oversold. You buy it because the chart says so.

Trina Solar Limited (TSL) and LDK Solar (LDK) Comparison

I have been following solar stocks for about 2 years now, and the analysis below shows the difference between TSL and LDK, two solar stocks that have performed very differently. I consider TSL to be the best of the solar stocks, and LDK to be the worst (based on technicals). Among others,

Strong: YGE, CSIQ

Weak: FSLR, SOL, STP, SPWR.A,B, CSUN, JASO

Stone Energy Corporation (SGY)

Manitowoc (MTW)

Nice looking inverse head and shoulder breakout through 200 EMA on big volume. The stock is currently trading at 30% above the 50 EMA, so waiting for a retrace to at least 20 ema before going long would be the safest play.

9/13 Dow Futures

Futures look weak at the moment - trying to hang on to support. Although it's generally a poor predictor for the market direction of the next trading day.

Bank of America (BAC) and Citigroup (C)

In the past few months we have seen a disproportionate number of shares traded for both BAC and C in the S&P 500, and both have caused quite a stir among investors and the public alike. Based on technical trend analysis, there's a couple of points that can be made:

1. Both are in uptrends, and both favor long positions but BAC is in a much stronger uptrend than C.
2. BAC has cleared almost all major resistances, and the only two that remains are $18.00 and $18.50. C, on the other hand, must reach ~10.50 before clearing the final major resistance.

From a fundamental standpoint, BAC has diluted their shares from 4.5 to 8.6 billion shares in 1 year. This magnitude of dilution has essentially cut the EPS in half, and it is highly unlikley BAC will ever return to the glory day highs of mid $40 PPS. The maximum I see BAC is around low 20's unless they buy back their shares. C, on the other hand, has only faced a 10% (450mil) share dilution since last year. But the problem is they're already insolvent if it wasn't for the government backings.

Believe it or not, the initial signal given to sell these two stocks occurred back in 2007. The charts below shows the weakening process and eventual breakdown. By sticking to trends, it would've been easy to see why they were great shorts that one could have held for a sizable profit in a span of 1 & 1/2 years. The purpose of this analysis is to demonstrate the power of trends, and why one should trade with the trend regardless of external views. Being right in fundamentals doesn't always translate to profits.

US Nat. Gas Fund (UNG)

UNG is one of the best examples demonstrating the power of trends and why it's a bad idea to try and catch the bottom. The sell signal was given back in late July of 2008, nearly a year ago. Since then, there has never been a buy signal on this fund. This was a great shorting opportunity, and demonstrates why you should always:

1. Always follow the trend.
2. Never average in (the greatest sucker play / mistake an investor can make)
3. Never take more than a 10% loss

Many had thought that natural gas had finally bottomed at 12 in May and this was the buy, but notice how the 20 EMA stayed well below the 50 EMA, and never even came close to touching. This was another great shorting opportunity.

Now that winter is approaching and it's typically the season for natural gas prices to rise, it is possible that 9.00 was the bottom. But it's pointless to try and predict the future - instead, the best option right now is to stay on the sidelines until the trends suggest otherwise. For UNG to be a buy, the 20 EMA must first cross the 50, and then be able to sustain it. No need to rush or try to catch the bottom (as the past few months have already proven that it was a bad idea) - sometimes the best position is to stay cash. It is better to be late and miss out on a little profit but be right than early and wrong.

The correct play was to short July '08 at around $47 once it broke 200 SMA and and 50/20 ema crossed. Another option was to short at the 20 EMA on 8/27/2008 and cover if it breaks through. This way, you would have rode it all the way down, and would still be short to this day and cover only when 20 crosses above 50 EMA again.

Genworth Financial (GNW)

One interesting stock is GNW - Genworth Financial. It hit 0.78 PPS back in the March bottom, and has since rallied over 1,000%. The signal was given at $2.00, and has made a 500% return according to the 20/50 EMA crossover strategy. I believe it's still not too late to enter in a long position once it drops back to the 20 EMA.

I like this stock for a couple of technical reasons.

First, it has dropped below the 50 EMA only once since the run started, which shows that it's in a very strong uptrend.

Second, it has risen above all major EMAs shown in the chart below, and the 50 EMA has crossed the 200 EMA (my bull run confirmation).

Third, they have not diluted their shares since the start of the financial meltdown. In fact, their total common shares outstanding have actually decreased year over year. This is an important piece of information to watch out for, as companies that have diluted shares will not rise to their prior highs. Take for example, DRYS, which went through a ~600% dilution since the crisis. The EPS is greatly diminished.

9/11/2009 - SPX update

The SPX made a new high yesterday at 1048, but it is still confined to the rising bearish wedge as seen in the chart below. Based on the strong uptrend of the market, it is best to stay long at this moment until the trends suggest otherwise. Notice that the SPX has risen above all EMA resistances, indicating that there is much more upside left.

Contrary to what most believe, I don't think there will be another crash coming this month or October. Not only is it just too predictable, there is also nothing in the trend that would suggest a crash of any kind that's coming. This is the prime example of why understanding fundamentals/reading the news has little to do with making money in the stock market. I am deeply concerned for the future of our country, and I understand the actions taken by the government/federal reserve will only delay the inevitable destruction of the USA. However, nobody knows when the fundamentals will actually hit the market. It could happen tomorrow, or in 2015. The point is you cannot predict the top accurately and sell all long positions and go short immediately before the crash. But you do know the trend, which is up at the moment.

By following my strategy and going long in April when the 20 EMA crossed the 50, you can see that the trend has stayed up this entire duration, and the only time it came close was during 7/8 - 7/10, when the market was about to break down on the head and shoulders formation. Most people thought that this was the beginning of the next crash. However, using the strategy, you can see that the 20 ema NEVER actually crossed the 50 ema, and this was THE best buying opportunity if you had missed the April signal. The correct way to play was to buy at that level, and sell for a small loss if the H&S did in fact break down. You would be minimizing your risk. Regardless, by sticking to the strategy you would've been in at SPX 800 and you would still be in profits regardless if the H&S broke down or not.

In terms of sectors, history suggests that financials and technology always leads markets out of recessions, and I don't see this as any exception. Some tech stocks are already reaching pre crash levels, and financials are equally strong. More conservative plays such as commodities are usually the last of the sectors to rise.

9/11/2009 - Collected thoughts on trading

I have developed some simple rules to follow for successful investing/trading:

ALWAYS follow the trend - Use 20 Day and 50 Day EMA as the trend indicator.

Sell into strength in downtrends, buy into weakness in uptrends

Don't pay much attention to financial reports/news

Rather buy in higher and be right than catch bottom (buy lower) and be wrong.

Cut the dogs loose, let the horses run

Amateurs don't short

NEVER EVER take more than a 10% loss.

Don't make trading decisions intraday.

If you lose, you learn a lesson. If you get lucky, you learn to gamble.

The worst thing that can happen to a trader is to make money on a bad play.

It's better to miss a play than enter a bad one.

In an uptrend pay close attention to the 20 EMA, in downtrend mind the 50 EMA.

Don't day trade. The stress is not worth the money.

Trade alone if possible. The herd is almost always wrong.

Never reveal your trades to your friends.