Joined Nov 29, 2008
329 Blog Posts

50-day MA Intermediate-term Resistance / Possible Upcoming Distribution

I’m in 100% cash once again, not having the courage to hold overnight positions, especially when we’re at the 50-day MA. I see no reason to put my money at risk here. The 50-day MA is like a stop sign along a trend and the market has always met resistance here and has either paused and continued its uptrend or stopped completely and made a U-turn to go back to where it came from. The same applies to the market – it’s one big road.

No doubt, you’ll see some crazy drivers. For example, today you saw Bernanke in the front seat of dollar destruction, driving 130 in a 65, recklessly throwing Benjamins out the window. And if you’re a short-seller, you might see Congressmen tailgating your ass, shouting and shit, telling you to get off the road. You realize that they’re all driving POS Ford Pintos and Chevy Cavaliers, so you just speed up while giving them the finger behind you, hoping that they don’t pull out the uptick gun in their fit of rage and use it on you.

As you’re cruising along, you’ll encounter SEC cops sitting on their fat asses enjoying their KKD donuts and not giving a care about what happens on the road. They’re only there because other drivers want them enforcing the law. You stop on the side of the road to inform them that a 70 year old man with silver, curly hair wearing a jacket with the initials “BLM” and a stupid grin on his face looked like he was robbing some bikers on the shoulder of the road. The cops go back to eating their donuts, not giving a damn. You get back in your car and drive into the sunset, giving them the finger.

As dusk approaches, you come across some highway construction workers putting up directional signs to help you navigate the road. You stop and ask the bald guy, Cramer, for some directions. After blindly following his stupid directions, your car ends up in a swamped out ditch on the side of the road in the middle of no-fucking-where. It is 3am and you’re standing on the shoulder having lost your wallet, phone, and your shirt.

But good thing you had your seat belt on.

Bullish broadening wedges are only bullish if the market consolidates at the upper range and breaks out. Otherwise, there is a risk that the market can fall to the lower end of the wedge, just fyi.

By request: PCU.

The issue I have here is that PCU will meet prior high resistance & 200-day MA long-term resistance about a buck away from here. You could probably get away with pocketing a buck, but that’s it for the short-term. Also, volume does not support the gap up currently.

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Neutral Range + Symmetrical Triangle on Pre-Fed Day

Not surprised.

I’m all hedged out 100% and slowly reducing both longs and shorts until I get as close to 100% cash as possible. Why? Because the NASDAQ is in a neutral bound range and the DJIA and SPX are in symmetrical triangles. I refuse to involve myself until there’s a clear breakout/breakdown, and most likely the FOMC decision tomorrow will be the catalyst.

(Note: both upper and lower sym tri lines are fluid and still developing.)

Typically, consolidations after an upside move is indicative of more upside, but I’d rather see what exactly comes out from the Fed before I make more assumptions.

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30-day MA & Nov Low Resistance / Doji & Shooting Star Reversals

Yesterday was a reversal day and I am now greater than 20% short in the financials and small caps. I put equal weight on reversal candles, moving averages, trends/channels, support/resistance, and price/volume action to determine whether I scale-in more positions.

We had the rare gravestone doji yesterday and various shooting stars, that have either formed right at the 20- or 30-day MA’s and have also hit resistance, with most indices at the November low retracement. The COMP has shown a divergence and it has formed a quasi evening star reversal.

The obvious question is, ‘Will this be a normal pullback or is this the start of a breakdown?’. The answer is, ‘I probably wouldn’t get any signals until Wed’. Why? Because typically, a upside reversal candle such as doji or hammers precede the continuation of a rally. In a downside breakdown pattern, you’ll see solid red candles with larger volume on the sell-off. The key here is the volume. Low volume should accompany pullbacks and the opposite is true for sell-offs (higher volume).

A great way to confirm any short-side thinking is to look at the inverse ETFs, 2x and 3x, and see if they exhibit reversal candles on support levels or moving averages and are accompanied by higher than average volume. For example, if I wanted to short financials, I would look at FAS, FAZ, UYG, SKF, XLF, and their top main components to see what the odds would be if I decided to short. In most cases, there won’t be any divergences, but if there are, then I have to consider why.

I am looking to swing the shorts and then the market determines what action I take next. Below are 40-day and 5-month charts for the SPX, DJIA, COMP, and RUT.

What’s coming in the next few days?

Normal pullback -> upside
Deep sell-off -> breakdown
Neutral range -> going nowhere
Current Results

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Plutchik’s Wheel of Emotions

As you know by now, psychology is a secondary interest of mine, after reading charts and tarot cards, of course. For this week, I decided to cover the “trader’s mindset” and the most common psychological issues that all traders deal with.

How does someone know that they reached the trader’s mindset? Here are a few characteristics:

1. No anger whatsoever.
2. Confidence and being in control of the self
3. A sense of not forcing the markets
4. An absence of feeling victimized by the markets
5. Trading with money you can afford to risk
6. Trading using a chosen approach or system
7. Not influenced by others
8. Trading is enjoyable
9. Accepting both winning and losing trades equally
10. An open mind approach at all times
11. Equity curve grows as skills improve
12. Constantly learning on a daily basis
13. Consistently aligning trades with the market’s direction
14. Ability to focus on the present reality
15. Taking full responsibility for your actions

Developing the trader’s mindset takes time. It usually takes traders 2-5 years before they can read through the above list and honestly say that it describes themselves.

Let’s take 100 traders using the same trading system or approach. It is highly likely that no two of them will trade it exactly the same way in all aspects. Why is this? Because our mindsets, beliefs, and understandings are unique. It is no surprise that most traders fail and the reason why is because they lack the trader’s mindset. This article covers those in Stage III and IV within the 4 Stages of Learning. More importantly, it applies to those that survived Stage II.

There are two parts to fixing any psychological problems:

1. Recognizing that it exists
2. Accepting it so you can move on

In trading, this is where it’s so crucial to take responsibility for your own actions because it induces change and you can start making improvements. If you don’t recognize and accept a problem, then you won’t get anywhere!

What are some of these issues that I speak of? Here are a few along with their causes and/or effects:

1. Anger over a losing trade – Traders usually feel as if they are victims of the market. This is usually because they either 1) care too much about the trade and/or 2) have unrealistic expectations. They seek approval from the markets, something the markets cannot provide.

2. Trading too much – Traders that do this have some personal need to “conquer” the market. The sole motivation here is greed and about “getting even” with the market. It is impossible to get “even” with the market.

3. Trading the wrong size – Traders ignore or don’t recognize the risk of each trade or do not understand money management. There is no personal responsibility here.

4. PMSing after the day is over – Traders are on a wild emotional roller coaster that is fueled by a plethora of emotions ranging throughout the spectrum. Focus is taken off of the process and is placed too heavily on the money. These people are very irritable akin to the symptoms of premenstrual syndrome.

5. Using money you can’t afford to lose – Usually, a trader is pinning his/her last hopes to make money. Traders fear “losing” the “last best opportunity”. Self-discipline is quickly forgotten but the power of greed drives them, usually over a cliff.

6. Wishing, hoping, or praying – Do this in church, but leave this out of the market. Traders do not take control of their trades and cannot accept the present reality of what’s happening in the market.

7. Getting high after a huge win – These traders tie their self-worth to their success in the markets or by the value of their account. Usually, these folks have an unrealistic feeling of being “in control” of the markets. A huge loss usually sobers them up pretty quickly.

8. Adding to a losing position – Also known as doubling, tripling, quadrupling down, typically, this means that the trader does not want to admit the trade is wrong. The trader’s ego is at stake and #6 comes into effect as the trader is hoping the markets will “work in their favor”.

9. Compulsive trading – Similar to #2, except these traders have an addiction to trading and quite possibly gambling issues. They need to constantly be trading, even if there is no rational reason to do so. They are always excited whether they win or lose.

10. Afraid of “pulling the trigger” – This usually means that the trader does not have a system or approach already in place. They have not calculated risk/reward and many times, these trades are unplanned. This also comes after a string of losses. They don’t want to be “wrong again”. There is no trust from within.

11. Over-thinking or second guessing – Similar to #10, but these people are usually looking for a “sure thing”, when they clearly don’t exist. Losing is not recognized a normal part of trading and the risks and unknowns of trading are not fully accepted.

12. Limiting profit or getting out too early – These traders have poor self-esteem. This is a direct effect of believing that the profits were undeserved. Usually a trader is stressed over a trade for some reason and closing the position quickly eliminates the anxiety. Usually, there is a fear of “giving back” those gains.

13. Fear of being stopped out – Traders fear failure and the pain from taking losses is great. Here is another instance where the ego is at risk. They must always be correct or suffer a feeling of “let down”.

14. Not following your system – This is a trust and follow-through issue. Perhaps the trader didn’t test it enough, or it recently produced a string of losses, casing some doubt. Your faith in the system is broken. Not only do you not trust the system, you can’t even trust yourself with picking one that works for you.

15. Following other traders (indiscriminately) – These traders do not have a system. They are also limited in trading knowledge. They feel that they will become winners if they simply “follow” someone. These trades are usually impulsive.

The key to all things is creating balance. This means that if you are winning or losing, you should not care. When you finally recognize and accept each of these common pitfalls, you’ll be well on your way to acquiring the trader’s mindset. Good luck.

Take the poll below. Multiple selections are allowed:

Which psychological issue(s) do you struggle with the most?

Anger over a losing trade
Trading too much
Trading the wrong size
PMSing end-of-day
Using money you can’t afford to lose
Wishing, hoping, praying
Getting high after a huge win
Adding to a losing position
Compulsive trading
Afraid of “pulling the trigger”
Over-thinking/second guessing
Limiting profit/getting out too early
Fear of being stopped out
Not following your system
Following other traders (indiscriminately)
Current Results

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Meeting 20-day MA / 30-day MA / Nov Low Resistance / Still Boxed

Here’s the video of Cramer getting shitted on by Stewart (for those trying to look for it):

[youtube:http://www.youtube.com/watch?v=B96vUHKN_I4 450 300]

Not too shabby today! The market was riding the upper range of the channel until it broke out. Half my long positions were sold out in the afternoon and I was finished for the rest of the day. I am 12% long/10% short/RIC, so I have no personal bias toward either side. I know people who are insanely long and insanely short, but at this stage, after a double-digit run-up in the market, I think it’s best to get hedged, no matter what side you are on. Or, why not wait until Monday and just enjoy a 3-day weekend?

It gets tricky here as you can see in the 1 month/60-min chart. We are sitting right above the 20-day MA, only about 20 pts away from the 30-day MA, and there’s a whole bunch of support and resistance all over the place. Keep in mind that it can get really choppy here. I think I’ll sit this one out and take a road trip. In my opinion, we are due for a pullback and we are in a zone where it is very possible for that to happen. Also make note of the multi-month charts of the various indices approaching ‘chop zones’ and resistance areas. I take no chances here.

On a fundamental level, I find it hard to believe that C, JPM, WFC, and now BAC have all of a sudden become “profitable”. BAC and C are stressing that they don’t require anymore government capital. All of a sudden just like that? Businesses that lose money need to reach the breakeven stage before becoming profitable. All we can do is wait until they report to see if the CEOs told the truth, but I find it difficult to believe that the big boys are all making money now…just like that. Now THAT’s a miracle!

Are the big banks actually making a PROFIT?

Yes, no more losses. Up we go!
Maybe. How in the world…
Hell no, this is all bullshit!
Current Results

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Doji Day / Boxed in / Use S&R Lines

I’d like to know what types of traders/investors are out there. You may pick multiple choices if needed:

I am a…

Day trader
Swing trader
Position trader
Momentum trader
Current Results

I nailed the doji day. For some reason, they are the most predictable for me. You can go through my twitter or whatever and see that I called doji days before noon on many, many days. As a swing trader, doji are the most important days for me, despite the fact that nothing really happens on these days. Depending on other factors as well, doji are the most perfect set up for swing traders. It is absolutely the worst day for daytraders to trade. There is absolutely no point in going in-and-out unless you want to waste your time. The key is determining if the day will be a doji well before the day is half way over. I’ll try to write something up about that in near future.

Also, I want to point that there are some divergences among the iBC bloggers. As you know, Fly, Alpha, and RC are hardcore long and Danny is wanting to short the shit out of the market. I am long but have a short hedge so I’m not as hardcore, and Gio just loves to surf with the VIX all day. According to my poll yesterday, 157 people gave their opinions on how long this rally would last. In this market, if you are one day early or one day late, then it’ll be tough for the average trader to sit through the pain. As long as you back up your reasons for any trade, you should stand by your decision unless something dramatically changes.

Anyway, the market is boxed in. You’ll also notice that I use the term “boxed in” quite a bit. It is a term that I use to describe a stock that is either entering or is in the middle of a major congestion zone filled with multiple support/resistance levels, channels, and or moving averages, all of which will limit the movement and progress of the market or stock. A good practice is to take out a chart of whatever timeframe you are using, and extend lines as far right as you can to visualize the next day’s support and resistance areas. This way, you’ll never be caught off guard whenever a bounce or pullback occurs. Give it a try sometime.

For tomorrow morning, I will depend on my trusty lines to ascertain direction. After all, a doji suggests indecision and is usually 50/50, so the support and resistance levels become especially important for today’s trading. I will keep an eye on the COMP because that is actually a spinning top, and there’s more weight towards a reversal. Also, several financials are on the “potential reversal” list, and they are WFC, BAC, C, PNC, etc. I’ll just have to see what happens pre-market to make the call.

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