Three Tight Pieces of Assessment

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The Nasdaq Composite (first daily chart below) is gapping directly into that key 2,600 level. On the one hand, it is a plus for the bulls to partially fill last week’s gap. However, I do not see a high probability trade in going long a gap into what is likely to be an area where overhead supply will dominate. I expect 2,600 to continue to be a tough area for the bulls to conquer, without putting in some more work first. Even if the bulls keep running, the chart is sloppy and needs to tighten up to meet my criteria.

The second chart is the Dow Jones Transportation Average. It a good sign for the bulls to see it back above 4,700, and they are pointing to the strength in the trannies to supper their case. Moving above 5,000 remains the line in the sand for a true breakout.

Finally, the Euro/Yen currency cross, which I have been pointing to as a proxy for global risk appetite, is unimpressive today given the news and action in the stock market. I would have expected a much more potent move from the Euro given the kitchen sink approach by central banks.

In sum, there are still troubling signs underneath the hood of the car. Only price pays in the stock market, so the Euro and Nazzy are not reasons to short just yet. However, they are charts to monitor to see if they resolve in favor of the bulls…or not.

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In the world of potheads, “420” is code for blazing tree and all things dealing with kine bud. In the stock market today, the Dow Jones Industrial Average is as high as a kite, hovering up near 420 points for much of the session. In many respects, you can argue that the liquidity being offered up by central banks around the world is a sort of drug that equity markets have been craving to stave off withdrawl symptoms. It is interesting to discuss, but I have to always come back to the fact that I am stock trader and arguing with the market is not what I do best. 400-point rallies tend not to come in the established part of trending bull markets, but they do usually come either off a major correction/bear market low or during the meat of a bear market in a brief counter-trend rally. There is no way of knowing which one it is just yet; Only time will tell.

As you can see below on the intraday chart of the SPY, either you caught the gap up this morning or you did not. Since then, the action has been subdued on the whole. I am not making any moves just yet, but I do have my eye on some potential shorts inside 12631. I will let the market dictate to me as the beginning of the new months tomorrow whether I should continue to stalk them.

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This news-driven market has delivered again, with central banks around the world making moves to increase liquidity in the global markets. The major indices are up over 3.5% across the board as I write this, and bears who were feeling pretty good with the futures down last night have seen their portfolios take a sharp turn down a one-way street into an unfriendly neighborhood. If nothing else, the action this week shows you that just because this market has been largely unfriendly to longs, it does not necessarily follow that shorts have had an easy or even fair time either.

That said, I am overall still fairly skeptical of markets gapping in either direction the way this one has. Just as a down 3-4% brings out the cockiest of bears, a day like today brings out the same qualities in bulls. Rather than getting swept up in the emotions of the moment, which can run high on a dramatic gap higher like this one, the better approach is to focus on whether you are seeing setups that fit your style. I remain troubles by the lack of high probability long swing trading setups, but that can change within a few days of action. Most issues are seeing huge gaps higher on their daily charts, adding to the sloppiness of many of those technical patterns. It is a plus to see the VIX back under 30, but staying below that level has been a tough nut to crack.

As 12631 members know, I walked into today with 14% of my portfolio long, 4% short (AAPL), and the rest in cash (82%). The cash level will stay high until better setups emerge, regardless of whether that means long or short.

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Last New Year’s Eve, I gave one final prediction for 2011 in this post. Here is the text:

“There Will Be Head Fakes”

-chessNwine 12/31/10

Accordingly, please use caution headed into the next several weeks. There is nothing wrong with taking a wait-and-see approach to start the year.

HAPPY NEW YEAR

Given my style as a technically-driven trader who is best at reacting to price and momentum, it is tough for me to make bold predictions seriously. I was having a bit of fun in that post above, but my sense was that 2011 would, in fact, be a difficult year for just about all market participants. Your style may very well be different from mine in terms of making bold predictions, and that is fine by me. I just try to stick to what I do best.

We have a little more than a month to go in 2011, and there have indeed been plenty of head fakes in both directions at various points throughout the year. Although it sounds, and can most certainly be, boring to say and do, protecting capital has been the far more important discipline to practice this year than growing it. Usually, that means staying in heavy cash and keeping a tight leash on positions.

And that brings me to my next point: The most important and least discussed aspect of trading is bankroll management.

“How do you pay the bills while in heavy cash?” is a question I often see on the Twitter stream from traders who believe they must trade all day, every single day. First and foremost, if you are an active day trader then you are going to, naturally, be more active than I am as a predominant swing trader. Beyond that, though, if you trade full-time then you should have, at the very least, six-to-nine months of living expenses set aside in the event you are trading lightly or are on a nasty losing streak. To state the obvious, unlike other jobs where you are an employee working for a salary or hourly paycheck, in the market you are risking capital each and every time you try to make money.

If you think about it, anyone can label themselves a full-time stock trader. It is only when you deal with the inevitable losses, especially the ones that come quickly and throw you for a loop, that you find out if you are a true professional. In addition to temperament, i.e. not going on tilt, being properly bankrolled is a must if you are going to trade full-time. Not gambling with the rent money is one of those old axioms that will never become obsolete, given how many will be forced to find religion through the school of hard knocks in the market.

There are plenty of talented traders out there who blow up their accounts not because they got outmaneuvered by the guy (or robot) on the other side of their trade, but because they were simply not bankrolled properly and felt compelled to overtrade in poor market conditions to try to “pay the bills.” Well, I have news for you: If you need to trade to pay your electric bill and utilities, then you are in the wrong profession. Being properly bankrolled also gives you the peace of mind that you do not have to, in fact, trade all day, every day. Trading is gambling, although your definition of gambling may differ from mine. The market owes you nothing, and society has exactly zero sympathy for those who have the capital to trade/invest and lose it all (unless you are a giant bank, in which case you can rely on a bailout from Uncle Sam).

If you do not have those six-to-nine months, at a minimum, of money set aside, then no amount of technical or fundamental analysis will keep your back from soon being up against the wall.  In addition, position sizing is an important subset of bankroll management, which I will discuss in another post. In easier, trending markets, mistakes are easily forgiven by Mr. Market. But those markets eventually morph into nastier ones, where there is much more of a premium placed on details and discipline. We all make bad trades and stray from our discipline at times. The key is quickly re-focusing and striving to improve.

However, failing to adhere to bankroll management is worse than a mere blunder in a chess game–It often amounts to leaving your King exposed to get checkmated by the market. And that will ultimately be the take-home lesson for most traders from the market as the year 2011 comes to a close.

 

 

 

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The 20 period weekly moving average on the S&P 500 is curving down and is now acting as resistance to price. As you can see below on the weekly chart, it smoothed out with the summer topping process and then torqued down with the crash. You will note throughout the course of the Fall 2010-Spring 2011 uptrend that the 20 period weekly moving average guided price higher the whole way.

In other words, it is a useful reference point, or guide, on an intermediate-term timeframe, whereas the 20 period monthly moving average which I have discussed in other posts is better for a longer-term view. Currently, the downward sloping 20 period weekly implies that the bears have yet another good opportunity to short into this bounce. The fact that the bulls got price above it earlier this month, only to see it roll back over tends to reinforce this view.

The 20 period weekly moving average is currently at 1206 and declining. It will take plenty of more work to smooth it out and get it turning back up again. For now, the bulls should strive to at least get price back above it.

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