Full-time stock trader. Follow me here and on 12631
Joined Apr 1, 2010
8,861 Blog Posts

Trading What Is


In the sequel to last Friday’s thrashing, the bears delivered several more sharp blows to the bulls into the closing bell today. With the S&P 500 off 1.35% to finish at 1050, Mr. Market is punishing anyone who is trying to get in his way.   What we are seeing is a constant flow of traders trying to call a bottom, buy stocks, and then eventually get stopped out or sell out in frustration when the market tumbles further. This type of action is the essence of a bear market, and helps to reinforce the market to the downside. It is only when traders give up on the idea of picking a bottom, that we will get close to seeing the selling pressure alleviated and exhausted.

As the updated and annotated daily chart of the S&P 500 illustrates below, we have remained in a steep downtrend since late April, complete with bearish pattern after bearish pattern.

With our close at the 1050 level, we are back to an area that has served as key support dating back to early February.  As we become more and more oversold, it is likely we will see some kind of bounce.  However, whether this bounce is ephemeral or lasting remains to be seen. From a swing trader’s perspective, you should resist the urge to immediately stick your bid in if we see a bounce in the next day or two.  The bounces that we have seen since mid April have either been total duds that have abated within the same trading day, or have been exuberant but ultimately short lived bear traps.  In order for swing trading opportunities to present themselves again, the bulls have an awful lot of work ahead of them.  Not only do institutions needs to start providing some heavy buying volume, but the charts of many key stocks, such as $FCX, need to stabilize and form healthy bases, if we are going to move higher in a sustainable manner.

To an impartial observer, it may seem foolish to see bottom callers inflicting this much economic harm on themselves day after day, but human emotions are powerful and can have a profound effect on one’s trading.  One of the best remedies to trading on emotion is self-awareness.  To be sure, everyone wants to make an exorbitant amount of money in the stock market.  However, it is crucial to understand that you should only trade the market that is actually there.  Trying to trade the market that you want to happen, wish would happen, would really, hopefully, maybe-would-kind-of like to see happen, is futile and ultimately counter productive. Trading, or not trading, “what is” will keep you grounded and clear headed, which is exactly the frame of mind you need to have to make the best decisions on a day to day basis.

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…on making your brokerage rich via copious amounts of commissions from your overtrading.

This kind of market does not just wipe out stubborn bulls who buy stocks the whole way down, it also punishes habitual bottom pickers, and basically everyone except the most talented of daytraders. Eventually, we will form a tradable bottom.  When that comes is anyone’s guess, and is out of my control. What I CAN control, however, is not making low probability trades out of boredom while the market remains unhealthy.  On the back of last Friday’s distribution day, the bulls have to overcome a heavy burden of proof to get me enticed on the long side anytime soon. I am willing to change my mind at a moment’s notice, but I need to see the evidence first via accumulation and healthier setups across the board.

Finally, I urge you to continue to monitor $FCX as a broad market tell.  It continues to weaken and has yet to see any kind of a bid.  Watch it closely to see if that changes.

If you are having problems sitting tight, go get some discipline at basic training for Marines:
(Warning on the video for all of you thin skinned types)

[youtube:http://www.youtube.com/watch?v=yyC0BmTYTgI&feature=related 450 300]

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My Trader Creed

I trade stocks to make money,

I do not trade stocks to win an intellectual argument with the stock market.

I trade stocks to make money,

I do not trade stocks because I love the way the action/gambling makes my heart race and my body feel truly alive.

I trade stocks to make money,

I do not trade stocks because it helps get my mind off of the problems in my life.

I trade stocks to make money,

I do not trade stocks to impress my friends, family or significant other.

I trade stocks to make money,

I do not trade stocks to become a famous celebrity, and appear on financial news networks or in any other media.

I trade stocks to make money,

I do not trade stocks when I am drunk, high, tired, hungover, hungry, or ill.

I trade stocks to make money,

I do not trade stocks out of boredom, and when I think it would be something fun to do.

I trade stocks to make money,

I do not trade stocks when I am feeling particularly emotional or on edge.

I trade stocks to make money,

I do not trade stocks within the first thirty minutes after the opening bell.

I trade stocks to make money,

I do not trade stocks to boost my self-esteem and overall self worth in life.

I trade stocks to make money,

I do not trade stocks to prove other traders that I know are wrong about a certain thesis.

I trade stocks to make money,

I do not trade stocks because I feel an emotional attachment, or indeed any emotion at all towards any one individual issue, ETF, commodity, currency, or option.

I trade stocks to make money,

I do not trade stocks when I have no discernible edge, that I cannot objectively articulate with clarity.

I trade stocks to make money, and that is enough for me.

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Am I Death Cross Diversified?

On CNBC’s Mad Money, Jim Cramer runs a weekly segment called, “Am I Diversified,” where diabetic retirees call in and seek Jimbo’s input as to how well they can spread out their losses via diversification techniques. In that spirit, I am going to play that game too. Only this time, I am going take an admittedly hardcore bearish stance. The daily charts of the stocks seen below all show a “death cross,” where the 50 day moving average crosses down below the 200 day moving average. This cross reliably illustrates that a former uptrend (as seen in the inclining/flattish 200 day moving average) has grown long in the tooth, and the fresh downtrend is taking hold (as seen via the down sloping 50 day moving average).  Basically, the presumption is that a bear market is now upon us.

Moreover, all five firms are considered best in breed in their respective sectors, and have very large market capitalizations, none less than $29,500,000,000.   They are: $FCX (my “tell”), $GILD, $GOOG, $GS and $KO. In my charts, look for the blue line (50 day) crossing below the yellow line (200 day). I fully admit that I am cherry picking these five stocks to illustrate the death cross.

Assuming the death crosses hold, I would like to hear your comments over the weekend.

I would like to know, specifically:

Can the market successfully rebound with these five mega cap names in bear market mode?

It has been a long and intense couple of weeks. So, feel free to vent anything else that is on your mind in the comments section, when you guys check in to iBC periodically over the weekend.

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Cruising Down Cape Fear

Ever since the market made a temporary low last week, we have been in a highly volatile consolidation zone just under the 200 day moving average on the S&P 500.  Naturally, you would think that just about all traders would be fearful of another sharp leg down, and thus would be reticent to put on any long positions in the past few days. That assumption would be wrong.

One of the most capital destructive fears that traders have is the fear of being left behind in the dust, if the market suddenly sprints higher on a new bull run.  It should be obvious as to the reason why this fear of being left behind is far more destructive than a fear of a downturn: The money you allocate to buying longs in anticipation of a move higher can easily be wiped out, versus a risk averse strategy in anticipation of a pull back of sitting in cash or putting on hedges.

The setups that I proffered last night looked enticing and actionable, when seen through a vacuum. Unfortunately, most stocks in the market do not trade in a vacuum.  They are subject to the machinations of the broad market in such a way that you had better respect the movements and trends of the senior indices, before you become aggressive with any individual issue. Thus, I felt compelled to note that we needed to wait and see confirmation before allocating capital. Indeed, we have seen anything but confirmation to the upside today, given the huge selloff.

With the continued news driven price action to the downside, the market has yet to convincingly given us swing traders a reason to get involved.  As frustrating as it may seem to sit in high levels of cash right now, it would be wise, instead, to think about the better opportunities that we will see down the road, once the market firms up and is done shaking out the weak hands. When things are going well, the market seems like the easiest game in town.

However, it is the patience and discipline shown in markets such as the current one, that truly distinguishes the traders that have lasting power in this business.

NOTE: Bear vs. Bull today:

[youtube:http://www.youtube.com/watch?v=rm81LSKJC2k 450 300]

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It has been quite some time since I have had a chart-filled post with setups.  I must say, despite how good some of the charts seen below appear, we are still on very shaky ground as far as the broad market is concerned. Seeing as at least seven out of ten stocks move in concert with the broad market, I will wait for confirmation by the senior indices (namely the S&P 500) before allocating capital. I urge you to do the same.

With that said, however, I am eager to get involved in the issues listed below upon said broad market confirmation.  As always, feel free to pick and choose whichever setups best fit your style.  Also, I urge you to use stop losses in order to mitigate your downside risk.

I hope you find these helpful.

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