Why I Scale Out

Today was the quintessential example of why I scale out of stocks at logical price levels.  Check out the intraday action in TSL:

Pull up a daily chart of TSL and put your eyes on $5.75.  That’s a logical scale point.  If you want to be a chart chump like me you best learn to spot these levels and trade accordingly.  Now I still hold a 2/3 position but I’ve already booked over a 10% gain. 

I don’t love having a full size position on.  Until I get my first scale I’m looking at a potential for a big loss.  However, I know my probabilities and when to push my edge.  Now that I’ve booked a gain, I can put a stop in place and allow the market to decide whether I will get some cream or just the necessary bread and butter to be a consistently profitable trader.

Today Trina printed a huge upside shadow suggesting the presence of an aggressive–reactive seller.  It’s probably a conservative (hehehe, I kid).  I like to examine how a stock trades after such an escapade as it gives me tons of information.  Was today enough to work off the HUGE overhead supply from last year or will newly initiated buyers start hitting the exit too?

I couldn’t care less.  My job here is done.

I have to post the edited version of this song, because the video is essential:

Coming into the day 100% long I expected to get a worse beating than this.  The broad markets are down today and it’s taking most of my portfolio with it.  Before it had a chance to sink me to a -2% day, the stock gods blessed me with a manic 8% run in TSL, my former largest position mind you.  Former, mind you, because I scaled 1/3 off at $5.75.  I told you hoping any home gamers would do likewise.  I sold Goldman too, all of it, because if any sector is due for correction it’s the financials which have been on rip for three months.  All this action raised my book to 15% cash going into the gap fill lower.  We talked all about that too.

Expect my tenor when addressing you to change modestly going forward.  My days of being premier in these halls are numbered.  And that’s fine.  I will add this feather to my cap and continue on my merry way (no homo).  As a trader you must always stay humble to the markets.  They are much larger than any one of us.  They are the collective action of trillions of dollars sloshing around, much like the tides of the oceans.  I will continue to be water, but I hate all of you.  Well, most of you.

The levels we currently are experiencing were highlighted this morning.  So far, no real damage has been done to the bull case.  We’re in a big range and we’re near the bracket low.  This could be an excellent buying opportunity.  I would like to see the NVPOC I mentioned earlier get tested.  That’s an interesting price level that could display a high degree of sentiment.

We have ZNGA reporting tomorrow and that’s sure to disappoint many social degenerates.  I plan to hold some long exposure through their earnings because MJNA is ripping and the CEO of this company promotes the use of MJNA declaring 4/20 a work holiday.  Good for you.

Bottom line: this sell off is contained until it isn’t, readers want to throw mashed potatoes at each other rather than banking coin, and marijuana is my basis for speculating ZNGA rips post earnings.

As of this writing my book is down 1.2%

The solar industry is seeing solid gains so far this session. Keep these stocks on your radar. Many boast healthy charts.

Details and charts via finviz.com

Good morning traders.  The Super Bowl is complete and futures are off eight handles from their globex highs.  Early selling has the S&P back to the important 1500 level. How we treat this zone continues to be paramount as can be seen by the number of sharp rejections (read: quick moves away from) this price level:

I’ve marked up the profile showing the poorly auctioned zone from 1500.25-1497.75. There have been many rejections in-and-around the 1500 century mark. I’ve also noted in green areas where I will look for signs of buying activity. The first zone represents 2/3 of the January 31 value area with the top range being a gap fill. Revisiting this level cleans up both a monthly and daily gap on the charts. It’s very constructive action.

Below there we still have a naked VPOC from 01/24. Should the buyers not present themselves at those levels I would consider the action a strong shift in sentiment.

The world’s best marketing is on display Super Bowl Sunday.  It’s hard for advertisers to get our ADD attention.  Yet once a year marketers are promised a massive audience who are actually excited to see commercials.

Going into tonight, my position bet was with Best Buy.  I thought they would deliver a solid advertising presence.  I found their commercial to be a non-event mostly because I was outside running a charcoal grill in the sub-arctic during its run.  No one mentioned it otherwise.

Samsung crushed the commercial scene.  They ran a funny Super Bowl ad campaign hard on the internet leading up to today and then a late game variation on the idea.  Then they splashed LeBron James in FTW.  Nice use of Saul Goodman too.

Chrysler delivered two solid ads, sticking with the serious tenor that the media machine receives well.  They played the military and the God card.  They want you to cry, they want you talk, then they want you to buy a pickup truck.

Through all the drama and Beyoncé emerged one very clear winner.  They didn’t have to spend a dollar on advertising, although they have plenty of cash on hand.  All they needed was a few thousand inefficient metal halide bulbs to overwhelm the electrical grid.  If only they had lit the stadium with the lights of the future, the LED lights of Cree, we would have had an uninterrupted Super Bowl.

Cree is already a beast this year, up nearly 30% in one short month.  The recent advancements in lighting grade LED technology are a boon for company as adoption rates accelerate.  Infrastructure rhetoric is sure to be on the tongues of our current administration.  How much of this is currently being baked into the stock price of Cree is unclear, but converting more of a city’s infrastructure away from outdated lighting is an insurance policy against fragile electrical grids.

Cree wins.  The babies from space had me for a minute, then it was Kia.

Bonus points to the Iron Man trailer, showing Air Force One blowing into pieces only seconds after the shocking power outage which my jaded mind instantly thought could be a terrorist attack.  Strange times we live in.

I went over my performance for the month of January this morning and I was rather impressed.  I’m sure people outperformed me, but I turned in a healthy 4.8% for the month.  It was a simple month to make money long, but that by no means makes it easy.

I started digging into the data for my future trading strategy too.  This project has been on the back burner for months as I completed a major overhaul of a business process but with the pesky business tasks and IRS requirements wrapping up it’s time to push my algo over the finish line and get her live.

Whether superstition or numerology or pure voodoo, I find much success in life when I use the number three.  Teams of three, three dips from the well, three sacrificial chickens, and well you get the point.  The environment I trade stocks in isn’t quite as structured as I plan to trade futures because I like to give stocks time to work and this can take days to months.  But with how I intend to trade futures, there will be multiple trades per day with the book going 100% cash at the end of each day.

Given the higher frequency of trades, a mistake is amplified and much quicker to damage my wealth.  Therefore I’m developing a very structured environment that will give me quicker feedback.  Part of that feedback is the rule of three.  These rules are put in place to prevent me from blowing up yet another futures account:

Three losing trades: paper trade the rest of the session and review plan and market context

Three losing days: paper trade the rest of the week and review plan and market context

Three losing weeks: rebuild the plan and algorithm

This will be my first attempt at automated trading.  My prior attempts at trading futures have been purely discretionary.  The key to being a successful (read consistently profitable) future trader is to TRADE ONLY.  That means no running a business and no having a day job.  I like to diversify my income sources and I have big plans outside of this market.  An algorithm solves this dilemma by only allowing me participation in the market when my edge is present.  I will get an alert when a trade is initiated and I can then turn my attention to managing the trade if I want.  Otherwise I can let the algorithm handle the exit too.  I like handling the exit so far in testing because I can’t program market profile context into my robot.

http://youtu.be/1mdgLn5BFRQ

I don’t think many people take me seriously.  The funny thing about a serious person is how funny you really are.  You’re living a joke of a life.  When I had a clear reading of the tea leaves this morning, I sent out the following tweet (edit: bad spelling and all):

Petal to the metal

— Raul (@IndexModel) February 1, 2013

I don’t know how many people realize this, but I always put my money where my mouth (pen/keyboard?) is. Always. If something is worth talking about, it’s worth putting your skin on the line. As for business endeavors, I firmly believe in giving 100% as anything less is lazy at best and whimsical at the absolute worst.

So I spent the remainder of the session ratcheting up my long exposure and taking my cash down to zero. Yes, I’m 100% long. I haven’t been all-in in over two years. My positions range from high quality to downright degeneracy. It is my hope that the Super Bowl stimulates obese spectators to jam their nacho covered hands into their tiny pockets to grab an inked pen and write a reminder on their arm to buy stocks on Monday.

Wow my thesis sounds really flimsy now that I write it down.

I have many positions, but I’ve placed my primary bets on TSL, SU, GS, SINA, ANGI, and VHC.

Trina, Susan, and Angie are my girls this weekend.

Trade’em well!

Getting fancy with exotic stock picks has so far not been the best strategy for participating in today’s big move.  Your favorite senator’s bank, Goldman Sachs, and Notorious AIG are ripping in today’s tape.  A simple tech play like Google is crushing.  The non-farm and housing data out this morning was received well by the market and we’re seeing gap-and-go action from the S&P.  The NASDAQ is having a strong day too.

Meanwhile my specialty plays like solar and retail are trudging around, looking like they’re wearing their dad’s trousers.  Overall the morning session has been a progressive one for the bulls with strength in many key areas and a healthy start to February.

The profile today is long and thin suggesting buyers are initiating new trades at these levels.  The VPOC currently resides at 1506 which is a huge jump from yesterday’s at 1494.25.  The ball is in the buyers court going into the afternoon session.

If we see selling enter the tape, look for a fight at Wednesday’s value area high starting at 1504.  If buyers don’t present themselves at these levels we could rotate down through the value area and back below 1500.

http://youtu.be/zQDaGLe2qk4

Yesterday’s auction was successful in cleaning up the toothy lower ends of the prior two day’s profiles.  The price range from 1500-1495 has been very balanced and building pressure.  We’ve seen aggressive entry into the tape by both buyers and sellers at the extremes of this range which is healthy behavior for a balanced auction.

The sellers did manage to push value to its lowest level since entering this new range, down to 1494.75.  There were three shifts in the VPOC yesterday which is another sign of a balanced auction.  The VPOC was resting higher most of the session but as we entered the last fifteen minutes of trading a massive block of orders came through and lifted price higher.  Before the price was lifted the activity shifted value lower.

Honing in on yesterday’s value area, notice the entire value area is below the prior days.  This is a victory for the sellers as they have been able to slow value at best for most of this year.

Being the first of the month and a Friday, I’m expecting lots of trickery and traps.  I will again be placing most of my attention on the afternoon activity and the value placement.

Seasonality data is still new to me, but given the volume of the data available it’s interesting to analyze the distribution to understand what is normal.  If we can define February performance that is normal we can hone in on stocks and industries whose behavior isn’t normal in the wonderful quest to extract money from our markets.

When you put all of the average monthly returns available in The PPT seasonality into a frequency histogram you see a normal distribution which forms the familiar bell-shaped curve.  Most readers of this site made their way through the school system by being massaged into the lower 1/3 of the bell curve.  Good for you.  I know a few of us were up in the 99^th percentile, let us continue.

Once I have the data set I can make some observations which can direct my eye to potential opportunities.  My first observation is the slight upward bias of the distribution.  The highest frequency occurs above the zero line.  This could be attributed to the upward bias of the market during the month of February.  Next I use my eyes to single out where roughly 70% if the data is, much like the value area on a daily volume profile auction.  I’ve noted the range of normal February returns in orange on the following chart:

Much like the value areas from my profile charts, the opportunity lies at the edges of value.  This is where we can focus our attention and do business.  The extremes of the tails are interesting, but they could be erratic, event-driven performance.  If an industry’s stocks moderately outperform a massive dataset, there is a proclivity for repeat performance.

Thus I filtered the data down to stocks that reside in the fat tail of the upper distribution, with performance in the range of six-to-ten percent.  The data returns 187 (buck, buck, buck) stocks.  Finally I see which industry has the most stocks from this sample.  The winner is Industrial Metals & Minerals then gold:

Given Fly’s take on the data and mine [sic] I would say it’s going to be a shiny February.  It’s nice to see Senator Gint rejoining the ranks today.  You should read his post today and run through his entire archive and consider yourself lucky to have that knowledge free at your disposal.

http://youtu.be/oxpcZrQQM-4