NYC

I'm in New York City for the rest of the week. Probably not going to post until early next week, unless something big happens or I end up having a little extra time to post. Here's a pic of a trading floor from a pretty big bank that is right across the street from my hotel and very viewable from my hotel window..it's kind of fun to watch them over there and see different levels of activity going on at different times of the day.I hope everyone is having a great week!

TLT

Recognizing a Range Bound Market: Key to avoiding the Chop

After the first hour of trading, it is clear that today is a range bound market with a high likelihood of chopping up anyone who attempts to trade it (unless your trading method is geared specifically for this type of market). I've made only one trade this morning, only because there is nothing to do right now. I've got JPM on my radar as a long and GG on my shortlist, it's just a matter of them properly setting up for the trade.

So instead of trying to trade and getting chopped up I thought I'd post about how I attempt to recognize these types of day. Learning how to recognize this type of poor trading environment and keeping myself out of the market when it's like this (sometimes that's the hard part) has positively affected my P&L way more than anything else. You can make some killer trades when conditions are good but it's all for nothing if you just end up giving all your profits back when the chop fest begins.

Ok, here's what I'm looking at this morning:So that's a pic of a choppy market that is likely going to continue to be range bound. On a good trading day, you want to see the opposite. The watchlist should be mostly one color. The line charts for the advancers/decliners, up volume/down volume, and VIX/SPY should all show the lines heading in opposite directions to indicate a trending market. Today they're just crossing back and forth over each other...a sign to go post on the blog instead of trading.

Another indicator that helps is the NYSE TICK. This indicator shows the NYSE stocks that are making upticks vs. downticks. Readings between -400 and +400 are generally considered neutral. Everyone has their own take on how to use the tick and what levels are important. I look at +-1000, 800, and 500. The other thing I do is keep an eye on whether the majority of the ticks are in the positive or negative zone. Having a moving average helps as well. Here's a chart of today's 2m tick chart:As you can see, today's tick chart has been all over the place. That's all I've got for now, hope everyone had a good weekend.

TLT

***Update***
The market literally broke down right when I hit the post button to publish this post. I was able to catch a piece of the GG short that I had planned (short below 39 with a profit target at 38.50). Unfortunately there is not much follow through for shorts right now as the market has been in an uptrend lately. Thankfully I grabbed a piece of the sell off, I just thought it was funny that the market sold right as I published the post about the market not doing anything.

Can You Say Short Squeeze?

WDC was a big money maker this morning as many traders sold it short right off the open. The daily chart shows significant levels being violated and the hourly was slanting down..all great bearish signs. But all good things must come to an end and this one was swift. WDC has been one direction since the 3rd 15 minute candle stick this morning and that direction has been up.

I'll admit it, I thought about shorting it at a couple of different spots, including the resistance at 38 after it filled the gap and looked like it might head back down. Fortunately I did not take any of those trades because it went off on a tear...must have been ripping through stops. In fact it's still moving higher as I write this post. Here's a 15 minute chart to illustrate what I'm talking about (although this chart was saved 20-30 minutes ago and now it seems outdated):That, my trading friends, is what a short squeeze looks like. What fun!

Hope everyone's having a great day.

TLT

Anemic Volume Today

It's no surprise that today was a range bound trading day with little opportunity, unless you were trading something that was stock specific like CSCO. Volume was well below average for most stocks and indexes. Here's how I track intra-day volume in order to get a clue as to it being a trend day or a range day, which is important to identify so that you have realistic expectations for follow through on trades.

I keep an excel spread sheet that I update daily. This spread sheet tracks the average for the prior 20 trading day's average volume, range and 14 period ATR (average true range) for each 15 minute period of the trading day on the S&P 500 index etf (SPY). Okay, that was a mouthful. This spreadsheet is useful because I can look at it and tell what the average volume for the prior 20 days on SPY between 10:00 and 10:15. For example, today's volume for that period was roughly 2.5 million shares. By itself that doesn't mean much to some people. Well, my spread sheet tells me that the average for that 15 minute period (10:00-10:15) for the past 20 trading days is 6.8 million. It doesn't take a market wizard to figure out that today's volume for that period was way below average.

I print this sheet out in the morning and leave blanks to hand write the SPY volumes for that trading day. This method works better than just a moving average on the volume below the chart because it compares apples to apples (or the same period of time to the same prior periods). Here's a screen shot of today's sheet:Maybe we'll see a little more follow through tomorrow..this chop can really put a dent in the P&L if you're not careful. The chop got me a little but fortunately I was catch some of the CSCO move this afternoon to put me in the green for the day.

Hope you all had a good start to the trading week.

TLT

T.G.I.N.F.

Yes, Thank Goodness It's NOT Friday. Why do I not like Fridays? Most traders dislike Friday because they know they have to wait through the weekend for the markets to open back up. While I feel this way as well, there is a much better reason that I don't like Fridays..at least when it comes to trading.

I cannot stand to have a bad Friday tradingwise because then you get the whole weekend to stew over your mistakes and what you should or should not have done. This is not fun. I had a bad trading day this past Friday. After the market closed, I was writing in my trading journal and doing other end of day activities related to trading when it hit me...I did not have a good Friday last week either. And then I checked my trading journal and realized that I have not had a good day of trading on a Friday in at over a month, and even the good Fridays that I've had were mediocre at best!

After having this little break through, I pulled up my trading reports and looked at a report that breaks down trading performance for different times and more importantly, different days. This really put things in perspective for me. The day of the week that I have the highest win ratio (batting average) is Monday with a 60% win ratio. Not bad for the type of intra day trend style trading I do. My absolute worst day (drum roll) is the dreaded Friday with a win ratio of only 28%..ouch.

So what does this tell me? Either to not trade at all on Fridays or at the very least, reduce my trading to a little while in the morning and keep very tight risk control measures...like quit for the day after 2 losing trades or 2 winning trades. So why are Fridays so bad? I don't really know but I have a few ideas that pertain specifically to me..it will be different for everyone I'm sure.

For one, after having had a bad Friday once and thinking about it all weekend, I began going into Fridays thinking, "don't have a bad Friday, don't have a bad Friday." It's funny how when we tell ourselves not to do something or that we don't want such and such to happen, we either do it or whatever it is happens. A weird phenomenon that some chalk up to the subconscious and it's inability to comprehend the negative phrasing. Thus, we say, "don't do such and such" but our subconscious only hears "do such and such." So this could be a factor explaining bad Fridays and it is also the reason that positive self talk is so important.

Furthermore, I tend to go into Fridays with the mind set of, "it's the last trading day of the week, better make some money." This tends to screw up my open mindedness with trading as I'm now expecting something from the market that may or may not happen. Having expectations that don't match up with the market in trading can lead to a disaster, especially if you're stuck in your expectations and fail to change your trading based on what is unfolding in front of you through out the trading day. Every dip in an uptrend begins to look like a buyable dip and the thought never crosses your mind that this could be the end or even a late day reversal. You stop looking for or even ignoring evidence that supports or conflicts with your ideas. As you can imagine, this is not a profitable trading mindset.

Then note that Mondays for me tend to be the opposite. I'm refreshed, open minded and ready to see what the market is going to offer for the new week. This leads to great trading days. Imagine that. It doesn't take a genious in psychology to figure this stuff out but it does take a discplined trader that is both open and willing to change in order to take the necessary action involved to improve on these problems. As for me and my discipline and willingness, we'll give it a little time and then I'll do a follow up post on my progress or lack thereof.

Okay, that's enough for one post..I didn't mean to sit down and write a book, I just needed to get all of this down in written form.

I hope eveyone's having a great weekend.

TLT

Sandisk: A Lesson On Holding Good Trades Longer

Early in the program at our trading firm, the head trader said that after a month or two, our biggest problem would be holding good trades longer. I don't know about it being our biggest problem, but SNDK was a great example of leaving profits on the table today. I traded in and out of it a few times and failed to pull the trigger a few times as well. Despite making money in this stock today, I would have made much more just holding any of my long entries (both the ones I took and failed to take) until the close. Given the recent choppiness of the markets, it was nice to see some follow through in various tech names, such as: sndk, ctsh, wdc, and stx. Easy money is always welcome and getting frustrated about booking profits too soon is just a sign of easy money..and for that I am grateful. Remember, it's always easy to look back on a chart and say, "I should have done so and so..", but having a plan, sticking to it and making money is great. At this point, I will closely monitor whether I'm consistently taking profits too early and if that's the case, I'll adjust my plan accordingly.

Hope everyone's having a great week.

TLT

Big Bets Against the Euro

This Wall Street Journal article, states that Soros, Eihnhorn and several other big hedge fund managers are betting against the euro. Some claim that the Euro/Usd could see parity (1:1) by the time the euro stops falling. Another manager stated that the outcome of the EU's problem with Greece will be bearish for the euro no matter what happens. These are some big claims.
Well, as you can see from the above daily chart of the Euro/Usd, the currency pair is in a significant downtrend and the only question now is: Where does it find support?

TLT

Weekly Wisdom Quote

"If you don't get what you want, it's a sign either that you did not seriously want it, or that you tried to bargain over the price."

--Rudyard Kipling

Home Depot: Ready for lift off?

I've been following and trading HD for over a month now and I've been looking forward to it reaching this level (the plus 30 level). The $30 range has been a major resistance zone for HD for a while...go and look at the weekly chart to see this. Today it gapped up above the immediate resistance and closed above 30 by two pennies, here's the chart:If the market rallies tomorrow, which is a possibility, this thing could take off quickly. Keep in mind, I'm day trading this thing so by take off, I mean pop up .75 to a dollar in a day. This will possibly offer up a great risk to reward opportunity, as your risk is well defined..cut you loss if it retraces back below 30. Another thing to notice, is that this stock has recently had a breakout, consolidation, pullback pattern. HD could offer up some great follow up trades later on.

As always, time and price will tell.

TLT

President's Day Quote

"Things may come to those who wait, but only the things left by those who hustle."

--Abraham Lincoln

How to Recognize Intra-Day Buying Orderflow: My 1,2,3 Internals

As I'm typing this (roughly 11:00 a.m. central time) I'm watching what appears to be the end of a great short term buying opportunity. It could push higher, but the initial momentum is definitely over for now. This was one of the best upmoves I've seen in at least a week. Fortunately, I was able to recognize that I needed to be long and was able to catch a piece of the move, although I left a little on the table because booking profits lately has been very difficult due to the choppiness of the market.

How did I recognize the intra-day buying order flow? The big signal was the market internals. There are several things I monitor at all times while day trading and these are the big 3 (note that I didn't include the cumulative tick in this list...i always watch the tick as well but it's more common so I'll leave that alone for now). The big 3 are: 1) Advancers vs. Decliners, 2) Up Volume v. Down Volume, 3) the Vix vs. SPY. I plot all of these with intra-day line charts. Here's a screen shot from just little while ago:As you can see from the above pic, it was time to be long. In 1, the advance line was way above the decline and they were heading in opposite directions (bullish), in 2 the up volume was above the down volume and they were heading in opposite directions (bullish), and in 3, the Vix was maxed at the very bottom of the chart and the SPY was at the top (very bullish). When I see the 3 internals cross and start heading in opposite directions, I know to be ready to trade. On choppy days that are hard to trade, you'll see these cross back and forth several times...a sign that it's very choppy and you have to have low expectations of follow through if you trade at all.

Today I saw buying pick up and the internals got bullish and I knew it was time to stop shorting financials, which was chopping me around a little, and look at my list of potential longs. My big long of the day was NVDA. NVDA had awesome relative strength this morning as it was able to hold a gap up and then continue higher even as the market was heading lower. A stock with that kind of strength has the potential to pop if the market starts heading higher and that's what it did. All-in-all, it's been a good day and now I'm just going to sit back and watch for the rest of the day.

I hope everyone is having a profitable week/month so far and I'll be back with another post soon.

TLT

Trading Is A Game Of Confidence

I love books that apply to trading that do not directly have anything to do with trading. These types of books tend to be about achievement and quite often about achievement in some type of competitive sport. The best are usually about the psychology of playing a competitive game, The Inner Game Of Tennis is a great example. Another great book that I've been slowly working my way through is Golf Is A Game Of Confidence by Dr. Bob Rotella.

In this book, Dr. Bob walks you through 18 stories about different golfers that encountered and overcame some sort of challenge, generally a psychological challenge, in their golf game. Some of the players are professionals while others are just amateurs. To demonstrate how applicable some the principles of this book are to trading, I will show you an excerpt paragraph in its original form and then show it again but with a few words changed.

Original excerpt from the book:

The second constant is the game plan. I want professionals to make their decisions about par fives on Tuesday and Wednesday, during practice. That way, their decisions are more likely to be coolly taken than they would be in the heat of competition. Of course, a plan has to have some flexibility, taking into account such things as the presence or absence of favoring winds. But in general, a player who thinks she is executing a plan is morel likely to be decisive than a player who walks onto a tee wondering what to do. And decisive players, by and large, hit better golf shots.

Changed version adapted to trading with changes in bold:

The second constant is the game plan. I want professionals to make their decisions about trading scenarios (setups) before or after market hours. That way, their decisions are more likely to be coolly taken than they would be in the heat of the trading day. Of course, a plan has to have some flexibility, taking into account such things as the presence or absence of favoring market conditions. But in general, a trader who thinks she is executing a plan is more likely to be decisive than a trader who watches the market wondering what to do. And decisive traders, by and large, make more profitable trades.

Very interesting. Sounds like a paragraph straight out of a trading book. I've only read about half of this book but from what I've read, I would highly recommend it. Dr. Bob Rotella also has another book that I'd like to read called Golf Is Not A Game of Perfect, which I'll probably get after I finish this one.

I hope everyone's having a great week so far.

TLT

Weekly Wisdom Quote

"There is a principle which is a bar against all information, which is proof against all arguments, and which cannot fail to keep a man in everlasting ignorance--that principle is contempt prior to investigation."

--Herbert Spencer

Looks like a Big iPhone and Sounds like a Feminine Product: the iPad

Apple presented their new tablet today and the market shrugged...although the market in general being weak could be to blame for any reaction or lack thereof (to be fair, AAPL, RIM and T got a little boost when AAPL announced the price). The biggest reaction I saw regarding the iPad was all the jokes being sent around the online trading room today when the traders heard the name of the tablet. The Fed is making their announcement as I type this so I better go and watch the reaction...gotta see if my short is still a good position.

Hope everyone's having a profitable day.

TLT

The Lines Have Been Drawn

The bulls made a good showing today, but the bears hopped on the intra-day double top and shorted all the way down to the close. The increasing volume to the downside in today's action combined with the technical damage that we've seen on the higher time frames...in particular the daily...tells me that the short side will probably win. That being said, if the bulls manage to trap the bears, there could be a big rally as the bears get squeezed. With Obama giving his state of the union tomorrow, I'd be very cautious trading to the upside, but then again, I'm short and probably a little biased.

We'll see if tomorrow's trading can get us out of the range.

TLT

Today's Action: ZZZZZZZZZZZZZ

Wake me up when something happens. I must say that the consolidation is not a good sign for the bulls...lots of people were expecting a big move up after the sell off we saw last week. The good news for the bears is that the S&P was able to stay above Friday's lows, at least as of 2:30 central time as I'm writing this post. Here's an hourly of the SPY to illustrate my point:Fortunately, inside days like today provide tight consolidation that leads to a good move whenever a break out/down does occur. We'll just have to wait and see.

TLT

Weekly Wisdom Quote

"If I had been a professor, I would have let Mr. Bernanke pass his exams, but I would have told him never to become a central banker."

--Marc Faber
Barron's-January 18, 2010 issue

***Barron's witty reply to Mr. Faber was, "He would have told you never to become a professor."

Trapping Traders: The Mid-Day (False) Move

Another day of earnings releases followed by selling in the market. Even in after hours today, Google sold off after releasing results. There was a lot of money to be made trading the short side this morning, at least for the first hour and a half of trading. After that initial move the markets merely chopped around and most likely chopped away a lot of day traders' profits from the morning.

A good example of why intra day traders get chopped up mid day occurred around 12 o'clock (central time) today. For this example we'll use the SPY index, but you can see this same kind of set up among several different indexes and stocks at various times through out the day. Around noon, the SPY finally looked like it was going to crack the lows of the day and head lower. I'm sure several traders were eager to add to their shorts or sell short again or even short for the first time because they missed the big move earlier in the day. SPY broke through the prior lows by 6 or 7 cents but then quickly retraced and continued heading higher for quite some time, which trapped traders and no doubt ate up some profits from earlier as traders had to cover their loser shorts.

So what caused this? Most likely, two things: 1) buy programs, and 2) professional traders. There are several algorithmic programs that are programmed to fade the highs and lows of the day, especially when the high/low occurs during the middle of the day when there's not a lot of volume. These programs are designed to trap short term traders and force them to exit their positions causing the stock to bottom/top and the program exits for a profit. Lots of professionals know about this because they've been doing the same thing for years, it's just that the algo trading has dramatically changed the moves, as they are much quicker and tend to last longer now.

Here's a 5 minute intra-day chart of SPY that illustrates what I'm talking about:So what can traders do to protect themselves from these kinds of traps? First, they can not be as aggressive to trade a breakout, especially when it occurs outside of peak hours in the market. They can also wait for confirmation. Notice that the new lows didn't even hold on the 5 minute chart above...just waiting for prices to close at the new levels would have kept you out of this trade. Another thing to do is to cut losses quickly. Set your uncle point and stick to it. Note that adapting to program trading is just part of trading these days and it forces traders to either cut losses quicker than before and wait for a re-entry or allow trades more room to breath and slowly build a position.

These intra-day high/low fades are funny to watch when your not in them, but they are awful when you're caught in one and you're not prepared to exit quickly. One last suggestion on how to deal with this is to examine your intra-day P&L levels. I've noticed that for the most part, my trading profits occur during the first hour and a half of the day and the last hour of the trading day. I tend to take mediocre trades and get chopped up in the middle of the day, unless there is something specific that is making the market move. Paying attention to your intra-day P&L will give you insights into what times you should be trading and what times you should not be trading.

I hope everyone is having a profitable week so far and is prepared for what will likely be a very interesting Friday tomorrow.

TLT

Popular Post Replay: Market Wizards

This was one of the most popular posts from 2008. It was originally posted on October 19, 2008. The popularity of this post is due to it involving two things that are dear to most traders' hearts: 1) the book Market Wizards, and 2) Ed Seykota. Check it out.


**********************************************************************************Ah, yes...it's a classic and we all reference it as being one of the best trading books of all-time. Well, I recently began reading the book for the 2nd time, after reading Market Wizards, The New Market Wizards and Stock Market Wizards. This series of books is excellent and I would encourage anyone who is interested in trading or even an investor, to buy all of the books and read them.

Tonight, I was reading the classic "Ed Seykota" chapter and I was struck by his answer to what his views of fundamental analysis were as to his trading approach. Here is his answer (emphasis is mine):

"I am primarily a trend trader with touches of hunches based on about twenty years of experience. In order of importance to me are: (1) the long-term trend, (2) the current chart pattern, and (3) picking a good spot to buy or sell. Those are the three primary components of my trading. Way down in very distant fourth place are my fundamental ideas and, quite likely, on balance, they have cost me money."

If you aren't familiar with Mr. Seykota, you need to be. Check out his website, it's filled with wonderful information.

Good luck out there.

TLT

Weekly Wisdom Quote

"If you're not making mistakes, you're not trying hard enough."

Vince Lombardi

Not Too Much To Do Today

There was not much to do today, especially after 10:30 a.m. (central time). Unfortunately, I was in court for most of the morning so I missed most of the good shorting opportunities. I did use today's strength in the dollar to exit my long dollar position (uup) because that idea didn't pan out the way it should have. The dollar and the markets seem to have started their inverse correlation relationship again, which indicates that the dollar strength at the end of 09' was probably just traders unwinding their carry trades for the year.

The selling in the markets stalled out this morning and almost all of the stocks that I have on my potential short list couldn't follow through to the downside...so I went long TNA this afternoon with a buy the dip trade. We'll see, BGU may have been a better call but the small caps have been strong lately.

Have a great long weekend!

TLT

Today's Heartbreaker: CHK

It was a pretty good setup going into the trade because oil and gas stocks have been relatively strong lately. CHK was on my radar this morning. It is one of 4 stocks that I'm tracking daily. This morning it gapped up above yesterday's high...very bullish...then it broke out of it's opening range around 9:10 (central time). This was the entry signal and a long was established at 28.27.

At this point, the trade's on and looking good and the main risk was the upcoming natural gas inventories report that would be released at 9:30. I tightened up the stop heading into the release and I established an "uncle point" back within the opening range (see chart below). This trade had some profit potential if the market reacted positively to the report. As you can imagine by the title of this post, it did not. Here's a 15 minute chart that breaks everything down:

Calling this trade a "heartbreaker" may be a bit of an exaggeration, as this was still a good trade, it just didn't work. There are a couple of lessons to take from this one: 1) be aware of economic releases...especially ones that specifically pertain to the instrument you're trading, and 2) respect your stops. Fortunately, I tightened the stop prior to the release and respected it. Had I not, I would be sitting in an underwater position that's going nowhere and tying up precious capital.

As for the market in general right now, I'm liking financials. In particular, I think there might be a good longer-term trade developing in WFC or several short-term trades. Keep an eye on WFC if it trades above and holds the $29.50 level.

Have a great day!

TLT

Weekly Relative Strength Rankings

Here's where the alpha was last week.

I hope everyone had a great weekend.

TLT

Weekly Wisdom Quote

"If you have a minute, I'll tell you how to make money in stocks. Buy low and sell high--now if you have five or ten years, I'll tell you how to tell when stocks are low and high."

--Jesse Livermore

Outta Gold and Into Utilities and Some Random Observations

I bailed on my short gold position today as it broke through my stop. It's showing quite a bit of momentum and it traded on decent volume today. I'm out for now and will look at going short again once (or if) it approaches the recent lows. Here's a daily chart:You can see that gold bounced off the 50% retracement level and then failed to make lower lows. We'll see if it chops around or takes off higher. One thing to note is that Silver (slv) has been very strong this week...it has been at the top of my relative strength list for 2 days in a row now.

I did manage to get in utilities (XLU) today. This is a support test trade which means I'm betting that the recent support will hold. The weakness over the past week has offered a good risk to reward entry and as always, we'll see how it works out. Here's the daily chart for XLU:Note that I labeled the support a zone, this is because I don't like pinpointing the exact price but rather a thin zone for support/resistance trades. The stochastic is in oversold territory, which is essential for this type of trade.

Other things to take notice of are the extreme strength in both energy (xle) and materials (xlb). As for materials, FCX and DOW have been particularly strong. There was some weakness in tech (qqqq, xlk, smh) but that's not surprising given the strength that the sector has shown recently.

Last but not least, the dollar (uup), which I'm still long, continues to chop around with little significant moves in either direction. Long term yields pushed higher today which helped my short long term bond (TBT) position. I'll be back later in the week with more.

I hope everyone's off to a good start for 2010.

TLT