Now, What? 8 Pieces of Advice

Last week we were talking about a potential for a larger correction, which we then saw early this week with some of the worst action we’ve seen in years. Later in the week however the market bounced back and all of the sudden, we found ourselves sitting at only small losses for the week. It’s been a rollercoaster type week in the markets and the question that remains is; what next? What should we expect? How should we trade in lieu of this type of environment? I want to share with you 8 points that I am going to be trying to do this next week and for the foreseeable future. This should help those who are curious how to trade or act during a market environment such as this one.

  1. Take your time. With added volatility, the temptation to rush into trades becomes greater and the fear of missing out is strong.
  2. Know your strategy. Review your rules. We have rules for a reason and one of those is so you can know when you are wrong, if you don’t know this, given enough time, you’ll lose your money.
  3. Don’t swing trade. Volatility is not conducive for swing trading, the market whips back and forth and doesn’t trend.  Without a trending market, swing trading is made much more difficult.
  4. Day trade, if that’s your thing. In light of the previous point, day trading is good strategy to take up when the market volatility increases like it is.
  5. Again, patience. The charts are broken. They are not healthy right now and won’t be for quite some time. Just because we saw a bounce later in the week does not mean everything is fine and we’re back to normal. The price is still below the major moving averages and the damage to the “cleanness” of the charts is immense.
  6. Don’t guess the end. I don’t know when the market is going to be back to “normal”, no one does. Stick to your rules and process and you’ll be fine and won’t have to worry about when the market is going to be normal again.
  7. Learn. This is a great chance to learn more about yourself and trading itself.
  8. Go for a run. Relax. Think more, not less. But this is more of something you should do all the time.

A Larger Correction Looming?


The market had one of it’s worst weeks in recent years and the charts are pretty ugly, in general, out there right now. After months of the market doing nothing but going sideways in a very small range, the price consolidation was finally broken. The larger the base, the lower/higher in space. Just like if you were to compress a spring a little, it would expand a little. The same physics applies to the market, the tighter (more compressed) the market is (price), the greater the move will be after it breaks.

Personally, based on the size of this base and the breaking of a few key MAs, I imagine that the correction is going to go deeper. The charts are simply too broken to be considered buyable here for more than a quick bounce trade (which will happen in the next day or so). The market is likely to come in a little more before I would consider purchasing anything. After a historical run the past few years, then a long consolidation (this year), then a break lower from this consolidation, I personally don’t feel comfortable saying the market is a buy right now. Let’s take a look at some charts.

8-22-15 iwm weekly

Above is the weekly IWM chart. As you can see, the price closed greatly below the 50 MA – something that hasn’t happened often in recent years. Combine this with the huge head and shoulders pattern (a bearish pattern), that was just broken (see drawn neckline), I don’t like this chart for a purchase right now. I think the market could finally see a pullback to the 110.00 area, for starters.

8-22-15 qqq weekly

The next chart here is the QQQ weekly chart. This chart is the best testament to the historical trend of the past few years. Truly, it’s been a bull market for the textbooks. However, I am not so sure it’s going to continue – or at least not how it was – as you can see in the chart, the price closed below the 50 MA for the first time in a couple years, usually a sign of a trend change. Often trend changes don’t happen all at once. I expect the market to bounce around some, then continue lower, it’s not as easy as just a straight shot down (usually).

8-22-15 spy daily

Above is a SPY daily chart. I added this daily chart to show you how big this base really is, it’s huge. Approaching a year old, and based on the size of this base, it makes sense that the move out of it will be large. I think it makes sense for SPY to make a trip down to 190.00 in the next couple weeks, again, not straight down, but down nevertheless.

8-22-15 spy weekly

 

Finally, here is a weekly chart of SPY. Again, as you can see the base is enormous and the break is clear and clean, especially when it comes to the 50 MA. The 50 MA hasn’t been broken in a long time in this chart either.

Overall, I think the dynamics of the market are changing and I think it’s likely there is going to a larger trend change in the next couple weeks. I am not calling for another bear market, by no means, but I am saying that I don’t think I would be comfortable buying this dip quite yet. I would give it time, be patient and wait for the set-ups to come back before just buying in the hole. And of course, if I am wrong, I will know it quickly and the set-ups will come back sooner than I expected.

I wish you all the best. Let me know if you have any questions or comments.

 

Trade Review – $EWZ

For some of my followers, it came as a surprise that I would trade a stock that is beaten down as badly as $EWZ was (and is). These people are justified in their surprise, I don’t trade these dumpster dive trades often at all. I don’t think they yield the best return or have the highest potential for success. The reason why I actually decided to take this trade was simply because, withholding the negatives to the strategy, I want(ed) to diversify my strategy to capture more of the movements in the market.

There were a handful of reasons I decided to take this stock in particular:

1. The stock was on MAJOR long term support
2. The stock was extended below the lower Bollinger Band
3. The stock was forming a hammer on the daily chart
4. The volume pattern associated with this hammer pattern was enormous
5. Risk was easily defined (below the hammer candle)

The combination of these very basic facts of the chart of $EWZ gave enough warrant for me to purchase the stock and to diversify my strategies, something I mentioned I wanted to do in the last post I wrote.

My purchase price was 28.50, my sell was at 29.09. The net profit was not a lot, but the trade confirmed the validity of the strategy. The sell price was selected because it was near the end of the day (on Wednesday 7/29), and coming into a down-sloping 8 ema paired with the fact that the stock trend itself has been horrendous the past few months.

I will continue to monitor this stock over the next few days with the eye for another consolidation period below the moving average(s), which will create another defined stop-loss area (below the recent consolidation).

EWZ Post

2015 is different…

I haven’t been blogging as much this year as years previously, I think that this is due in part because of the overall market condition this year.

This year $SPY is down just under 1% for the year, much different than the (likely) close to 10% it was up at this time last year. Look at the chart of SPY and it will quickly become evident that the market is consolidating this year – up then down, down then up. This leaves me, as a momentum swing trader, in a tricky spot. Rarely do I get much traction in my trades given this condition. Rarely are there stocks that are tight and poised to breakout higher. Often I find stocks that are inside huge consolidation bases and not really doing much in terms of trends, just a ping-pong of price action.

For someone like myself and for everyone in the market, this is likely rather frustrating. Most people make money on trends, up or down, and when there are no trends, then making money becomes a little more difficult. This year, so far, has humbled me and made me realize that my strategy, while good and robust, is far from absent from the providence of the overall market – I am also affected, positively or negatively by the market conditions, we all are.

Over the past month or so, I have been thinking about how I can broaden my strategy to incorporate other trading techniques, namely, trend following (long-term) and short term range bound trading (buying support), I am still pondering how I would trade these strategies and make them congruent to my comfort, but the more I think about it, the more I feel as if that’s the way I need to go with my trading, to grow and continue to learn. To some extent, I have mastered the Coghill Flag (my own pattern technique) and now I need to move on and find some new strategies.

Should be an interesting time, and I am glad you – being my reader and fellow trader – are along for the experience with me. Thanks for listening to this out-loud thought and I look forward to sharing how I am doing down the road. As always, if you want to talk further or have any questions, feel free to message me and I will do my best to get back to you quickly.

Paradoxical Intentions to Success

Tonight when you get into bed be sure to think about sleeping and falling to sleep a bunch. Try your hardest to fall asleep in 10 minutes.

If you’re an experienced snoozer, you know this strategy is flawed. No one can get to sleep if that’s all they’re worried about (going to sleep). It’s strange logic, but if someone thinks about not going to sleep, they will end up fearing not going to sleep and in turn, won’t go to sleep. This is what is called a paradoxical intention; want something, you must aim for something else to get what was originally desired. For sleep, this would mean thinking of anything else, or just earning for rest. Do this, you will get sleep. Think about sleep and you will get nothing, but more tired.

I mention this because paradoxical intentions are everywhere. Aim for money, you won’t have any. Aim for contentment, it’ll elude you. Aim for peace, it’ll be chaos. Aim for happiness, it’ll just never quite be there. The overall theme we see in all these is this; 1) we need to aim for something greater to get the lesser things 2) make something too important, it’ll collapse on itself (won’t ever have enough). The solution; know something greater, something objective that will not fluctuate. 

All too often new traders start in this business with the intention of making money, they usually find one of two things to be true because this is their intention 1) they won’t make any money, for that’s all they’re concerned about  or 2) they won’t ever make enough, which is functionally (and emotionally) the same as the former. For the new and old trader, the secret – one that spans all of life – is to gain, one must lose (the interest in making money, in this case) or to die is to live. In essence, to live or to trade with a purpose is the only way to contentment and success, any other way and you’ll be left with (functionally) nothing. So, what’s the reason you’re trading? For money? Fun? Educational? Job? Emotions? There’s a whole host of potential reasons, but what must remain and what’s essential is the answer to this question; would you still do what you do even if you suffered as a result of it (losing money), if so, you are on your way to success.

Set Ups to Watch Next Week

It’s been a while since I last talked about the setups I am watching and why I am watching them, so that’s what I am going to do this weekend. As always, if you have any questions or comments, feel free to reach out and tell/ask me.

$DPZ, $MGNX, $NLS, $POWR, $RDWR, $WUBA are the main stocks we will be focusing on today. There are more strong stocks than just these that have some potential out there right, but for the sake of our time and sanity, I have narrowed them down to a select few that I like the best.

$DPZ – One of the tightest patterns in the entire list. Part of my strategy is to find the tight set-ups and then set a stop loss close by, thus, lowering the risk associated with the trade. As for DPZ, the stop loss would likely go just below Friday’s lows. I think this one, had I seen it Friday, I would have bought.

6-6-15 DPZ

$MGNX – This pattern is not usually one that I would actually trade, but it is a stock that is inside a base and is holding higher within the consolidation. So, in that sense, there is some potential for upside. The reason why I wouldn’t own it right now is because the BBs are not pinched and the stop would need to be too far away.

6-6-15 MGNX

$NLS – This stock is one that I WILL purchase Monday afternoon if the stock holds higher inside this consolidation pattern one more day and then closes at the highs of the day. Love the strength and how tight this pattern is shaping up to be.

6-6-15 NLS

$POWR – Not the absolute favorite of the group, but definitely own-able versus the lows of Friday, from a swing perspective. I really like the BBs pinch, the closing on the highs of the day and relative strength (versus the SP500).

6-6-15 POWR

$RDWR – By far one of the best out there right now. I really like the way this one looks from a swing perspective. The BBs are pinched, the stock is showing Relative Strength and it is closing at the highs of the day within a consolidation pattern. All these make it a perfect Coghill Flag pattern candidate. If I had seen this one Friday, I would have purchased it.

6-6-15 RDWR

$WUBA – This is one stock that has a ton of potential, but just isn’t quite ready yet to be purchased. If it can hold higher one more day (above the 21 ema) after Friday’s huge upside day, then I will be purchasing it versus the lows of the day Monday. This is a much watch potential set-up going forward.

6-6-15 WUBA

That’s all for now. I hope these help you out as we head into the next week of summer trading.

The Vitalness of Risk Management

I believe the most overlooked discipline to the stock market is the importance and application of risk management. I mean, most people don’t even know what that ‘really’ means, yet they own stocks. People tend to think that buying a stock must mean it has to go up from there and they’ve made the absolute correct investment decision. Doing this is exactly the same as saying you know what the weather is going to do tomorrow, because you looked at a doppler radar. Sure, you can get a good idea about what may happen tomorrow, but even the meteorologists get it wrong sometimes. Purchasing a stock without acknowledging you could be wrong (and know where that point is) is exactly the same as the meteorologist who calls for sun, then it rains, yet he still says it’s sunny. It’s irresponsible and a poor investment strategy.

So, what is risk management? Investopedia describes it as:

“Simply put, risk management is a two-step process – determining what risks exist in an investment and then handling those risks in a way best-suited to your investment objectives.”

But, in my own words a better and simpler way of saying this is: know the point in which your investment is wrong. If you were a meteorologist and you called for rain, yet it was sunny, you would know the point in which you prediction was wrong (when you wake up the next day and it’s sunny, not raining).

The point you pick when purchasing a stock for the ‘infliction’ point (point where you are wrong) is relative to your personality, strategy, time frame, etc. So, unfortunately I cannot tell you a one size fits all formula for this discipline. However, to not know (or have) a point is to not have a robust enough strategy to be competitive in the market place in the long run, I can guarantee you, you will go out of business.

An real example from my trading of the importance of risk management can be seen in a recent trade in $RALY of mine.

I bought this stock on 4/23/15 in anticipation of a breakout higher. So, logically, I would know when I was wrong in this trade when the stock failed to breakout higher. But where is this point? Right below the recent candle’s low (4/23).

5-12-15 raly

Once the risk management level (also called stop loss or infliction point) is determined, the trade can be placed. Unfortunately, this stock did not breakout higher like I had hoped, but luckily I had a plan for this type of event – risk management – and when the infliction point was hit, I sold and moved out of the way as the reason why I was ‘in’ the stock was no longer valid. In this particular case, if I had held onto the stock, it would have cost me a lot more than my measly 3.5% loss, it would have cost me a whopping 14.5% loss and that’s a lot. Imagine if you had three trades in a row where you didn’t have a stop loss and each one you lost 10+%, you would be out of business in no time.

I cannot stress the importance of knowing the point in which your purchase is wrong. If you want to be in the business, you have to know the limits. This is not a get rich quick business, it is a slow grind, through careful analysis of risk and potential. If you want a roller coaster of emotions in your job, you’re better off elsewhere, because if emotions or careless decisions ever get a hold of you in this business, you won’t be around much longer.

Know When To Go Outside

The weather is becoming really beautiful now, highs reaching the 80s consistently (where I am located). Everyone is ready to get back outside and enjoy this weather after being cooped up for the winter, I know I am. But with everything, you have to plan your activities and to go outside when it is going to rain would be (sorta) silly. Similarly, trading during a ‘storm’ (when it is not conducive), will be detrimental to your long term success in the stock market.

Every trader that is going to be profitable long term is going to need to have a process (a set of rules) that they follow when considering to place a trade. The best traders though not only have a process, but have a process that tells them when it should be used and when it is more successful. If you’re a trader and look at the market in the same everyday (without any sort of inclination to the climate of the stocks), it would be like looking at each day’s weather patterns the same way with no regard to whether it is going to be snowing, raining or 100 degrees – it’s just plain foolishness. 

I would like to stress this point; just like the weather patterns, pretty much every trader in the business has different climates in which they find they ‘sweet spot’. For the options guys, it may be when nothing is moving (going sideways), or for the momentum trader(s), it may be when the stocks are going up and then following through the next day – with power (this is me). There is not one size fits all, if there were it would be like there being one weather pattern which satisfied all the people of the world – impossible – so stop looking for the holy grail of trading processes. 

So, here is the climate of the stock market right now:

  • Lack of momentum
  • No follow through
  • Lack of tight stocks (measured by the Bollinger Bands)
  • Lack of stocks closing on the highs of the day

Now, for me this is a climate of the market in which I KNOW I will not make money (much of 2015 has been like this) and because of this, I am going to bring my rain jacket or stays indoors (or in other words; be protective and wait out the storm). 

I hope this helps explain what I have been talking about the past couple weeks, let me know if you have any further questions.

 

Knowing Your Trading & How to Be a Trader

If you want to know how to trade, you must know yourself and your trading. You probably wonder what that is and what I mean by that, let me do my best to elaborate.

If you’re reading this you are likely a member of StockTwits or Twitter and follow many traders and watch them ‘rake in the money’. I can speak from experience in this regard – they don’t always make money and their strategy is not the only ‘right’ one. When I first started to trade I would follow so many traders on Twitter and watch them trade everyday and seemingly make money each and everyday. I wanted that, but oh how naive I was – just because they could do it did not mean I could or that they had the only way figured out.

Twitter community has a tendency to only show you the good times. Sometimes a trader will Tweet out that they had a losing trade, but more often than not the bad trades that these traders take will be down-played and not spoken about often. On the flip side, the good trades are going to talked about constantly – it’s just the nature of the selfish world we live in. To be clear; I am guilty of this myself. I often Tweet both my good and bad trades but only really elaborate on the good ones.

My aim is this; do not be discouraged or deceived – the traders you often aspire to be are the same ones that the trader himself is aspiring to be. More often than not when learning to trade we are not comparing ourselves to real traders that are ‘so amazing’, but rather comparing ourselves to an untainable imagined trader that people often place on display as a sort of facade.

To be a trader you must drop the unrealistic expectations and comparisons. To be a good trader you must drop the stress of making money. To be a good trader, trading must not be enthralled in trading. To be a good trader, you’ve got to have a realistic expectation. To be a good trader, you be patient. To be a good trader, you must know you’re not ‘a great trader’. 

How do you get to this point? Below are a couple points I want to offer you on that subject:

  • Drop your expectations
  • Live your life outside the charts – don’t think about it all the time, please
  • Learn from others, but don’t expect to do what they do
  • Be patient
  • Consistency
  • Don’t change your strategy because someone else is better than you – who cares
  • Read and Learn but don’t expect it to come in a day

All real traders ‘know’ they are a trader, they have a sense of communication (of sorts) with the charts. They’ve seen the patterns enough that they come more naturally and fluidly. So, please remember you can do it – anyone ‘can’ – but it’ll take losing your expectations and losing your unhealthy desire to do so.

The “TA is Bogus” Fallacy

“TA is Bogus”

People who employ this sort of thought have unfortunately committed a major logical  flaw in their mental processing.

Most people who come to this abrasive, definitive, conclusive opinion about the validity of Technical Analysis (TA), have in fact – done zero research to substantiate this claim. Have you not noticed that people who make the most abrasive (perhaps offensive) claims are also the same people who do not – often – have a shred of evidence for their beliefs. Similarly, ever notice that the people who are consistently calm and unfazed have the most confident position because they HAVE done the research and come to a legitimate conclusion. Now, before I go further I want to say; there are some people who have completed empirical evidence refuting TA – I am not speaking to them – as they are are not the ones who make the abrasive comments, they actually fall on the side of being ‘consistently calm’.

Perhaps there is a bias that influences people’s investigating of the legitimacy of TA before they even get started. Personally, I think this is almost always the case.

So, please be careful with every single thing that ever enters your life whether it be Technical Analysis, A political campaign, a World View – research it with the most open mind you can possibly have as doing it any other way is (or can be) horrendously detrimental to your personal development as a human being (or as a trader).

Til’ next time. Let me know if I can help you in anyway – that’s what I am here for.