Saturday, February 25, 2012

DRI February 25 2012

Good, conservative play currently on a pullback.

WYN February 25 2012

This is a slow but steady play, but there's nothing wrong with that.  All the analysts love this one.  You may not get rich with it, but you likely won't go broke, either.

ANR February 25 2012

Another energy play that looks strong. You have to take what the market gives you, lots of fine set-ups in the energy sector.

Risk Disclosure and Comments on Positions

I post a lot of charts.  Yes, I have positions in these stocks from time to time.  But I post a lot of charts in which I do not, have not, and will not have any positions.  I like to chart, it helps me understand the value and limitations of charting.  And, I could buy or sell any of these stocks that I post at any time.  Please don't interpret this as either I am touting my own book or don't really have confidence in any particular play, because I like to focus my attention and hate to switch unless I am convinced the position is played out.

At the moment, just FYI, I am long DRYS and am trading the S&P Futures (I go long and short at random).  I have not traded MU, COP, SODA or any of those other stocks in some time - though, looking at some of them, I wish I had.  :)

Please note the time and date of this post and understand that my positions could be different when you view this. 

Also, kindly note that nothing in this site is intended to constitute trading advice of any kind, it is provided solely for entertainment and educational purposes.  No inducements to buy or sell anything are intended.  There are inherent risks to trading any security.  Please consult with your brokerage firm for a fuller understanding of those risks.  Everybody engaging in the securities market in any way should perform their own due diligence at all times and not enter any positions without first consulting with their licensed securities consultant or adviser.


SODA February 25 2012

Huge 14% gain since my last chart.  Now at breakout point.  Make or break time for SODA.

Videos on the European Financial Crisis

A pessimistic look at the European bailouts by an Irish economist. "France and Germany are bulldozing their attitude through the the economies of the rest of the periphery of Europe. In the process of trying to save the Euro, France and Germany are actually destroying the European Union."

You may think all this is being resolved. However, there are some very dark hints about future political struggles as a result of the desperate fiscal measures being attempted. And this guy is by far not on the farthest extremes of the Left. People who think all the Europeans are on board with this nonsense are fooling themselves. Who are the villains? Watch and find out. Hint: it's not Germany.

Friday, February 24, 2012

Market Thoughts February 24 2012

A weak close to the week should frighten some Bulls, but it won't.  After two months of only upward moves, nothing short of a cataclysmic drop will change the complacency infesting this market.

Very telling was the final 15 minutes of the S&P Futures.  After closing regular trading hours at 1364, they fell during the 15-minute after-session to 1362.75, just above the lows of the day.  Anybody who has been watching this market over the course of this rally will tell you that this was unusual, if not downright unique.  Throughout this perma-Bull rally, the Futures consistently have ended trading on a positive note, even if only due to the usual final-trade short covering spike.  Some were desperate to get out of their longs even at a loss, considering that the Futures closed just above their lows of the day of 1361.50.  That is not a good omen for market events next week.

 I don't really have to say much about the above graph beyond restating my position that the Transports are a leading indicator, and their Bearish divergence with the broader market is only getting worse.

And, if you don't have faith in the Transports, the DJ Utilities are showing the same Bearish divergence.  Funny thing about divergences, especially ones as glaring as these, is that they usually close, with the laggard catching up to the leader.  I stand by my belief that a correction is coming, and soon.

Everybody is talking about the rise in oil prices.  It is usually accepted that a small increase in oil prices helps the market, by lifting the myriad energy and energy-related stocks.  But once the increase in oil prices gets out of hand, the whole market gets clobbered.  Oil ($CL_F) was approaching 110 today.  With a market just begging for a real correction, a further move higher in oil prices could help set that in motion.

IDCC February 24 2012

IDCC looking good, looking to fill the gap and then some.

COP February 24 2012

ConocoPhillips is in a breakout stage, with oil at $109 and rising, this is one way to play it.

PCX February 24 2012

Interesting chart, good breakout so far.

USO February 24 2012

Nice Bullish chart, good hedge on oil prices

SODA February 23 2012

SODA had a great day, uptrend firmly intact.

Thursday, February 23, 2012

DRYS February 23 2012

Please note that all the "smart" traders despise DRYS and look down on it as beneath them.  That is why they have not participated in the 60% gains in the stock over the last month.  So, only trade this stock if you want to make money. 

$ES_F Current Downtrend Channel February 23 2012

The channels are a little rough, but I still think they are useful in this context.

Wednesday, February 22, 2012

SODA February 22 2012

Consider using today's dip in SODA as an entry point.  Right at good support.

$ES_F Current Downtrend Channel February 22 2012

We are currently smack dab in the middle of a downtrend channel in the futures that began on Sunday night.

Monday, February 20, 2012

Micron February 20 2012

Should be a quick run to $10 or higher.

SODA February 20 2012

SODA ready to clear Bullish ascending triangle formation, buy the dips.

CSCO February 20 2012 weekly

Look for move to mid-20s, maybe to challenge recent high of 27.

INTC February 20 2012

Solid play in the chip sector with a 3.1% dividend.

TRGT February 20 2012

Interesting play, beaten down, moving higher.

Why I Usually Don't Like to set Price Targets

One of the prime questions I hear is, “What is your target on this stock.”

I usually have to say I have none.  Because that's the truth.

That is followed up with, “Well, if you don’t have a target, why are you in the trade?”  I consider that an amusing question, it’s so off-kilter from common sense that I usually start laughing when I hear it.
I don’t like to come off as a smart-ass – OK, well maybe sometimes – but the absolutely honest answer to that is, “I am in the trade to make as much money as I can from it.”

Targets are completely unnecessary and counterproductive except in limited situations.  In fact, just thinking of a trade in terms of a target puts me in the wrong mindset from the moment I consider entering it.  An underlying feeling develops that you have failed if you haven’t reached the target, or succeeded just because you did.  In either case, your feeling would be completely unwarranted and could easily cost you money.

I both day and swing trade.  A day trade can turn into a swing under certain circumstances, though I try to avoid that.  Day trades, in fact, can be exploratory trades for later swings.  But that’s another topic for another day.

I day trade because I see a temporary opportunity such as an oversold condition on one of the shorter charts.  I swing when I see a trend on one of the longer charts. Targets don’t really enter into either, though they are more likely on the day trade.

If I’m day trading futures – meaning the trade begins and ends that same day – and I get a good, quick scalp, I’m out.  If I’m wrong on direction and the security starts heading the wrong way, I’m out.  Either way, I’m never in a day trade for a very long time.  That has nothing to do with a “target,” though I suppose you could call it that.  My only target is to make a good profit with as little risk as I can manage.  I take as much as the market will give me, no more and no less.  I prefer to keep things fluid and simple.  In advance, based on overall market strength and my risk tolerance, when long I will often put in a sell order a point higher or something like that just to catch a minor fluctuation, and a stop somewhere lower.  If you want to call those targets, so be it, but that is just scalping.

Swings are designed to last more than one day.  That basically is the only limitation or target I put on it.  Sometimes I don’t even achieve that.  If I enter a swing and the security moves the wrong way immediately, I’m out.  I can always get back in.  Admitting my error quickly saves me time and money.  Making or missing a “target” has nothing to do with it.

For both swings and day trades, I consult both the short and long charts.  A day trade is based on a 1, 3, 5, 10 or 15 minute chart, but I consult the longer 30-minute, hour and day charts to make sure I’m trading with the larger trend.  It’s just safer that way.  Swings, on the other hand, are based on the hourly and daily charts, but I prep with the shorter charts to find a good entry spot.

Once I’m in either trade, my only goal is to make as much money as I can from it in a reasonable time.  If I enter a day trade and get an immediate fifty cents, I’ll take it and move on and be quite pleased with it and maybe even boast about it on twitter like everyone else.  I’m not going to to stand and fight because my original target was seventy five cents.  That’s just money management.  So, if I do that, what is the point of having a target?  It will just distract me.  These are fluid situations, and I throw out any preconceived notions that might lock me in to poor choices.

“I better not sell here despite the sell-off due to that Guardian article, because I’m only at $49.30 and my target is $49.63.”  I don’t think so.  My goal is to make a reasonable profit and get out without damage.  That’s my target.

Similarly, in swings, I keep going until the market signals the risk/reward ratio is turning against me.  If all lights are green and I’m riding a trend, I’m not going to sell at $50 just because I set that as my target a week before when $52 is looking quite attainable.  If the trend changes on me or what looks like a typical three-day sell-off starts, I’m not going to try and ride it out because I set a target at the outset of a $5 gain and I only got $4.  That seems silly to me.

Usually, the most I’ll do is look at the chart and see a likely ending zone.  That can be based on prior price action or any of a number of other factors.  Maybe I just want to make sure I get out before the weekend, or some earnings news.  Lots of decisions can shorten a trade.  Having a “target” isn’t one of them.

The reality is that, with a swing, you never know how the market is going to react from day to day.  Your security may go up fast and top out, or may do a gradual incline.  It is tough to know that in advance.  Breakouts are particularly difficult to judge in advance, due to their ferocity.  Often, a breakout will Bull Flag, in which case the target sets itself.   Prudent choices of stop loss points are more valuable than targets.

Targets usually are gimmicks used by sell-side brokers and analysts to make themselves sound like they know what they’re talking about and convince you to buy or sell.  When an experienced trader talks about targets, I have a pretty good idea where they’re coming from,  and I know that’s not my bag. I don’t need that crutch from a broker.  Hey, if it works for you to organize your thoughts, terrific.

There’s an old military saying.  “No plan survives contact with the enemy.”  Same way with this target idea.  The market here is the enemy, and no target is going to survive what the market does or does not give me.  I simply don’t like setting targets in Dollar and Cents terms.  Selling at such a “target” would be a pure coincidence of many factors.

Targets usually don’t interest me.

Sizing your futures Position

One of the most important decisions you will ever make as a trader is the size of your positions.

That's right.  It is up there with what you buy and sell, when to get in and when to get out, and whether you are after capital appreciation or income.

New traders are excited and used to maximizing their efforts at whatever they do.  If you are an accountant, you want to get as many spreadsheets done as you can.  A baseball player wants to get the most hits, a police officer wants to make the most good arrests, and so forth and so on.

This quite natural - and usually correct - assumption that more is better will destroy your chances of succeeding as a trader unless you get it under control.

Focusing just on the e-minis (aka "the spoos" and "the S&P futures"), you need $5000 to trade one contract, $10,000 to trade two contracts, and so on and so forth.  These contracts actually control quite a bit more than that, as their leverage is about 90%.  When you trade one contract, it is quite deceptive, because it looks as though you are trading very little, when, in fact, it is quite a lot.

Each tick of the minis is .25 of a S&P 500 point.  If the contract moves from, say, 1362.50 to 1362.75, you would make $12.50.  You have to deduct your commission, of course, but let's ignore that for a moment.  The amounts increase depending on how many contracts you are trading.  Two contracts and you would make $50, three contracts, $75, four, $100, and so on and so forth.

The mistake when you are new is to look at $12.50/tick as insignificant.  Many new traders who are used to trading equities are used to much bigger Dollar swings for each quarter point.  If you are trading a standard 1000 shares of a stock and it goes up a quarter point, you've made $250.  That is a healthy sum, but if you have $30,000 invested, it is a fairly small amount.   But traders get used to swings of that much money, and their tendency is to transfer that bias over to the futures.

To get a $250 gain for a quarter point move in the futures, you would have to trade 20 contracts.  So, a new trader might think that if he or she "only" trades 10 contracts, that this is being conservative and completely prudent.

It isn't.  Failing to realize the leverage you have with futures contracts is the fatal error.  When a stock is trading at $30, a quarter point move is a much bigger percentage move than a quarter point of an index such as the S&P 500 which is trading at 1362.  While both equities and futures have their fast and slow periods, futures can move with a speed that will make your head swim.  The larger your number of contracts, the more exposed you are to these types of movements.

A trader might have, say, $50,000 in his account and say to himself or herself that ten contracts would be a good size to trade.  Each quarter point is then $125.  Not so bad, right?  Wrong.  Everything is fine until the market moves against you.  When you are down five full points on ten contracts, you are taking a serious $5,000 hit.  Even using tight stops, a move against you hurts.

Factor in that a new trader doesn't have the necessary experience to know what to do in all situations.  When the Dollar losses start mounting, prudence goes out the window.  All sorts of bad natural tendencies set in, such as trying to make back your losses right away.  So, with the market going against you like that, maybe you turn around and go short.  Then, of course, is when the bounce occurs and you are down another $3000.  Yes, it happens that quickly and that horribly.  Getting whipsawed is the result of poor position size, because the losses lead you to poor and hasty decisions due to the natural emotional reaction to sudden large losses.

If you want to be prudent, there is a good way to ease into trading futures that will minimize these learning experiences.  Consider getting an account with a broker that allows you to paper trade using the same tools that you would use to trade for real.  Experiment with that for a while.  Get a feel for how size impacts your account when the market moves with and against you.  You should spend weeks, if not months, doing this.

You should not switch to trading with your account until you can show consistent profits on the paper trading account.  Once that happens, start small.  When I say "small," I do not mean as a fraction of your account.  Instead, I mean one contract.  That's right, just one solitary contract.  Trade that one contract for at least several weeks.  Once you can show consistent profits with that, then move up to two contracts.  You should spend at least twice as long trading two contracts as you did trading one.  After that, increase your size gradually until you are comfortable - and then stop.  Don't just keep increasing your position size because you can.  The key to making big profits is not related to your leverage, but to your decisions.  Believe me when I tell you that you can make more trading two contracts consistently than you can trading ten contracts without the proper experience.  Your risk is lower and your balance sheet will be better.  Don't think that the size of your futures position will make you more money, any more than buying the most expensive skis will make a beginner a better skier.  In the latter case, it will just make you more likely to run hard into a tree.

The final thing you should consider in terms of position size is to always trade the same size.  If you trade two contracts, trade two all the time.  If you mix it up, and trade three this time, five the next, two the third time, you are only asking for trouble.  Have a standard position size and stick with it.  If you are going to vary it, only vary it by trading fewer contracts.  By this time, your average trade should be profitable.  Trading the same size each time will allow your natural skills to work the odds into your favor so that you consistently make more than you lose rather than getting killed on that "obvious no brainer" play that goes against you and gives you sickening losses.

Sunday, February 19, 2012

2012 Political Outlook

The stock market does not exist in isolation.  It is a function of economics, politics, and general world events.  It pays to keep track of developments in those areas if you are making decisions about the market and its direction.

At this stage, in February 2012, it does not appear that the Republicans are going to be able to mount a serious challenge to President Obama's re-election campaign.  Mitt Romney just has too many issues and is failing at the most fundamental task of a politician, to appear genuine.  He is just about the least genuine candidate imaginable.  There are certain things you just do not do in politics, and one of them is to allow an image to be crafted of you that paints you as above everyone else.  That is so deadly in politics that you just have to have some other awesome quality about you to overcome it.  Usually, politicians with that potential rap (FDR, Ted Kennedy, John Kerry) work tirelessly to ramp up their liberal credentials so that their aristocratic attributes are shrugged off as mere quirks.  But when you are a Republican, all the old stereotypes get dredged up and the late night comedians have a field day.  I'm afraid that is what is happening to Mitt Romney.  He actually might make a pretty decent President, with all of his executive experience in and out of government, but the first requisite of governing is getting elected.  I think he has serious issues there, and even if he is the candidate, he has damaged himself so much with off--handed statements such as that he "doesn't really care about the poor" that he is just playing into Obama's hands.

Rick Santorum appears to be the only viable alternative.  The Republican primary season has seen a succession of surges and quick drops.  That is a bad sign.  Santorum is the latest and, by all accounts, the most serious and longest-lasting rival to Romney. The fact that he couldn't even get re-elected as Senator in his state of Pennsylvania does not bode well for him if he should manage to snatch the nomination away from Romney.  He is a backbencher who fate is throwing into the mix because it is such a weak field.  I don't see how he could win a general election unless the economy rolls over in the mean time.

What that leaves us with is another four years of President Obama.  I don't see that as terribly negative.  He is a good politician, though he has the same fault of George W. Bush in seeming to let economic issues take a back seat to his emphasis on terrorism.  Now, terrorism and the wars in Iraq and Afghanistan are supremely important, and the Iranian issue just keeps getting worse and worse.  But all too often, he leaves matters up to Congress in such a way that nothing gets done.  I don't fault the man for having difficulties controlling Congress - that seems to be the case with just about every President - but, on balance, I see his re-election as good for foreign policy and a negative for the economy.  A win by his Republican opponent would be the opposite.  The polls will be important to the market this year, the more Obama looks like a lock, the worse the market will react.  I think part of the early strength in 2012 is the emphasis in the media on the Republican primary season.  The Republicans are getting their message out right now, without too much direct opposition.  Once Obama starts campaigning in earnest, it could be a completely different story.

The saving grace of this year's elections would be an increased Republican grasp on Congress.  While some losses in the House wouldn't surprise me, neither would Republican gains in the Senate.  On balance, that would strengthen the opposition's hand to Obama.  In our divided government, that would probably be a better result than Democratic gains which would result in more dithering, as opposed to at least a vocal Republican opposition that submits serious plans and has some responsibility to make things happen and get things done.  All too often, the politicians worry too much about winning the next election and not so much about solving problems.  With Obama a lame duck and Republicans in the ascendancy, and especially since there is no clear Democratic successor to Obama (I doubt Biden runs, or if he does, that he gets nominated, he has been way too low-profile as VP) there could be some tough decisions made to get the deficits under control.

And that is the real drag on the economy.  Working on getting the US budget balanced should be the number one emphasis of politicians.  Wrangling over who gets credit for that only makes things worse.  With Obama caring less and less about hot-button policy issues after his re-election, and the Republicans hopefully bearing down in an improving economy, there could be some good developments down the road despite what the markets may think in the short term.

As a result of all this, I am looking for market weakness toward mid-year as Obama shows his electoral strength, continuing into the fall.  But, as always, we play it as it comes.

General Stock Market Direction

The past few years have been crazy for the stock market.  The volatility has gotten out of hand at times, and at other times, it has been a steady climb higher.  The funny thing about that is the fundamentals haven't really changed all that much.  The US is still climbing out of a deep Recession, and Europe is still trying to salvage the Euro and keep Greece in the fold.

The one thing that has changed is that there is no longer an air of crisis.  There may be untold millions of people unemployed, but, eh, so what?  The official statistics are getting a little better.  Greece may be unable to ever repay its debts, but, well, who really cares?  It's only about as important economically to Europe as some of the larger counties in a Northeast State.

It is the air of acceptance that is the most striking thing.  The market is discounting all the negatives and pinning its hopes on continued improvement.  That might happen, but there are all sorts of dangers, too.  But the market is ignoring those.

Overall, 2012 is looking uncannily like 2011.  Just like last year, we are having a good run higher early in the year.  Perhaps the fact that this is an election year will keep spirits high into the fall, unlike 2011, and I'm sure that is what The Powers That Be would like.  However, if that fragile veneer of recovery cracks, it is just as likely that, once again, we see a market top sometime around the mid-year point and a destructive collapse in the markets as people rush to lock in those ephemeral profits.

My own view is that the most important economic indicator is not employment, or inflation, or GDP.  It is a very simple thing that affects everyone: the cost of a gallon of gasoline.  If that continues rising, as predicted, to well over $4/gallon, it is very difficult to see this recovery continuing without some serious issues.  Looking back at similar occurences, a spike in gasoline prices invariably results in a Recession (1973, 1979, 2008).  I am not saying that is an inevitable outcome, but I am keeping a close eye on that as a fundamental leading economic indicator.

There are a couple of caveats to that.  With all the fracking going on and the rise in the use of natural gas, the price of gasoline may not be quite the be-all-and-end-all that it once was.  Also, all the money being relentlessly pumped into the system with QE this and that may be wrecking the foundations of the economy in the long run, but in the short run it could prop things up, at least through the elections in November.  So, there are no sure things here.  I'm just pointing out the dangers of being lulled into a false sense of complacency about the economy and where it is headed.

A nice investment balance, I think, can be found in some of the oil, gas and related plays such as UNG, XOM, RIG and the like.  One of the stocks I have been playing that has surged over the past month, DRYS, is a stealth drilling play.  Day rates for drillers are going through the roof with the huge activity going on between Africa and South America.  DRYS has the added bonus of benefiting from an improving shipping sector (if that turns out to be the case).  It's pretty clear that the drybulk sector can't get much weaker, and I like plays like that, where all the bad is known and things on balance should improve.

So, I am on my guard this year, though I have been playing the rally like everyone else.  You have to play the trend or you will get burned, and the trend right now is up.  But once it reaches some kind of tipping point, be it 1400 or 1500 or wherever, this market has the potential to roll over in a major way.

SPX and Initial Claims Remains Bullish

But lest I appear too Bearish, please note that the one thing still pulling the market higher is Initial Claims.  That is still very Bullish and provides a strong counterweight to all the negatives coming into play.  So the picture is not as rosy as it was, but at worst it remains mixed.

But I still expect a market correction.  Soon.

SPX and DJ Utilities Bearish Divergence February 19 2012

Here is exhibit B for the Bearish case.  The DJ Utilities are another leading indicator that I follow.  Note the Bearish divergence.  It may not happen immediately, but we are getting overextended, and the warning signs of a correction are there.

SPX and DJT Bearish Divergence

I realize everybody expects the rally to continue, and that I risk being locked up in an insane asylum for even suggesting otherwise.  However, the Dow Jones Transports are a classic leading indicator for the market, and they are diverging southward.  Yes, I EXPECT A MARKET CORRECTION SOON.

DVA Knocking on 90's Door

This one a good bet to get to 100.

USB Bullish Chart

This is on a steady climb, look for it hit the mid-30s easily.

MX Chart Very Bullish

Updated UNG Chart

Updated DRYS Chart

DRYS and UNG charts

Market Thoughts

Just a few quick thoughts for now.  I am long DRYS and am considering going long UNG.  I look for basing formations that have the ability to explode decisively given the proper catalyst.  We saw just such an explosion in DRYS over the last couple of weeks.  UNG also has the same potential, though you can never know when that will happen.  As Jesse Livermore wrote, the big money is made by waiting, so you have to be patient and, above all else, not sell too soon.