Sunday, December 31, 2006

Wrapping the Year - I Resolve

When I started this BLog in July (287 posts ago) I didn't really know where it would go. I thought maybe I had something to say that might prove useful to the trading community and I've tried to keep it light and entertaining and informative along the way.

I've made some money this year and that is the objective - I've learned some nifty things and taught some nifty things to others and that also is the objective.

I've made money day trading but I've made more swing trading and that is the style that suits me best. I can use my day trading methods to find swing trades (i.e. gaps up and down) and I can use the same moving averages (the EMA 4, 8 and 21) and I can use my filters to find distressed stocks to buy and I can use the same entry methods. Life is good.

Dr. Brett says that you should find your comfort zone and I believe I've found mine.

So for next year I resolve to continue to post daily (where would the magic coin go if I didn't?) and will attempt to predict the market's trajectory on a daily basis and, if I remember I'll even start keeping track of my performance against that of the magic coin and we'll see who's best at year's end next. So in the next wrapping post we will both start at 0-0 and see what happens.

I also resolve to be more patient although after all these years I doubt I will ever learn to do that.

I also resolve to continue to visit my favorite BLogs and offer advice if it can be of help or just words of encouragement if they seem to be needed.

I have more ideas per minute than a beer has bubbles and I resolve to share as many of them as I can with you as time goes by.

Have a prosperous New Year - may you be satisfied - for that is indeed the path to happiness.

Dow Theory – Again? – Yes – Again!

In the ever-shrinking world of “are we there yet” the answer is always a resounding “no” and “I told you to go before we left.” But that aside there are people out there who still adhere to the Dow Theory. That theory insists that the transportation index has to confirm the Industrial index in a “you complete me” kind of way. Sort of the way dysfunctional relationship’s work – (or, for that matter, most relationships). And the cult of Dow probably wants to burn me at the stake - but I’m not buying it.

The way I look at it the Dow theory in the last 16 years or so has exactly predicted 5 of the last 1 collapses of the Industrials. And that one is iffy at best.

Here you can see for yourself. I’ve scribbled all over this picture to show my utter contempt for a theory that was worn out in the 40’s but still has true believers today



As you can see the Trans index is once more seeming to signal impending doom for the Industrials – will it really happen this time or … stay tuned.

But it is the 50-year that best tells the story that I want to get across to you – the EMA 4 very seldom dips below the EMA 21 on the quarterly charts(which means, of course that the price very seldom does either) and once it comes back up for air – it seems to stay on top for a lonnng time.



For those of you with a short attention span - here is the last 50 years of the Industrials.

Predictions – INDU

I think this part of the market is in for some more records. Again I’m looking at a quarterly view but when making long-term predictions you need a long term past to base from. I see much the same thing I saw with the SPX with a couple of major additions.

Back in 99-00 there was a discernable blow-off top (arrows) and one of my favorite “tells” the “steeples” started appearing. A "steeple" to me means that price is going up but then pulling back leaving a long neck on the candle.

I call the resulting view a "steeple" because in the olden days when the traveler was approaching the ville in the distance the first thing he could see was the steeples on the various churches and cathedrals. That was his first signal that his weary trip was nearly done. When I see steeples forming in any stock I’m involved in I start looking confirmation, and after getting it, I get.

To me that “Roman candle” (you never knew what that was called did you) in the first quarter of 00 was a confirmation signaling end of trip.



Once again note that the distance between the close and the EMA 21 at “a” is about twice as much as at “b”. That suggests to me that there is still room for this market to run. Based on that idea I think we see the 15000 Dow Industrials this year.

And here is the 50-year view with the moments that the EMA 4 crossed under the EMA 21 circled. Once again that doesn’t happen very often. Then after it crosses back over again it seems to want to stay there. I think that there are reasons for this – but they will have to wait for another post because they are even more cockamamie than predicting a 15000 Dow.



As always folks – just a guess with about as much chance of being correct as all the other mother-guessers out there.

Saturday, December 30, 2006

Some Off-Site Recommendations

There are a several sites I use when short term trading to see what kind of edge I might have when I take the trade. These three in particular - Ivolatility.com, Whispernumber.com and NASDAQ.com.

I use Ivolatility to get a current perspective of historical volatility versus implied volatility. I like stocks that I buy to have a 10 point implied volatility edge over the historical volatility. Even though volatility is low in just about every stock - I find that the 10+ point difference suggests that a stock might be moving in the near future. Since I expect the move to be up I'm not concerned with the direction as implied volatility is directionless. An example of this would be one of my current short term holdings, DHI where current historical volatility is 17 and implied is 34.

I use Whispernumber to find out when the stock will be reporting earnings because I dislike holding short term trades through earnings. I've been burned too many times by this to let it happen again regardless of the story being told in front of the fact. You have to register at whispernumber but it takes a minute and it is meaningless. An example would be the fact that I know that two of my short term holdings are reporting earnings in 24 days. So I will be out of them by then.

I use the NASDAQ site for information regarding institutional holdings. What I want to know is how much of the float is being held by the 'tutes because for a short term stock I want high participation. I look for at least 70%. For example, SYMC a short term stock that is turning into an investment has 91% of its shares held by institutions. With 8000+ mutual funds out there I would be concerned with a stock that wasn't held widely by the 'tutes. (You can also get this information from Yahoo Finance and others as well - I use NASDAQ because it is so easy).

Just a few ideas to help your trading go a little more smoothly.

Predictions - SPX

Here are some of my ideas for the next year and they will probably astound and confound but that is OK. First, this bull market that we are in is just begun. What went on between 00 and 03 was merely a correction, a pause to catch its breath. How do I know? If a stock goes from 0 to 15 and then retreats back to 7.50 it is considered to be a 50% re-trace and that is a good thing. Take a look at the SPX presented here in a quarterly view. Note how it went to 1500 and then retraced to 750. Personally I think that’s just a coincidence but that’s how a mini-bear market behaves.

But I do know that the distance from the 21 EMA to the close Friday (b) wasn’t half the distance that we saw back in 2000 (a). Nor has there been a huge build up in volume – nor has volume declined – in fact, if you squint really close you might notice that volume pretty much stays the same.



After the “correction” or whatever you want to call the period between 99 and 03 you can see that it took almost a complete year for EMA 4 to cross over the EMA 21. Once it does that and it keeps going up until it runs out of steam. And it doesn’t look as if that is going to happen any time soon. In fact, on the following chart you can see that there have been exactly 3 times in its history when the EMA 4 dropped through the EMA 21 on the quarterly charts.



So while we might have a red quarter or two every now and then – a major correction seems to be very rare. And, if you are like me – you can’t help but notice that a red quarter is generally followed by an amazing buying opportunity.

Therefore, based on this non-evidence I predict a 168.00-point year for the SPX.

I'll be back later for my guess on the Industrials.

Friday, December 29, 2006

Krispy Kreme Revisited.

When we last visited donutland I pointed out a tweezer bottom on the 2-hour charts that could have been seen on the daily charts as well since it crossed two days in a row. I had preceded that post with an earlier one that pointed to 4-point tweezer bottom on the 2-hour charts in a single day. I said at those times that the tweezer bottom meant that the stock was probably saying that this was rock bottom and it should go up from there. Then one more tweezer bottom and off it went.



Up 10% in two weeks. It pays to watch for the "tweezer" regardless of the time frame.

I have no position in KKD nor do I eat the donuts.

Wrapping Friday

As expected a down day - the problem being there isn't anybody around who really cares enough to buy anything. Given the extra day off next week (Tuesday) nearly everyone who is anyone took off at noon today to prepare for the 4-day mourning session honoring our only unelected President. I know I'm going to pull out my old WIN button and wear it proudly for the next 4 days. (WIN = Whip Inflation Now - Gerald Ford's answer to some of the most miserable run-away stagflation ever to hit the country).

I end the year holding SYMC even though it backed up today, DHI, and I added a very small position in GM this morning. I will be holding them through next week in anticipation of the coming boom in the stock market. Actually I'm taking all of next week off. Nothing special just a short trip I've had planned for awhile.

For a recap - the up/down ratio is now at 38% and the new 20 day high/low ratio is 42% and the VIX is 7% over its 10 day moving average. These things mean that next week will be a good one - at least on Wednesday. I'd really like for the market to fall back for the next two weeks and then, when there is lots and lots of things to buy, take off from there.

With the exception of the SPY everybody else (DIA, QQQQ, IWM, GS) finished with a red candle in the last hour - which is good. That means that there was even more capitulation following through from yesterday.

I'll be back later this weekend with a fearless prediction for the next year - it doesn't matter whether I'm right or wrong - it's just something you can look at and compare with all the other fearless no nothings out there.

The magic coin having nailed today finishes the year 42 - 31 and if you don't know how much better the coin is than Cramer you just aren't paying attention. For the First Trading Day of the New Year the coin says --- Heads - bull market -

And that's a wrap.

Thursday, December 28, 2006

Wrapping Thursday

Very interesting. The headline on Yahoo is "Stocks Finish Lower On Economic Reports." The only problem with that is that the "economic reports" suggested that there will be huge profits coming in the new year, that housing is on the mend, and that employment is finally under control. But all the market could see was the possibility of new interest rate hikes in the near future. Oh Bull Snot!

We know why - it was because there was nothing left to buy and so the crap got sold. Then about mid day things turned around and for one brief shining moment this afternoon the Industrials even turned green.

Now there are things to buy - not great but some stuff is available - we'll get to the indicators in a minute.

I sold off the HCC this morning for a small profit. Once again I probably should have kept it but I really wanted to buy some more DHI which I did on the turn around in mid morning. Still holding SYMC and it actually went up today and stayed up - will wonders never cease. I also hit MAMA for a nice scalp. I took it on the turn-around second candle and rode it to the top. It fell back some but that volume spike on the 4th and 5th candles kind of said - blow-out and the confirmation on the sixth candle got me out with some profit.



This is actually turning out to be a pretty good little stock for a fast buck a couple of times a week. After the blow-out top I considered a short but I don't like to short so I let it go - hope some other folks made some on it. That volume spike at end of day looks to me like some short covering. See how the stock went down then went back up again?

Anyway tomorrow is last business day of the year and it should be soft and mushy like today. All the tax sales and fund buying had to be accomplished by COB Wednesday so I doubt anything else will be going on and the street will probably take off early for a four day.

The numbers are starting to get better as the up/down ratio is now at 39% and the 20 day high/low ratio is 65% and this all reflects well for having things to buy. The VIX remains in the neutral zone and the three majors (DIA, QQQQ, SPY) the one minor (IWM) and the proxy for the stock market of the 22nd century - GS - all printed red candles in the last hour of trading which means complete and utter capitulation. I think we just go sideways tomorrow.

The magic coin is now 41-31 having hit today and for tomorrow says .... tails again - another bear day - could be.

Wednesday, December 27, 2006

Wednesday Wrap Up

Well that was a great day. I sold off DHI about a nickle under high of the day and made a nice profit. I probably should have held it as I planned but the housing market is still shaky and I think I'll wait till January to see if I get back in that game. The one I should have sold off was SYMC - a complete round trip today - and you know how I hate that - wasting my opportunity on a stock going nowhere. I'm still holding HCC and added a half load on DIVX. Both finished in the money so I'm pretty happy with them. I took DIVX off of a daily volume increase but it went back to really low volume today so it's possible that I'm going to dump it early tomorrow.

Another record on the Industrials but we really could care less - it's only a headline. The real action happens down in the pits and that's where you and I play the game.

For tomorrow - the up/down ratio is 66% which is extremely high especially when coupled with the new 20 day high/low ratio of 83%. When they get up this high there isn't a whole lot left to buy so I think we go sideways tomorrow and maybe even a little down.

Four of the five majors finished the day strong and only the Q's finished red in the last hour and the VIX is back in neutral territory. It seems as if everytime the VIX sticks its head up 5% we get a couple of day rally and it drops down again quickly.

Magic coin blew today big time so he's 40-31 and for tomorrow says ... tails again - looking for the bear. It's a possibility.

Watch Out GOOG - Wiki's Coming

A lot of the content I produce for this Blog is not readily available to the general public because I use my own theories, tools, and methods to produce them. Of course almost all of what I do is derivative - and who doesn't borrow - you see a good idea and then you start tweaking it and picking at it and before you know it you've integrated that idea into something that you can call your own. You hardly know any more where what you borrowed began and where what you brought ends. And that's the way it should be - originality is the key.

In other words - if I wanted to know what some index did today I'd go to bubblevision and let some bobblehead tell me. Then they will tell me some BS for why it was that way. On this site we all know why the market goes up and why it goes down and it really doesn't have much to do with what GE or the proprietors of 8000 funds think. It is simply this - if there is something worth buying it will be bought and if not it will be sold. I know that doesn't sound sexy and romantic like "Santa Claus Rally" but which one do you think makes more sense? You do believe in Santa Claus don't you?

If I wanted to know what the market is going to do tomorrow I'd come here because here is the only place with the cockamamie up/down ratio and new 20 day highs - new 20 day lows and last hour candlesticks and blah blah blah that has any original thinking. Besides, as you know, the magic coin is better than Cramer and millions of people listen to him.

Folks there is nothing wrong with original thinking.

The guy that founded Wikipedia realized a dream and it probably wasn't his but a dream of researchers all over the world. A quick, mostly accurate place to begin a quest. And, yes, I know sometimes the articles, especially the bio's are pretty bad and somewhat inaccurate but there is an awful lot of really good stuff in there. I have discovered that if I want to know anything about just about anything instead of going to Google I go to Wikipedia. Instead of getting 11 million results that I'm not going to use I usually get exactly what I was looking for. I've also heard, anecdotally, that the rest of the world is catching on to this too.

For instance I just wanted to remember the formula for the relative strength indicator(RSI). I know I have it in about three books in my bookcase, and probably in four or five folders on my hard drive - but I simply typed "RSI" in Wikipedia's search box and then selected from the dozen or so "RSI" they have listed. Within 30 seconds I had my solution.

Now I've heard that the Wikipedia folks are going to join with Amazon to build a search engine. My recommendation - for those of you invested in GOOG or BIDU - take the profits and run. Wikipedia is an original idea born of the Internet for the Internet - within a couple of years they will overwhelm the search space and that is one IPO I want to get in on.

UPDATE: No sooner do I get it posted than TradingGoddess (a GOOG holder) comes along and sends me to a post containing the same old same old about Wikipedia - and that - folks - is the whole point - not even the criticism is original. As I said - there is nothing wrong with originality - why at one time or another even GOOG was original.

Tuesday, December 26, 2006

Dow Theory

I’ve talked about (ridiculed) the Dow theory in these pages before so it won’t come as a surprise if I do it again. The reason for this is that in one day on two different Blogs I read about the almighty Dow theory and I think the author’s were serious.

But everyone is entitled to his or her opinion and just because it used to work when transportation meant rail and steamship doesn’t mean that it shouldn’t translate neatly into the 21st century – right? Because let’s face it when the principle means of transport these days is digital and there are no digital carriers in the transport index that doesn’t mean that the thing is bogus – does it? Course not - sweet cheeks – don’t trouble your little head over it.

Well here are the two indices rendered in Marlyn’s curve (which is nothing more than averaged normalized prices) –



Let me walk you through it. This is the weekly INDU and TRANS indices for the last 150 plus a couple of weeks. That’s about three years or so. At point “A” which was back in 2004 the transports took off and the industrials lagged by a good 3 months. In other words there was a ton of activity in the transports before there seemed to be activity in the industrials. But this is not a problem – product is shipped before it is paid for but transport is paid for right away so it makes sense that the transports would be leading the industrials.

But then in July of 2005 (B) they kind of synced up again – which if we expect the transport to lead the industrials didn’t seem to happen. Then in August ‘06, (C) right in front of the industrial’s record breaking run the transports were lagging. In other words the industrials managed to make a ton of profit without shipping anything. Maybe that’s what’s wrong with our economy. Or maybe the shippers shipped for free to help the economy out. Or maybe … I don’t know. Who are you going to believe, me - or your lying eyes?

At the current time on the weekly basis at least both indices are going up. Which brings me to yet another rant – if you are going to predict the future over the next several weeks or months using the daily closes is about useless. At least use weekly data for month out predictions and monthly data for year out predictions. Then you might have a shred of credibility in your predictions. But I will say this - I do see on the chart the INDU starting to lose a little momentu and maybe even lean a bit. It is awfully high. Wouldn't surprise me a bit to see a little drawback here.

But remember - I never predict - I just go with the flow.

RIP James Brown - you made me feel like dancin'

Tuesday's Wrap

Not a bad day. I'm still holding SYMC and DHI came profitable at the close for the first time since I took the position. I'm not holding my breath - it will take some time.

I took a quarter position in HCC this morning off the 8 EMA crosses the 21 method. It dropped a bit on the open and I took it in the second 15 minute increment. It finished up. I doubled up around 1 P.M. and am looking for some more upside tomorrow. If I get that I'll double again. I'm trying a new method where I'm "layering in" I don't know if it will do any better than taking it all or none at jump street but you never know until you try.

No day trades today. I'm concentrating on the swingers. I know I missed a couple of real good ones though (AMR) so maybe tomorrow I'll take one or two just to stay sharp.

That's if tomorrow is a good day. Right now I'm guessing it will be about like today except for the fact that the prime indicators, the up/down ratio and the new 20 days are once more in bear mode.

The up/down ratio is printing 59% which is high and the new 20 day highs are 62% of the total of new 20 day highs and lows (a new way of looking at this number). The VIX remains over its 10 day MA by about 5% and all five of the majors (which includes GS) finished the last hour with strong white candles.

The magic coin is 40-30 having hit today square and for tomorrow says ... tails - bear a comin'. Stupid coin is still doing better than Cramer.

Monday, December 25, 2006

EMA Crossovers – Look Out Above

The Dogwood Report – this guy is as passionate as I am about developing filters and back testing them and it’s great to have someone else willing to take the time to describe their methods and results. Anyway he tested a simple moving average crossover system using buy points on the Q’s and the SPY and you really need to go take a look. I've included a link in the right column.

His work stimulated me to go to pull out one of my “notebook filters”. A “notebook filter” is one I outlined in my notebook with the idea that I’d get to it someday. Apparently today is the day.

The difference between my approach and the Dogwood approach is the difference between the two software applications we use. Mine starts out by looking for stocks given a set of constraints that I supply – his starts out with a methodology and looks for entry and exit points for a given stock. These are both valid approaches.

At any rate the Dogwood report tested various long-term (to me) exponential moving averages to find optimum entry and exit cross over points. And I’m not going to steal his thunder with a report - you need to read it on his site.

I am a shorter-term trader – I like the 1 to 4 day window (again - based on my old-fashioned candlestick training – we’ve discussed this). Consequently I wrote a filter looking for the EMA-8 crossing over the EMA-21 from below and then back tested it. It tested well out of the box. With a little tweaking I obtained some great returns. But, and this is a critical "but" – take a look at this chart.



I saw this frequently in the trades that came up in the back test – the target stock slid back to the 21-period average and then rebound from there. I think if you were a trend follower that you would want to hold these stocks until they broke through the 21 EMA and went down decisively.

For a good example of a long trend that seems to be over – here are the Q’s. For my money I’d wait to buy anything “tech-ish” until the next time the EMA 8 crosses over the EMA 21.



And yes - I know - it's Christmas morning - but the kids are all grown so it's quiet these days. Just the way I like it.

Sunday, December 24, 2006

Traditions – 2

Marlyn’s Christmas Dressing

Every year I make a special dressing that we cook separate from the bird. It is always different and usually turns out tasting just fine.
This year’s edition –

Ingredients:

1 package (14 oz) pre-seasoned stuffing (I like Pepperidge Farms – but any other will be just fine – if you prefer to season it yourself that’s fine too – I’m lazy).
1 medium onion
1 stalk celery
1 can (1 ¾ cup) chicken broth
1 can mixed fruit (no sugar added – just a twist – not a requirement)
3 oz Amaretto (or a dash of vanilla extract if you don’t want alcohol)
½ stick of butter (not a half pound – a half stick)
Splash of EVOO (extra virgin olive oil)
Craisins
Salt and pepper

Chop the onion and celery very fine.
In a sauce pan sauté the onion and celery with the butter, EVOO, and 1 cup of the chicken broth and salt and pepper to taste.

As this is going on – mix (about ¾ cup) with 3 oz of Amaretto and the liquid from the can of mixed fruit with the remainder of the chicken broth. Put the chicken broth in last. This should make about 1 cup of liquid – if not don’t sweat it. But don’t let it become more than 1 cup – hold back on the chicken broth if you are going to have too much liquid. If you don’t add the 3 oz of amaretto you can fill it out with plain water.

Once the onions and celery are done (tender to the taste - al-dente) combine the contents of the sauce pan with the stuffing mix in a large bowl. Then pour in the remaining liquid. Stir until the stuffing mix absorbs the liquid. Then add about 2/3rds of the mixed fruit and a handful of craisins. Stir well.

Put muffin papers in a 12 section muffin-baking pan. Using a spoon (and your clean fingers) fill the muffin papers with the dressing mix. Overflow it but make sure each cup contains about the same amount to the same consistency.

Bake for 30 minutes at 350 degrees and serve warm.

Good eats – Traditions! Ya gotta love ‘em!

Traditions

Years ago I decided that I liked whiskey too much to make it my regular drink but I didn’t want to give it up completely.

So I made myself a promise – I said I would only drink whiskey on Christmas Eve. I will only drink a couple of shots and then I will sleep well and not touch it again for another year.

Don’t get me wrong I have wine and beer regularly with my meals and a cocktail every now and then and there is little better in life than a snifter of good Cognac by an open fire. I just don’t drink whiskey because I love that drink too much.

This year I celebrate the 25th anniversary of that promise with smooth and delicious Crown Royal – Traditions! – ya gotta love ‘em!

Hopefully this holiday finds you well and that the New Year dawns with bright new promise. May prosperity and light fill your life with joy.

Saturday, December 23, 2006

Revisiting the Turtles

We have written about the Turtles before this in mock admiration because they proved that if you followed the rules you could profit in the market. The method was largely - take a trade whenever a certain criteria was met and set a firm stop loss under it. As long as the trade continued to meet the criteria stay - with it and keep trailing the stop loss.

So now I'm going to say what I should have said then - this works - all you need to do is stick to it. And that is what the Turtles basically proved - if you have something that works don't fix it.

I can prove it. I wrote a filter that was a little more complicated than normal.

Show stocks where low 2 days ago < lower bollinger band(20) 2 days ago
and low 1 day ago < lower bollinger band(20) 1 day ago
and close > open
and Average Volume(90) is above 500000
and close is between 15 and 35

This requires the low of the day to be below the lower bollinger band on the previous two days and that the day before the trade is taken the stock price went up. Same basic price range and volume constraints.

I then looked back 30 days and pulled out this list of stocks (highest 10 by volume on that day):

NT, HANS, DHI, PHM, TOL, CC, SPF, INTU, HOV, and AQNT. I then put a mythical 5000 investment in each stock. As of Friday: CC and INTU were both stopped out at a 5% loss and the rest were profitable. What are the returns - over the 30 day period the SPX returned 1.018 and this little system - let's call it the Turtle system - returned 1.119.

The key factor is - take the losses as quickly and painlessly as possible and let the winners run. That is how you trend follow.

2 Down Method – Revisited

I tracked 10 stocks on Friday that my 2 Days Down method output and of those - 5 sank and 5 either showed a profit from jump street or turned in mid-day and began clawing back to the surface for day trades.

The 10 stocks were CSCO, CWTR, SID, NWS, PGR, TMX, TELK, UTIW, WDC, and XMSR. The three that turned green were SID, PGR, and TELK and the two others that were reversing were XMSR and UTIW.

Given that low-volume sell-off on Friday to have these kinds of results on a little chip shot of a filter is amazing.



Simple enough – 2 days up skipping a day in between and then 2 days down with no skip. It included a little price constraint and a little volume constraint.

This is what SID looked like – No blow-off bottom – just an understated dummy spot at 11:30 and then up from there



My filtering software comes from stockfetcher.com and my charts are from prophet.net. As always I get nothing from either of these companies but I do like their products and think you should give them a look.

Friday, December 22, 2006

Shorting GOOG

What – they just put a $650 target on it and we’re talking about shorting it. What gives?

Although I don’t short stocks (I should - I just haven’t learned how) I know what a short set-up looks like on GOOG. I’ll draw it out on the following weekly chart and you can see if if you can see it too.



If GOOG follows the script it has written up to now it will kiss the 21 and rebound. If not it might fall all the way to the 90 then rebound - if it crosses 90 going down - look out below.

Wrapping Friday

OK - I got my wish - a pretty good draw down for the week - that will set-up next week just fine and we can continue with the bull run. I'm still holding SYMC and DHI with no changes.

The up/down ratio is at 36%, the new 20 day lows are outpacing the new 20 day highs almost 2 to 1 and the VIX is actually 6% over its 10 day moving average and moving into oversold territory. All four majors and GS finished with strong red candles in the last hour and as you know - that is a good sign because it calls for a contrarian position. All in all Tuesday may pay for Christmas for those of us who are positioned to take advantage of it.

Magic coin missed today so he's 39 - 30. For Tuesday he says --- heads - bull market - I'm going along with this one.

You Probably Ain't Doin' It Right

Young Cal Trader has put it on the line - playing the Russell futures market - and the financial Blogosphere is seeing red. Poor Cal - he was successful in his first few trades and everyone is pretty sure he can't keep it up. Not just that but he "just isn't doing it right" and "besides he is risking ruin."

I say - go for it! Good grief folks he's a young guy putting 5 grand of his own cash on the line and taking a chance at learning something new. It's not like it would be the end of the world if he busts out. The college education he is currently pursuing will cost a lot more than that and there are no guarantees at the end of that rainbow either.

When I was a regular down at the race track an old guy said to me - "if you never reach into your pocket and put everything including your car fare home on a horse you really like you probably ain't doing it right." He was right - and I made a lot more doing it that way than from the dollar exacta boxes I was playing. And a couple of times I had to hitch hike home. But, damn, I had fun!

When Should I Enter a Trend - 2

I ran across another BLOG, Dogwood Report, where the proprietor also does back testing and appears to use a more sophisticated set-up than I use. I added his site to my list and I will be visiting frequently and hope you do too.

Anyway regardless of the back testing methodology we both seem to agree that "down 2 bars" is a good entry position. That is goodness.

But my biggest problem is once I have a filter testing well I keep tweaking at it and tweaking at it trying to make it better.

This morning I managed to make "Down 2 Bars" a bit better. I simply added two lines one that required the close 3 days ago to be greater than the close 5 days ago and a second requiring the close 2 days ago to be greater than the close 4 days ago. Then the rest remained the same - 2 down days in a row. (For filtering purposes I count the last element in the filter as "0" as in "0 days ago" or "today").

By doing this I was ensuring that an uptrend was being interrupted for whatever reason and then resumed. It returned 29800 and change so that is about 18% better than before.

If you look at the MAMA chart in post MAMA Mia you will see this filter clearly.

Thursday, December 21, 2006

MAMA Mia

I just saw this today – happened to be looking at some 30-day charts and ran across MAMA. Do you see what I see – that’s right a kiss of the 4 EMA after that huge run up earlier this month – then it doubled off that. If I keep missing these jewels and taking trades in dogs like WFC I’m going to trade in my kit for a tin pan. I’d be better off panning some cold creek somewhere looking for gold.



Anyway, congrats to all who saw this classic set-up which goes like this –

1. A brisk rise in price in either one or several days,
2. A pull back to the nearest EMA (or MA),
3. Kiss the EMA and then rebound, or,
3a. Drop through that EMA to the next and then rebound, or,
3b. Drop through that EMA to the next and then rebound.

One way or another it is either going to rebound or keep going down. When you see the set-up developing you should put the stock on your watch list and return to it at least once a day towards the close watching for the rebound. Note that I said “you” – I obviously am immune to these rules. What’s worse I even played this guy the other day for a day trade and didn’t bother to bring up a longer-term chart. What a Duma (the middle b and the trailing s’s are silent).

Also might review this chart in the context of the previous post - When Should I Enter a Trend.

Wrapping Wednesday

Great day! I didn't do much trading - just watched a bit, wrote some new posts and, what else, went shopping. I think we are almost done but I never factor "done" into this calculous because "done" implies "finished" and my bride never really is. I'll be scurrying around on Christmas eve trying to find one more wingbootentooter for Aunt Millie or some such play pretty as that. No I don't know what any of that means I'm just tired. But the stores were a whole lot more crowded today than they've been in awhile so maybe everyone final got the memo - 3 days left.

Still holding SYMC and doubled up on DHI. I do that on the second day of a trade sometimes if I expect the trade to go up - which I do.

The up/down ratio sits at .36 which is in oversold territory, the new 20 day highs peeled off 100 to 381 and new 20 day lows went up to 604. Another great sign because that means that there is actually something out there to buy. The final hour saw a mixed batch with DIA, SPY and IWM finishing with white candles while the Q's and GS finished red. Doesn't matter - volume tomorrow should be in the single digits. The VIX has withdrawn to the neutral zone and that means no volatility for the options guys or the day traders either.

I'm looking forward to a quiet day tomorrow regardless of any news. I just saw that RIMM is up 6 bucks and change after hours on its great profits last quarter so that might serve as a bit of a catalyst for the tech area tomorrow - we'll see.

Magic coin is now 39-29 having called today correctly so we'll give him another chance to make a fool of himself and calls for tomorrow ... heads - bull market. I suppose it's possible - two down days in a row...

When Should I Enter a Trend

I was reading Dr. Brett the other day and he asked the musical question – what happens when the market (by this he usually means S&P 500) goes up 2 days in a row? He found that 3 days later the market is generally weaker than when compared to the average 3-day period. He then tested 2 down days in a row and found the exact opposite. (We could have told him that).

I thought about this for a bit and I said I could test this for individual stocks by using a simple filter. What I did was write a filter that simply looked for stocks selling between 15 and 35 where the close was higher than the day before on the last 2 days.

I then tested this using a 3-day holding period over the dates from 9/01/2006 to 12/15/2006. The return was $11500. (By this I mean starting with 100000 and ending with 111500).

I then switched the filter to two down days in a row and keeping everything else the same the return was 25100 (125100). Obviously you are better off going long off of two down days rather than two up days as a starting position if you are swing trading.

Something to think about - One of the problems with designing filters these days is that the market continues to go up so just about any filter you design and back test in the recent past will return a winning percentage. And that is not reality or at least not normal so be careful with your own screens. Understand that you have to take the results with a grain of salt.

Of course back testing in anything other than the recent past can also be problematic - so watch your step in any event.

What!!??

Just read Seeking Alpha's recap of Cramer's mad money show last night - Cramer says that Circuit City is done for and that Best Buy is eating their lunch on the same product.

What he doesn't say is that the same products at Circuit City cost less than at Best Buy because these two stores are in direct competition with one another in the consumer entertainment market.

I know that the same product (exact make and model) costs less because I have comparison shopped using the net. I'm in the market for a large, flat screen television. I'm holding out because I believe that prices are going to come down hard during pre-Super Bowl - post Christmas bust out sales. In the meantime I've been comparison shopping across every venue known to man looking for the absolute rock bottom deal.

I use bizrate.com for such comparisons because I have found that they have a good search engine and manage to cover the marketplace like a carpet. Then they have a great comparison window too and when you make a selection they give you all the stores, both on-line and sticks and bricks within a 20 mile radius, whether the product is in stock, shipping costs and so on.

Anyway this is the problem with Cramer - he makes pronouncements out of his butt and people take it as gospel. Do your own DD but I wouldn't write CC off anytime soon.

I neither own nor plan to own CC shares either now or anytime in the near future.

End Of Year

I don’t like the looks of the weekly charts. Everywhere I look I see brutally oversold indices (as represented by their ETF’s). For example here is the SPY one-year weekly chart with its 8, 21 and 90 period EMA.



Notice that in June it dropped below the 21 EMA and then fell all the way to the 90 EMA where it made a stand and then recovered. The problem right now is that the closing prices are too far away from the 8 EMA, the 8 EMA is too far away from the 21 EMA, and the 21 EMA is too far away from the 90 EMA. I think of this as being like pressure being put on a pot and eventually it has to release.

You can see on the left side of the chart where the MACD and its signal line are just sliding along together. That required a correction and you will very seldom see a correction up from that configuration – almost always the correction is down – which is good. It takes the pressure off the pot and the pot doesn’t explode. The point is we could possibly see that same effect over the next several months as the EMAs slowly converge and that might have a similar effect in mid-year as it did last year. The other possibility is that we have a couple of months of severe down turn to the 90 EMA.

I think that there is so much pressure that what we should see is a quick down turn to the 21 EMA, a bit of a fight there and then either a completion of the plunge to the 90 or a resumption of the “relentless plodding up turn.”

On the 2-year chart you can see the flattening I was talking about more clearly and in context. For almost six months this past year the market “meandered” and I think I heard that word to describe it over and over and … you get the point.



The Q’s are in much the same configuration except they have already begun flattening off at the top as a prelude to either a sideways slide or a bit of “kiss the 21” action.



Of course all of this is truly meaningless to those of us who trade on a short-term basis except maybe as a warning that there might be a few rocky weeks ahead. For the shortists it is probably going to be a feast time.

Just some thoughts – not advice – and certainly not a prediction – only the magic coin is predicting and it is smart enough not to tackle anything further out than tomorrow.

Wednesday, December 20, 2006

My Favorite BLOG

Aside from this one, of course, would have to be Seeking Alpha. While the rest on my list are good - Seeking Alpha provides a trading education and more trading ideas per inch of column space each and every day of the week than all of those and then some put together. It is an aggregator and as such pulls in the writings from the best and the brightest on the web today - for example Trading Goddess has had a column on the site. Barry Ritholtz is a regular contributor as are a dozen or more other folks who's opinions I respect and admire.

It is a low key site with one small advertisement and the best part it is totally free. If you want to make comments you can register with the site but otherwise you can read everything on there for the cost of your time alone.

Those of you who are new to trading might not understand Alpha and Beta as it is used in this business. - Beta is the return of the benchmark index and your portfolio is said to be tracking Beta when its return is equal to the benchmark. Alpha is the return over and above Beta and thus it is what we all seek to achieve (otherwise we would just invest in an index fund and call it a day). When you are seeking Alpha you are looking for profits over and above the routine and that what the site helps you find.

Wrapping Crappy Wednesday

Man I’m getting sick of these boomerang days. Up we go, down we go – around we go – nobody knows where we want to go. I want the market to go down and go down hard. I want that to happen in the next 10 days. That will give us a good set-up for the next year. It won’t of course – don’t know if you’ve noticed or not but there just isn’t any volume in this market. All of the indices ETFs that we follow are at half speed if that.

I’m still holding SYMC although I wish I had sold this morning early and I picked up some DHI and was probably a day or two too early on that one. Dumped out of WFC – a 9-cent gain off a three-day hold. Could have had 9-cents after the first three minutes. Sometimes you just waste time although a profit is a profit. Sometimes they are so boring you just have to kick them out of the portfolio. WFC fit that profile to a T.

I took a day trade in CRVL. That chart's below – I took it on the fifth bar where it "kissed the 8" and dumped out right at 48 – that was my target and I had to go shopping again. Good thing – looks like everyone else had to go shopping too. MAMA would have been a great trade again today – as I mentioned in my post on cheap stocks – MAMA and MVIS both were showing some support on the monthly charts. MVIS hasn’t been doing much but MAMA has been running pretty well.



I’m getting sick of shopping. I read a column by Barry Ritholtz this morning on Seeking Alpha containing anecdotal evidence that the season is lacking in the retail sector and I’ve got to tell you – I agree. I’ve been out almost every day in December and in years past where I would have had problems with parking – no sweat this year. Also we have had some lines but nothing too difficult and an awful lot of stores just don't have anybody in them. Not the big boxes of course but a lot of the specialty shops. I don’t know what that means for certain but I think it bodes ill for the retail reports in January. That will mean a one-day market decline at best and then ho-hum up we go again. Adam on the Daily Options Report said it best – he called it “relentlessly plodding upturn.” That pretty much nails it.

I really thought we’d have a good day today – at least go up and stay up but there are a lot of profits from the “relentless upturn” and somebody is taking them. Possibly the funds – setting the end of year markers – the retail trade is too conditioned to wait for January to take profits and there are hardly any losses to take this year.

For tomorrow the up/down ratio went up to 48%, the new 20-day highs gained ground and the new 20-day lows lost ground. Everybody went red in the last hour except IWM. The small caps had a great day. The VIX slid back inside of 5% below its 10-day moving average.

This all sums up to a great big – I don’t know. I’m going to sit on my positions through the holiday and see where we go next week. I'll watch CRVL and MAMA and a couple of others to see if I can get a day trade but other than that I'm pretty set where I am.

The magician is now at 38 – 29 having called today correctly – I should have listened and not played DHI – oh well sometimes you have to believe your own stories. I still think homies are over-sold and I'll get 10 - 15% out of DHI yet. I'm looking for a about a buck-60 with no real downside risk. For tomorrow – magic says --- tails – more bear. Could be.

Homies

The homebuilder sector has been on the down and out for awhile. I just finished reading in Seeking Alpha about Hovnanian’s “gruesome quarter” and indeed it was gruesome. The best part however was the way the CFO lowered expectations for the coming year. Now if they post any profit at all it will be a prelude to the second housing boom. That was the good news – they are at rock bottom, they can only go up, and they are positioned for some bad quarters ahead.

Then I looked at the chart – and you can see for yourself that we all should have been in housing for at least a month already if not more.



You see in November where on the weekly chart the candle bisected all three averages? That followed an obvious blow-off bottom the week before. Then the only thing that happened on the “gruesome quarter report” was that the stock “kissed the EMA 8” (as I call it) and rebounded smartly. All of this together suggests to me that these stocks (TOL, DHI, KBH, CTX and HOV) might actually develop some legs in the New Year. And if you don’t know which one to buy there is always XHB. The fact that its chart looks exactly like HOV’s is not a coincidence just a fact. The best part of this chart is the increasing volume since July. Brave souls would have bought on that indicator alone. Notice also the bisecting candle in mid-November.



Now I don’t particularly like “idea” stocks as in “my neighbor’s sister in law’s kid's best friend forever said that she doesn’t like this, that, or the other.” Those kinds of stocks always cost me money way back when. But I do like distressed stocks and the Homies have been distressed for a year. It might just be time to get some.

Now, of course, the last several weeks could be read as a rounding top and those steeples might mean a little more downside so if you do get involved stay awake, stay aware and be ready to get out if you can't take the pain.

As always this is not advice – just a guess – just like that bald guy on TV who is always foaming at the mouth and spitting at the camera – good ol’ what’s his name.

Tuesday, December 19, 2006

Tuesday Wraps

I’m still holding SYMC and WFC and both actually went up today. I managed to salvage most of my losses on ORCL this morning – I expected a small downside – not that steep drop but, as always with a mature company, the first drop is an overshoot and if you jump on board and double or triple up you can usually get out without losing your shirt – and that’s what I did. I wouldn’t do that for some no-name but I seldom play immature companies just for that reason – I really want to know how the trading community reacts to bad news or, as in this case, good news.

I jumped out on the rebound at .25 and only lost a 100 bucks in all. Considering I was a grand down at the start – not bad. I then took a solemn vow – I will never play ORCL again – this is the second time that it was traded out from under me for no good reason. It is now on my white board under the word “Never” along with 20 or 30 others that I will not play - mostly because they are empty pieces of junk that misbehave.

(start sermon)
Warning! Warning! Warning! If you try this on your next dump job and you lose don't blame me - it is not an approved method of trading. Never, never, never double up a losing position - Never! (end sermon)

In case you think I have forgotten my day trading skills I took a small position in MAMA off a new method that I have been testing. It seems to work but I’m going to tell you that the risk factor is high and you need to move quickly. I have found this to be an effective play in every time frame from 4 minutes through 15. Look at the chart below.



You can see what the new set-up is – if the first time increment encompasses all three of the EMA’s that I use then I buy it on the next open. I keep my mental stop at the EMA 21. Now I don’t know if this will work with other moving averages because I’m happy with it working with the three I use all the time. Interestingly, MAMA also had a classic set-up a bit later in the morning – but I was already in the trade.

If you don’t think this occurs very often – take a look here at WFC – also today.



And here is a counter-gap trade I wish I could have taken but I was back on the shopping detail this afternoon. I give you HANS.



Finally – I thought the markets had a good chance to go up today because the first hour PC ratio opened above yesterday’s first hour open and closed below yesterday’s first hour close. That was despite the fact that the FTSI 100 was down all day. As I mentioned yesterday - these are rules of thumb and not hard and fast "must be's".

Of course a lot of stocks did go up today – the up/down ratio is back at 45% but the new 20 day lows are still 200 more than the new 20 day highs and that is a good thing. The VIX is back at 5% below its 10 day moving average but the good news is that every major index we follow and GS finished the last hour with a strong red candle – there was a ton of selling going on. All of this leads me to believe that we will probably go up tomorrow. But as you know a good trader doesn’t care about the direction of the market because a good trader can make money regardless.

I’m giving Mr. Magic a pass for today since the market finished mixed which leaves him at 37 – 29. For tomorrow --- tails – bear in the air - - oh, who believes in magic anyway?

Never Letting It Go

I've held onto something for 40-years and it was the best investment I ever made - my bride and I celebrate our 40th this date. I won't bore you with the details - to her and I they were anything but boring - but to others they would appear to be just the mundane life of two young people learning to cope with the world and at the same time learning to cope with one another. In this transaction there are no charts to read, no candlesticks to analyze, no moving averages to bounce off of. Just two people in a sea of billions of people who found one another accidentally and then made a life together.

If you have a libation today please raise your glass to my beautiful bride - she is the one who gets the credit for this "trade". Me? - I'm going to hold this one forever.

Til death, darlin', til death.

Letting Go - Or - When Should I Sell This Thing

A reader asks about USB – specifically why so volatile all of a sudden? I looked and can only say – dividend fever. The company increased its dividend by 21% and the world said – oh wowie – free money and piled on. I can think of worse reasons to buy a stock, can’t you?

Let’s face it folks - the traders out here are nuts – a couple of weeks ago they ran a road-kill removal company (PNTR) up 2000% based on 20 cents of earnings so why not run a respected business up a buck and a half on good news. I suspect there was a lot of fund interest in the dividend and after the x-date (December 29th) they will probably sell-off some of their holdings. The stock should go down a bit towards its 21-period EMA and then resume its upward, boring trajectory in no time at all.

Anyway I got the idea that the reader who’s been holding this stock for awhile is thinking about letting it go – well certainly after the dividend check is in your pocket – that’s number 1. And number 2 – maybe hold it long enough to get the capital gains tax break. Sometimes making money is boring. You buy a stock - it begins to go up and there just isn’t any convenient exit. It becomes a matter of opportunity cost and utility and that varies with the individual.

For the day and swing traders out there – USB is a clinic – it began heating up at noon last Tuesday with a big drop followed by a crisp climb through the rest of the afternoon. All of this was based on the dividend announcement. Tuesday’s closing volume was almost twice the average. That was a good clue to put this stock on a watch list for Wednesday and maybe catch some of the up. (I didn’t – but I’m sure a lot of others did).

(Speaking of PNTR they had a news release regarding their guidance forward yesterday and some of the bag-holders started doubling up. – This stock will probably go up to 4 or 500 bucks before it’s all over and the laugh will be on me – just watch. – and I mean that seriously - just watch. And if you want to see something funny looking – go look at a one month daily chart of this beast).

Monday, December 18, 2006

Monday's Wrapping Up

What a great day - beautiful weather - a nice round of golf - some cold beer on the patio after the round - life can't get much better. And yes there was a stock market going on today. And yes it went down and yes I'm happy. I'm happy because it appears as if tomorrow could be a booming day. But before we get to that I have some thoughts I'd like to share.

This morning before the market opened I was watching the NASDAQ pre-market trading as I usually do and I saw it going up, up, up. The problem is the FTSI 100 at the same time was going down, down, down. I've mentioned before that when the FTSI goes down the U.S. market usually has a weak day and today wasn't an exception.

After I got back to my office this afternoon the first thing I looked at was the PC ratio. The first hour is usually the critical hour and again it was no exception. I've found that whenever the PC ratio opens above and closes above the previous day's open and close in the first hour the market is usually going to go down. That looks like this:



Now these are "rules of thumb" which means some times they don't work as well as others but most times they are pretty good indicators of market activity for the rest of the day. So add the FTSI 100 and the pcratio to your box of tools and you will probably be better off for it.

I'm still holding SYMC, WU got stripped away in the heat of the afternoon - actually before I left this morning I reset the stop order too tight and lost it. That was a mistake because my stop was swept.

I bought ORCL and Wells Fargo (WFC) at the close. Oracle was bought off a distressed list and WFC was bought because it popped over its 21-period EMA. I've got a 30 cent loss or 60 cent profit on WFC. ORCL has a 50 cent loss or $1.00 profit target - or 4 days whichever comes first.

The up/down ratio is in a nice place at 30% which is very low. The new 20 day highs barely made it to 354 and that is almost half of what it printed on Friday. The new 20 day lows on the other hand a way up at 714 and that is twice what it printed on Friday. The market sentiment as measured by the five markers we follow, DIA, SPY, IWM, QQQQ and GS (which you know what that is by now) all finished with strong white candles in the final hour of trading. Barring catastrophe or news of either good or bad persuasion we might have a tradable market tomorrow.

Poor magic coin - 37 and 29 having called a bull market for today. For tomorrow it says --- heads again - the bull will be running - I think it's right.

Shorts

Just for fun I thought I would whip up a contrarian filter – one that would deliberately lose money. The reason for this is that my back testing software only permits entering buy positions so in order to show how a short filter would work I have to have one that shows a loss.

Now this was really quick and only serves one purpose – to show how regression to the mean works. The important line in the filter below is the last one – the close is more than 18% greater than the 21-period EMA. This appears to be too much in many instances and the stock will fall back to be a little closer to its primary moving average.

show stocks where close is between 15 and 35
and average volume(90) > 50000
and ema(21) is more than 18% < close

I also tried the same filter on low price stocks and achieved even better results. I changed the first line to:

show stocks where close is between 2 and 10

For the first version we achieved losses (short gains) of about 28K. For the second we achieved losses (short gains) of about 44K. These are after holding for 4 days and selling automatically or sold as a result of hitting the 10% stop loss.

Once again if you are looking to enter a short position check the stock’s proximity to its primary moving average. I use the EMA 21 but you could use the MA 20 or any other average that you might feel comfortable with. On the other hand if you are thinking about going long a stock – you might want to wait till if falls back and kisses the primary moving average before you take your position.

One other thought that is pertinent – the back testing software is set to select the highest volume stock of each day’s output for entry. So even at the top of its run volume should show on a stock going down.

In the future - (going to be 70 degrees here in the mid-Atlantic today so you all know where I'm going - no Mary Ellen Margaret - not shopping - golfing) I will try to work up a filter designed to more accurately predict the tops.

Sunday, December 17, 2006

Marlyn’s Three Methods

One of the things I learned many years ago when I was studying candlesticks is the rule of threes. Moves in the stock market have a tendency to happen in threes – three tops, three bottoms, three gaps up, three gaps down, three methods and so on. The rule of thumb is buy, buy, sell, and rest.

The first day the speculators come to the market place and buy. The second day the volume from the first day is noticed and the brokers join the speculators and continue to buy up. On the third day the retail trade figures it out and the speculators and brokers offload their inventory onto them. By the end of the 3rd day the speculators are out of the market. The morning of the 4th day dawns clear and then a storm develops - this is when the retail traders can’t find buyers at higher or even equivalent prices and begin to panic sell.

For swing trading I like buying distressed stocks off large volume (buying the dips as they call it) - then I either close the trade on the third day or first thing in the morning on the fourth. If the trade appears to be running I might leave it on but with a tight stop on the fourth day because I’m not giving up too much profit against the coming panic. Occasionally I’ll get a runner but I’m expecting them to drop so I’m ready to sell in an instant.

A filter such as “MACD Histogram is Negative” is ideal for this kind of approach because the negative histogram reflects a distressed stock. By staying with the top volume of the filter output I’m generally getting in at the end of the blow-off bottom which is normally accompanied by large volume. It also serves as a convenient set-up to a potential trending stock because almost all trending stocks start with a negative histogram.

You might keep some of these ideas in mind in your own trading.

Cheap Stocks stay Cheap Stocks – Part Two

Ok – I wasn’t going to bother with this but my last cheap stock post generated a comment that I at first didn’t wish to argue but I think that I need to say something. First I don’t “assume” – I’m sure you know that when you “assume” you make and ass of you and me and I do not care to be in that calculus.

In the near term cheap stocks remain cheap. In the long term sometimes a cheap stock actually does something spectacular.

One problem – there is no way of determining the true market value for most cheap stock companies. Another problem that I consider even worse - many cheap stock companies were at one time expensive stocks (see MAMA and MVIS) that have fallen on hard times. Most stocks that fall on hard times seldom make it up the ladder again (and I’m not going the list the several hundreds in this category - you know them well). However, I will add that both MAMA and MVIS show some promising growth on the monthly charts coupled with rising volume so it is possible that they can go up more and may even become “home run stocks.” May.

I am not a long-term investor and I don’t think that my posts regarding day trading and day trading set-ups ever indicated that I am. The longest time I ever hold a stock is about 4 days. If visiting relatives and fish start to stink after 3 days - I believe that stocks absolutely reek after 4. And you can quote me on that. That is also my principal bias - short term trading.

Still I can justify my statement – Cheap stocks stay cheap – with a simple filter.

I looked for all stocks in the universe of those selling for $20 or more today that were selling for less than $10 and more than $1 one-year ago. I came up with 14 out of the 2384 that fit the constraint. Then I looked for all stocks in the universe of those selling for $40 or more today that were selling for less than $30 and more than $15 one-year ago. I came up with 76 out of the 2362 that fit the constraint. (I used 15 – 30 to make the starting batch about the same 2384 – 2362). Bottom line – 14 cheap stocks have been going up during a nearly year long bull market and 76 intermediate priced stocks went up during the same period.

Now I’m not going to say that I would have been able to pick those 14 stocks or these 76 stocks out of the over 4700 stocks involved in the test. All that I am saying is that it seems that the odds are a little better outside the universe of Cheap Stocks to find stocks going up significantly. Of course good TA would have picked up all 90 of those stocks since they leave nice trails behind them. The problem is good TA would have picked up several thousand others that didn’t go up significantly over the past year. TA is like that you know.

So let’s leave at this – I won’t play cheap stocks except for quick scalps on a day trade basis and I’ll be happy. You, of course, can play what you please. But don’t insult me by saying I “assume” since the only thing I “assert” is that nobody knows nothing. (And the universe of “nobody” includes, of course, you and me).

Saturday, December 16, 2006

Pivot Point and the Q’s

Generating the pivot point is fairly simple – you sum the high, low and close of the day and divide by 3. We’ve discussed the pivot point before in regard to using it for determining entry and exits for trading. This information is widely available on the web and I don’t want to re-cover that ground at this time.

What I want to discuss today is a method for using the pivot point as a means of determining overall trend of the market and as a timing method. Shown below is the last 170 days or so of the QQQQ ETF annotated to show a variety of features. The fact that the blue line is the pivot point and the red line is the average of the pivot point shouldn’t bother you in the least.



You can see clearly that you can use the pivot point and the exponential moving average as a means to determine long term trend as well as using it for determining buying or selling points.

If you want to do major buy or sell events there are two things you need to watch for – first that the pivot point crosses the 20-period exponential moving average and second – that the 20-period EMA confirms by turning in the direction as the pivot point. Once the turn is made it stays in effect for quite some time. Sometimes areas of congestion can be related to earlier activity in the stock. These are shown by drawing lines from one side to the other. The reason for this is that battles have already been won or lost in these areas and wherever there is a lot of congestion there is generally a lot of volume. That means that sometimes people have been trapped in the trade for a long time and now just want to get out. Consequently a lot more buying or selling pressure is put on the market. The short side players can see this too and they begin to take advantage of areas of perceived weakness. Once the area is broken through however the shortists help in its ascension by panic covering.

One area is annotated as the primary support/resistance. That is because this is where the descent was made some months ago and it represents a near term high of the market. However once the QQQQ broke out of the area of primary support/resistance it began going into new territory for this year. In the last 20 days or so it has begun once more to congest and the 20-period EMA seemed to be getting ready to roll over again. The following diagram is a cut-out of the last 20 days.



Instead a bull pennant formed and it is possible that the last two days signify a breakout from the pennant. The 20-period EMA seems to have resumed its upward trend. I think that if you are short the Q’s at this time you might consider covering until the actual trend is revealed.

Why, you ask, use the pivot point? Simple enough I reply – it shows “bottoming” more clearly than does the raw close by itself.

Look at the area of the long term chart marked false turn. Then look at the area marked real turn. Market bottoms are most often characterized by higher highs and higher lows, but they are also periods of indecision. Note how the points cluster together in the real turn and how they remained fairly constantly spaced in the false turn. You can see this again in the top right corner. That’s why I say it is of the highest probability that the Q’s are going higher.

Remember nothing is certain in the stock market and any event good or bad can cause the bulls to scatter and the bears to appear.

Friday - Wrap It Up

A good week all things considered. I didn't get the hard pullback I was looking for but as you will see from Marlyn's Curve later this weekend there are some momentum changes taking place which, unlike the weather here in the mid-Atlantic, are seasonal.

I decided to keep holding SYMC - mostly because there wasn't much else going on. (Truth, I'm doing my normal Christmas duties and running the wife all over here and gone shopping) (when I'm not playing golf that is).

I also added a half position on Western Union (WU) off the apparent blow-off bottom on Thursday (2-hour charts) - you know their motto - "Bailing out dead-beats for a 100 years." Oh go ahead and laugh - we've all used it for that purpose. Anyway it's a relatively new stock and I have a $23.95 target on it or a stop at 22.60 or there abouts.

For Monday - the up/down ratio is at .458, the new 20 day highs are at 688 and the new lows are at 357. This combination by itself says "more of the same" but let's see what else is going on in the prediction space.

The VIX has pulled back inside -10% but still remains lower than -5% so we could have a down day or two coming in the next week. Then again maybe just a weak sideways up which can also raise the VIX (it's sort of like raising the Titanic any more).

The best indicator (at least to me) is the fact that DIA, SPY, QQQQ, IWM and the proxy for the stock market of the 22nd century - Goldman Sachs (GS) all printed red spinners or red doji in the last hour. Last time this happened the market went up strong the next couple of days. I'm going out on a limb here and say that we have one more day of this weak rally then we go dormant until after Christmas. I think that is the fourth time I've said that but - eventually it will be Christmas and I'll stop saying it.

As always I don't "know" I just "guess" just like that guy from TV you follow so slavishly. - "Good jumpin' jiminy Sarah-Mae - he's filthy rich - he just hasta know what he's doin'!" - Oh yeah lemme buy summa dat. (sarcasm off)

But now for someone who does know - someone, who but for a few measly cents yesterday and a new Dow record could have been something special, coulda been a contenda - but instead is 37 - 28 having blown the call (and we all know how that feels too - don't we sports fans?) for Monday says .... heads - going to be a bull market.

We'll see - Later this weekend, if I can get off the shopping detail long enough, a post on wither the majors using Marlyn's curve; a reprise of my Cheap Stocks Stay Cheap rap - and no, Annie-Mae, I'm not going to say I'm sorry; and, maybe a couple of other posts depending how creative I'm feeling. I've been playing around with the 4 day swing trade method I use and I want to share some tests I've done with you.

Till then - tah.

Thursday, December 14, 2006

Thursday Wraps

Well I got that one wrong - I really don't know why a couple of thousand fewer people claiming unemployment benefits should have such an impact on the market but it seems to have done the trick. The DIA and the SPY had great set-ups today but the Q's and IWM both gave up after the first hour. I don't like the looks of the Q's because every single hourly candle had a tall neck (or what I call a steeple and you know what the steeples mean - end of trip).

I managed to get out in the fresh air today and play some golf so I didn't do much except dump my ORCL shares at COB. I dumped them for the simple reason that given an NDX run up by 19+ points it round- tripped to dead even. I am now holding some SYMC. I think that I'll close that position tomorrow and in fact go flat through the end of the year. We'll see.

The up/down ratio sits at 56% which is neutral but trending towards the bear. New 20 day highs are up to 811 and new lows are down to 270. These are not good numbers for an upwardly mobile market. The VIX is now 12% below its 10-day moving average and is back in single digits again. The Q's, IWM and GS all printed red candles in the final hour. But DIA and SPY didn't. So a mixed message there. And tomorrow is expiration day. Generally there isn't much volatility on expiration day so I expect tomorrow to be quiet. But you never know.

The magic coin gets to 37 and 27 having hit today square and for tomorrow --- tails - bear market. I think I agree.

Three Tweezer Bottom

Last week I showed you that KKD on the 8th had a 4-tweezer bottom on the 2-hour charts (12/07). I mentioned that the tweezer bottom is often used as a significant point - no lower than here (for a close).

Over the next three days KKD again printed a tweezer low on the daily charts - each day closing higher than the tweezer bottom on the 7th.

Then yesterday it gapped up and closed up significantly. Do we know our tweezers or what?



I mentioned that I watched for tweezer bottoms and tops and used them as significant turning points in a stock's price. They are a warning or guidance and you should watch for them also.

Wednesday, December 13, 2006

Wrapping Wednesday

This is as funny as it gets - here is what I said about the magic coin yesterday evening - "But for tomorrow ... landed on its edge - just kidding - tails - bear market. Dumb coin" And damn if the market didn't wind up on the edge today. Way to go coin!

I followed the plan - on the jump I sold the half position of ORCL I bought yesterday afternoon for a little gain. Then I dumped ALTR for a little loss - wash out. And this afternoon I doubled up on SYMC for tomorrow.

I spent most of the morning watching MAMA (among others) trying to find a set-up but one never came - everything I was watching stayed as flat as the rest of the market. There were some nice ones that I saw this afternoon but they weren't on my radar this A.M. Oh well - looks like we'll rest now into the week after Christmas when there will be a little rally and then about the middle of January the money will start flowing again.

Anyway the up/down ratio is neutral at 43%, there were 523 new 20 day highs (a slight increase) and 443 new 20 day lows (a slight decrease) and the VIX is 10% below its 10 day moving average. The 4 major indices (DIA, SPY, QQQQ, IWM) we follow all finished the last hour strong white and GS, the proxy for the stock market for the 22nd century, finished with a doji. And, believe it or not, but it looks like a blow-off bottom for GS. As I said earlier I'd be surprised to see much more than the same as today for tomorrow.

The magic coin gets a bye for yesterday as I don't consider that either bullish or bearish more like dovish. So it stays 36 and 27 and for tomorrow .... authoritatively a head - bull market. Might happen - we'll see.

Tuesday, December 12, 2006

Cheap Stocks Stay Cheap

There is a reason why cheap stocks are cheap stocks – nobody wants them. And for every AAPL there are 2209 others that languish on the sidelines waiting to be called – like the little kid at the sandlot ball game.

For those of you who suffer from attention deficit disorder, AAPL sold for less than 9 bucks just 3 and a half years ago. And the number “2209” is not made up either – that happens to be the number of stocks selling between 1 and 9 dollars yesterday. And for each of those 2209 stocks there is one hell of a story. Believe me – I’ve heard most of them.

Now take a close look at this chart of AAPL that I have laboriously annotated for your viewing pleasure. Soak in the many lessons to be found on the chart. It is a cheap stock clinic. If you see similar set-ups on the monthly basis in your favorite cheap stock you can be pretty certain that it isn’t going to stay cheap for long. But if you are buying because it’s an “idea” stock (as in - I have an “idea”) you better be using “mad money.”



Don’t get me wrong – every once in awhile one of these guys catches a bid and takes off, you just never hear about the other 1000 that didn’t.

My advice (which is free so you get what you pay for) – leave the cheapies to the dreamers and the fools (and I’m not talking about the Motley ones either). If the stock sets-up go for the home run – otherwise remember rule 1 – nobody knows nothing – including me.

Wrapping Tuesday

Except for the fact that I'm actually carrying a small portfolio for swing trade purposes I welcome a down day. Now despite the blah blah blah from the bobbleheads on bubblevision (I don't watch I just read the headlines) it really wasn't because of the Fed or because of Best Buy or even because Oil went up or down or the dollar went somewhere or the trade deficit which last month caused the market to collapse because it went up this month caused the market to collapse because it went down. Whew - did I get it all in? I hope so. The reason why the market has been a little weak lately is because - are you ready Chuckles? - because there isn't anything to buy and most of the buyers are on the normal - ain't gonna do nothin' between now and Christmas/Chanukha/ Festival of F'in Lights or what have you because I'm on my out of pocket vacation. I.E. I'm screwing off because that's what we do between now and January 1st. Besides its options expiration week. What do you expect?

I had to get out of CTXS today because I couldn't stand the pain any longer and that one was hurting me. I probably sold too soon and if it starts going back up anytime soon I might reacquire - although for the life of me I don't know why. Replaced it with some GLW although that is probably going to prove to be a mistake as well - we'll see. At least it didn't go down. I also doubled up on my ORCL position this afternoon at close of business. If we get a good bounce tomorrow morning I'll sell off that portion for a quick profit. If not I'll sell the original half tomorrow at COB which was my plan anyway. ALTR and SYMC didn't do much either way today which is fine.

The VIX remains more than 5% but less than 10% below its 10 day average but the good news is that the up/down ratio is at 35%. There were 483 new 20 day highs and 506 new 20 day lows. The first time in 11 days the new lows outpaced the new highs. The 4 indices we track DIA, IWM, QQQQ, and SPY (actually the ETFs of indices) all finished the last hour strong. Only GS, off a report of extremely strong profits, finished the day down. That's normal - there is no place for GS to go now but down they've made all the money there is to make in the entire world (sarcasm off).

Put all of this together and I think there will be a small rally tomorrow and Thursday then a flat Friday (expiry day)and a weak week next week.

Old magic coin blew it today and starts the downward slide again - 36 and 27 - I smell a TV contract coming soon - isn't that how bubblevision rewards ostentatious mediocrity? But for tomorrow ... landed on its edge - just kidding - tails - bear market. Dumb coin.

Who’s Your Dummy?

BBY crashed today. How long ago did the insiders know and what did they know? Somebody knew something - somebody was selling into earnings with both hands.

This chart tells the sad story for all to see. Next time you see a dummy spot (11/22) with a blow-off top (11/27) on the very day that Wal-Mart warns and then see it confirmed on the very next day (high volume lower high lower low) you might want to say – sell, sell, sell. And if you didn’t get it then - why didn’t you see it coming when the stock began declining into earnings?



And had you sold short on any one of those days – or bought some ITM puts going into earnings (today) – you would be sitting pretty right now.

This is not an easy play to make – you need to think like a trader and understand that that head fake on Friday and Monday is meant for other people not you. One thing about retail, especially the big stores, they track together. What affects one is assumed to affect all especially when it comes to sales. Circuit City took a bigger hit than BBY.

When you have a portfolio of stocks or derivatives these are the kinds of things you have to watch for. These are "tells" in the parlance of poker and when you see one you can't be so in love with your stocks as to hold them - remember there is always tomorrow and it only costs a commission to buy them back. (And yes I know about taxes and wash sales and blah blah blah - and I can't think of a better reason to lose money).

Now a little test - without looking do you know when your stocks are announcing earnings next? Do you know which are the top 3 stocks in the sector where your stock appears and do you know when they are going to announce?

I don’t watch or play BBY nor do I shop there – they are too expensive.

Monday, December 11, 2006

Monday Wraps

It was 59 degrees today and I should have gone and played golf. I didn't. One time this afternoon I looked at my monitor and after 5 seconds or so I realized that the only thing moving was the clock on one of my windows. Things started fluttering a little after that. It was all I could do to stay awake.

I remain in my swing trades - SYMC, ORCL and ALTR and have added CTXS to the mix. I plan to hold these stocks each for at least 3 or 4 days unless they crash to their stop loss points at which time I will unload them. As bad as the day was I made some in SYMC and ORCL and didn't lose much in ALTR and CTXS. ALTR is shaping up as an interesting trade. It printed a NR7 today. The NR7 as you know is the narrowest range in the last 7 candles. The method I used to pick the swing trades was a filter - low near or through bottom Bollinger Band, MACD histogram in negative territory, one of the 4 highest volume stocks matching this filter's constraints. It back tests nicely and all I have to do is be prepared for some small losses and a couple of good size wins. I can do that.

I tried daytrading a little PFE early in the session but I didn't have it long as it turned around and I unloaded it for an $96 loss including commissions.

Just so I don't forget - KKD went up again today - I showed you the quad tweezer bottom on Friday. Remember this is just a lesson - I neither play KKD nor eat their donuts.

The market has several good things going in its favor - one is the Fed meeting that should announce an end to inflation in our time on Wednesday. And the second is that more and more stocks are finding their way to the bottom of the pile and not so many are being added at the top even though the market is going up.

Speaking of that - the up/down ratio is printing 47%, there were 610 new 20 day highs and 318 new 20 day lows. That was an increase of over 60 off Friday's number. Two of the five majors printed the last hour white so that's a mixed signal at best - the only time that signal is valid is if they are all white or all red - otherwise it's a wash.

The VIX is now 6% under its 10-day moving average and that's sliding towards the bearish side but just a little bit out of neutral territory. So we have a several mixed signals, neutral signals, and leaning bearish signals. I'm going to call tomorrow more of the same as today - waiting for the Fed to speak. Maybe a little bit down.

The magic coin is 36 and 26 because it hit today fairly well and for tomorrow it says .... heads - bull market again - maybe so.

MACD – Analysis of the Analysis

Yesterday’s post relative to the MACD and the value of selecting stocks when the histogram is below 0, specifically below -.1, had me thinking. When something as simple as that produces serious profits especially when the exit is just as simple – sell after four days of holding – there has to be a dynamic in place that I am just not seeing. Then, of course, like a bolt out of the blue it came to me – I select stocks for back testing by picking the highest volume stock of the set output by the filter on a daily basis. And stocks become high volume stocks because people either want them or don’t want them.

So back to the laboratory we went and we ran yet another test – this time for stocks with the same price range but volume based only. A one line filter – show all stocks between 15 and 35. Then for testing purposes, as always, pick the stock that has the highest volume.

I’m not going to keep you in suspense – using the same two periods I used in yesterday’s MACD test

Period 1 – equity result = $28865 / MACD < -.1 33602 / MACD > .1 19427
Period 2 – equity result = $13355 / MACD < -.1 27661 / MACD > .1 6115

In both periods the equity results of "volume only" was better than the equity results for those stocks picked because the MACD was greater than .1.

Again, stocks that are in distress – MACD histogram below 0, close below EMA 90 and the like – can be more profitable than stocks that appear to be in good shape.

As always do your own testing – I’m hoping that the materials here stimulate you to think about technical analysis and how it applies to the next stock you select to buy.

And remember investing in the stock market is just like poking yourself in the eye with a sharp pencil - it feels much better when you stop.