Tuesday, January 30, 2007

The VIX

Adam over at Adam's Options has one more interesting article on the VIX to share with you. It is worth your time to read it.

But I wanted to show you something else about the VIX - something that every day trader should know - you can read the VIX as if it were a stock -



As you know but by way of refresher when the VIX goes up the market goes down and vice versa. As you can see in the figure above - the head and shoulders formation suggests that the VIX is going down. If you remember last Friday the later half of the day saw a large recovery and many stocks finished the day up. Yesterday the blow off bottom in the VIX signalled an abrupt reversal of the market which did occur beginning at 1 P.M. EST. (Note there is no volume in the VIX - the blow-off bottom has to be intuited by the large descending candle followed by an ascending candle). You can also keep a chart of the VIX on your monitor with the Bollinger Bands as is suggested in Adam's article. That looks like this on the 15 minute charts from yesterday. Once again a clear signal that the market would be changing direction.



So you see - keeping an eye on the VIX can inform the direction of your trading regardless of your time frame.

And yes I'm supposed to be going on vacation - I'm going, I'm going.

New Filter - Blow Off Bottom

You know that I write often about the blow-off bottom, well I've been working on a filter designed to find these the day they happen so that we can take advantage of the next several days of returns. It's not as easy as it looks but interestingly enough I've managed to get one that works well on "cheap" stocks.

show stocks where close is between 1 and 5
and average volume(90) > 500000
and close 2 days ago < open 2 days ago
and close 1 day ago < open 1 day ago
and volume 1 day ago > volume 2 days ago
and close > open
and low 1 day ago < low 2 days ago

As you can see it concentrates on stocks selling between 1 and 5 dollars with fairly good daily volume (long-time readers of this BLog know that I am partial to the high volume stocks regardless of their price). It tested well over three overlapping periods ranging from August 1st to January 29th (that would be yesterday) with the highest returns happening in the most recent test period. I won't give you the equity figures because those require you to buy 25000 dollars worth of 1.30 stock and you aren't going to do that. The ROI however was in the 160's for each period so I would say that that would be a good data point. ROI is based on end price minus start price regardless of numbers of shares bought.

The other data point that is significant is the win rate and that, for the filter in its current form, is between 50 and 57% or below where I like them to be.

OK that's the good and the bad and the bad isn't that bad - so without further ado - here are the top 3 selections of the filter for today.

DRL
FORG
XOMA

None of them are coming up with earnings this week. FORG actually made money last quarter and XOMA is a biocrapper with some kind of ties to Schering Plough.

At the open today I plan to take some DRL because it is the most volatile of the three and at the top of the list for volume. Nothing much - maybe a grand - something to play with for a couple of days. My stop for DRL will be 32 cents which is 2 times ATR and my profit target is also 32 cents.

Monday, January 29, 2007

Wrapping Monday

First things first - I won't be posting for a couple of days because Marlyn is taking his bride for a brief vacation (yes when you are retired you still call it a vacation).

Ok - someone tell me - what happened at 1 P.M. EST when the bottom fell out of the entire market and every index began dropping like a stone? Then around 2:15 or so the engine coughed to life and they all turned around and began climbing again. One notable item in all of this - IWM didn't go down as rapidly or as chaotically as did the others and it recovered a lot quicker. That is probably an indicator that we are entering the time of the small caps once again.

I didn't do much today - still holding a potful of Q's and KKD and CRVL. Bought some LUV for a 3-day swing trade as well. Maybe longer if it holds the line and continues to go up. I bought it off a dummy spot.

I believe the Q's will go green this week and as soon as I'm profitable again (and that isn't too far from here) they're gone. CRVL hit the $46 sweet spot this afternoon and I still haven't decided whether I'm going to double up or sell. I'll be around tomorrow morning at the market open and will decide then. It sure is a nice looking breakout pattern though so I'm leaning towards the double. I'm profitable again with KKD but I'm letting greed dictate that trade - once again I'm holding a stock that I only wanted to day trade but I have no good reason to sell it - the profit isn't good enough yet nor is there a loss sufficient enough to cause me pain.

GOOG reports earnings Wednesday and according to Adam over on Adam's Options the market is expecting a $35 one way or the other move. For everyone holding GOOG here's hoping that the news will be good. I think it is possible that YHOO's beating the street last week might suggest that GOOG will also beat - but I wouldn't run out and game the stock based on my thinking. And you also better keep in mind that YHOO, since its big bump up last week, has been making its way back down. MSFT too has lost the momentum its pseudo-good earnings story gained it. But as I said in these pages several weeks ago, MSFT was due to come back in because it was too far away from its 21-period EMA on the weekly charts. So this is a good thing. The daily charts tell a totally different story in that it is bumping its butt on the 21 period. I'd be hard pressed to buy it at this point - I still think it is over its top of $30.

There are a huge number of stocks that look poised to go up - it's just going to take some kind of catalyst to get them moving. AAPL is a good example. From all the Doji it's been throwing off for the past week or so you can see how the Street wants to buy it but for some reason they are afraid. You be afraid too - at least until you see some movement.

For tomorrow the up/down ratio is at 51% which is as neutral as you can get, but the new 20-day high/low ratio is 67% which is not very good. On the other hand the VIX is back in the 5-10 above the 10-period moving average and there was a split in the last hour of trading with the indices - two white, two red, 1 Doji. Confusion ahead of the Fed. I'll forecast an up day tomorrow. Just based on the VIX and the action this afternoon.

The magic coin says - - - heads - bull market. Well we agree again.

I've got to call today a tie just because some of the indices finished green and others finished red so the score is now Marlyn 7 - 5 and 2 and the coin is 5 - 7 and 2.

I'll be back on Thursday. In the meantime keep pushing the market up.

It Takes a Dollar -

To make a dime. We've all heard this old saw and it is as true now as it ever was. And when you trade you need to understand something about the relationship between your trading account and the value of the stocks you trade.

I normally stay in the 15 to 35 dollar range. I don't like the less than 15 dollar stocks because of my opinion (tested thoroughly) that cheap stocks are cheap for a reason (notwithstanding that I just wrote a post about buying same). And I generally stay below 35 for the simple reason that I'm using only a portion of my brokerage account for day/swing trading purposes and a small portion at that.

So what is the difference? When you find a potentially good trade the best way to take advantage of it is to buy as much as you can afford - either at one time or layered in. And what you can afford is dictated by your total trading account. If that is a small amount you should probably be concentrating on lower priced stocks - if a large value then the range can expand. Here is a single filter with two different entry ranges -

Tweezer Bottom - $15-35 - 71 entered - 75% win rate - Equity appreciation - 23630
Tweezer Bottom - $35-55 - 54 entered - 67% win rate - Equity appreciation - 9084

This is an extremely good filter. It has a high win rate across the board (many do not but that will be a subject of another post). What didn't change? The amount of money the back testing software put into each trade - it was always 25% of the same basic trading account value - starting at 100K and going up or down in system time. What happened is that by buying higher priced shares the system gave up opportunity to make more money because of fewer shares being bought. So to trade at the higher levels you would have to increase your trading account. In other words, you start small and move up as you earn it.

The second part of the equation, naturally, is the number of stocks you are involved in at any one time. I always believe that if you want to be involved in many stocks for "diversification" then you can use any one of the several index ETFs and be done with it. You will have an absolute Beta of 1 and life will be grand. On the other hand if you are trying to follow 8 or 10 or more stocks at one time then you have probably sliced and diced your trading account to an unacceptable degree of tiny. Remember your main trading constraint is available cash.

Here's proof of that wild statement. Same filter - different number of stocks being purchased and held. In the first results set above it was 1 stock a day with no more than 4 in the portfolio at any one time - now it is 2 a day with no more than 8.

Tweezer Bottom - $15-35 - 130 entered - 67% win rate - Equity appreciation - 14354
Tweezer Bottom - $35-55 - 88 entered - 63% win rate - Equity appreciation - 5860

Everything else held exactly the same as the last set of tests and the equity decreased. I can't make this stuff up - reality is just too good.

So you see it isn't just a good filter or scan that wins the day - it is also money management and money management includes not only risk and reward, but position sizing too.

Naturally there are other ways of sizing a trade than just some percentage of whatever my current portfolio value is but regardless of how you do so it will always come back to the same idea - the more shares of a winning trade that you buy the better off you will be.

Sunday, January 28, 2007

Volume Tells A Story

And the story is usually one with a happy ending if you are willing to listen closely and pay attention. Here are 4 stocks that have enjoyed high levels of institutional buying in the past month. Who can see what common factor is shared by all of these stocks?







That's right, Mary Jane - a huge increase in volume precedes their ascent. Did everyone pick up the Return to 8 set-up on CCF (in case you missed the volume memo)? While it isn't as visually appealing on the other three they each had a pause after their initial run up, a little sideways step, and then a continuation of the climb. For those of you who are really sharp I bet you picked up on that blow-off bottom on CALM between 12/29 - 01/04. You might have wondered what was going on there? We also have a 3-average crossing on CCF and ICAD. That generally says to me - buy me - especially if I see it with this kind of volume. I don't normally scan for stocks in this price range but I can see now that that might be a mistake. I certainly will be looking for volume jumps in this area from here on out.

I obtained these stocks and a bunch more of the same type by using a pre-defined scan over on MSN "Institutional ownership up last month." So if you just want to jump on the 'toot bandwagon you are perfectly welcome to do so.

But instead of using that scan what you might want to do is find a scanner that allows you to look for stocks that are showing a major increase in volume right now and then wait for the pause. As you can see from each of these there will be a pause and a sideways step to the EMA 4 or the 8.

Saturday, January 27, 2007

Tweezer Bottom - The Filter

I’ve talked about the Tweezer Bottom before and what I wanted to do today was to show you a filter based on the tweezer bottom and let you see some of the results from that filter over the past 3 months or so.

Here is the filter in all of its four lines of glory:

show stocks where close is between 15 and 35
and average volume(90) > 500000
and low equals low 1 day ago
and close < Donchian Center Band(20,4)

And here is what it looks like -



The filter back tests are impressive with a 75% win rate and a 100%+ ROI over 4 days but I think results that you can verify are as important so here are some you could look up yourself. The values shown are for the stock from the day it was discovered by the filter to Friday, 27 January 2007 i.e. yesterday.

OCT 20 (65 days ago)
Top 5 selections only of 11 (9 win - 2 lose)
SCHW 11.45%
TEVA 2.58
ADI 11.96
EXPE 26.74
WCI 32.90

Dec 26 (20 days ago)
Top 5 selections only of 12 (10 win - 2 lose)
NSM 2.84%
TOL 2.34
ACOR 8.18
LYO 14.86
SWFT 13.27


JAN 19 (5 days ago)
2 selections only
BMC .32%
CECO 8.03

And these are the most recent selections from the filter for you to put on your watch list for the coming week: NYB, CHT, MFC, TCB, and ORI.

Please, as always, do a thorough DD – I have not checked any of these regarding coming earnings reports or institutional holdings or growth or any other fundamental approach. This is pure TA at its best or worst.

Once again thanks to prophet.net for the charts and stockfetcher.com for the application that allows me to write my own filters.

This Just In

Saying, "We can't A-Ford that," Ford Motor Company today announced that the source of their 12.7 billion dollar loss has been found and corrected - they are closing 7 day care centers that they run jointly with the Union.

"We just don't know how it happened but costs just spiralled out of control. Do you know how much Pampers and Huggies cost these days?"

Ford expects to return to profitability by June when the last of the centers is finally closed.

Friday, January 26, 2007

Friday Wrapper

I don't know what that was - a sideways we don't know what to do day do dah do dah do dah day. It wasn't really up but it certainly wasn't really down. They closed well off the lows of the day and all the majors formed nice looking hammers. The hammer at the top is called a hanging man and generally signals a reversal. These hammers however are forming below the highs so it is possible that they are truly hammers and the pullback we witnessed this afternoon was truly a rush to buy stuff. As I noted in the midday wrap a lot of issues suddenly started looking oversold.

I'm still holding that KKD I bought yesterday because, obviously, I didn't get a bounce today. But I don't think it is a risk to hold it over the weekend. Also hold CRVL still and the Q's. Contrary to the indicators there the Q's did not go up this week - thereby breaking a 6-month tradition. Is this the end of the bull market? I don't know.

OIH was down a bit and MAT was up a bit. GOOG had a small short squeeze but nothing to write home about. MSFT for all the storm and fury gained all of 15 cents on the day. As promised here is the rest of that Q's chart from this morning.



So what happened? At 11:30-12:00 we had a blow-off bottom that was obvious - the problem being there was no follow through. There were some attempts but nothing special and we finished about where we started the blow-off. That would be what I would call a normal Friday afternoon.

Next week - I'm hesitant to say. The normal indicators are all looking bad for an up day because the market took all the frosting off the cake this afternoon. The up/down ratio ended the day at 51% or double yesterday and the new 20-day high/low ratio ended at 61%. The former ratio is neutral and the latter is overbought. The VIX also pulled back inside the neutral zone this afternoon. The only thing in our favor for an up day is the fact that all five components of my major index indicator finished the last hour down. This happens about twice a month and usually the next day is up. So I'm going out on a limb and saying that Monday is an up day.

The magic coin meanwhile says ... tails - down day on Monday.

Today despite the fact that most of it came back towards the end must be considered a down day. Consequently I was wrong and the score is now Marlyn 7 - 5 and 1 and the coin is 5 - 7 and 1.

Midday Friday Wrap

So far so good - yes - good. We need to get some of the stress out of the market and down days are the way to do it. We don't care how far the Dow drops because we don't hold any Dow stocks - do we? No. Actually 7 of the Dow 30 are up with CAT leading the way. MSFT is also up on a relatively poor earnings statement. Several years ago I was holding a pot full of MSFT ATM calls into earnings and they came out with absolutely great earnings and great guidance which I had expected. The next day they opened down a buck and they never recovered - at least not by the time my options expired worthless. You can't predict the reaction to earnings.

Anyway this is a wrap so here are the current figures - the up/down ratio is up a bit to 32% but the 20-day new high/low ratio is down to 35%. The VIX is over 7% so I have to say that we are getting the stress out of the indices and that is a good thing.

A couple of other things are going on and you should pay attention to these too - the PCRATIO is starting to top out. It generally goes up in a down market and vice versa. The VIX is also looking toppy.

We may get some turnaround this afternoon. In the past half hour I've seen some possible short covering in the DIA, the Q's, GS, and the SPY. Here's what that might look like in the Q's. This could shape up to be a bottom - time will tell and I'll publish the rest of the chart this evening at the wrap.

Thursday, January 25, 2007

Thursday's Wrap

Well I mis-called that one. The indicators all pointed solidly down and the market followed the indicators. After my epiphany this morning regarding EBAY's profits I was not surprised. I'm working on a new indicator that looks like it might be better than the old up/down ratio - I have to watch it for awhile and if it proves to be valid I'll include it in the mix.

Bought some KKD just above midpoint low (MPL) and it didn't do anything all day except bounce around the MPL. I'm holding it overnight because the indicators are all solidly up for tomorrow and this time I'll follow the indicators. We'll get to those presently.

One that I missed was BKUNA - I had it on my daily watch list and for some reason or other didn't believe what I was seeing. But it came out of S2 this morning like a shot and went to R1 at the close - my mistake. Here is what that looked like.



You see how you can combine your process (wait for a bottom indicator) with the pivot points in order to make decisions. This one was pretty clear and I really don't know why I missed it except maybe I dozed off for a bit when it was developing.

Day 7 and the dumb traders started shorting GOOG again. Don't they know that Jimmy called for a short squeeze? But in all seriousness - at least as serious as one can be in this business there are some interesting developments in GOOGle-land. One of the sites I frequent, whispernumber.com, is suggesting that the "whisper number" is lower than the analyst estimate for GOOG - by 6 cents. Now we know what kind of havoc 4 cents can bring. If the whisper number (the non-publicised but hardly a secret number) turns out to be correct - look out below on January 31st.

OIH was off again today - some market some inventory a lot of hot air - most of it on the East Coast of the USA. Have no fear oil bulls - summer is coming and I can pretty much guarantee we are going to need a lot of air conditioning and all these old oil fired electric plants are going to be working overtime supplying the juice.

Seeing some chatter about the housing market depression being over and I really think it is. The reason why is because the other day in my morning paper (yes I still get a newspaper - how living in the 50's is that?) in the primary spot (upper right front page) big headline regarding the slump in the housing market. I contend that by the time reality reaches the mainstream media change is already underway. Barry Ritholz disagrees but he said we having a lousy Christmas season and we didn't. Remember rule 1 - nobody knows nothing - including me - and especially in this case since I agreed with Barry.

The up/down ratio is rock bottom at 24% which is more than half of yesterday. The new 20-day high/low ratio is at 39% which is also more than half of yesterday's number. The VIX actually leaped over its 10 day moving average and is now in the yellow zone of oversold territory (+5 - 10%). The DIA, Q'S and IWM all printed white candles in the last hour. GS printed a dummy spot (Doji) and SPY printed a gravestone Doji. Everything signals a bottom. So I'm forecasting an up day tomorrow.

The magic coin having listened to all of the evidence says ... heads - agrees with me.

Marlyn is now 7-5 and 1 and the coin is 5-7 and 1. See you tomorrow.

We Can't A-Ford This Crap

Well Ford misses by 12.7 billion - time to give the Execs a nice bonus - it could have been worse. Let's see - we'll lay off half the work force move all the manufacturing to someplace no one has ever heard of and make the vehicles out of rat crap - oh wait we've already tried that and lost 12.7 billion.

Have you driven a Ford lately? Obviously not many people have. I own a Ford - I got the Escape when it first came out and I love it. It's the perfect car for me and the wife - fuel efficient enough and can pack a load when we go away on our vacations.

But the problem with Ford is the same as with every vehicle manufacturer out there - they make them too good. My Escape looks like new - the finish is as bright as the day as it came out of the factory (and I don't waste time waxing cars). It works - it gets me from point A to point B with the minimum of irritation. Am I going to buy another one? As soon as this one wears out but I have no idea when that will be. I put over 200K on my last Ford (a '93 T-bird) and then gave it to my grandson to wreck - that was in 2001. (He did).

I think we are witnessing the last throes of Ford Motor Co.

It's a shame and I for one do not blame the unions. I don't think that labor getting a fair share of the profits is a bad thing and I don't believe their share was unfair. Ford put all of these contracts in place back when they made most of their money from the financing and not the car and the only purpose for the car was to pay the manufacturing costs and get something on the lot to finance. This nonsense about health benefits being 18% of the cost of a car to manufacture is just that - nonsense. They never cared how much it was as long as the cost of labor was covered by the price they could get for the vehicle.

Ford made most of their money on financing - car sales were secondary to writing the note - the most important guy on the lot was the Finance and Insurance manager - everyone worked for him regardless of what the org chart showed. If he could write the loan, the insurance policy, the undercoat, the overcoat, and the extended warranty it didn't matter what went off the lot the dealer was going to make money and the company was going to make money. All that counted was the interest rate and a servicable loan.

That's what all the emphasis on leasing was about. Leasing was sold as the way the poor man could drive the car he wanted and the program sold - what it meant to Ford was the never ending finance contract. Unfortunately that was more a fad than a fashion or maybe a fashionable fad and the first time the guy brought the car back with 10 miles more on the odometer than permitted it was the last time he leased.

Now when you can get the loan off the Internet - overnighted to you in a Fedex envelope - the finance business has gone completely sour. And very few people buy the extended warranty - pretty much everyone has discovered that they are nothing but cash cows for the dealerships and the cars live through them anyway.

I think in 20 years Ford will have gone the way of Studebaker and the rest. Most of their dealerships already sell something else and in many of their dealerships that something else sells more each month than Ford.

Ford, of course is up 3.29% at this writing based on the idea that it can't get any worse - it can.

AAPL Core

We discussed Maximum Top earlier and while looking through charts (yes - that's what I do - I get up at 4 A.M. make coffee and look through charts) - I happened to see this one.



Because it serves as a great teaching instrument I thought I'd share it with you. Needless to say I don't adhere to the necessity for the three gaps to be in a row as you might find in the classical literature - I just want them somewhat close to one another as is shown here. But wait - here we have three gaps up and a maximum top but what's that after three gaps down? A maximum bottom? It could be. It could be.

I wouldn't sell the homestead and buy AAPL today but let's wait and see what happens down in the orchard after the open. AAPL looks like it's setting up for a small run. It will be interesting to see if it can get beyond the maximum top.

EBAY Rising

EBAY announced 24 percent profit growth. Don't go there - instead read Notable Calls and what you will find is that it's a lot of smoke and mirrors and much of their "profit" overshoot is a result of foreign exchange.

This is one of the problems with so many multinational companies - you really can't compare apples to apples when they announce their earnings because they make some portion of it on the spot market. And you don't know how much is from good business practices and great sales and how much is from Forex unless you read the prospectus. And even then you might not be able to tell.

Just watch your step in this one and others like it.

Maximum Top

I'm not picking on MAMA here - this configuration has appeared on many, many stocks (cheap or otherwise) and will appear on many, many more in the future. I just want you to know that when you see it beginning to form on your favorite, must-have-in-my- perfect-(blush blush gush gush)- portfolio that you sell at whatever price you can possibly get and then avert your eyes - it ain't gonna be pretty - Sally Mae.



I call this "maximum top" and this is one of the bestest that I ever saw. First it is the third of three gaps up. Every candlestick analyst in the world knows that three gaps up is the death of any stock's upward momentum (we've discussed this before). Then it is accompanied by huge, blow-off top volume. (Just in case you didn't get the memo).

I call it "maximum top" other folks call it "oh sh*t oh dear there goes Christmas."

If you ever see it - run away and hide. (Or short the crap out of the stock if you can borrow the shares - your choice).

Whither the Small Cap?

I drew this picture on my high-tech Etch A Sketch* otherwise known as "Excel"** with a little help from Power Point.



This is the IWM, the ETF version of the small cap index - the RUT 2000 or more familiarly the Rusty 2K. Anyway rather than give you the loaded with distractions charts as I usually do when talking prices I thought I'd produce a stripped down version to show you where we were (and where we've been for awhile) in the small cap world.

Sometime in the next forever there is going to be a breakout - but which way? Ah but there's the rub - how can we tell from the price action when we are range bound? Unfortunately there is only one way - if we go above the upper dotted line we are probably going up - if we drop below the lower - well you know the rest of that story. For now - repeat after me - there is no trend in small cap. Which might explain your mutual fund performance lately.

*Etch A Sketch is a toy invented in 1959 by Frenchman Arthur Granjean and introduced commercially by the Ohio Art Company (ticker: OART) in 1960 - it enjoys popularity even today. I just looked at OART and I don't know why, maybe they discovered a cure for cancer in left over etch a sketch aluminum powder and plastic beads, but it went from 5 bucks a share in Nov 2006 to close at 9.50 yesterday. I kid you not. (Damn! I love Wikipedia! If I had had Wikipedia back when I was in school --- wow!)

**You all know where Excel comes from, Power Point too.

Canny BS - Revisiting CANSLIM

Nobody knows nothing - including me. I bet you think I'm going to apologise for my snark attack on Can Slim aren't you? Not today - maybe next week. For today I'm just going to say my CANSLIM-ish or CANSLIM Lite filter picked HLX, SPN, CECO, SLAB, CAKE, and PSUN. I'll spare you the grisly details - to date they are a total of -1.66 from where they started. To be fair - HLX is up 2.40 and PSUN is down 1.01 and the rest filter in between.

If I remember next week we'll take another look because CANSLIM is a method for buy and hold for almost forever players (Wowser! is that ever a metaphor for success if I've ever written one). Stay tuned.

Wednesday, January 24, 2007

Wrapping Wednesday

Continued day trading as I said I would and was very successful. Hard not to be on a day like this.

Took KKD early at the midpoint high (see Pivot Points) and held it through R3. In numbers that is 12.54 - 13.47. Did a similar with TRID except was out at R1 - a slower developing trade with a slower moving line. Still a 28 cent profit is OK. I'm feeling a lot better now that I'm not losing money on stocks such as Glass (up 2 and change today) and CTXS up a buck 77 on the day. Of course they might give it back and then some tomorrow. I just didn't want to hold either one of these into earnings. I'm still not sure how GLW managed to "beat by a penny."

Still holding CRVL and it went serious-profitable for me today but I decided I didn't have a good reason to sell it. I'm pretty sure that it's going to continue to go up - at least past 46 bucks. Maybe I'll sell then. Sprint also went up some more and I still can't find a good reason to sell that one. Not as sweet as CRVL but I have a lot more exposure too. And Q's are really turning profitable. The weekly indicator is green. I hope it can hold through Friday - I don't think I'll keep the Q's over the weekend. Meanwhile I intend to continue day trading using the Pivot Points as my entry and exits. It's kind of neat not having to make any real decisions except hit the line and buy - hit the other line and sell.

Was today the long awaited GOOG short squeeze? Nah - just normal activity for an abnormal stock. How can you tell? The volume forms a bowl - high for the first hour and a half - tapers into noon - begins to climb again through 4 P.M. Still a nice 4% bump and I'm sure everyone who bought at 513 in front of Jimmy's short squeeze breathed a sigh of relief.

But you have to figure that any day that SUNW shows a profit is a day when everyone should show a profit. They have the best warranty in the business - you pay for it but don't dare go without it 'cause you're going to need it. (You don't read that in their brochures).

For tomorrow first I'll give the data points and they all point to a down day. The up/down ratio went up a paltry 2 percent to 60 but the new 20-day high/low ratio hit 84% and that is hugre. The last time it was this high we had a sustained three day loss. The VIX is back in the overbought zone between 5 and 10 and all 4 major indices plus GS printed strong white candles in the final hour. That in itself should bring the market down a bit tomorrow. But - in the after hours EBAY reported massive earnings and even as we speak there is a feeding frenzy going on in all of the internet stocks. If that carries through to tomorrow and it should we're going to have another up day. I'm forecasting an up day tomorrow.

The magic coin meanwhile sits and sulks having miscalled yet another one today. But for tomorrow the coin says ... tails - bear market - can't convince the coin that sentiment beats luck.

Marlyn is now 7 - 4 and 1 and the coin is 4 - 7 and 1 maybe skill beats luck after all. We'll see.

I'm giving Jimmy Crack Corn Pone a break today. But we'll be watching tomorrow - day 7 of the GOOG short squeeze vigil - get your candles at the door.

Pivot Points - More Examples

These examples are for swing trading purposes. A swing trade is a trade that is normally taken over a period of days. Pivot point calculations can assist the swing trader in determining entry and exit points for the trade.

Step one – select a list of stocks you believe you would like to trade. In other words you don’t normally use the pivot point to find the stock – you use the pivot point to assist you in trading the stock.

Step two – calculate a set of pivot points for each stock selected in step one. Use the previous week’s high/low/close data for this purpose.

Step three – wait until one of your selected stocks crosses a support pivot point level – either S1 or S2 or midpoint low.

Example 1 – BIG. This is a stock that I identified in a post the other day from an article I read in Notable Calls. Here is how it behaved on Monday and Tuesday.



You can see that it opened and dropped right to S1 where it printed two Doji one of which being a higher low. A little while later it rebound from S1 and went over the course of the next two days to nearly R1 where, what else, it printed two Doji.

Example 2 – BLG. An old friend – and you can see it more or less did what BIG did.



Example 3 – MDRX. A stock I played last week and dropped out of after a small gain. Should have had it on the radar this week. Not quite all the way to S2 but to the midpoint between S1 and S2 which is just as good. You can, of course, wait till it crosses S1 (and note how it lingered there waiting for the traders to catch up. Then it went to the PP where it lingered some more and then it went to MPH. Will it go higher? I don’t know – today will tell.



Example 4 – QQQQ. I’m currently holding some from just above MPL which is where it is right now. I think it rebounds today and goes to MPH at least.



Example 5 – AMD. Some readers are talking about this – here is how it looks in Pivot Point View. S1 to MPH + already this week and on its way back. If it crosses MPH again this week it is probably going to R2 which is 17.93. If it goes back to S1 - then it starts all over again. Such is the swing trade world.



There you have it – five crisp and recent examples of possible swing trades using pivot points. The one thing you have to notice is the small amounts most stocks move from S1 to R1. This, of course, is a function of the initial price of the stock. The less costly the stock the smaller the expected move all things considered. And the word is “expected” there are no guarantees in this business.

And as a last word - you couldn't help but notice how all of the stocks up there, selected more or less at random, have a similar chart pattern. What that means to you is that if you pick a stock to watch and it starts hitting S1 and moving up there is good reason to believe that your other stocks are also hitting S1 and moving up. Then your only problem is picking the ones to play. And how do we do that? ATR is Volatility.

Now for your pleasure here are two sites that will help you calculate pivot points. Since you still have to enter the initial HLC values and then transcribe the results somewhere else you are probably better off doing it with an Excel spreadsheet.

pivotpointcalculator.com

Stepney Futures

Tuesday, January 23, 2007

Pivot Point Example

I just remembered that I promised an example of a pivot point trade and haven’t provided it yet – lucky you guys – here it is. I’m using KKD because it is the chart I happened to be looking at this evening when the promise resurfaced in my head.

The first thing you have to do is generate the pivot points – I showed that calculation to you yesterday. In that post I also mentioned that for swing trading (across several days) I like using the previous week’s high/low/close and for day trading I like to use the previous day’s values. For KKD in this post we are day trading so I generated the pivot points as follows –

R1 – 12.45; MPH – 12.16; PP – 11.86; MPL – 11.70; S1 – 11.54.

The MPH and MPL are simply the midpoint high and midpoint low and are found by finding the midpoints between the PP and R1 and the PP and S1. That’s pretty simple. The MPH and MPL are used as checkpoints on the way up or down. They are used for positioning stop loss. Now look at the following chart – I’ve annotated the appropriate points (as well as I could).




The trade is taken at the pivot point +/- 10 cents. You can see by the red dotted line on the chart that the previous day’s close was about 12.12 so the pivot point is located below that level. When KKD opened it gapped up and then dropped instantly with heavy volume. The next candle showed a higher low so we could probably say that the first drop was just panic-based selling reflecting the market’s opening gyrations and was truly meaningless. Take the trade at 11.94 because if it didn’t drop through the pivot point at this time it probably won’t for awhile. Set your stop at the MPL, which is 11.70, and not shown on the chart for obvious reasons.

Then the trade takes off. Note that when it hits MPH it flattens out and then takes off again from that point. That is expected at the MPH. For the regression-to-the mean guys you can see that the EMA 4 was running far away from the EMA 21 and by the time the price broke over R1 it was pretty well exhausted.

You have two choices here. People who day trade for a living realize that the stock will probably rebound off the EMA 21 (or MA 20) and continue the journey (after all this stock has been going up for a month now). So choice one is sell right after it hits R1 and take your profits and run. Choice two is reset your stop at MPH and wait for the rebound. In this particular stock on this particular day it did rebound but closed right on R1 so either choice would have garnered the same amount.

What if it went through R1 and kept on going? Then you set your stop at R1 and play it to R2 or to wherever it decides to top. Most often however R1 is kind of the limit for a day trade.

One of the nice features of Pivot Points is that they give price a context. You are not always trying to guess the next move because most often the pivot point is controlling the outcome. Isn’t that nice?

Wrap That Tuesday

Not too bad - the Q's didn't do much except round trip about 30 cents. The couple of stocks I talked about most recently - oil (any stocks) and MAT were both up some. I didn't buy either because both constitute a long term (or at least until Friday) relationship and as I mentioned before I want to concentrate on my daytrading.

Except that I'm still holding CRVL because I won't sell it for a loss when it's only 20 cents away from a profit. Also holding Sprint because - well same as yesterday - no harm in holding it for now. I'll wait until it crashes a buck - buck and a half before I dump it. (That's a joke - I hope). And I'm holding the Q's because I still believe this will be an up week for that ETF. If not this week then next.

I wrote earlier today about BIG and KNOT that I pulled out of a number of stocks setting up nicely. I managed to get out of both of those near the top of the day so all in all a profitable round.

Now both the up/down ratio and the new 20 day high/low ratio have gone up significantly since yesterday with the first printing 58% and the latter printing 68%. The VIX is still in the neutral zone and of the four majors and GS, only the Q's printed red in the final hour and IWM printed a Doji. The others printed strong white candles. Disregarding all of these bad omens and I think we are going to have an up day tomorrow.

The magic coin disagrees coming up ... tails ... bear on the way.

Marlyn is now 6 - 4 and 1 and the coin is 4 - 6 and 1 - the race is on.

And we have gone through day 6 of the GOOG short squeeze watch and Jimmy Crack Corn Pone is nowhere to be seen and neither is the short squeeze.

Black Gold

Well we have a breakout in the oil patch - I don't know how long it will last or even why it has happened - remember I use charts exclusively because I hold to the rule and the rule is - nobody knows nothing - including me. Consequently the bobbleheads on bubblevision can talk talk talk all they want and the many guru's who write BLogs can write all they want but price is king. And here is what price is saying about oil.



So now that it is broken out it is time to buy.

Not advice - just a guess - but Jimmy Crack Corn Pone wishes he had guessed it first - (complete with sound effects).

ATR is Volatility

I feel a lot better in my current configuration - day trader. And we've had a lot of opportunities this morning. I started with the QID/QQQQ trade and lost 11 cents on the QID side. More than made that up on the Q's (so far).

Several good trades presented for short term trading and I have three problems with that - first I like to buy in bulk rather than nibbles; second I don't have unlimited funds; third I only like to day trade no more than two stocks at a time. So given set-ups appearing on BIG, CVS, EIX, KNOT, KKD, MAT and MOLX what to do? How do I select the two to hold?

The answer is the two with the highest volatility. But how do I do that? Simple - I get the 15-minute 10-period Average True Range for each of the stocks and play the two highest ones. Today that was BIG with an ATR of 16 cents and KNOT with an ATR of 25 cents. BIG returned 40 cents (so far) and KNOT is providing about 65 cents so far.

I have found that the ATR is a good substitute for historical volatility for daytrading purposes. I used to go to Ivolatility.com and look up each stock but no longer - now I just look at the ATR provided by prophet.net as a technical feature of their charting capability. I just looked on Ivolatility and discovered that yes indeed BIG and KNOT have the highest current historical volatility of the list above.

I'm not a scalper so I don't need extraordinary speed - but I do like to make life as easy as possible for myself.

Monday, January 22, 2007

Toying Around

Found a breakout that looks pretty good - MAT. Mattel Corporation started to become more volatile than ever in October which is clear on a six-month or longer chart. It is only now re approaching its latest 52 week high and it looks to be both a good day trading vehicle (consistent 40 cent range) and a good swing trade. Earnings are coming up on the 29th, it's not a tech stock, and there are no negatives that I can find - except that it's in the toy business. It would be a spec play until after earnings but it does look as if the 'toots expect a good number out of it. A lot of positioning going on in the stock. Why the 'toots? - this isn't a retail stock - it's a no buzz - high volume stock. I don't know who is buying - it will be 3-6 months before we know that but it looks like all offers are being accepted.

The annotated chart shows the trajectory - it is a good strong wave format with each successive wave building on the last. And while these things are always personal the stop loss could be set at the last underline.



Do your own DD. I currently have no position in MAT - I might tomorrow even though I hate buying at the top.

Not advice - just guessing - if I were Jimmy Crack Corn Pone I'd declare authoritatively that once this thing hits 23.7 there will be a short squeeze all the way to 25 - there won't be but if I were him that's what I'd call.

This is Embarrassing

Let me count the ways I missed the KKD day trade today - that would be four not including the fact that it was signalled on the 4-minute charts. What a maroon!

Monday Monday - Wrapping Monday

I trust everyone had a wonderful weekend and now we know the answer to that most troubling question - which two teams of overpaid athletes are going to the Super Bowl. For most of America - the answer would be - the wrong two.

As I said on Friday - today wasn't looking too good for the bulls because everything was kind of overbought and some selling was necessary. That took place this morning between 9:30 and 11 and after that it was a snoozefest. Aside from my little QID/QQQQ play this morning that I documented in another post all I did after that was buy some Q's. Kept CRVL because I'm not selling that stock for a loss and also held on to Sprint because - well just because there was no reason to sell it. I think they both go up tomorrow and I will reconsider my position then.

I bought the Q's this this morning right after they rebound off of the S1 pivot point based on last weeks weekly high/low/close. That was 43.59. Right after the buy the QID's began flattening and I was out of them. The Q's buy was based on another post I did last week that suggested that this week the Q's would be going up because they usually did after a down week. My initial target is 44.79 which is mid way between the pivot point and R1.

This was day 5 of the long anticipated GOOG short squeeze - I'm beginning to think that the almighty guru Jimmy Crack Corn Pone is having fun with us.

Oil gapped up and then fell back - but the high was over the dotted line. I think I'm going to buy some tomorrow to go along with my Q's.

And one more update - somebody is reading my KKD posts - up .65 again today.

For tomorrow the up/down ratio is 32% - about half that of Friday and the new 20 day high/low ratio of 35% is also about half that of Friday. The VIX has pulled back closer to its 10 day moving average and the indices are mixed - some green some red in the final hour of trading. All of this is a good sign for tomorrow and I think we are going up.

Coin says heads - bull market coming. Given the fact that coin has been on a real losing streak this year so far it probably will be an up day tomorrow.

Today was a down day so the score is Marlyn 5 - 4 and 1 and the coin is 3 - 6 and 1. Come on coin - Jimmy Crack Corn Pone does better than that!

QID – PSQ – QQQQ

As I forecast in Friday’s wrap I thought that today would be down and the rest of the week would be OK. Obviously we are being hit by earnings but the other factor – nothing to buy – is contributing as well. Consequently everything is being sold off hard so that there would be something to buy later in the week. I’ll do some pivot point examples later today but for now I’d like to show those of you who didn’t know how the Proshares QID and PSQ act with the QQQQ. Here is a picture rendered in my spectacular method for making quick and easy comparisons – Marlyn’s curve.



As you can see the PSQ reflects the Q’s almost move for move while the QID exaggerates the Q’s moves. That is because the PSQ is a 1 for 1 short vehicle while the QID is a 2 for 1 short vehicle. This can work to your advantage. As shown on the chart if you believe the Q’s are going down and you have a method such as Marlyn’s bands to guide you in your decision you can buy the PSQ to play instead of the Q’s. But why, you ask, should I use the PSQ when I could use the QID and get twice the results? Safety, I answer – the QID is far more volatile than the PSQ and even though you go up 2x as fast you also go down 2x as fast.

So when should I use the QID? On days like today when you are not sure from the outset which way the market is going to go.

Let’s say you buy 1000 shares of Q and 500 shares of QID at the opening bell. And you put a stop below both your trades – let’s say 15 cents on the Q and 30 cents on the QID. Within a few moments of market open your trade on the Q’s would have stopped out and your trade on QID would be mean and green. That would be one way to use QID. In this example QID went up $1.75 by 11 A.M. when it started flattening out and falling back so let’s say you close your trade at a buck 60. That’s 1.60 x 500 shares = $800 minus the $150 you lost on the Q’s gives you $650 profit less round trip commissions – make it $600. You didn’t have to do anything but sit and watch for an exit on the QID. Which was pretty obvious – take a look.



Out too soon? Maybe - but why be greedy.

Now of course you could have done this with share for share (I.e. bought a 1000 QID) but why bother when they are giving you some risk mitigation in the 2 to 1 short function.

This morning was a good morning to make this trade because the first few minutes were relatively benign – no big gap either direction – and because the direction was not as crisp as the futures and the pre-market exuberance would have you believe. Of course you can use QID in a gap up market but that’s a subject for another post.

The way I keep these two in my mind – I say the “D” in QID stands for double.

Oh - this is one very dangerous way to play the market - if you think you would like to try it start out small and work your way up.

Sunday, January 21, 2007

Pivot Trading For Swing Profits

Go to Dr. Bretts BLog and read how to use pivot points to assist you in swing trading - he does a good job of explaining it. I'll try to put up a couple of examples later.

For now here is how you compute a pivot model.

The Pivot point is simply the previous period's PP = (high+low+close)/3. The previous period can be an hour, day, week, month, year - whatever you want it to be depending on your time frame - when I day trade I use the previous day's values as do most traders.

Then you compute R1, R2, and R3 which are the resistance points. R1 = 2*PP - the low of the previous period. R2 = PP + (previous period high-low). R3 = R1 + (previous period high-low).

Then you compute S1, S2, and S3 which are the support points. S1 = 2*PP - the high of the previous period. S2 = PP - (previous period high-low). S3 = S1 - (previous period high-low). And that's how they are computed.

Now go read Dr. Brett and find out how to use your new found knowledge.

3 Month Low - Using Weekly Data

Wow! I read the stockfetcher manual (what a concept - a man reading instructions). Anyway I found out how to convert the filter to work with weekly values. Here is the final result.

Show stocks where close is between 15 and 35
and average volume(90) > 500000
and weekly close 1 week ago reached a new 3 month low 1 week ago
and weekly close 1 week ago < weekly open 1 week ago
and weekly close > weekly open
and weekly low > weekly low 1 week ago

The first 4 lines set up the dip and the next two set up the buy conditions. In this regard I want to ensure that the “dip week” is a down week and the buy week is an up week and that the lows are going up.

So the filter goes from 3 lines to 6 lines but what is the result?

I tested it against three time periods.

06/30/2006 – 11/01/2006 there were 74 trades, a 66% win rate, Reward/Risk of 2.52 and a 129.34 ROI.
09/01/2006 – 12/22/2006 there were 51 trades, a 71% win rate, Reward/Risk of 3.66 and 124.57 ROI.
09/29/2006 – 01/19/2007 there were 52 trades, a 69% win rate, reward,risk of 3.84 and 120.57 ROI.

These are excellent results. The fewer trades in the two later periods just show that there have been fewer dips to be bought in recent months. That’s a function of the market going up in a relentless manner.

Stockfetcher computes reward risk by: compute the product of the number of winners and average gain of the winners. Next, compute the product of the number of losers and average loss of the losers. The reward/risk is computed by dividing the winner product by the losing product. (copy right – Stockfetcher.com).

The higher the reward/risk factor the better the filter.

So that’s the saga of the 3-month low filter – I will be using this one for identifying dips from here on out. The most current one is LPNT – do your own DD.

Tags? Tags? We Don’t Need No Stinking Tags

That movie was on the other night – The Treasure of the Sierra Madre - one of Bogart’s top 3 – which include Casa Blanca and ______ (You fill in the blank – I don’t need no stinking arguments either).

I’ve been tagged so the anonymity of the net becomes a little less for me. Anyway – here goes –

1. I am retired, 62 years old, married 40 years with 4 children and 5 grandchildren, and I live in Maryland.

2. I had two long, rewarding careers – the first in the United States Air Force fighting Commies in the Cold War and the second as a systems engineer for several companies. I spent most of my second career helping to develop and deploy the GPS system so that Domino’s Pizza can better deliver their products.

3. I am a published poet who has been paid for his work (I still have the check – poets, much to my chagrin, aren’t paid much).

4. I once bowled a perfect 300 game (ten pins). I know the feeling of the 12th ball – it is the most amazing feeling in the entire world, you hardly think you can approach the line never mind deliver the ball. The only thing that was going through my mind during the half hour it took to roll that final shot – please God – don’t let me screw this up.

5. I try to learn something new every day. And that is why I started this BLog – it forces me to have the discipline to come up with something fresh and new every day – the only way I can do that is to research it, learn about it, and then write it down – once I write it down it stays with me. So there you have it - the last personal statement – I’m selfish – you guys thought I was writing all of this for you when really it was for me. Of course you are always welcome to read it.

I'll make my three tags to the BLoggers I select in their comments.

3 Month Low

This is proving to be an elusive filter - it works as written and here it is

Show stocks where close reached a new 3 month low 15 days ago
and Average Volume(90) is above 500000
and close is between 15 and 35

Without doing anything at all except to play the highest volume stock that is output by the filter every day for 77 days it returned 66% winners and a 91% ROI with a reward/risk factor of 2.3. When I shifted the test period to the most current period (taking in last week for example) it returned 62% winners and a 85% ROI with a 2.68 reward/risk factor. It pumps out net change values of 6.16 over 20 days and 5.78 over 30 days.

These are very good numbers for such a simple minded filter - and they prove beyond a doubt that there are people out there buying nearly every dip that happens (doh!). Here's the rub - my filtering software (stockfetcher.com) does a great job on daily values but weekly requires a bit more effort and I haven't expended it yet. And it is on the weekly charts that I can see what I want to do - the problem is I can't translate that (yet) to daily values. (And trust me - it isn't the software it is the programmer and that would be me in this instance).

Here is a picture of one of the selections - this is weekly data



You can see clearly what constitutes a winner - the problem is I need to be able to address the data points in weekly terms rather than daily terms. Point "a" is the high of the week when the lowest low occurred. On a weekly basis it is easy to see. I need to figure out how to identify it using Stockfetcher. I'm fairly certain that it is an easy thing to do - I just haven't done it yet. (By the way - a blow-off bottom formed on this stock last week - I'm putting it on the watchlist).

This dip method is showing the most promise yet. So bear with me and I'll get the problem solved.

If you haven't checked out stockfetcher.com yet I don't know what you are waiting for. They allow free access that won't give you everything a relatively inexpensive subscription can provide but at least it will give you an idea of what they are all about. I do my own programming but they have hundreds of ready mades that you can use as is or quickly and easily modify for your own uses. Also many people share their methods and some of them are a lot more complex than anything I'll ever write.

I receive nothing for this endorsement and do not seek anything for it. I use this software, I like it, and that's sufficient for me to suggest it.

The Week Ahead

I'm still working on the 3 month low method and it is not going very well - I'm turning out some great numbers but I can't find any good reason for them - at least not that I'm ready to share right now. The best I'm coming up with is a combination of 3 month low and candlestick/volume analysis and since none of that is automatic (yet) it might take some time - it does look promising though.

Read Notable Calls. If you don't read Notable Calls today and every day (less Saturday) you do not want to have any good investments. I picked these up this morning - BID, BIG, DG, and FDO. But there are another 50 or so being talked about. Read Notable Calls.

MOLX looks like it has bottomed (weekly charts) a lot of selling but no price action two weeks in a row. If it starts going up this week it might be a good investment stock. Do your own DD.

These are all in various stages of breakout (weekly charts) - ACV, PFE, CVS, GOL, INTU, CRI, ENDP. All of them came from my 3 month low filter over the past 30 days. Do your own DD.

I'm going to put all of the above on my day trading watch list and we'll see what happens. If I remember and don't have much to do next weekend (fat chance) I'll try to do an update post on all of them.

Do your own DD. I'll be back later with my answer to the tagging.

Saturday, January 20, 2007

Filter Madness

Dogwood and I are currently working on some filters trying to determine what the best method for finding stocks at their bottom. I started this with my 4-day down method where I skip a day and look at lows. He uses a sequential method looking at closes (although I might get him to convert) and has had great success in 4 and 5 day increments. Go take a look - Dogwood is worth a read anyway.

So this morning I was working on my version of the filter looking at 6 and 7 low sequences when, for fun, I made a new, three line filter that said "give me stocks making a new 3 month low." And that would be a close at the three month low - no sequence or anything else - in other words a brute force approach to the problem.

There were only two things that amazed me about the back test results - first that there never was a day without a stock making a new three month low - in fact most days there were many of them and second - it returned 121% ROI. We're on the right track. It only had a 60% win percentage however. In an effort to tighten that up I offset the requirement by 15 days - that is I said give me all stocks that hit their 3 month low 15 days ago. That brought the win percentage up to 66% and I like that. It did lower the ROI a bit but that's OK since ROI in any given period is only for comparison purposes.

Now just to keep things on the straight edge I reversed both filters - for the first one I substituted new 3 month high and for the second, new 3 month high 15 days ago.

The win percentage was 47 and 55 respectively and the ROI's were 9.45 and 49.2. I'd like to say again for those who are still with me - if you learn nothing else from this Blog - inscribe this on your monitor - Buy the dips - Sell the rips.

I tried 4, 5 and 6 month lows and not surprising there are a lot of selections out of any category on any day. But the longer they go going down the more they go down. Still the returns on each of those in both win percentage and ROI-wise were better than the new high versions.

I'm going to work on this for a bit and see if I can't modify the 15 day offset 3 month low to look for something in that 15 day time period that will improve both win and ROI.

Later.

KKD - How Sweet It Is!

Once more time with KKD - Since I pointed out the tweezer bottoms this stock is up 15% in a month. You'd buy a subscription to Jimmy's magazine for that kind of performance. I didn't even make you sit through any BS about how great the company is (I don't know anything about it) or a boring interview with the CEO (I don't even know his name - nor do I care to). All I did was point out an old timey tech analysis indicator -



As it says in the header folks - No Booyah No BS - just information. No sound effects either.

(I neither invest in KKD nor do I eat their donuts).

Highs and Lows

When I’m trading I always have a number of charts on my screens simultaneously and I’m watching for one thing and that is a reversal as indicated by a higher low or a lower low than in the previous period. I set the charts to 4-minutes and keep an eye on them throughout the day. When I start seeing higher lows I switch to my preferred time frame – the 15-minute view with volume. I then use the bar shape with the volume to let the stock tell me what it is going to do.

The following chart is the first half-hour of GM on Friday using the 4-minute Java chart that I put up on my screens. You can see that the first three bars clearly show a reversal. Most often three bars are sufficient for this purpose.



I then switch to the 15-minute view that I prefer.



The bar marked “a” shows the 15-minute version of the first three 4-minute bars I show in the other chart. This clearly shows that a reversal has taken place. There was a tremendous sell-off to begin the day (which reflected the fact that the Dow INDU opened down) but this was just as quickly reversed.

Once I see a reversal occurring I wait for a confirmation of direction on the 15-minute charts. In this example one of my favorite set-ups occurred – a tag of the EMA 8 (two or three red bars slide sideways-down to the EMA 8). That is a mandatory buy in my book. An hour later we get the dreaded red candle top and another reversal - this time down. The trade is ended with the lower low at 11:30.

Later, around 12:30 or so, there was yet another reversal on the 4-minute chart. This is marked “b” on the chart above and below.



As a result of that reversal I switch back to the 15-minute charts and enter the trade on the first higher low and higher high beyond the 4-minute reversal (about 12:45). This trade we hold to the end of the day. Why wouldn’t I sell on the white bar with the lower low 3rd from the end? Because that bar is a white bar and just another tag of the ‘8. Had the next bar turned red (close below open) and been a lower low I would sell then – it was a red bar but not a lower low so we could continue the trade. More often than not you will get a flattening at the end of the run. I usually wait for the trade to turn down (lower low red bar) before I end it. I’ve learned that if I wait and the trade goes higher it will often go up significantly.

Note that I only use the close to determine whether the bar is red or white. The most important information - at least in my estimation - are the high and the low of the period. They show the dynamics of the buying and selling. The close is more of an accident of time than a deliberate position. By this I mean that the close might have been higher or lower had the period under observation not timed out.

Also the volume at points “a” and “b” are very similar in nature. While not the same magnitude the concept is the same – a blow-off bottom is a blow-off bottom. But always wait for confirmation.

The higher lows/higher highs reversal method works on every time frame from seconds to months. But none of this information is meant to induce anyone to risk any money in the stock market. I believe that if you are not ready to spend a number of months (if not years) studying (not paper trading but studying) charts and printing charts and looking at charts and marking on charts you might as well go and put your money on the line in Vegas. While I sometimes make it look easy - you must have great patience and wait for a proper set-up before you get invested. There are a number of reasons why new traders go broke - one is inadequate capitalization, a second is not having adequate preparation or knowledge, but the most important one is playing a trade based on hope.

Charts as always copyright prophet.net - an excellent company.

King Oil - 2

Yesterday I posted a chart showing where we were with oil using OIH (I could have used XLE by the way they are about the same as far as price action) and I used the following chart - except this one is one day later.



Not quite yet - at least not for me - I want to see the breakout before I buy. I'm pretty sure there are those who jumped in the puddle yesterday.

Friday, January 19, 2007

Wrapping Friday

Well I was part right - not really a booming day but not too bad. I made back some losses and got rid of a couple of albatrosses including GLW and SYMC. I dumped GLW because it was behaving like a stock that was going to go into earnings and give up another 4 or 5% and I was already down a half. It might not but I'm not taking that chance. SYMC faded off during the afternoon and given the upward trajectory of the NASDAQ it just didn't feel right either. I'll trade them again some day just not over this weekend.

I bought MOT from a day trade pattern that you've seen in these pages often enough (return to the 8) and I thought I might hold it over the weekend but I've decided that I don't want to hold stocks for long periods of time any longer. So I sold it mid-day for a profit. Imagine that - actually selling a stock for a profit. I dumped RX for a break even less commission which is still a loss. Fortunately what I made in MOT more than made up for it. Right now I'm holding a small portion of both CRVL and Sprint (S). Both of those are going to the dump on Monday and I'll be back to day trading exclusively.

In order to swing trade successfully you need to start from a depressed market (a dip) and play from there. Everything is just too oversold right now and earnings will be killing us for another couple of weeks so I'm going to go back to chart watching.

Monday isn't looking too good for an up day although I expect the rest of the week to be OK. The up/down ratio is at 58% and the new 20-day high/low ratio is 65%. The VIX has once more dropped into the 5-10% below region. However, only the SPY and IWM printed red candles in the last hour of trading. The DIA and GS bth printed strong white candles and the Q's printed a white candle but it could be called a Doji (indecision). In other words we have mixed signals but the indicators are suggesting down so I'm calling Monday a bear day.

The magic coin calls Monday ... Heads - bull is coming.

I think today should be considered an up day because two of the three major indices and IWM all went up. That makes the score Marlyn 4 - 4 and 1 and the coin is 3 - 5 and 1. Take that magic coin, take that!

A Perfect Storm

What's black and white and red all over? The pre-market window on money.cnn.com. (Sorry - couldn't resist).

Well today is going to be something special - options expiry (normally a benign day) and MOT just announced horrendous results. Couple that with IBM's massive profits that managed to disappoint everyone in sight last nite and whomever is holding all of those put shorts has got to be having a lot of problems holding their WII about now. Buy-write just took on a whole new dimension and it isn't pretty. The call shorts are all out celebrating with the put longs and the call longs are just cry ai ai ai ying over you. (RIP Roy).

Of course given the fact that everything is so oversold that there isn't anything left to sell has got to factor in here somewhere - me I'm going to sit back and watch - I was always a "hold the coats" or "go get the sheriff" kinda guy.

Update 09:00 - watching the pre-market and they are hardly trying - IBM hasn't even turned a million shares yet. The big hit of the morning seems to be CWTR down 5 and change off an awful report. Maybe the fact that it's expiry day will keep the 'toots in check - we'll see.

Update 10:00 - it is possible that we are going to have a turn around day. Q's are starting to catch some interest and a number of stocks I'm watching - S, MOT, GLW, SYMC appear to be on the way up. Of course it is day 4 of the GOOG short squeeze. But even GOOG looks like its getting some interest. Not a short squeeze but some interest.

Update 12:00 - for about 8 minutes there I was actually in the green for the week - maybe 9 minutes.

Update 2:00 - Q's are clean and green and look like they are going to stay. I guess three days down was the charm. IWM is also up and of course GS went green early this morning and stayed that way. SPY is also green. I would have liked to have another down day but we'll take what we get.

King Oil

OK kiddies – get ready, put your eyeshades on and pull up your sleeve protectors it’s getting close to the time to get down and dirty with King Oil.

Just like whenever Sports Illustrated puts the latest can’t-be-beat team on its cover just so we can bet against them from then on out – I read in Notable Calls that the WSJ Heard on the Street is wondering “which co's will be hurt most if oil stays down”. That my friends is the contrarian call to end all contrarian calls.

Soon the Oil Industry Barons will be able to go back into the shoppes and convenience stores along Rodeo Drive with heads raised high and stomaches pooched out and buy their loved ones those Coach-made handcrafted-in-Borneo-sweatshops alligator purses and maybe even get one for their wives too. Ha! Nancy Pelosi – you can’t take my tax money away from the Oil Barons and expect them to keep the price of oil down – can you? No - I say – No-No-No-No-No.

Histrionics aside (and yes, Virginia, that is a word) the price action this week in the face of all the absolutely negative news regarding oil tax breaks and OPEC not being able to cut production suggests that all of that news is just noise – as usual.

Here’s a picture amigo – it isn’t time yet but it’s getting closer.



Hopefully you can see the similarities with every other blow-off bottom I’ve shown you. Especially the new factor – the “short-squeeze” (thanks Jimmy). Depending on its size and location within the sequence, a hammer can mean many things. Here it means that selling couldn’t hold and a lot of buying took place. I call these two candles “hammer-ish” because they aren’t perfect – but they are very close. This is evidence – and, as always evidence can turn against us – but for now it’s the best evidence we have.

So watch the dotted line folks – as soon as the high pokes above the line Oil should be back.

I am currently not invested in any oil company nor am I planning any investments until after the high pokes over the dotted line. Charts courtesy of prophet.net - a good company.

Thursday, January 18, 2007

Once More With Feeling

If you wonder what tomorrow will bring just take a look at the afterhours on IBM. Down 5 and change on an absolutely spectacular earnings report. The last time I saw this kind of market reaction was back in 2002. Then it didn't matter what the earnings were the street took exception to everything. IBM was selling at around 116 at the time and when the smoke cleared it was down in the 50's.

But that was a mutual fund clearance sale. The 'toots needed to get their books squared up and everything was so oversold there just wasn't anything to buy any more. So they started offloading inventory like there was no tomorrow - not every institution in any one stock but they kind of did a dance and some offed this one and some offed that one and so on. For example institutions A, B and C unloaded a few hundred million IBM, while institutions B, C and D unloaded a few hundred million of something else - maybe MSFT or LMT. The brokers bought everything and held it in inventory. Then, once the back was snapped the 'toots turned around and started buying again. Was there collusion? Oh Hell No! Everything up and up - straight and narrow all the way.

Which brings us to today. According to the NASDAQ site 4.5 million shares were sold in the afterhours. But that's just the tip of the iceberg - the NASDAQ transactions. Average volume is 6 million during normal hours and 14 million changed hands today and the stock went down 47 cents. OK - 2.5 times normal shares trade and the stock goes down 47 cents. Then the report, spectacular, and boom 5 bucks off the top just like that. Now it's nice to know that for every sale there was a buyer (eventually) but most often that buyer is a brokerage and that stock just goes into the inventory pending a better day. Most of them are hoping that the shares will be borrowed to the hilt tomorrow and sold short. Sooner or later the funds re-buy all the inventory and the dance begins again.

Now this isn't paranoia (although a good case of paranoia can be a blessing for a trader) but a proven fact. Of course we'll have to wait for 6 months or so before we can see who's selling today.

Calling BS on Jimmy

Jimmy Crack Corn Pone says – tech should be sold in the beginning of the year and bought at the end of the year. He says it goes down from January through May and up from June to December. If he is correct then this chart of NDX should reflect that. What you are looking at are quarters for the past 4 years. If his proposition is correct what you should see is red in the first two quarters of the year and white in the last two quarters of the year. What do you see?



So who do you believe – Jimmy or your own lyin’ eyes? Last year was the only year in 4 where his proposition seemed to hold. Prior to the last 4 years it was either up all the time or down all the time. I’m sorry but this guy’s act is getting really tough to take.

As always the charts are from prophet.net - a really fine company.

Once again I get nothing from the endorsement nor do I seek anything. These are some good people - the product isn't perfect but it's plenty good and they're working on it all the time.

Wrapping Turdsday

Wow! Was I ever wrong! And am I ever happy! What? Oh yeah, man! (Emeril doesn't have that phrase copywrit - at least not yet). (By the way his Garlic Lovers Spaghetti sauce is out of this world wowee!). 'nuff about that - back to the market.

As noted in an earlier post today AAPL led the market lower because of their silly 4 penny miss. Now I was thinking - what if we all got together - all the AAPL shareholders (I am not) and gave them 4 cents out of our own pockets - do you think that would help? It's a thought.

In a later post I asked the musical question - whither the Q's next week and if you all answered up, up, and away - you might be right. In the past 6 months there has only been one down week followed by a down week - the rest have been up weeks and today was a super blow-off if I've ever seen one. A lot of crap stocks were sold today along with AAPL.

Day three of the GOOG short squeeze vigil passed without incident and I'm beginning to receive dispatches from the front - most of them saying things like - what the hell and are you kidding and who is the Jimmy Crack Corn Pone anyway? To which I can only reply - Jimmy said it - I reported it - some people believed it - and I don't care. Or in the words of my dear old Ma - Do Dah Do Dah Day.

I dumped Chiquita Banana today based on the fact that it didn't seem to want to go anywhere but held RX because I'm stupid. Also held GLW and SYMC and CRVL and added to the pain with S (Sprint). Why Sprint? Simple I read my Notable Calls this morning and Sprint is troughing (much like MOT I might add) and they are probably going to go up once all of this shake-out is over.

I might take a position in MOT tomorrow. And I heard about this little guy the other day, GTXI, that has something or other coming out of trials and the news is looking good. I might add a small bite of that to the plate as well.

Tomorrow is options expiry day and contrary to popular belief it is usually a pretty calm day. I expect a moderate to mild rally tomorrow.

And that is based on the up/down ratio printing 30% and the new 20 day high/low ratio printing 38% (they both went the same way for a change) and the fact that the VIX has climbed back up within the 5% range and the fact that every major index printed red in the final hour and GS, the proxy for the stock market of the 22nd century, printed a doji. I would like to see it go down again but trust me - everybody is in a hole and there is only one way out - up.

The magic coin says ... tails - bear market - we'll see coin, we'll see.

Marlyn is now 3 - 4 and 1 and the coin is 3 - 4 and 1. At least we disagree about tomorrow.

Whither Q’s?

Take a look at the following chart – does anyone want to guess where the Q’s are going to go next week?



OK - let's not see the same hands all the time - you - nervous kid in the back - what's your guess?

I whine about it but I really like the weeks when the market is down - it makes the following weeks that much more profitable.

An Apple a Day?

Here we go again - the market, having run out of C stocks to abuse, will now turn its attention to a great source of vitamin C - AAPL. Yesterday evening, based on the early numbers and massive celebration that followed thereafter I failed to notice that AAPL too has forecast a missed analyst estimate by 4 cents - 4 cents. That, of course, is sufficient to drive AAPL into debtors prison and to punish all of the folks who are holding AAPL in their retirement accounts. AAPL finished the evening down another 70+ cents.

And even though GLW has nothing to do with AAPL I'm sure GLW is going to get punished too. And SYMC too. And watch MOT give it all up because, after all, they make something like phones like AAPL does. And NOK and probably the oil stocks too because isn't there a lot of oil used in plastic and doesn't AAPL rely heavily on plastic for their IPOD cases not to mention their failing Mac line.

The only one that is going to win is MSFT because MSFT is the direct opposite competitor of AAPL.

Remember - day three of the GOOG short squeeze watch is upon us. Pay attention kiddies - learn something. Learn that Jimmy Crack Corn is an entertainer and his jokes are starting to show their age.

Wednesday, January 17, 2007

RSI 8 Vs RSI 7 - Shootout at Filter Corral

Stephen asked an interesting question - how much different from 8 20 was 7 20? I didn't know so I went to see. First - here is the filter as it was originally written:

show stocks where close is between 15 and 35
and average volume(90) > 500000
and RSI(8) < 20.00

They don't get much simpler than that.

This filter produced 69 completed trades with 45 winners for a 65% win rate with a 121% ROI. Now the ROI is not that important except for comparison purposes with other filters - you probably won't get that exact value because you will be playing different priced stocks with different amounts of money for different periods of time. What does matter though is the next item of comparison the net over days held.

What I selected was
1 day chg +++ 4 day chg+++10 day chg++++20 day chg+++30 day chg
.66% ++++++++ 1.70% +++++ 2.84% ++++++ 4.69% +++++++ 5.30%

Obviously the longer you hold the better off you are. Then I changed the last line above to

and RSI(7) < 20.00

Ran a back test with all of the same conditions as I had for the above set of results and this is what I came up with:

72 completed trades with 42 winners for 58.33% with a net gain and a 70.89% ROI.

1 day chg +++ 4 day chg+++10 day chg++++20 day chg+++30 day chg
.31% ++++++++ 1.01% +++++ 1.70% ++++++ 2.71% +++++++ 4.49%

What a difference a day makes.

Now it might make a difference if you use 7 periods over another time period rather than the one I selected. It is always dangerous to assume that because a filter tests so well that you have found the Holy Grail - or the Rosetta Stone for all TA. So I tried a different time period.

I switched to 6/01 - 9/28 which overlapped into the first month of the last period.

This time the RSI 8 tested at 76 completed trades with 58% win percentage and a 28% ROI.

The net change over time numbers looked like this:

1 day chg +++ 4 day chg+++10 day chg++++20 day chg+++30 day chg
.36% ++++++++ .62% +++++ .84% ++++++ 4.47% +++++++ 7.48%

Which suggests that the longer you hold the better off you are. Still we are just using these numbers for comparison purposes.

The RSI 7 tested at 78 completed trades with 51% win rate and 13% ROI (which happens to be 2 points less than the SPX ROI for the same period).

But the net change over time tells another story.

1 day chg +++ 4 day chg+++10 day chg++++20 day chg+++30 day chg
.09% ++++++++ .20% +++++ .82% +++++++ 3.90% +++++++ 7.72%

Short term the RSI 8 is a lot better than the RSI 7. As you get out into the longer net change numbers they are about the same - but that is explained by the fact that the period after mid-July was hot for just about anything.

And something even more subtle takes place with this kind of testing - the starting values in the later months of last year are higher - i.e. the dips are higher than they were earlier in the year. So stocks entered in Augues for example will show better appreciation than stocks entered in October even though both periods were characterized by dips.

Which is why when you have someone bragging about their great portfolio returns for the past year you should congratulate them but don't think that they are something special (even if they think it themselves) - everybody had great returns last year - including me. And if your portfolio manager didn't - then you might think about finding another manager.

Just a thought - never advice - I know nothing.

Wednesday Wrap

Strange day - a little up - a little down and once again no clear direction in a directionless swamp. AAPL just came out with record earnings and that probably means the market will explode tomorrow and I can't wait. I bought a bunch of crap today and wound up holding it overnight. Among the many mistakes - RX, CQB (Chiquita Banana), CRVL, and SYMC. Still holding GLW but regretting every minute of it. Especially since it went past my buy point and I could have gotten out with a small profit this afternoon. I'm going to regret that too.

Wait did anyone hear that? That rocket blast? That was DHI - freed from the encumbrances of my owning shares it took off today with the rest of the homies. Up 2.35% on a relatively down day in the old marketplace. And Bullish Jim thinks that he sells too soon. Fahgedaboudid!

Day two of the GOOG short squeeze watch dawned bright and crisp and as the nation waited for that event with baited breath - it didn't happen. Why oh why Jimmy - tell me why...I mortgaged the homestead - I sold off the hogs including Ma's prize winning Jersey Petunia and put it all on the line at 513 - and now its selling at 497 and the broker called and he wants the cows, horses, and chickens toooooo.

Nobody knows nothing - don't ever forget it and if you wake up every morning and look in the mirror and say that and add "including me" to the end of it you will probably stay out of trouble. I didn't this morning - obviously.

MDRX that I bought yesterday for a couple of days hit a very tight stop loss this morning (my error - I told you the range was a buck and change but did I listen - oh hell no) and, of course, rebound one tick too late. Anyway I replaced it with RX and that one just kind of meandered sideways/down (swon which is the opposite of swup) all day. CQB is a buy because of the recent freeze out in CA and it was going up and then hit an imaginary ceiling and did a mime impression all morning beating against it and then fell away. Both these two are up or out tomorrow.

SYMC I grabbed up at the bottom and I actually made a buck or two on it today. If it turns tomorrow it too is gone - I should have sold at close today but I was busy with some other things - if it continues up tomorrow I'll double up. I know I'm going ot regret that. CRVL is also a purchase against a brighter day (tomorrow).

Tomorrow should be better - AAPL's earnings will make the pain go away and everything will go up and the world will be a better place. Right.

The up/down ratio actually increased today to 44% but the new 20 day high/low ratio went down to 60%. That's what I like about two disparate ratings that sound alike but are totally different. The only time they mean anything is when they both go in the same direction. Otherwise it is a split decision. The 4 majors and GS were all over the place at the end - some up - some down. More split decision - and to add to the confusion the VIX actually went down in a down market - talk about not knowing which way the wind is blowing. There's a reason for that but you'll have to go ask Adam as I haven't a clue. I think all of these holidays and extra days off and the rest of that has gotten the markets so confused they don't know which end is up. But I'm still thinking about years past and the fact that right around here you normally get a bump. Of course earnings have been pretty good in years past.

I think tomorrow will be another weak day but will close up - I'm calling tomorrow for the bulls.

The magic coin says ... heads - bull market coming.

OK it was a bear market today and I called for an up market that makes me 3 - 3 and 1 and the coin is 3 - 3 and 1. What a race - a train wreck in slow motion.