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 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.

MACD for Fun and Profit

Sunday is the day when I sit and think about filters – stock picking filters that is. And the way I get a lot of ideas is that I find a stock that has been successful over the past month or so and then I look at various technical analysis elements associated with that stock back when the run began. Then I pull out the salient features of those elements and see if I can replicate that success using those features in a filter. Today I’m going to be looking at the MACD.

The MACD is one of the most frequently used and least understood technical analysis methods known to man (with the possible exception of the RSI but we’ll save that one for later). Again, if you came here looking for confirmation of your methods of doing things you might as well go away. If I can’t bring something new to the discussion I’m bringing nothing at all. Today I’m going to bring it! (Saw that in a movie once and thought it was neat – the statement - not the movie).

The stock I was using as an clinic stock was HANS. And I really don’t know why I put the MACD under it but I did and lo and behold I discovered something. Now when you couple the MACD with Bollinger Bands you get a pretty good filter – especially if you get a volume supported blow-off bottom associated with the stock. You can see that in this figure. Take a moment and look at it carefully then try to figure out what I’m going to do with the MACD.



All of you who said you noticed that HANS went up when the MACD crossed the EMA go to the back of the class and face the wall. The rest of you pay attention. What I noticed was that the MACD histogram (those little lines sticking out of the 0.0 baseline) was in negative territory when the run began. Sometimes we think we should take trades when the MACD histogram crosses 0 and begins to ascend. We think that because that is the easiest way to understand the MACD. I'm going to contend that I have always known that that was probably too late which is one of the reasons why I never used the method. I think I can prove this contention.

I wrote a filter that was as simple as can be. It consisted of three lines as follows:

Show stocks where close is between 15 and 35
And average volume(90) > 500000
And MACD Histogram(12,26) < -.1

That's it - MACD Histogram less than minus .1. You do not get any simpler than that. Then I back tested it. I used my standard entrance criteria – one trade a day using the top volume stock output by the filter with no more than four stocks in play at any one time. I also used my standard exit criteria - hold the stock for four days then automatically sell at the close unless it hits a 10% stop loss in the meantime. If it does hit the stop then sell it at the close and take another trade. Then I ran the test and these were the standardized results:

Number of trades: 73
Win Percentage: 53%
Stop Loss trades: 0
Equity Result: 33602; ROI: 101% and S&P500 ROI during the period: 29.76%

OK – that’s pretty impressive for a simple filter. So then I changed the third line to

And MACD Histogram(12,26) > .1

And reran the test. These were the standardized results:

Number of trades: 73
Win Percentage: 56%
Stop Loss trades:1
Equity Result: 19427; ROI: 60.77% and S&P500 ROI during the period: 29.76%

Whoops – what happened? Apparently you are better off taking the trade when the MACD is below the line than when it is above. That makes sense. Somewhere in the past posts there are a number of articles about taking trades below the EMA 90 or MA 200 rather than above it.

For good measure I changed the test period. I bumped it up a month to have it end last Friday. I ran the second filter first (i.e. the one with the histogram above the line (>.1)). Here are the standardized results:

Number of trades: 64
Win Percentage: 53%
Stop Loss trades: 1
Equity Result: 6115; ROI: 28.89% and S&P500 ROI during the period: 29.54%

Well it was a tough period. The I ran the test for that period with the other, better filter (histogram < -.1) and here are those results:

Number of trades: 64
Win Percentage: 56.25%
Stop Loss trades: 0
Equity Result: 27661; ROI: 100.00% and S&P500 ROI during the period: 29.54%

You be the judge. Maybe the next time you use the MACD to inform yourself of a trade you might want to remember this little exercise. Of course you will want to couple it with another method just to make sure - this little tidbit is only the icing on the cake.


None of my writing is an invitation to gamble, uh, invest in the stock market. If you feel that you must invest in something I suggest you see a psychiatrist immediately. You can do worse with your money.

Where Have We Been

Where are we going? What a difference a couple of weeks make – the Q’s have rolled over and are on a strong decline while the small caps as represented by the IWM are rising every day. The Standard and Poors 500 as reflected in the SPY ETF is sliding sideways/up while the Dow Industrials represented by the DIA are in decline.



To be fair to the Dow the index has taken a couple of real shots lately – it hit a new all time record and that always requires rest, and at least two of its heavy components – PFE and GM have had some severe hits. And this doesn’t take into consideration that the tech portion as a whole is declining (see Q’s above). If the Q’s go down then the tech portion of the Dow goes down also.

But, as the following figure shows the Q’s appear to be a bit oversold at the moment and are looking like they are getting ready to turn around again. The jagged blue line is the non-averaged initial data point. (Not the raw data - that is the price itself).



I use multiple methods to keep track of these kinds of things since I’m really into timing. In fact that will be the subject of an even longer post someday I’m sure. But for now the method I use is so scientific that if I were to divulge it the world might come to an immediate --- never mind – what I do is look at the number of tech stocks below their 20-day simple moving average. I use a simple moving average in this case because it links to Bollinger’s amazing innovation – The Bands. I.E. it is what Excel’s standard deviation algorithm uses. Consequently since that is what everyone else looks at – in this instance why shouldn’t I?

Of course I should. Anyway - survey says - 26 days ago there were about 408 tech stocks below their 20-day moving average, 15 days ago there were 186 below, and 6 days ago there were 362. Currently there are 321. Are you starting to see a pattern emerging? I hope so. Especially since I told you once that the market cycle seems to be 20 days.

The converse of this (those above the 20-day moving average) is indeed that - the converse - small number to large number back to small number. I hope you understand that I’m not going to give you everything - you really need to go find these numbers on your own. Why? Because if you do it on your own you will believe them, they will make more sense to you, they will no longer be abstracts on a computer screen – whereas if you just get them from me you probably won’t.

(sermon on) - If you want to be successful at this business you have to accept the fact at the outset that there is no easy answer, no pre-packaged, pre-paid solution. You either do the work or you don't. If you do you might win, if you don't you won't win - it is truly that simple. (sermon off)

Now go do some work.

Risk Management – Stopping Disaster

A reader asked about stops and to be honest I seldom use them – at least not hard stops – someone did point out once that I probably had mental stops and yes I probably do but I’m not afraid to take a loss. I could tell horror stories all day long regarding stops both from specialists who swept them to make a large trade for his own account to stocks that fell through them on bad news. So I seldom use them.

But the reader asked and I have to say that when I set stops now I normally set them based on the average true range of the stock. To get the average true range –

True Range = (The highest of the following three formulas)

Today’s High – Today’s Low
Previous Days Close - Today’s Low
Today’s High - Previous Days Close

The highest result is carried forward as the True Range into the next formula.

Average True Range = ((19 * ATRp) + True Range)/20

Where ATRp is yesterdays Average True Range

Because this is an exponential average the very first ATR has to be derived from a 20-period simple moving average. Fortunately most trading software will calculate the Average True Range for you.

I came to this after trying various percentages as well as fixed values based on the cost of the stock – e.g. 20 cents + a dime for each decile over 10. So a 30-dollar stock would have a stop of 40 cents. That’s probably as good as any other method but I like the ATR method in that it reflects the volatility of the stock and that to me at least seems scientific and is probably a good place to start.

Some people say you should double it but since I mostly buy and sell stocks I know I don’t bother with that. If I know them I know how they move.

Another good use of the ATR is for targets. For example I’m now holding three stocks in a swing trade mode – SYMC, ORCL, and ALTR. My target for each of these stocks is twice the ATR for a profitable sale or if any of them decline a single ATR I will sell it at a loss. For SYMC by way of example - I bought it at 19.89. If it touches 19.39 I will sell it for a 60-cent loss and if it hits 20.59 I’ll sell it for a double ATR profit.

Tweezer Bottom

The other day I wrote about a tweezer bottom in GM that was separated by an hour. How about this one in KKD from Thursday? The bottom occurs in each increment of a two hour chart.



The tweezer bottom is telling you that this is it – there is no more down side to this stock – every time it hits here it is going up. That is a good thing to know.

Here is what happened on Friday with KKD.



You can see the four bottoms on Thursday in the 10, 1, 2 and 3 hours. On Friday it set-up nicely at 9.78 and went up from there for a bit. I'd watch this one for awhile longer - it may continue to climb now that it drew the line in the sand.

(This is not a recommendation to buy this stock - nor is it a recommendation to buy Krispy Kreme donuts)

Link Exchange

Not ordinarily. Take a quick look at the BLOGs in the roll and you will see one consistent theme - everyone of them is written by people who have an overwhelming desire to first - publish frequently (in some cases maybe a little too much but who is counting) but even more importantly and, second: to - teach - me - something.

Me - they want to teach ME (and that means they want to teach you something too). Even better - for free - and if some of them advertise their friends or their books so what - they give of their time and effort to teach me. I really, really, really appreciate that.

Of lesser importance but of some consideration is that they have a sense of humor. This is a serious business we are in - if we don't laugh and laugh frequently we will all go stark raving nuts.

If I visit your BLOG I will bookmark it and then return frequently - at least once a day - looking to see what you have to say now. If I keep coming back and finding the same old tired post surrounded by the latest in Google ads** I'm not going to list you nor visit you any more. When I do visit I will be looking for number two above (teaching). If I find that you want to teach me something (even something I might already know) I will add you to my blogroll without reciprocation required.

My belief is simple - if you like what you see here and you want to share it fine - if not fine. If I stay current, humorous, and keep trying to teach people eventually people will find me. I'm going to keep writing it regardless - it is my trader's autobiography.

** Don't get me wrong - I know that GOOG offers the ad package and a lot of folks put it on their sites - that's their business and it doesn't bother me as long as the site is kept frequently updated - otherwise the site only exists to sell hits for the ad company and that is just plain a waste of my time. And I won't recommend a time waster to others.

Back Testing Software

When I first started this site I decided not to have ads or do endorsements. I plan to continue with that position. Consequently if I say that I use this product or that product and that I might like them a lot it does not constitute an endorsement. Nor do I receive any compensation from any site that you might go to on my recommendation - nor do I wish to receive compensation for same.

So saying - I use a subscription version of stockfetcher.com for filtering and back testing. I highly recommend them for filtering purposes because you can use one of the many dozens of technical indicator based pre-built filters, modify any of the pre-builts to your own desires or develop brand new filters to do just about anything you might want them to. For example most of the pre-builts have a price consideration of 5 to 250. Maybe you want to concentrate on stocks between 15 and 25 - you can easily change the criteria to match your desires.

I'm currently playing with a filter where an exponential moving average crosses a simple moving average. You just can't get that kind of flexibility on most filtering sites (although I'm sure that I haven't tried them all).

Stockfetcher.com also has a back testing capability that permits you to run a back test using your filters for any period that you select. This is important because you can test your filters both for strong trending markets and weak falling markets (or down trending markets). If you do something like this (and I do often) you will be very surprised how a "can't miss" filter misses quite frequently simply because of market conditions.

Here is a recent example of the kinds of things you can gain from filtering with a technical bent. Readers of the site know that I like the exponential moving averages because they are far more sensitive to stock movements than are the simple moving averages. In fact a couple of weekends ago I did a cross comparison between the EMA 90 and the EMA 200 with good results for both but the 90 won the match. (At least in my mind anyway). Since then I have explored filtering with the EMA 90 for potential day trades and have been working on a particularly promising little filter. It is simply closing price is greater than EMA 21 and EMA 21 is less than EMA 90 - can't get much simpler than that. I use a price cutoff from 15 to 35 and volume doesn't much matter because I only take the four highest volume stocks out of the box.

On Friday those four happened to be BSX, FDC, RBAK and CVS. Watching the four during the day (using prophet.net - my favorite charting software) produced a super set-up on RBAK that looked like this -



Anyone could have taken this off the hammer in the third position to get a 60 cent gain in short time. I passed on this stock because I was working on something else at the time and I don't like having too many active at once.

(rant on) One other point - you can read every book on TA ever published and you will probably never see this method - that's the problem - everyone is using the old methods and no one is innovating. Thankfully we have software these days that allow those of us who are moderately creative to be able to test our ideas. That's what the quants at the hedge funds are doing - they are so beyond the simple moving averages that it isn't funny any longer. (rant off).

Again this is not an endorsement of stockfetcher, but it is a recommendation. I receive nothing from this so go try them out if you are interested in back testing or building truly technical indicator-based filters.

Wrapping Friday

I'm late - but had a party last evening - a lot of that happening lately. Going to keep this short as I have several ideas burning and so I will have several more posts on the chart before the end of the weekend.

A very weak day - up certainly - but nothing to really cheer about. I took some swing trades (deliberately) which include SYMC, ORCL and ALTR (with the proviso that I can't stand any of these stocks). These trades will be completed when I hit the targets which will be exposed in a subsequent post this weekend - stay tuned.

Of the several stocks I said I would be watching, only IM and NFLX set-up well enough to take a shot at - but I passed. There were some great trades to be had, mostly in the health related sectors, but I missed all of them because I don't follow that sector at all.

For Monday the up/down ratio is back into the neutral territory as is the VIX. The only promise is that the new 20 day highs only surged forward by 11 even though the new 20 day lows retreated by 25 or so. They are now printing 581 and 248 respectively. I thought we could get all of the major indices to print red in the last hour but Goldman Sachs (the proxy for the market for the 22nd century) surged to green at end. Can't keep a good brokerage down (or a bad one either for that matter).

Those of you who visit here often know that I firmly believe that the only thing that moves the markets is having something to buy and right now it looks as if the "buy me bin" is filling up nicely for the next year. In Tuesday's wrap I mentioned that the Bollinger Band high-low numbers were 200 high and 9 low - after Friday's close that number is now 85 high and 59 low. That is goodness for the bull case and it appears as if the bear case will just continue to be weak. It could always change but a bear market always comes at the very height of irrational exuberance and this isn't it. There is nothing irrational about the current valuations regardless of what the perma-bears say - the average market PE is not too terribly high (obviously I'm too lazy to look it up or I would tell you what it is) so I think this sideways-up stuff will just continue for some time. What is happening is that some stocks are getting way over valued and others are going way under valued. The hedge funds and funds of funds have been working for years and years in an effort to identify the market at that micro level and seem to be succeeding. (Quantitative analysis). They sell off the way over valued and switch immediately into the way undervalued. Consequently one day a stock is going up and the next it is falling and no one knows why except on bubblevision where some bobblehead blames it on everything (interest rates, jobs, economy, blah blah blah) other than what is really happening which is good old fashioned horse trading. Something to buy - something to sell - that's what it is all about kids - nothing more, nothing less.

The magic coin is 35 and 26 and is improving daily with its truly miraculous calls and I'm so impressed that I'm going to let it do it again for Monday - coin says --- Crikey! - Heads! Bull market again - start buying everything in sight at the open.

Don't laugh too hard - it may happen just that way.

Risk Management

I was reading Dr. Brett’s BLOG and he brought up the Turtles – remember the Turtles - no - mother, not the Teenage Mutant ones. These Turtles were a group of people selected to take part in a noble experiment to see if absolute morons could be taught to trade in the stock market (sort of like the movie - Trading Places). Well that’s probably not true either and perhaps even a little harsh. Well, it’s a lot harsh but the Idea (and we always capitalize the “I” in “Idea” when it is a great Idea) was to take ordinary people not unlike you or I for example and teach them a trading method and then, if they followed that method to a “T” they would make fame and fortune. For some reason or other they called themselves “Turtles” probably because of the absolute slow and boring nature of the work they were doing.

Think about it people – if I give you a set of trading rules that I know has a probability of success of say 55%, plus a very large trading account and I set you in front of a computer terminal all day and you follow those rules perfectly then you should have a 55% probability of success. And if you don’t follow the rules, you won’t. Good grief - for this they needed a test? I’m probably missing something as usual. Anyway if you go to your favorite search engine and you type in Turtle you will probably find the rules. They ain’t much and they have been sold for thousands and thousands of dollars but are now available for free. And there is a reason for that. They basically say buy the trend and when it stops trending sell it - Duh. I can prove this and will a little bit later in the post.

But let’s not belittle the process itself. The most important part of Turtling is risk management. That’s because risk management is the most important thing a trader can do. Above all preserve capital until you hit the home run. Something we day traders sneer at and other people make fortunes doing.

Now the proof. I pulled out one of my favorite tried and true, time tested – oh crap – I threw together a filter that simply selected stocks based on closing price in relation to 2 moving averages and then listed them in volume order highest to lowest. It is a very prolific filter because there are so few moving parts but we only use the top several selections by volume in our back testing so it doesn’t really matter how many are output. I expect this filter to produce about 60% winners over a four-day period – the expectation is based on experience.

When I back test I use a simple baseline – One trade a day with no more than four stocks in the portfolio at any time. The way I have the back test exit criteria set is also simple – after four days exit the trade and take a new one unless you hit a 10% stop loss before 4 days in which case sell that stock and take a new one. Based on a virtual equity starting capital position of $100K this permits 25K per trade to begin. Note that I don’t care how many shares I’m holding just how much money I’ve got in them. After I run the test over an 80-day period or so I look at the equity results and for this baseline we achieved $53860 in profit with a 67% win rate – not bad for 80 days or so.

After establishing the baseline I started mucking with the internals one at a time. First number of stocks in the portfolio. I adjusted this to 1, 2, 8 and 16 stocks in the portfolio at any one time and here are the results.

1 – 47865
2 – 46147
8 – 24325
16 – 11570

This suggests that there is an optimum number of stocks in the portfolio and for this test it seems to be four. (If we doubled our starting cash to 200K would that change the number of stocks in the portfolio factor)? Let’s now look at more than one trade a day with no more than four stocks in the portfolio. (If you answered “yes” to our question above you are correct).

If we take four trades a day with four in the portfolio we can get to 60249 with a 71% win rate. For two trades a day with four in the portfolio we achieve 54891 and 68% win rate which is still better than one a day with four in the portfolio.

Let’s try one more factor – let’s take our best result, 4 x 4, and increase our holding period to 10 days. The result was 24357. If we add a simple measure such as a 15% profit exit criterion it goes to 34334. This is probably trying to tell us that stocks go up and down and unless you are a buy and hold forever type you need to attend to your portfolio a little more often than the broker recommended once per year.

So with a makeshift filter I have shown how money management – changing the way you buy not what you buy can make a large impact on your results.

According to song and story those Turtles who became successful adhered to the process like glue. The ones who deviated from the rules were not successful. It is that simple, kiddo.

There are a couple of exceptions to the above regarding “what to trade”. For those of you who are enamored of low price stocks (less than $10) – same system with a dollar requirement of $2 to 10 – holding four stocks in the portfolio – one trade a day nets 27784 and four trades a day nets 17255. Both produced about a 55% win rate. Two points – with one trade a day you are sometimes holding 20000 shares of some low price piece of crap and I can pretty much guarantee you aren’t going to get out of it alive unless it goes way, way up. Second, it is obvious that low priced stocks are low priced for a reason.

Exception two – note that the trades selected in the above tests were all “highest volume of the set that was output by the filter daily.” Volume matters when selecting trade candidates. Low volume stocks are low volume for a reason.

Also no Turtles were injured during the filming of this report.

Wrapping Thursday

Dumped AFFX this morning for a one cent gain. I knew right away that it was going to be a miserable day just based on the PC ratio. I watch it during the first hour of trading on the 60 minute charts. I want to see two things - where it opens and where it closes in that hour. If it opens below yesterday and closes below yesterday (first hour only) that is generally a good sign. Today it opened below yesterday and closed above. That means churn and burn. And that's what we had.

Still every day brings something new to look at and this is a beauty. A tweezer bottom with a one hour separation. I didn't see it until an hour after or I would have played it. I take the tweezer bottom seriously. Here is GM with its tweezer bottom on the 15 minute charts.



See where that long spike touched at 9:30 (and it's valid - I checked on the one-minute charts) is then reproduced by another touch at 10:45. That's the tweezer bottom. This is also a mini blow-off bottom and the buy point is on the close of the next candle. The exit is obvious around 1:30 to 2:15 or so. The lower highs in a row inform you of that. Always take the tweezer bottom seriously - it is a set-up alert.

I bought some BKUNA this morning figuring on an up day and the financials have been doing a fine job of leading lately but that trade collapsed. I'm was down a dime all day until 3 P.M. and am now down 30 cents thanks to the late day market fold so I'm holding it overnight at least. Another investment. I hate investments.

Of the several stocks that I said I would be watching, ATHR, SYMC, PTEN, and CRM, ATHR set up about 11 A.M. for a nice little run, the other three didn't. Because of the kind of day it was I passed the ATHR trade too. We'll try again tomorrow with LEND, AVCT, IM, NFLX, and SY. Who knows - a good day and we might get some.

We had a good day, I miscalled it but still no matter - we need a relaxation of the tension in the indices and today helped. The up/down ratio is now 34% and that is in oversold territory, the new 20 day highs came back under 600 to 554 and the new 20 lows increased by 70 to 259. The VIX is printing 9%+ over its 10 day average and SPY, QQQQ, IWM, and GS printed a red candle in the final hour of trading. DIA printed white. Regardless that is a very positive sign - I would have preferred for them all to be down in the final hour but we can't have everything can we. All of this together along with a good jobs number tomorrow spells a one day rally and then we can all take two weeks off until Christmas. I won't be taking off - but I will cut back on trading - maybe only 2 or 3 a week.

The magic coin is 34 and 26 having nailed today and I doubted it - what a maroon. For tomorrow, I can hardly wait, .... heads - bull market coming. Well - we agree, we'll see.

Passion!

I read Dr. Brett's BLOG both because I am a believer in the technical aspect of the game (i.e. esoteric stuff such as the Put/Call ratio and the TICK) and I believe in the psychology of the game.

For example - it's 2 A.M. and after a solid 3 hours of sleep I awaken with an idea - most people would go back to sleep - I get up and shuffle over to my office (next to my bedroom) and start to work on it.

I've been trading for a number of years following several other careers that I was also passionate about. I'm not saying that you have to get out of bed at 2 A.M. to prove the point - but if you ever do and it's because of a trading idea - then you probably want to do this job for a long time.

By the way - it's 5:30 A.M. the idea didn't work out - but I'm up now so I might as well put on a pot of coffee and get ready to go to work. The overnights (futures) are green and the FTSI is up. It's gonna be a great day!

Passion!

Wrapping Wednesday

Took HANS today as soon as it broke yesterday's high which was the last tick yesterday. Made a buck and change on it and am very happy. Also played AFFX but that turned into an investment - it was only up about 20 cents all day from where I bought it and I decided to hold it overnight. I'm OK with this because I believe that the market is going up tomorrow based on the internals that I watch. More about that later.

I took AFFX as a result of something I saw on the 2-hour charts using a new theory that I'm working on. I'm not ready to divulge it yet because I think I might have just got lucky but if it pans out I'll share it with you. Yesterday, if you recall I mentioned that I would be watching AFFX, CTXS, and BRCM today. Of course I won't play a stock unless there is a viable set-up.

I played AFFX off a gap down set-up. As I mentioned it went up about 20 cents from where I played it. Had I picked up BRCM from its gap down set-up I would have made a little more. CTXS didn't set-up until late in the day and by that time I was busy with other things. So all three stocks set-up and all three went up from their set-ups on an overall down day but I want to make sure of my proposition before I share it with you. It might take a while because I don't like rushing these things. In the meantime if you look at the 2-hour charts on your own and figure it out for yourself - even better for you since it will be like you are discovering it on your own and that's not a bad thing.

For tomorrow, using the same approach, I'll be watching ATHR, SYMC, PTEN,and CRM for playable set-ups. As well as trying to find a spot to unload AFFX.

For tomorrow the up/down ratio is printing 41% which is nearly oversold territory, the new 20 day highs pulled back by a third to 724 and the new 20 day lows increased by 10% to 178. The three sisters and the proxy for the 22nd century all printed very strong white candles and only IWM printed red in the final hour. Put it all together and I see an up market tomorrow.

The magic coin has fallen on hard times having fallen to 33 and 26 because it missed today too. For tomorrow --- tails - bear market - I doubt it but, we'll see.

Blow-Off Bottom – Again

Being able to pick a bottom in a stock or an index is an amazing skill that should be learned and then honed. Being able to pick a bottom in an hourly format is even more important to a short term trader. And it isn't that difficult to do in this age of information availability.

The chart that I used in the last post – the SPY in hour format just so happened to contain two crystal examples of a blow-off bottom.

There are simple rules for identifying a blow-off bottom. First it must follow a decline of some kind. Second it must be accompanied by larger than usual volume. And, third, it must contain a candlestick that closes in the upper half of its body. If you look at A and B on the chart you will see all of these features annotated.



Practice looking for these in every time frame and you will be rewarded in your trading forever.

The First Hour

Is the most volatile hour of the day. Need proof? I knew you would - so here it is in all of its glory -



I've looked at thousands of charts and almost every one of them show that the first hour of the day is the most intense as far as volume is concerned. After the first hour the rest of the day is pretty much the same day in and day out. But for all practical purposes it is one of the reasons why we make most of our money in the first hour and then, unless we catch a good one, cruise for the rest of the day.

Tuesday Wrap Up

Dumped SYMC 5 minutes into the session and glad I was to do so. Picked up some AMD and got out a little ahead of commissions - it was up to a reasonable profit but I let it degrade into nearly a break even trade. A couple of old favorites such as HANS, GM, and AMR made some today - but I picked AMD as the trade of the day and that's the way of this game. You make your pick, you buy the assets, and you take what you get. But AMD is officially off my Christmas list.

This is nonsense - the market goes up for an hour and then degrades the rest of the day. I'll give you an idea - by 10:15 the DIA was up 25 cents to 123.22 - it closed at 123.35. Made 25 cents in 45 minutes and took another 6 hours to make an extra 13 cents. And it never really was much higher than that just another nickle. Can't make any money in this kind of environment. I'm considering going back to my old method which was strictly overnight - buy at 3:45 sell at 9:45. In that half hour you will make more money than at any other time in the market. So sayeth brother Brett (Dr. Steenbarger) and so sayeth Marlyn. But it takes real guts to hold overnight in this environment - so if you don't have the stones don't make the play.

Currently flat and happy - always be tomorrow. For tomorrow, although I think it is going to be a down day (but I think that almost every day and am wrong quite frequently) I will be watching BRCM, CTXS and AFFX. If the method I am researching pans out I will let you in on it tomorrow evening.

The up/down ratio prints 49% which is neutral as is the VIX. New 20 day highs did pull back some to 1028 and the new 20 day lows went ahead to 150. These changes are extremely small and meaningless. The three sisters, the ugly step sister and the proxy for the market of the 22nd century, GS, all finished the last hour in the white(green) which is a totally bogus signal as far as I'm concerned.

The problem remains - nothing to buy. To put it into a different perspective right now for stocks between 5 and 250 with an average 90 day volume greater than 500K there are 200 closing at the upper Bollinger Band and only 9 closing at the lower Bollinger Band. Tell me we aren't top heavy. Something has to give and, truthfully, we need a couple of weeks of solid declines. I hope we get them because only then will we be able to get back to making real money again on the day side. Besides the shortists need a break too.

Ol' magic coin is 33 and 25 having missed yet another one but persevering always it bravely soldiers on and for tomorrow says - heads - bull market. I think we can fade that.

A Word to the Wise -

Might be sufficient but I’ve been looking into the magic 8-ball lately and not liking what I see. As you read this be aware – it truly is crystal balling the future and if we can’t be sure of what’s coming tomorrow how the hell are we going to know what’s coming several years from now? We can’t - all we can do is guess and here is my guess.

For the past 10 or 12 years of so, or for about as long as I’ve been working with Marlyn’s Curve I’ve noted that the market cycle is roughly 20 business days. And as time has progressed out of the 90’s into the 2K’s the cycle has seemed to become more pronounced and deliberate. I have come to understand that this is being caused by the influx of 401K money that feeds into the stock market about every 20 business cycle days or so.

This isn’t a problem today but if we take the baby boom as beginning in 1948 and we add 60 years to that, around the year 2008 the leading edge of the boom will be able to begin extracting their money with no penalty or added taxation. Needless to say this is the generation that has made a science of extracting every penny of the equity in their homes so that they could buy more junk – do you really think they are going to leave their 401K’s intact?

So if we believe that what goes up must come down this will start looking like a balloon with the air being let out of it. As soon as the earliest bunch starts extracting funds the later comers are going to start noticing some shocks to their system. Especially those folks who have been contributing to a 401K all of their working life - all of a sudden the market is going to go backwards on them and in a hurry.

As a result it is possible that they will do two things – first, move all of their funds to money market accounts (within the 401K system there is always a “safe” cash capability) as quickly as they can (much the same way I did in 2000); and, second, start counting the days until they too can withdraw their bucks without penalty. There is no third option because, you see, there are no other pension options left in this country. Folks have to continue contributing to their own pensions because that’s all there is.

The rapid withdrawal of funds from the 401K stock accounts will cause the stock market to sink to depression levels in a short time. I know this because we already have a case to study and that is the depression of 2000 – 2003. The tech bust caused many funds to see major outflows including those funds that had nothing to do with the tech boom in the first place. But, and this is a huge but – the 401K money kept flowing into the plan administrators. The problem is it didn’t go into stocks - for the most part it went into relatively safe, money market savings accounts.

Here’s proof – this is the Dow Industrial Average from 1990 to yesterday. Note how the market depressed from 2000 to 2003. (By the way – that’s a rounding top you are looking at – it works on a lot of different time scales – this is monthly). Also note that the INDU volume increased massively through the 90’s fell during the depression and is once more on the rise.



Here is Marlyn’s Curve portion of the boxed portion of the chart above. Notice that there was huge volatility during the Bear market and that the volatility has been damped out of the market since about March ’03. Point A on both charts are approximately equivalent.



Finally while volume is an indicator it is not the be all and end all. Here is the COMPQ over the last 10 years. See how the volume has never declined after the tech bust. I think that’s because most trading is done in NASDAQ while most investing is done in the large caps. And there is a difference between trading and investing.



Unfortunately our Government has no plan to deal with any of this – except for “privatizing” Social Security. By “privatizing” SocSec they mandate that people’s paychecks must flow into the stock market and they might prevent a major, wealth destroying meltdown – for awhile at least. As always who do you think is going to be left holding the bag?

My Opinion of Mr. Softy (MSFT)

A reader (not you mom) asked for my opinion of MSFT – I hate it.

I think he meant my opinion as a trader but I don’t trade MSFT – it isn’t volatile enough to make me pay much attention to it for day trading or even overnight.

My thinking from a swing trade standpoint – always buy it ahead of dividend, get the dividend, and several days later sell it. If you had done that last month you could have had it for 28 and change early in November, been holder of record on the 14th collected your 10 cents a share and sold it several days later for 29 and change. Best deal out there - a little free cash off a profitable trade.

But here are my chartist observations.



Note that even though this is a 2-hour chart the triple tweezer top occurred on three separate yet consecutive days. And each top was at 30. A tweezer top is usually just that - a max top.

Secondly, everywhere you look there are steeples. They signify a difficulty for this stock to go up – remember – seeing steeples in the old days meant you were coming into town and the journey was done – still means that today regardless of the time frame.

Then last Tuesday in the first two hours there was a great opportunity being signaled – that set-up normally means pay dirt and it did - for all of 30 cents - an OK overnight swing trade but there was no follow-through. A 2-hour chart signal generally results in a substantial follow-through but the stock just collapsed again the next day.

So the question has to be – is 30 the max of Mr. Softy? If I were into this stock and wanted to go long I’d let it break over 30 before I even gave it a second thought. If I wanted to go short I’d probably take it now and make 30 and change my stop.

I’d like to thank any readers I do have – I hope I’m being both entertaining and educational. But remember – anything I say regarding any stock is my own opinion. If you do invest in a stock do so for the right reasons – and if you don’t know why you are investing in a stock – don’t do it.

Wrapping Monday

Days like today are two hours too long. The market closed around 1:30 and everybody went home. After that it was the standard afternoon degradation in price of just about everything including the indices.

I took positions in SYMC (still holding) and VRSN this morning right after the bell based on their 2-hour charts from last Friday. They both looked as if they were going somewhere. VRSN did – it went right up to 25.84 and collapsed back to where I bought it. I’m out even less round trip commissions. SYMC stayed profitable all day but if I sold it now it would only cover its and VRSN’s commissions plus a bacon cheeseburger and that would mean that I wasted my day when I could have been doing something better or at least different. I think it will go up tomorrow – if the market goes up. At least I expect it to jump in the first 15 minutes or so and maybe I’ll be able to get something out of it then. I hate this time of year – nobody knows what to do. They’re afraid to sell and wreck their year end statistics or maybe get a tax hit and they are afraid to buy – although the market, to the best of my knowledge, has never crashed in December.

Anyway there is always tomorrow and whether the sun comes up or not (I’m betting it does any one want to fade me?) we are going to have a stock market to ridicule and maybe even trade a bit. What’s the forecast?

The up/down ratio sits at 61% (not good) the new 20 day highs doubled up to 1074 (not good) and the new 20 day lows halved to 128 (not good). The VIX is back to neutral and the DIA and SPY both finished with little white spinners in the final hour, the Q’s finished strong red, IWM finished strong white (watch out for the small cap rally through December more on this later I think) and GS finished white. Wow – yet another one-day rally – be still my beating heart. This is the reason why I’m kind of just watching even though I took a couple of trades today. I’ll probably sit out tomorrow if I can get SYMC profitable.

Meanwhile the magic coin seems to have lost its mojo. It is now 33 and 24 having missed today and if it doesn’t watch out it could soon be 50 – 50 and be as good as Cramer (wonder if they’ll give it a TV show?). But for tomorrow --- tails – bear coming – keep calling ‘em coin and eventually you’ll get one right.