Has pulled back for 3 days on relatively low volume. Tested 8.40 successfully today and that's when volume came in. A doji day would be great today and would set it up nicely for a move up tomorrow. Waiting to see how it handles resistance at 8.50.
Just wanted to point out a couple of charts from today. Here is a 5 min chart (covering 3 days) of a stock till 3:45 PM today. Down less than 2% for the day. Minding its own business.
And here is the same chart, with the last 15 minutes of the trading day included.
Ended over 14% down for the day. Even if someone had stops in place, chances are one got a bad fill. I just checked and there was no news related to the stock, to justify such a drop, well at least not yet anyway. Just wanted to say that never got cocky. Always respect the markets. You might have had a great day or a great year, or might be on a hot streak, but always remember your place with respect to the markets. Be humble and gracious when you are running hot and feel like you can't place a trade wrong. And always, please always, exercise proper risk management.
Here is a stock that popped up in my intraday scans. Its from the mining sector, so its in the hot sector of the day. Nice volume today, having already crossed yesterday's volume. Next resistance - 11.40.
Today's Chart of the Day is FCS. This chart was in last week's watchlist too and since then, it has successfully tested the MA(20) which has provided constant support throughout the uptrend. Watch out for a break of 15.80 on volume.
The S&P and Nasdaq continue to make new highs but as can be seen in the charts below, the MACD , having peaked in November, refuses to make new highs with the broader indices.
This negative divergence has been developing since November and signals a correction around the corner. If you are long, do remember to take some profits here. As short term traders, we shouldn't worry about the tax implications of taking profits at the year end. Its been a great year and we must strive to make it end that way. If you are short, do remember that topping out is generally a long process, specially in case of markets as resilient as these. Last week, I had posted about the negative divergence with the Adavance-Decline Line, so signs of this rally being unhealthy are cropping up more frequently now.
If you wanna short here, do not take entire position at once and wait for confirmation of a correction before taking full positions. Remember, calling tops and bottoms is a fool's game. Its great for the ego if you are proved right but in the long run, it's harmful for your trading account.
And if you are long, remember to be tight and disciplined with your stops. As short term traders, we don't have to catch the entire part of the rally, just the meaty part of it. Make that the easy part of it, and it seems like the easy part is over.
Here are a few stocks I like heading into next week. My view on the overall market remains the same as last week, so I won't go into that again. Here is the link to that post.
BSX - Test of support at 7.50 after breaking out. Suitable for entry only above Friday's highs. Stop below 7.50.
GNTX - Consolidating nicely, on low volume, after a breakout. Watch out for volume coming in and a move over 30.
ISPH - Broke out of a multi month continuation pattern earlier this month. Impressive volume on Friday. Watch out for a break of 8.75. A stop below Friday's lows i.e. 8.40 should do the trick.
KKD - Broke out nicely after consolidation but then went down on an analyst downgrade. If you look at the 1 min intraday chart for Friday, it consolidated rather well at 7.25 and then moved higher on good volume.This is not the kind of play I usually go for but like it with a stop below 7.25.
PDS - The close above 9.75 on Friday was important. Would like to see volume come in here for a possible test of 10.
This post has been a long time coming. I have been pretty active on StockTwits this year, though nowhere as active as I would have liked but trading is not my full time job, and I think it is an absolutely fantastic concept and product. Even after being part of it for almost a year now, I am still amazed by the generosity of the traders (at least those who I follow) there. I think what really amazes me about this generosity and the willingness to share is the fact that it comes from a community that is pretty much thinking about money or how to make money (I know its more about the process but the goal is to be successful after all!) for most of the day. Now, that was the good part about StockTwits. But as is to be expected with any community that is growing so rapidly, you will find the bad too with the good. If you are new to the community, it is easy to be lost or as much as I hate to say it, even mislead, if you are following the wrong people. So, here are a few suggestions from me on how to make the best use of StockTwits.
1. Be selective on whom you follow: Take my example. After almost a year, I follow only around 20 odd people (this is just a number I am comfortable with, you might be able to follow and pay attention to a lot more people). I know for a fact that there are a lot more excellent traders I could follow, but I find it useful to follow only those traders whose trading style matches mine. I am a momentum trader and it makes no sense to me to follow a value investor, no matter how good he might be, though I might follow an options trader if I am interested in learning options. As the community grows larger, it becomes necessary to block the "noise". Be specially cautious of the "experts" who always seem to be on the right side of every trade.
2. Make the ideas your own: One will never become a successful trader, unless one starts taking responsibility for one's own actions. You don't need me to tell you that in trading one can always find someone else to pass on the blame to. Just visit any yahoo board to see what I mean. From insider selling to short sellers to market managers, there is always someone to blame. I see StockTwits mainly as a generator of ideas, many more pairs of eyes, some better than mine, scouting for setups. How I play the setup is entirely my call. If the trade ends up winning money, the credit goes to me (though one should always give a shout out to the trader who brought the stock to your attention) and if I end up losing money on the trade, the "blame" goes entirely to me too. The same setup can make money for one trader and lose money for another. All depends on how YOU play it.
2. Do not follow trades: Many traders will tell you when they are entering a trade and will mention how much they gained after they exit a trade. Nothing wrong with that. But the fact is that a lot of the traders only post winning trades and conveniently forget to mention the losing trades. But that is not the reason you should not blindly follow other traders into trades, no matter how successful they are. As stated above, it is your money and you have to do what you think is right. How can you take responsibility for the losses if you don't even understand why you got into the trade in the first place? Personally speaking, I am not the least bit interested if the guy I am following made or lost money from a particular setup. All I am interested is how I played that setup. Giving my example again, I am too quick while taking profits. Many times I have got thanks from fellow traders who actually played the same setups that I pointed out but ended up making more money than I did as they had more patience. Again, make the ideas your own!
3. Ask questions: This to me is one of the most useful things that StockTwits has succeeded in doing. Bringing a bunch of accomplished traders together and like I said before, its amazing how helpful some of these people are. Instead of blindly following a successful trader into trades, which might get you money in the short term, ask him how he found or why he entered the setup in the first place, which will be a lot more profitable in the long term. Again, with the large number of people involved, you can't expect everyone to be be helpful and that is why it is important to be selective in whom you are following.
To sum it up, I think the best use one can make of StockTwits as a generator of ideas and a place where you can learn from the best. There are no short cuts to being a successful trader and like in life, sometimes you just gotta make your own mistakes, but learning from those who are successful can certainly do more good than harm. And for me, the worst way you can use StockTwits is to blindly follow someone else's trades or ideas, even though it might be making you money in the short term.
I have to admit dear readers that I have been thinking of closing the blog on its first anniversary next month, the main reason being time constraints. However, I just received an email from one of the readers today and comments like these make me want to try my best to keep the blog going. I am most pleased that the blog is helping some (hopefully there are many more of you out there!) of you readers. I am reproducing the mail from the reader with permission from him.
For the last 20 years I had trusted my investments and personal finances to a number of 'advisors'.
After becoming increasingly dissatisfied with the returns and their general lack of regard towards the impact their decisions had to my wealth, I decided to start to manage my investments myself (long term and short term).
While the majority of my capital is still locked in long term investments, I carved out a small portion of capital to 'position trade' and have been managing it myself for 1 year today.
I just wanted to let you know that I have learned so much from your blog, and throughout the year have increasingly made smarter trades as a result.
Thanks for sharing your knowledge !!
Thanks Nathan! I welcome any comments from you readers at positiontrader @ ymail.com (no gap). I have been told I take criticism rather well (but praise even better!), so even negative feedback is most welcome!
Due to an emergency in the family, I won't get time to blog the rest of this trading week. Hopefully, things will get better by the end of the week and I will be back this weekend.
Here's wishing you readers a Merry Christmas and a wonderful holiday season ahead. Please do yourself a favor and take this time to tell all your loved ones how much you love them and how much they mean to you, even if it goes without saying. It could well be the most meaningful thing you would ever do.
I remember having written before on the importance of using multiple time frames for trading, even if one is a short term trader. I completed a trade today which I think illustrates this principle rather well, so I thought I would share it with you readers. BKRS showed up in my intraday scan on Friday as it was a stock which was up on high relative volume. I got in based on the 1 min chart which is shown below. I had posted about this stock even on twitter before getting in.
As you can see above, it was consolidating rather well after a decent move up. On the daily chart, I saw that 9.07 was a significant resistance level. Watching the bid and ask on the tape, I got in at 9.07 anticipating a breakout. The stock did manage to break the resistance level and closed at 9.24.
As shown in the chart below, the stock did gap up this morning, and I got out at 9.45.
Why did I sell a stock that was acting rather strong? No, I wasn't trying to catch the top. The answer lies in the weekly chart which is shown below (as of Friday). Before getting in the stock, I had noticed that the stock had got rejected at or near the MA(200) at least twice in the recent past. So, that was my price target.
So, I got in seeing the daily chart, based my entry based on the 1 min chart and sold based on the weekly chart. All this for a stock that I held only for one day. I think the above example illustrates pretty well the importance of using multiple time frames while trading. I admit that I didn't use to follow this method of looking at various time levels earlier and it is something I have picked up only this year. In the beginning, I had to force myself to look at various time frames but now it has pretty much become a habit.
Not that it matter, but the stock got rejected at the MA(200) again today and is currently trading at 9.09.
After going through 600 odd charts, here are some setups I like heading into next week. As an interesting sidenote, there were at least same number of setups that looked good until a couple of days ago, but are showing signs of breaking down now. In my opinion, the low volatility exhibited by the major indices in the last week is hiding a lot of volatility underneath. This volatility is great if you can play momentum stocks but as I wrote earlier this weekend, the market breadth is exhibiting signs of negative divergence and inspite of the relaxed holiday atmosphere out there even when it comes to the markets, this is no time to get complacent.
ADI - Has a history of moving up after flagging. Like the risk-reward ratio here with a stop below MA(20).
WCC - Was in the watchlist on Thursday. Huge short float. Nice close on Friday and the close over 51.70 was important. The huge short float means that this could really explode.
HLIT - Like the intraday action on Friday and the close on the highs of the day. Like it as a day trade on a break of 8.30.
ANF - Bullish volume pattern. 57.11, right where it closed on Friday, is the top of the trading range. The gap support will be further strengthened by the presence of approaching MA(20).
DECK - Bullish volume pattern. Made new highs on Friday and looks good for more.
KKD - Consolidating nicely after a big move up. Strong support at 7.25. Watch out for a break of 7.70
SLXP - Flagging nicely after a breakout. Look out for a secondary breakout on a break of Wednesday's highs.
PDS - Nice intraday recovery on Friday. Always good to see volume come in on support. On breakout watch over 9.75.
GNTX - Consolidating in a nice tight range on low volume after a breakout. Watch out for a move over 30.
FCS - A nice uptrend with the stock almost doubling in the last three months. Ideally, would like it to consolidate a little more, allowing MA(20) to catch up.
MCRL - Volume showing signs of picking up.Watch out for a break of 13.80.
The advance-decline line is the most basic of all market breadth indicators. It is the calculated by subtracting the number of declining stocks for the day from the number of advancing stocks for the day. Now, in a normal, healthy uptrend, one would expect this indicator to increase along with the overall markets. Below is a chart of the advance-decline line comparing it with the SPX index (in yellow).
It can be seen above that though the market is making new highs this month, the advance-decline is not doing so and is still below the highs it made in early November. I am not advocating going short here, but just be cautious and do not get complacent.
The markets are the worst and the best teachers. Worst because there are no easy or free lessons, everything comes at a price. A price that can sometimes be so high that we can't even afford to put in practice the lessons we have learned from the markets. The best teacher because they never allow you to become complacent. The market keeps you on your toes. The day you relax or get complacent is the day you suffer heavy losses. The day one thinks that one has it all figured out, is the day you are finished as a trader. Doesn't the fact that the market forces you to keep on learning makes it the best teacher?
All this got me thinking about the month that we have been having. I guess we have had a couple of down days so far, or maybe three at the most. The blogosphere and twitter is filled with talks of Santa Claus rally. Surely nothing can go wrong, right? Wrong! I am not saying we go down from here, all I am saying is don't get complacent. Don't take things for granted. Don't let mistakes creep into your trading because the market is in a very forgiving mood right now. This reminds me of a post I wrote about the benefits of learning to trade in a bear market rather than a more forgiving bull market. Come to think of it, I had written it in last week of March and looking back, the April top wasn't very far off. Below is a copy of that post which I believe is very relevant to the market conditions we face right now. Let's not forget the lessons we all learned from the bear market.
Here it is:
Markets continued going higher.
That's it. That's all I have to say about the markets today as far as the general market is concerned. But that doesn't mean I don't have anything more to say today. Read on dear readers, read on.
Are you scared on how this epic low volume junk rally will end? Now, I am not saying go and short this rally. Anything but. I don't think anybody has a clue when this rally will end. But we all agree this rally will end sometime, right? Its what follows this what troubles me. Let me explain.
I don't follow too many blogs but a common theme that has started developing in the comments section of many of the blogs I do follow is a lot of new faces, and in some cases old familiar ones too, coming on board and saying that pick any stock and let it run. In some cases, I see the traders getting stopped or taking profits being mocked at by these "experts". Their rationale is the market is just gonna go higher. No doubt, these new traders have enjoyed considerable profits in the last few weeks and I congratulate them on their success and wish them well. But at the same time, I am confused whether I should laugh at these experts or feel sorry for them. Being the kind spirit that I am, I choose the latter. I feel sorry for these new traders as we all know how this story ends.
I started short term trading around one and a half years ago, right in the middle of the bear market. I started short term trading after an unsuccessful attempt at buy-and-hold "investing" when the market crossed 13000 and everybody calling for 16000. We all know how that story ended. You can read all about my early exploits in investing over here. The point is I learned my trade in the worst possible market conditions. I am still learning and nowhere close to being the trader I want to be and the trader I know I can be but I learned my basic lessons in a bear market.
I certainly did not appreciate being a child of the bear market back then, but I certainly do now, especially when I see all these exuberant newbie traders who are children of the bull market. I learned the importance of keeping stops the hard way as I saw stocks fall to unimaginable depths all around me. Imagine not having kept a stop loss on AIG! I learned, as a short term trader, not to hold any stocks through its earnings report, no matter how confident you are about the stock. Its something that I still practice today, even in a bull market, as it becomes a natural defense mechanism when you see companies come out with horrible numbers one after another. Bear markets teach you this. I learned not to trust any company. No matter how big or reputed the company, as a short term trader my goal is just to take my profits and move on. Imagine trusting Lehman. Bear markets taught me this. I learned to take my profits, or at least partial profits, whenever the Stock Gods smile upon me. I have seen too many massive gap down days not to have learned this. All the above knowledge, courtesy of the bear markets.
I am not saying all the above was easy. Exactly the opposite in fact. Markets are the best teachers, but also the harshest ones. You get to learn a lot, but all this comes at a price. A price you see reflected in the bottom line of your trading account. But as long as one has the right attitude and is ready to learn, you DO learn. The markets are there to teach us everyday. I still make basic errors but the lessons from bear market are, and will always be, ingrained in my mind. Does learning in a bear market have any drawbacks? Sure! Take my example again. I have a hard time letting my stocks run, as I always fear the worst. Because the worst is all I have seen.
But give me the bear markets as a teacher over the bull markets anyway. Take the newbie traders that made me muse on this topic. The bull market is lulling them into a fall sense of complacency. It is showing them the door to riches, to riches they never thought were possible. It is telling them trading is the easiest thing in the world. It is telling them just buy a stock and keep it, because even if it goes down in the immediate future, they all go up in the end. We all know how this story ends. The same way it ended in 2000 and 2007. Eventually, most of these traders will too learn. But only after the bull market has played them for a lot. Bear markets just give you the harsh lessons straight up. Following a similar line of thinking, I feel it is much better if a new trader starts with a loss rather than a gain.
I never thought I would find myself saying this but I think I will drink to the bear markets tonight. Thank you bear markets! You sure were one hell of a bitch but you were a damn good teacher. Cheers!
Since I had posted about going short the overall markets by taking a small SDS position a few days back, it is only fair to post its exit too. I took a 0.81% loss on it today. Unless my stops are hit, I will go into the weekend long BSX, AMAT, BRKS, KKD and WCC. I had posted about these setups on twitter before entering them and I hope some of you readers benefited from some of these calls too.
Here are some charts that are setting up nicely. All these are highly shorted stocks with over 20% of the float short, making them prime short squeeze candidates if they manage to cross critical levels. One should always honor stops, but even if you are undisciplined, you must honor your stops while playing highly shorted stocks. They are probably highly shorted for some good reason, but as a short term trader I couldn't care less about what those reasons might be.
Yesterday, I had pointed out that the seven days with the highest volume in GLD since October were all down days. Well, make that eight dear readers. But encouragingly for the bulls, a relatively strong performance at the end of the trading day made gold finish right above the MA(50). Will the MA(50) hold tomorrow? Can we expect a short term bounce? That's what makes tomorrow such an important day for gold in my opinion. If MA(50) does break, expect support around the 130 level.
Gold seems to be headed to MA(50). The last time it was below this level was in early August and since then, this level has provided support for Gold as shown in the chart below. Interestingly, the seven days with the most volume since October have all been down days.
I think it is important to note that dollar made an impressive move today. Considering that it was up over 1% today, it is surprising that the market didn't end more down. After the action today, the chart again looks bullish, and the next resistance lies at 80.40. A break of this and we could easily see 81.44. Keep an eye on the dollar for a tell on where the markets are headed!
I switched over to the dark side today, taking a position in SDS at the close today. I guess this is kinda over dramatizing things as its a small position, but nonetheless, its the first time I have gone short the overall markets since the bounce from 1040. For the second consecutive day, I did not like the action in the markets today despite the fact that the all the major indices closing in green. Remember, that topping out is a slow, gradual process, specially in markets as strong as these. Notice the negative divergence in MACD in the SPX chart below. As far as my short position goes, I will sell it when SPX touches 1225 or 1250, whichever comes first. Just to clarify my position on the overall market, I still think that any dips will be bought but just that a pullback seems to be on the cards.
Like IGT over 17 with a stop just below 16.80. Below is the daily chart. Impressive volume today with the volume so far already nearing the volume of the last two days. MA(200) at 16.91.
The 15 minute chart shows impressive consolidation today after the initial move today and also shows why a stop just below 16.80 should do the trick. Like the reward/risk ratio here due to the close stop.
Though the market was up hardly a few points today, it was quite a good day if you trade momentum stocks. I booked profits at the open, and seeing the weak close, decided to go fully in cash. Thinking about it, there were many factors behind this decision. Firstly, I see a feeling of complacency setting in bulls out there, which makes me think a pullback might be around the corner. Even if this pullback does happen, I would rather use cash as a hedge than go short. The other reasons behind going in cash today were more personal. Thanks to today's Chart of the Day, MGIC, which was up 16% today (I hope you readers benefited from the call! I did not catch the entire move but quite a decent bit) and overnight holds in LOCM and KOG, I managed to meet my monthly goals today. No way I was expecting to meet them before even half of the month was over, but I am not complaining! I am sure the last two weeks have been great for you readers too. But the thing is I was beginning to see overconfidence creeping into my trading. Thoughts like increasing the position size, and making the most of this run while I could were creeping into my head. Now, I have learnt the hard way that whenever overconfidence starts to rear its ugly head, its best to step on the sidelines and let things calm down. I guess this was a more important reason that overall market conditions to go fully in cash today.
As for you readers, I have just one piece of advice. Please don't forget to take profits if you have done well during this rally! Nobody ever got broke taking profits. Seeing all your profits can be one of the hardest thing to deal with physiologically in trading. I still remember going for the home runs and not taking profits when I first started trading. At some levels, seeing those profits disappear can be even harder than taking losses. I have heard a lot of people say that a profit is a profit and a loss is a loss only once you sell. I say that that's bullshit. But more on that some other day.
Today's Chart of the Day is MGIC. Like the way it has been consolidating after almost doubling in one week. Ideally, it would make the next big move after waiting for MA(20) to catch up but also like it on a close above 7, which might come soon.
Here is a monthly chart of the S&P with the Fibonacci levels drawn on it, with the 2007 highs being the top and 2009 lows as the bottom. As can be seen in the chart, the index is pretty much right at the 61.8% level. It should be noted that the index did meet at first resistance and later support, at the 23.6%, 38.2% and 50% levels. This just goes on to show the importance of the level we are currently at and also the importance of using multiple time frames while trading, even if you are a short term trader.
With there being a lot of talk on the markets being overbought out on the blogosphere and twitter, I figured it was time to turn to our trusty ol' McClellan Oscillator for answers. Following are the charts of NASDAQ and NYSE McClellan Oscillators with the overbought levels as marked.
From the above charts, it can be easily seen that the markets are nowhere close to overbought levels, at least according to the McClellan Oscillator. This makes sense to me at an intuitive level as although the market has closed positive on almost all the days this month, there have been extended periods of consolidation with very little gains during this run. The reading on the above indicator does not mean that the market will continue going up (I wish it was that simple!), just that the odds do not favor the shorts just yet.
Also, please do remember that shorting a market, let's make that any market, just because you think that the market has gone up too much, is the worst possible reason to short. Calling tops, or bottoms for that matter, is a fool's game. If the market does reach overbought levels, and you do wanna short it, it's best to scale into your short positions rather than take the entire position all at once. Here is a post I wrote on playing overbought markets a while back, which, in fact, happens to be one of the most read post of this blog. Hope it is of some help to you new readers out there!
I will be back later with a watchlist for next week and also the Chart of the Day.