WhipItAround.com

I don’t have time to get into the specifics but take note– I have my reasons.  I will trade the market I see so if the technicals prove me wrong– big deal. I will still bank coin.

I was on Matt Trivisonno’s trading blog (www.Trivisonno.com) and Stringm reminded me that I never posted my trading rules.  Below is an explanation of why it is important to have a set of personal trading rules followed by my own set of trading rules.

It is crucial for traders to have a set of rules and adhere to such rules under all circumstances.  I have developed a set of rules that help me trade with a very high rate of accuracy and eliminate most of the emotion from my trades, provided the rules are followed.  The hardest part about a set of rules is actually following them. You can be the best analyst or stock picker and still lose money if you do not have a set of trading/investing rules that are strictly followed.  My rules may not be suitable for your trading style, but once you develop a set of rules that, it will eliminate a significant amount of emotion from your trades and I bet your profits will increase substantially.  I did not become a profitable trader until the hedge fund I worked for went bust and I began trading my own capital full-time, at which point I realized I needed a set of rules.

 Below are my trading rules, which I consider before trade execution (I actually read all of these rules before each trade).  Are there any rules that work for you that I have not included below?  Feel free to share with the group.

1. Verbalize the reasons for each trade aloud
2. Exit prices must be predetermined (stops and limits—can be mental or electronic) and cannot be changed unless there is a very good reason.  Identify the circumstances that will justify breaking the trade (strong TICK, strength in leading indexes/stocks, etc)
3. Identify if the trade is a scalp or longer trending trade.  If the trade has a lot of potential, sell fractions prior to resistance levels, but leave a portion on until a lower high is made
4. Size trade based on maximum loss if stop is triggered and verbalize maximum potential loss.
5. Treat each trade independent of prior trades (size, duration, stops/limits, etc).  Don’t let prior bad trades affect objectivity
6. Check indicators and other indexes prior to trade (TICK, stoch, XLF, IWM, GS, AAPL) – Do they confirm the trade? 
7. Is it the right time to execute the trade?  For example, afternoon reversals and large continuation moves usually occur during the last hour or last 15 minutes; channel formations usually last longer than you expect; breakouts usually do not occur until the VWAP (volume wtd. avg. price) is tested and held; securities usually bounce on their first test of the VWAP
8. Exercise patience: if stock is following a trend line, wait for a pullback unless breakout appears imminent
9. If angry, step away for 15 minutes and engage in another form of stimulation
10. Trade light during the first 15-30 min of trading or until there is a clear breakout
11. Goal is to follow the rules: Strict adherence to the above rules will “make it rain”

There isn’t a single TICK reading below -400 (lowest reading was -383) and there have been several readings above +1,000.  There was a pattern of lower highs and lower lows, however the lack of signicant selling pressure does not support initiating a short position. 

Using NYSE TICK as a short-term indicator has increased my trading P&L significantly.  NYSE TICK represents the number of stocks on the NYSE ticking up minus the number of stocks ticking down. Utilizing the TICK gives me the confidence to pull the trigger on suspected highs and lows, remain in anxious trades and exit deteriorating trade.    

Ways to use TICK:

1. Identifying a Long Set-Up: A low in the SPY is typically associated with an extreme reading on the TICK (usually below -1,000) or several extreme levels that are followed by higher lows and higher highs.  Most lows in the stock market are usually retested to some extent and if the retest doesn’t create a lower low on the TICK or match the prior TICK low, I will execute a large long position and will not scale out of until I see lower highs and lower lows on the TICK.  Often times, I’ll go long if the TICK forms a long tail on the candle that is supported by a long tail on theSPY.  On a retest, I’ll usually add to trade.The charts on the left in the attachment below display a trade on Thursday where I went long SPY at $89.32 (9:12 AM CST) after seeing three extreme lows on the TICK that were followed by higher TICK lows and higher TICK highs and supported by a high volume retest of the overnight low on /ES (several long tails indicating strong buying interest at the overnight support level), a higher low on AAPL at 9:12 and strong buying interest on the next tick higher.One can say that the same analysis of observing higher lows and higher highs can be applied to the SPY chart but the key is to see what the TICK is doing on pullbacks/reversals the SPY.  If the SPY is rallying and each reversal within the uptrend does not result in a lower TICK, then it is safe to remain in the trade.   Higher lows on the TICK within an uptrend represent weaker selling interest.  If a lower low is seen in the TICK then you should either exit a portion of the trade or be on high alert.    
2. Identifying a Short Set-Up: On Thursday morning, SPY opened higher and traded sideways until it broke its morning support level at 8:56.  While the SPY was trading sideways, the TICK was deteriorating with lower highs and lower lows, which told me not to go long and consider executing a small short trade.   
3. Staying in a Trade or Knowing When Not to Execute a Trade:  A strong market is typically represented by numerous TICK readings above 800 and much fewer TICK readings below 600. On Tuesday (see charts on the right in the below attachment), when the market went straight up until the last hour, there were no TICK readings below -500 and several TICK readings above 1,000, an indication of a strong uptrend that should not be sold short.  At 1:14 and 1:24 the first TICK readings below -500 were recorded (-542 and -646), which was just prior to a 0.80% sell-off in SPY. 

Upper Charts are SPY and lower charts are TICK

Basically, Tyler is saying it’s a trader’s market and the only things that are relevant are technicals and trader sentiment.

Thus while the market continues trading on a speculative basis and conjecture rooted in the casino psychology that has gripped equity markets (and recently credit markets as well), the long term picture is much less sanguine as the excesses of the credit cycle from the past 60 years wear off and not only asset prices but also repo haircuts find a new equilibrium.

What is certain is that the near-term economy will be driven in spurts and starts as mass psychology shifts from one extreme to another. The next catalyst in my view will be the interplay of the impact of stimulus spending coupled with the failure of the green shoots materializing into anything worthwhile. And while this will make the life of daytraders interesting, the traditional buy and hold approach to asset accumulation must be delayed indefinitely, until the critical equilibrium discussed above is achieved. Until that happens, anyone who claims the economy is headed in the right direction (either much higher or much lower), is merely spreading their own agenda or has an opinion that is fundamentally not rooted in actual facts.

Source: http://zerohedge.blogspot.com/2009/05/chasing-shadow-of-money.html

While hindsight is 20/20, Tuesday represented an excellent point to enter a short trade.  The following reasons justify the trade: 1) mkt gapped lower on Monday, 2) on Tuesday, the gap was not filled and Monday’s high was tested and failed, 3) stress tests, earnings and jobs report are all behind us, 4) 93 on SPY represented a major level of resistance (it’s also approximately the area where the market puked on Jan 7), and 5) the chart pattern looks very similar to the Jan top.  However, there are so many intraday trading opportunities that it is not necessary to take overnight risk.  I do expect the market to correct further, but it doesn’t matter because I am nimble and will trade what I see.  I think the most likely near-term downside target is 82.5 on SPY and if that level fails, we will likely test the 77-80 area.  A number of scenarios could develop.  Everybody seems to be expecting a correction lower, which is why it is important to be nimble because if there is positive news, such as a better than expected jobless claims figure, the market could trap a lot of bears and rip higher as they cover.  I read that last week will be the first week to reflect the Chrysler layoffs so I don’t expect the jobless claims figure to beat consensus. 

Today was an excellent trading day for me, as I felt completely in control of the market.  I made money on both the long and short side.  Below is the thought process behind each of my trades (they are numbered in the chart below):

1) Long SPY @ 9:10 CST The market gapped lower at the open and support was found near 89.2.  When the 89.2 level was retested and a higher low was made, I went long some SPY.  I did this because it appeared the market wanted to retest its opening level.  I took half the trade off near the opening level and sold the other half when I saw those long pins on the candle, which represented the high of the day.  Often times, long extensions on the candle represent strong rejection from the market (similar to touching a hot stove).

2) Short via SDS at 9:40: The market rejected the 90 resistance level with conviction at 9:28 CST and 9:34 CST.  When SPY broke lower, I went short via SDS on an attempt to retest the 90 level, which failed at 89.83.  I took the entire trade off near the VWAP.

3) Large Short via SDS at 11:28 CST: The market tested the VWAP for a second time and was rejected with force at 11:14 CST as evidenced by the long candle.  The market traded in a sideways channel for a few minutes, representing consolidation and indecision.  When the market does this, there is usually a strong break when the sideways channel is broke.  When SPY broke to the downside, I went short in size since I had a negative bias which was supported by the price action in the chart.  This trade worked almost immediately and I sold 1/3 of the position when support was tested around 89.1.  I looked back over the last 20 days to locate the next level of major support and it was the May 4 opening gap higher at 88.5.  I intended to sell 1/3 of my SDS when SPY was near the 88.5 level, but I didn’t want to press my luck and sold it a bit early.  I held the last 1/3 just in case the mkt continued to go lower, however, 88.5 looked like a near term bottom judging from the way buyers protected the level and how quick they took it higher.

I am looking into a way to post my trades live via Think or Swim.  If this doesn’t work, I’ll have my jr. trader post all trades to twitter.

On a side-note, all this inflation talk is overdone.  All the inflationary actions of the government will be counteracted by severe credit contraction and asset deflation.  Consumers are saving much more money, which will create demand for risk-free assets and you can’t have inflation from printing new money and selling treasuries if it is being done to offset weak consumer demand and currency destruction.  During this credit bubble, assets such as homes were viewed as currency (assets were used as collateral with very low haircuts e.g. homeowners were able to borrow against 95% of the value of their homes).  Now that the value of such collateral has declined and lenders demand a larger haircut (more collateral), asset values contract (similar to money contraction).  Even if oil goes to $100, this will not be real inflation, because wages and asset values can continue to decline.  The only way we will see meaningful inflation is if the economy expands rapidly and asset values catapult higher.  Can anybody think of a catalyst for such growth?

10 day on left. 1 day chart on right.

I have a lot to write about this evening, but will have to keep it short due to my onerous tax situation.  Goldman Sachs sold $5bn of stock at $123, which I was expecting ever since the stock broke $100.  GS indicated they have over $164bn of liquidity, yet they found it prudent to raise $5bn of additional liquidity to be on the safe side.  This tells me that GS sees the potential for another leg down and they think their stock is expensive.  In the conference call, GS stated “Our real estate investing portfolio generated $640mm in losses” due to deteriorating fundamentals in commercial real estate and higher cap rates — This caused all the REITs and insurance companies (which have high c.r.e. exposure )to get absolutely crushed.  Maybe I should not have divorced SRS last week — it was up 20% from its low of $30 yesterday (SRS gets you double short commercial real estate.  I expect SRS to continue to work, but would not chase it. 

I wonder who were the buyers of the GS secondary?  I imagine there must have been a very high amount of retail interest and if you were a professional money manger buying this offering, you deserve to be fired.  The stock was up almost 200% from its intraday low in November.

I had the GS chart on my screen all day because I thought it would drive the market.  I wanted to get short of GS below $122 but I’ve been burned so many times that fear kicked in.  The prudent thing would have been to only short 100 shares with a stop $1.50 above the issue price.  Think about it, if GS sold $5bn at 123 then all those buyers are breakeven at 123 so as the stock drifts below 123, selling pressure intensifies. 

Intel reported earnings after the bell, which were better than expectations (top and bottom line).  The bottom line was aided by a 2% tax rate, however, they would have beat estimates even without the lower tax rate.  The stock is getting crushed after hours due to murky guidance.  I’m very near-term neutral/bearish on the stock mkt right now, but for heaven’s sake, why was the market expecting positive guidance?  Intel sells chips that go in computers and other high end electronics — a truly discretionary item.  On another note, it amazes me that the market was surprised by the negative retail data this morning.  The futures plummeted over 1% on news that consumer spending was down over 1%.  I guess the analyst expected the consumer to BUY, BUY, BUY after saving so much money on their 4.5% refi and tax rebate.  As a good friend of ours says, “green shoots”.

On the overall market — there is a lot of bullishness priced into stocks and today was the first day where I didn’t see an underlying bid in the market.  If bank earnings are anything less than spectacular, the market will sell off further, but consolidation will likely occur around the 800 level.  Watch price action in GS, stay long above 800 SPY and go short below the trendline and support levels — Yes, it’s that simple. 

I’ve been trading the market very well lately, and wanted to share some of the reasons for my trades.  First of all, I start by writing into my trading journal whether I expect it to be a choppy scalping day, a choppy trending day, or a trending day, and I also take a directional view on the market.  If the technicals support my view, I trade in larger size, however, even if my view is wrong, I will still trade the price action I see, but in smaller size.  Today, I expected a choppy trending negative day due to GS.  I read highlights of the conference call this morning and expected traders to take profits and expected supply would outpace demand below $123. 

I went long a small amount of SSO when the vwap was held.  The sellers couldn’t take the market lower so once the market broke above the vwap (yellow line), this was a buy signal.  The tails on the candle also indicate resistance to go lower — confirming the long trade.  I let my bearish sentiment interfere with my discipline and sold the position very early, which is why it’s important to document these sell levels.  My next trade was going short the s&p via SDS when the mkt failed to fill the gap.  I exited this trade too early also.  The bullish action of the last few weeks made me hesitant to hold short positions too long.  When I saw the head and shoulders pattern on several charts and the TICK was weak, I repurchased SDS and went out for breakfast with a stop and limit order in place.  By time I returned, my limit was hit for a good profit, but the trade continued to work and I had missed a much bigger move.  In my last long trade, I bought 2000 SSO with a stop below the low.  I scaled out of the entire position with 85% of the position sold at limit prices below the vwap.  250 shares were stopped out, as I increased the stop price after the mkt moved higher. 

In order to be a disciplined trader, I can’t urge how important it is to have a set of rules and stick to them.  Personally, I find it helpful to automate my sell-stops and sell-limit orders and write them down.  Most of my losing trades are a result of changing a stop price and most of my daily stress is a result of lowering limit prices and selling too early.

On the 20-day chart, the 820 and 800 levels will be important levels of support.  My best guess is the mkt opens 100 points lower near the 820 support level and the green trendline.  Last time this happened, the market ripped higher after testing the trendline, however, the market is so extended and the financials have run so high, that I find this scenario unlikely.  I will be short if 825 is broke and long if the level is held.

If support levels hold, I expect the S&P to rally up to 900, however, I see a lot of near-term headwinds and the most likely scenario is that we consolidate lower.  Green Shoots says “We Go Lower”

I’m having the pleasure of doing my own taxes and found Investotek to be quite helpful.  I am using a couple of their products for the purpose of verifying my own calculations.  The website is www.investotek.com

Observe today’s intraday chart on the right and the 10 day chart on the left.  Resistance held on the longer term chart.  Trendline and vwap are resistance on intraday.  The opening level on spy was also major resistance (see how the mkt traded right down to that area and buyers came out). If the mkt can sustain a break above the vwap, we’ll make a run for the high.  Note that the Russell and NASDAQ are leading the mkt.