Thursday, January 06, 2011

Why we hate predictions

Crude is down 5% from its highs earlier this week, gold down 4%, and silver down over 7% and yet the Nasdaq hit a new high today.   The Nasdaq being a better comparison than the S&P 500 as it doesn't contain nearly as many commodities and is the "momentum" higher beta index.  Financials are not even 1% away from their highs.

This is evidence, thus far, of classic rotation.    The big million dollar question of course is IF the commodity sell off accelerates, will the market finally be pulled down?    However, attempting to predict the answer, for our type of trading, is completely irrelevant. 

This is all we do:  everyday after the close we go through a core set of stocks looking for set-ups.  We add alerts, put them in newsletter, send it off, and then trade accordingly the next day.   If market starts to crack, we'll see it in the set-ups. 

Don't worry so much about the big, bad correction.   All markets correct, and eventually we'll get one, be it next week, next month, or next quarter.   But it won't happen instantly -- you're not going to wake up to a 5% gap down and then see market die for next 3 months.   Trends as strong as this one are like giant ships -- it takes a while for them to turn around.  Thus far we've had an important red flag and that's the commodity weak price-action.  Commodities are often early indicators of corrections, but not always.  Basically,  as long as there's no contagion to other non-commodity sectors, it cannot be construed as bearish for entire market.

Before getting grizzly bearish we'd want to see financials die, tech leaders such as AAPL GOOG get hit hard, transportation stocks roll over, and most importantly, we'd want to see support buying cease to work.   Bear markets don't care about support.  They eat them for breakfast.  Support buying is our specialty and we'll be the first to know if it ceases to work.   Until that (very sad day) occurs in that we get stopped out on our support buys instead of seeing green, we'll be buying the dip on oversold sectors hitting support.    

So relax, take it one day at a time, and don't worry about predicting anything.   Just watch the price-action, trade your set-ups, take your profits, respect your stops, and trade accordingly.  That's it.  And leave the market predictions to the CNBC "gurus".  

Tuesday, January 04, 2011

Market Thoughts

Today's big rally decimated our alert list (we had 8 long trades trigger including our best set-ups that we had been stalking for weeks, including NTAP 56, VMW 92).   As a rule we never go counter-trend if we have a lot of alerts that still have yet to trigger, i.e. we never go short if our list is full of long alerts that haven't triggered yet.   However every once in a while a big rally empties our alert list such as today and when that happens we give ourselves the green light to go counter-trend.  We're expecting choppy action going forward (also note the divergence between market and commodities today which printed some exhausted candles) and are in scalp mode with a focus on shorting euphoric spikes up.

However all this being said: even a few days of flattish action would set up a number of new long alerts.   Definitely too early to call a top but can't be blind either to signs of a tired, extended market, especially if you have a very short time-frame such as we do.   Traders with longer time-frames have less to worry about as the market could simply base before grinding higher. 

ANR, one of our favorite trading stocks,  a good example of what we're talking about as it printed a gravestone doji today:

When we see exhaustion moves like this then we often go short for daytrades.  Not shorting weakness, but shorting euphoric buying as panicked longs chase exhausted moves up.

Huge run on ANR -- and extended from the base at 56.5 (where we had alert on the HCPG newsletter last week).