Saturday, June 11, 2011

Oh the suspense -- the XME test

Note the test and success first of the 50SMA in Jan 2011, then the test and success of the 100SMA in March 2011, and now the test of the 200SMA in June 2011.

Note the first test of ascending SMA has a much better chance of success than the next tests (if tested in short period of time).   The third test of the 50SMA failed and the second test of the 100SMA failed.   We like first tests on ascending SMAs, but not so much the subsequent ones (unless considerable time has elapsed).
Click to enlarge:
We have no position currently in XME — possible overshoot if SPX goes for 1240-1250.

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Our plan for next week

We took a mid-sized position near the close prices on QQQ IWM SPY but with the understanding (and lots of room in buying power) that market could gap down/sell-off a few percent into 125 SPY on Monday.     So why did we buy?  Because there’s a chance market doesn’t gap down and we wanted to be involved, and we liked the XLF hammer.  So why didn’t we go in with bigger size?  Because the evidence is quite mixed and major trend-lines and support levels often serve as magnets — basically, it’s too risky to bet anything big right now.  Even if we gap up we would have zero regret for not taking on larger size.   Note also we didn’t put on any leveraged product (no TNA, SSO, no futures) as we want to stay on the conservative side.
We wrote on Monday night “we think ultimately this market will at least go test the trend-line which currently is lining up with the 200SMA around 125″ and it’s coming even sooner than expected.     Note how trend-line is slightly below the 200SMA.  We’d love a) bounce before 200SMA to leave out all the dip buyers who didn’t get in today and were waiting for the 200SMA or b) a move through the 200SMA to freak out everyone and then bounce on overshoot to trend-line just under it.

And what if trend-line can’t stop this falling elevator?  Well, next support is near 122 — but unlikely we will get there without experiencing some bounce, even if it is a dead-cat intraday or 2 day bounce.

The QQQ very similar — trend-line support, and then major support right above 50.7
QQQ close to 200SMA — however, note the awful action in AAPL — good possibility that the 200SMA will not hold.
One of the brighter notes — XLF off the lows on Friday.   Good start.

Copper technically broke down but then rallied back to close near 405 support again.

GDXJ another bright spot as it held firm during the market downturn.

We’ve been asked for long-term predictions from some of you — we don’t have any.   We don’t believe in long term technical analysis.   The charts can look one way but then the market has two days contra-trend and the whole picture changes.  Right now it looks like we will test the trend-line, bounce, and then go through and test the major horizontal support (122 SPY, 50.7 QQQ) but again a  rally  could change that picture drastically.    The price-action is bearish but it’s too oversold for us to put on break-down shorts — however we will be active in resistance shorts on any bounce.    We think this coming week will bring a lot of fire-works — absolute key between those that make a fortune and lose a fortune is buying power.   If you start slow and add only at major levels (no margin, no leveraged products) you can often catch very nice reversals.  If you start too soon, add too soon, most of the time you will blow out before the reversal comes.
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Friday, June 10, 2011

The only chart that counts

This is the big kahuna — ideally we’d like a slight overshoot of the very watched 200SMA into the loving hands of the trend-line from March 2009.   Nothing goes straight down but that trend-line test seems like a given.  In our experience the first test of the trend-line is often a great risk-reward long.  The second test, not so much.

Click to enlarge

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Thursday, June 09, 2011

Respect the Lights

Modern civilization demands abstraction, and money is the ultimate signifier.    Most of our interactions are removed from reality.     This distancing effect is a common part of our life.  We buy an iPhone and all we think about is the dollar price, we don’t think beyond  the money — about the life of the person who actually helped construct the phone at Foxconn.

We buy our meat from companies that do everything they can to distance you from the idea that what you are eating was actually a live animal that was butchered.  It’s not even called “Cow part”, it’s called a Rib-Eye, another distancing effect.
The distancing effect is even more exxagerated for traders.  Money is already an abstraction, for traders it’s taken to a different level where money becomes an electronic number, green and red, bobbing up and down like in a pin-ball game.    Compare this to a carpenter who works for an afternoon, makes $100, and goes home with the money knowing what bills the money will pay. Every hour that passes he knows that he has pocketed another $25.     The connection is tangible.
Back in the bubble days (tech bubble, 1999) I was in a car with a buddy prop trader, going out for dinner, driving too fast down the highway.   We got clicked by a ghost cop car halfway down the route and my buddy was stopped an issued a ticket.  He was pretty flippant and I’m sure the cop was happy to give him the $250 ticket.  We drove off and he laughed, “Ha, I made that much in the first two minutes of the day”.   He didn’t care about the ticket , he had no connection to money, and incidentally enough, to risk.He blew out in 2002 and we lost touch.
The lack of respect for what you gain and can lose is directly related to how quickly traders blow out their accounts.   What is essential for new traders, especially prop/daytraders, is to make a physical connection between those flashing red and green lights and income.  Basically, what is needed is to try to overcome the distancing effect — to realize that those flashing lights represent hard-earned money and thus do everything in your power to follow the strategy/plan/discipline.    In this business to lose money is unbelievably simple.  On the other hand, to become a professional trader who can pull money consistently out of the market is quite difficult.  The first step in this quest is to respect those flashing lights.

Wednesday, June 08, 2011

Our tells and Mixed Market

We’re done nothing more than scalping today, looking for dimes here and there as the action is too mixed for us to bet in any one direction.  On the negative side we hate the action in the silver miners, CMI, and semis.   On the positive side AAPL showing a bid and OIH doing well (thanks to OPEC).
Zortrades showed a snapshot last week of a quick way to look at stocks on his screen — we liked it and borrowed the idea — doing the same but with our own favorite tells:

Quick look at this and it tell us to either stay flat, or go for scalps, and not push our luck in any direction — at least until we get better breadth.

What many are looking for is a trend-day up bounce — that’s not going to come until we get better breadth and a upside revesal on some of the “momentum” stocks (like it or not, silver miners are an excellent tell for hot money).

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