Disclaimer: None of what follows should be taken as investment advice nor as a recommendation to buy or sell any stock, mutual fund, ETF, or any other investment vehicle. Investing in the stock market carries a high risk of loss and is not suitable for everyone. Before you invest in any of the above mentioned assets, please consult with a qualified agent before doing so.
Please Read the “About” Page:
If you happened to have stumbled upon this site, please read the “About” page.
For a primer on the system I use, please read the “Getting Started With My Stock Market Sytsem” page.
Stocks Have No Real Value:
Regardless of what you’ve been programmed to believe, stocks have absolutely no value. EBITDA yourself all you want, but it doesn’t change a thing.
Here’s your first clue. When you buy a stock at $25, do you get some kind of certificate that states that you may sell the stock at some future date for $25? No. No one would ever be so foolish because they’ve got your money and there’s no way they would want to have to give it back. In fact, you’re out the $25, it’s gone from your account so you own the stock but you’re already in a losing position. In order for you to make any money on the stock you just purchased somebody else must be willing to lose more money than you. The value of a stock is determined only by what some greater fool in the Ponzi scheme is willing to pay and if that next person is willing to pay $26 for your shares, then you’re a stock market genius. On the other hand, if the next person is only willing to pay $5 or less for your shares, then you’re bag holding loser.
When a company goes public and offers an IPO, who gets the money? The company. The buyers of the IPO have given their money to the company and are out the money spent on the IPO. The buyers start out in a losing position as all the buyers get in return is a digital confirmation in their accounts that says that they bought the IPO for X amount of dollars. The buyers have exchanged their money for a license to sell those shares at some future date for an as yet undetermined price. These bag holders hope upon hope that some greater fool will come along and pay more for these IPO shares. Sometimes this works out and sometimes, as in the case of FB’s recent IPO, it doesn’t. But if stocks had value, then it would always work out, wouldn’t it?
The stock market is nothing more than legalized gambling in a speculative auction type environment where greed drives a stock’s price higher and where fear of loss drives a stock’s price lower. Forget earnings, P.E. ratios, and what analysts say because all of that is pure BS. The only thing that matters is what the next fool is willing to pay. And never forget that in order for you to make money in the markets someone else has to lose money.
Sell in May and Go Away:
The stock market always rises for a while and then falls for a while and in so doing gives traders 2-3 buying opportunities each year. In 2012 the market gave traders two such opportunities, one in June and then one in early November. These cycles shouldn’t catch anyone by surprise as they’ve been going on for years and years. Unless the market falls off a cliff in the meantime due to all these fiscal cliff shenanigans in D.C., the next sell should come sometime in the March/April time frame of 2013. This is what happened in 2010, 2011, and 2012. Other years have been different but the point is that each year gives traders a chance to enter at or near a low and exit at or near a high at least twice.
Bottoms are Easier to Spot Than Tops:
It’s been my experience that bottoms are easier to spot than are tops. Bottoms come with some form of explosive volume and the selling pushes breadth indicators into extreme oversold realms. Selling can continue for a bit longer but once there’s been a climax selling event, then you will know that the bottom is at hand.
Tops, on the other hand, are much more difficult to spot. This is because even though all the stars might be aligned late arriving buyers can prop the market up for longer than appears justifiable. Professional traders, institutional traders, and large hedge funds, who get much better information than us mere mortals, know when the market environment indicates that a top is coming and they have the ability to prop the market up while they quietly distribute. This kind of activity can last for days or weeks extending a rally long past its due date.
You can use failure swings/negative divergences of the RSI 14 and CCI to help spot tops but you will not really be sure of when a market tops until several days and/or weeks after the market has finally topped. When you do start to see these failure swings you can prevent losses by tightening stops, scaling out, or just going to cash. You will probably be early and you will question why you’re in cash as the market continues to rise and then one day all those extra points you missed will evaporate as the market collapses. In other words, when it comes to tops, it’s much better to be early otherwise it’s too late.
Trade In Isolation:
Back in 2000, an acquaintance told me to mute CNBC. He said that CNBC’s job was just to pump the market and create a rosy environment that would entice people to keep buying stocks regardless of what was actually going on. Back in those days, the pundits were using terms like “new paradigm,” and analysts were saying that QCOM was headed to $500 and even higher. When the market began to collapse in March of 2000, the pundits kept saying that stocks were a stone cold buy. And they said that all the way down to the 2003 lows. Stocks such as MSFT, CSCO, ORCL, and DELL have never gotten near where they were in 2000 when the QQQ was up at $100.
At the time I was a stock market novice and thought that the pundits on CNBC only had my best interest at heart. What a joke. Well, I muted CNBC then and only watched the ticker scroll across the bottom of the screen. I don’t even have a T.V. now so I couldn’t watch that idiot Cramer if I wanted to.
This was one of the best tips that I ever received and I don’t miss the cheerleaders on CNBC or any of the other sources for business news. But in the world of the internet, television and radio are just one source of information. There are forums, message boards, Facebook, blog after blog after blog, including this one, and the list goes on. I’ve been known to post things on various message boards as sometimes you just have to have some kind of human interaction when you’re sitting at a computer watching the market but I’ve done so less and less as time has passed and stopped all together when I got involved in the futures markets.
The problem with message boards, forums, and blogs is that you can not help but be influenced by what you read. You can not hold two conflicting ideas in your head at the same time without causing confusion. Your analysis might indicate that it’s time to get long the market and then you read a post by someone who you respect and they’re saying it’s all DOOOM from here and then you question your own conclusions. Worse yet, some people are always bearish and others are always bullish. Reading posts on forums or messages boards written by these kinds of people is of absolutely no use to traders. Still, right or wrong, their posts will cause you to second guess your own conclusions. The only way around this is to trade in isolation, to do your own analysis, and to let the charts guide you. Easier said than done, perhaps, but doable.
Ultimately you will pay for or benefit from your market decisions, even if they’re based on the opinions of others. Right or wrong, when push comes to shove, you have no one to blame but yourself. If you make a decision based on the opinion of someone else and the decision turns out to lead to a loss, the money you lose comes out of your account and not out of the account of the person whose lead you chose to follow.
The only way to avoid this kind of conundrum is to become as independent as possible, to do your own analysis, and to trade in isolation from the influence of any and all types of media. Mute or turn off CNBC. Limit your use of message boards, forums, and blogs. With the exception of muting or turning off CNBC, I’m not suggesting you go cold turkey but consider moving in that direction.
*Basically all you need to know about the market is on the charts so you don’t need any other information.
If you don’t want to get caught in a short squeeze, then you better stay away from ZeroHedge. No matter what is going on, the perma-bears that inhabit ZeroHedge have nothing good to say. And remember, you can not help but be influenced by what you read or hear or see so the negativity of ZeroHedge will doubtless color your thoughts and could lead you to make a costly mistake. It’s all about making money and you can’t make money if you’re always shorting because ZeroHedge says the economic system is on the verge of collapse.
I discovered ZeroHedge back in 2009, probably sometime after the March lows of that year. This was a pivotal time in the market and while I didn’t know it at the time the worst of the market collapse was over. However, according to ZeroHedge, things would only get worse and then there would be a complete collapse of the world wide economic system. Didn’t happen and three years later articles posted on ZeroHedge continue to predict this collapse. Maybe one day the whole system will collapse and ZeroHedge will be proven right but if this does happen then who’s going to pay the bears when they finally buy-to-cover?
Just as I highly recommend you mute or turn off CNBC, I also highly recommend that you avoid the other side of the coin and that includes sites like ZeroHedge.
Bears Drive the Market:
Love them or hate them, the market cannot exist without bears and shorts. For a few weeks or maybe a couple of months each year, the market will drop but the rest of the time it is inching up as that’s the way the market is designed. Long side traders have the luxury of sitting in their positions for as long as they want, through pull backs and rallies, but shorts don’t share this because if they’re wrong then at some point losses will become too unbearable or they’ll be subject to a margin call. When the shorts reach the point of forced liquidation, their buying helps propel the market higher.
Bears and shorts are always trying to sell the top of the market and they’re usually wrong because, as I noted above, tops are so elusive. When they finally give up and buy-to-cover then it is these forced buys and the coincidental buys of the longs that give the market the fuel it needs to move higher. When the bears finally give up trying to find the top, finally capitulate, that’s when the market will top. Then, later on, after the market has cratered, the bears, having sat on the sidelines licking their wounds as the market drops, will conclude that the market is going ever lower and they will start shorting the market again and the cycle repeats.
80% of a Stock’s Movement is Correlated to the Movement of the Index the Stock is in:
Since this is the case, then why bother looking for individual stocks. Instead, look for the best performing indexes and sectors and search for an ETF that tracks the index or sector. This is a lot easier than trying to find the next big winner and a lot less riskier, too.
* AAPL and the Q’s are the exception to this rule at the moment as it seems as though 80% of the Q’s recent action is coming from AAPL. At some point this winter, the $NDX will be rebalanced and AAPL’s weighting is likely to be adjusted so that moves in AAPL won’t seemingly be the sole source of movement in the QQQ.
The ES Will Test Either the High or Low From the Overnight Session 96% of the Time:
There’s a 27% chance that if the ES tests either the overnight high or the overnight low, it will then break that high or low.
There’s a 73% probability that once the ES breaks one way it will not break the other way.
Just some things to know and understand about the probabilities of the futures movements during the regular session especially since the futures move the regular indexes and not the other way around. You can check the ranges for the overnight session at BarChart.com so you’ll have some idea of the possible range the markets may trade within during the regular session.
Brokers Are Not Your Friends:
If you have a broker then know that his or her sole desire is for you to buy and sell stocks as often as is possible. That’s the only way they make money. They are salesman not traders and they are about as clueless as the bubble heads on CNBC. A broker just wants you to generate commissions for them. Period. They’re not interested in anything else. If you were to ask a broker about technical analysis, they’d probably just give you a deer-in-the-headlights stare. Nice people but not much use for traders.
99% of the People in the Market Shouldn’t be in the Market:
Think about the people who bought stocks in late 2007 and are yet to get whole on those stocks five years later. There are people out there who own the Q’s at $100 from early 2000. When are they going to get whole?
If you understand the market, the market can be very rewarding. But if you don’t understand the market, then the market is likely to show you its mean side.
Those fat cats with their $3000 dollar suits, $1000 dollar shoes, and $200 dollar ties that are paraded across the screen on CNBC do not want anyone to come to the conclusion that the market is a scam, a casino, or that the Emperor has no clothes . Oh, no. I mean, think about it. Those fat cats have dues to pay at the country club and then there’s that new kitchen they’ve got planned for that plush apartment they own somewhere up on the Eastside. And they get all this stuff off the backs of hard working but gullible people who get guilted into staying in “for the long haul.”
The entire financial services industry is nothing but a scam. They’ve worked hard to create this illusion that you must have a certain percentage of your money in stocks, etc. I mean, what’s your asset allocation? And those analysts and fund managers take a cut of your money every year regardless of performance. Hey, but what else would you expect from the 1%’ers?
Not a pretty picture but that’s the way it is and that’s what makes trader’s their money. With interest rates close to zero and with the possibility that they’ll stay at zero for several more years, then where else can you put your money? Just don’t be caught without a chair when the music stops.
60 Minute Charts:
Learn to use the 60min charts. Time and time again, when the RSI 14 drops to 30, the stock or index in question is very close to a bounce. You could just trade the 60min charts and nothing more. Get in when the RSI tags or drops below 30 and then sell when the RSI tags or rises above 70. Then sit out and wait for the cycle to repeat, as it always does.
I track and log the daily changes in all of the breadth indicators that are on the Breadth Indicators page. Before I started this blog, I back tested each of them and through the years I’ve seen them give good signals over and over. Breadth indicators track emotion, fear & greed, and assign a number to the degree of change in these emotions. When breadth indicators peak, that’s when greed has peaked and a top in the market will follow. When breadth indicators bottom that’s when fear has reached unsustainable levels and that’s when a bottom will begin to form. If you track breadth indicators you will rarely be caught off guard.
Trend lines, Bull Flags, & Bear Flags:
When it comes right down to it, you can pretty much do away with all indicators and just use a trend line to track the market’s movements. If the market has been moving up but then breaks below a rising trend line, then it’s time to try and track the market’s movements within the confines of a Bull Flag. If this goes on too long, then you’ve got yourself a falling price channel and a new down trend to deal with.
On the other hand, if the market has been moving down and breaks above a falling trend line, then it’s time to try to track the markets movement’s within the confines of a Bear Flag. If this goes on too long, then you’ve got yourself a new rising price channel to deal with.
Trend lines, Bull Flags & Bear Flags have made a lot of people a lot of money. They’re simple and require no understanding of MA’s, oscillators or other indicators. They can be applied to any market or any stock at any time. There’s nothing secretive or esoteric about them.
Definition of a Trend:
An up trend is defined as a series of higher lows and higher highs. Some would say that you need at least two higher lows before considering that the market is entering a new up trend.
A down trend is defined as series of lower highs and lower lows. Some would say that you need at least two lower highs before considering that the market is entering a new down trend.
Pretty basic but very important. As of this writing, late December, 2012, and based on the definitions above, we are currently watching an up trend reverse and potentially become a down trend.
The Fourth Turning:
Do a google search for “The Fourth Turning” and you’ll find several sites dedicated to the concept along with the home site as well. Basically, societies go through four phases based on generations with the cycle lasting approximately 80-100 years. This is similar to a Kondratiev wave but from a different perspective.
There’s no way to know if history is going to repeat itself, but according to The Fourth Turning it has for centuries and so probably will into the future. Here is a link to a recent interview with Neil Howe who was co-author of the book with the now deceased William Strauss.
Only the Paranoid Survive:
When Darwin wrote about the survival of the fittest, he meant, “better adapted for immediate, local environment”, and wasn’t necessarily referring to the strongest. He was instead referring to the smartest, the fastest, the most adaptable. If our small in stature ancient African ancestors hadn’t been smart, quick, and always paranoid, they never would have survived in Africa’s hostile environment. But they did survive because they were alert and quick to adapt to changes in their environments, even if those environmental changes were transitory as in the appearance of a large prey animal. Had they not been hypervigilant, our species would have been wiped out hundreds of thousands of years ago.
We owe our survival to the paranoia that is hard wired into our DNA and when it comes to investment risk, only the paranoid survive, baby.
Goodbye and GL in all your future endeavours.
Well, no bounce and it did appear that it might happen right up to the moment the selling started. Futures really tanked after the regular cash session closed . As I wrote in November, when there’s been an increase in capital gains taxes, the markets have been down about 1.5% in December. $SPX now down 0.97% for the month (-1.94% for the week). Of course, if there’s any good news out of D.C. on Sunday, then markets could take it all back on Monday.
We’ve blown through and closed below an important support level and are sitting right on another one. Last two days, $SPX has stopped dead at 1401 but today it closed awfully close to the low so it’s going to be tough for $SPX to hold above there unless there’s some good news out of D.C. If we should drop below 1398 then we’re probably going to take back every point of this latest rally leg. I’ve expanded the Bull Flag but if we should drop below 1398 then you might as well consider that the Bull Flag has morphed into a new falling price channel. To confirm that it is new falling price channel, we’d need to see a test of the upper line along with a failure to break through.
GL and be careful in the week ahead.
Today’s bottoming tail will probably buy us a couple of days and that may be enough for Congress to do something. No idea, really.
We clearly pierced the support line and closed above it so this can be said to be a successful test of this support area. This would be completely confirmed with a new high sometime in the next week or 10 days. What we do know is that the market can make a new low and often when there’s one then there’s another and another so we’re not out of the woods. We need to see a new high above the most recent swing high 1447.75. That will take several days to achieve and anything can happen between now and then. Today’s bottoming tail suggests a bounce for Friday but it may turn out to be a dead cat bounce unless Congress gets its act together.
I did unload my TNA today. I had planned on selling my UPRO but then we had the big reversal.
We are getting close to an important support level in the 1412 area. You can see on the chart where this support held previously, but it may not hold this time. If it does not hold then that would give us a lower low on the $SPX and we will then be at risk of putting in another lower low and or a lower high. If we start to see something like this, then the up trend is in serious jeopardy and some would say that the up trend would at that time be over.
$SPX is also moving with the confines of the Bull Flag and though it pierced the bottom of that channel today it did manage to close back inside. This is not very bullish but it’s all there is.
I continue to hold my long positions and am waiting to see what happens around the 1412/1411 area before I finally cash out.
Just before 10:00pm E.T.
It’s difficult to make too much of a pre-holiday trading session, but what happened today was not good. $SPX now moving inside a Bull Flag which by it’s name implies bullishness. However, until $SPX breaks out of the top of the pattern there’s a chance the Bull Flag could morph into a down trending channel, but that won’t happen for a while. For now it’s a Bull Flag and so as such should resolve to the upside. More troubling, at least for me, is that the 20,20 Sto did get a bearish cross today. This happened in late August as $SPX was moving within a Bull Flag at that time. As soon as $SPX broke out of the Bull Flag, then the 2o, 20 Sto had a bullish cross and the rally resumed for a couple more weeks. Then in late September there was another bearish cross of the 20,20 and that one marked the September top. Key for me now will be whether or not $SPX continues to move within the Bull Flag or breaks out one way or the other. Still watching $SPX 1411 as a key level of support but who knows if we’ll even get there.
Enjoy the holiday and GL in the shortened week ahead.
No idea what might happen next week because it’s a shortened week and then we’ve got those screwballs in D.C. to deal with. While I was certain that those cowards in the House would do everything they could to avert the fiscal cliff and thus not suffer spending cuts in their home states apparently they’re dumber and more cowardly than I anticipated.
Even with Friday’s panic sell off, $SPX still closed up 16.57pts and 1.17% on the week. I thought we were headed into the abyss Friday but the buying that started around 11:45 continued into the close and squeezed out a bunch of shorts along the way, so there you go.
On the 60min SPY chart below, you can see that as soon as the RSI tagged 30, SPY began to climb. The problem I see on the chart is that the 200EMA, which is right there with Friday’s cluster of candles, sure looks like it wants to roll over. Should that happen, then it would signal a change in trend so this needs to be watched closely for the next few sessions.
Daily chart of $SPX on which I’ve drawn in a couple of new trend lines with dashed yellow lines. This is valid for now, however, if $SPX should take out 1411.48 any time next week, then that would be considered a lower low and could be the first in a series of lower lows. As long as that does not happen, then the up trend should remain dominant. If $SPX were to drop below 1411, then I would get a bearish cross of the 20,20 Sto, if I haven’t gotten one previously. If that should happen, I will probably reduce my exposure by selling TNA or UPRO, or both.
Several months back I mentioned that at sometime I was going to quit posting on a regular basis. I put this blog together to be used as an educational source in which I’ve outlined various chart trading methods as well as how to use various breadth indicators. I never really intended to post something on a regular basis. Initially I thought I might just post something on the weekends or when I saw a potential market turning point in the works, but then I just got into posting more and more often. It’s time now for me to stop posting on any kind of regular basis and my last regular post will be next weekend, just as the new year approaches.
When I first started this blog, I would receive about 20 visits per day. I now receive between 80-100 per day and I want to thank all of you who have made this blog a part of your daily routine for however long that has been.
BTW, the blog isn’t going anywhere, just me.
Thanks & GL in the week ahead.
Better bounce tomorrow or it could be curtains.
By my own definition, a pause day is a +/- 50pt day. Today’s action does not qualify. The simple answer to why the markets sold off today is that there was no progress on the fiscal cliff negotiations, but there may be more to it. There is still the specter of capital gains tax increases and the possibility that selling to prevent these higher taxes will dominate market action from here through the end of the world or the end of the year, which ever comes first. Plus, we are headed into holiday trading and though this generally favors the upside, last year the markets were essentially flat from 12/19 through end of of trading on 12/31. The wild card is fiscal cliff negotiations which are going nowhere right now and I guess the uncertainty of such a deal was part of the reason for today’s sell off so obviously if we get some good news between now and Friday by 4:00pm then we’re off like a rocket for at least a day.
Chart of ES in the 5min time frame. Pretty interesting stuff all day. I ended the day after one trade, which just paid for the commission on that trade. After that I sat on my hands because I did not like the action. Anyhoo, just wanted to show the chart I was looking at with the DOM, or depth of market, on the left and the reason I’m doing this is because at 3:45:47pm someone hit the Bid with 1000 contracts at 1436.25. I didn’t actually see it happen but I did see it on the time and sales stream. At the time, there must have been over 1000 contracts sitting on the Bid waiting for the price to come to them and then, boooooom, most of them got filled. In the short time that I’ve been trading the ES, this is the largest number of contracts I’ve ever seen go through at one price. Anyway, this clearly spooked the market as all the players realized that someone with very deep pockets was heading to the cheap seats. You can see how, in the minutes that followed, the market dropped like a rock through the rising trend line that I was watching. Also, that huge, red volume bar is for 68K contracts. That is the largest number of contracts sold during today’s session and it says that the Pro’s were selling the close and this is never a good thing.
GL & be careful.
Just in time for Xmas.
I thought we’d get a huge one day rally on the fiscal cliff news and then we’d roll over for a bit. Not so. Two strong rally days with potentially more to come. I’m thinking that we’ll rally on the hope for a solution and then back off a bit once some solution is announced, but what do I know?
Per the RSI on the 60min charts of the Q’s, IWM, SPY, DIA, XLF, & IYT, these sectors are either overbought or very overbought. There are a couple of breadth indicators that I follow that are also overbought. This suggests that we’ll have a little pause in the action tomorrow, though news out of D.C. will definitely trump any and every other thing.
We are moving with conviction/volume. Today $SPX did 3.2billion shares, which is 500million more than its average volume of late, and blew by the important swing point of 1438 in the process. When you take out a swing point with this kind of volume action you just have to expect that the market wants to go higher yet.
On the chart I’ve put in a price channel and it is pointing right at 1460. Weeks ago I was pretty certain that the $SPX had put in its high for the year but with the way $SPX is moving now it does appear that the previous highs will fall before year end. Time, of course, will tell but that’s the way it looks from where I’m sitting.
GL & be careful because only the paranoid survive.