Saturday, December 31, 2011

Portfolio performance 2011

First things first. I get emails everyday asking me if I day trade? If I am only a short seller? If I manage a hedge fund? I suggest you to read this introduction and all the links in that blog post first. I also have a chance to explain now. I am not a day trader, but should the position insist me to open and close a trade in less than 1 day, I have no problem doing it. I am both a long and short player, so I don't have any bias there. I see opportunities, I trade them. I trade stocks, ETFs, stock, ETF & index options. I do not trade commodities, currencies, futures and options related to them. However, I take advantage of the commodity and currency fluctuations directly by playing ETFs or indirectly by applying them to the general market. If you want to take advantage of my trading methods, I believe you need to ask more questions. The more you interact, the more you will understand my methodology better. We all benefit in the end.

My previous performance letter was posted here . Till Q3, my portfolio was up by 39%. For the year ending 2011, my portfolio's gain was 48%. The market in major indices were mostly unchanged for the year. SPX was down by 0.0003% for the year, $DJI was up by 1.5%. Given the flexibility in my trading and the methodology I use, it should not be surprising that my portfolio was up. Account performance in the last quarter is shown in this picture from my brokerage:

Some highlights for the year:

  • The year was not short of drama even though my portfolio was up. Trading was in no way easy. In terms of trading being hard, this year would rank in the Top 3. In terms of YoY gains, this is not my best year but one of the best for sure. Y  2007 was my best trading year. Conditions were similar to this year but I was able to catch some good swings during that year which made it my best year in terms of returns.
  • I didn't expect the year for the stock market to be flat. In the beginning of 2011, we had QE2 going on. With such a massive liquidity push, stock market was all happy. I expected that the market would end short of 1500, based on the liquidity push at that time. It was only my expectation but you know I seldom trade for that long time for a year. 
  • My longest trade time was 28 days, shortest was for 5 minutes, average trade time 2.4 sessions. The shortest trade made my whole account go up by 1% :) , I had no options but to take the profits and ring the register ka-ching.
  • Going back, I had several trades which netted my account less than 0.2%. I regard them as waste trades, which made money for my broker but not worth my time. 2011 being a volatile year, I had several such trades. I am sure the brokerages made a boat load of money from every other trader as well.
  • 2011 was not a year for the lazy, couch hugging hedge fund managers. Hence, many hedge funds including the famous John Paulson's fund was down big for the year as well. The top performing hedge funds for the year 2011: here . By sector : here . Flexible, and many hardworking hedge funds did close in positive. I wouldn't classify John Paulson in the lazy group though. There are times when you are unlucky, I would bet that Paulson will return with a vengeance next year.
  • I did not expect the top for the year in May 2011. I continued to be long, hence I faced slight draw down.
  • My worst performances came in early August and middle of the October. In August, the down move was extended, and stretched beyond a 3 sigma move. I had gone long on August 5th after the market was down more than 10% in 8 days, then came the US debt downgrade by S&P. The market was down by 9% the next day. I did not keep my trade open, I had to close at 5% loss that day. Market was up by 8% next day, it would have been beneficial if I was still in the trade but sometimes market can be down 25% on a single day like in 1987, or 15% like in flash crash 2010. I couldn't risk a draw down more than 5% for the whole account in a single day. 
  • In October, I was a dumber. Though my market signals indicated me to go long, I traded short with a bearish bias in my head. I was rewarded with a 3% loss. But, that's not what hurt me during that time. What hurt me was not being in the biggest long trade of the year from 1077 to 1290. It was my lesson not to trade against the signals. If you trade against the signals, not only will you lose that trade but you also miss the trend.
  • I could not take much advantage of the gold rush in the 1st half of the year or the plunge in the 2nd half. I had stayed away from the Gold trade. I traded Silver though early on in the year. Gains from Silver (via SLV, AGQ) account for the largest profits I made in the year. Silver always will remain my favorite play as I had several profitable trades over the years.
  • Any 2011 year review without Steve Jobs tribute would be empty. Steve Jobs succumbed to Pancreatic cancer after a 8 year fight. We miss you Steve Jobs! 
I wish you all a Happy New Year 2012, have a very good and prosperous trading year!

Friday, December 30, 2011

Sell Humana Inc.

I am looking at HUM today. The chart I am using is a weekly chart, so this is an IT call. If you hold HUM, sell HUM (before the next call) and take profits. Don't short sell yet. Short sell below 82$. The weekly price developed negative divergence with many indicators, one of which is MACD. The price developed higher highs while the indicators are showing lower highs.

Watch the pretty breakout after the 2010 consolidation.

Thursday, December 29, 2011

What is holding this market down?

For the last several weeks, SPX has been hitting a thick wall of resistance and dropping down. Some think it is the 200 DMA, some think it is 61.8 number. SPX traded above, below, at the 200 DMA several times this week. There is significant resistance that is holding the market down though. I don't think this low volume push will cause the market to go higher. "Market higher" is the keyword and I expect the market to trade higher 3 months, 6 months from now. The 50 week MA is at 1267 and that is what is pushing the market down. For /ES, the resistance stands at 1264. 

I expect we will go lower, gain some momentum and then push higher in the new year. 

Thursday, December 22, 2011

Emini intraday update

My VST signal is still on a buy. I am still partly long, after closing 60% of the SPY position. When and if the trailing stop 2% hits, I will still be profitable on that position taking my entry into consideration.

At this hour, I wanted to post an intraday Emini futures update. There is a negative divergence of the price with the RSI (14) on the /ES hourly. I noticed this divergence early on, but the divergence is not complete until the hourly bar is complete. I am posting this now as we are very close to finishing the hour. What this means is we may have reached a VVST short term top. After consolidation, we may go up or down. My signal will determine my next entry. If VST signal continues to be on buy, my current position should be good. If VST signal is sell, I will open a short sell VST SPY position. I will post it on my trading blog. The divergence on the chart below is valid as long as the trendlines hold.

Tuesday, December 13, 2011

Euro update - Swing sell

Euro is out of the trendline that held it for the last few months. The implications of this trendline breakout are very negative. It means that the downward spiral from here will accelerate. Sell all rallies, same with AMZN (check my weekend post for the chart).

I also got a swing sell for the market. You can use any price appreciation today to sell SPY short with a 5% stop from here. I suggest you do that after the FOMC meeting update. I know we are not expecting any QE but who take risk even on a 1% chance? If FOMC statement is neutral, there will be a dip followed by a rally. I expect today to close in positive. Either way you can use any strength to sell. I don't think 0.5% on a ST signal matters, safety first!

Sunday, December 11, 2011

Not so FAST!

 It has been a while since I posted individual chart names. I found some good ones to post today. This should kick off the week for you. I have no idea of the fundamentals of these companies, that is your homework before trading/ investing in them. I will take a look at the sector, analyst estimates, 1 year EPS performance, trading volume before trading. I cannot guarantee I will trade all these charts, these are eye candies. If things line up well, I may trade them. I will definitely post it on Stock fund blog. 

I start with Fastenal Inc. today. Use the trendline on FAST to buy the dip with a 5% stop.

Next is symantec. SYMC has possibly double bottomed, buy it right here with a stop below the lateral trendline. Go short below it.
Below is the HOLX daily chart. Enter the position on a breakout, up or down.

Adobe recently satisfied Steve Jobs' ghost by killing mobile flash. Check ADBE chart. ADBE has been trending up after a good consolidation. Buy on a dip with a 5% stop.

We return to our good old friend, AMZN. AMZN is at the lower trendline of the megaphone pattern. I have a bad view of the fundamentals this company has. Yeah, traffic is growing and the site provides good stuff to buy. So, what? It earns 10 cents. With cash in balance and everything, if Wall Street used good criteria for buying stocks, then this should be below 50$. 

 Sell short on a trendline break but notice long term trendline support. If it breaks below that support, it should go down faster than NFLX.
Mattel Co. has been on the uptrend. With this being the holiday season, I am bullish on the name. The chart supports the theory as well. Buy 1/2 now, and buy on a trendline touch. Sell 3% below the trendline.

Sell BMC with a stop above the channel breakout. Buy if it breaks out of the channel.

BroadCom is bearish for some reason. To be honest, the tech sector is not leading this market. That is definitely not a good sign for the market. 
Sell BRCM below the lateral trendline with a 5% stop. I see a H & S on the chart, do you? If the H & S is real, then we should see BRCM test the 2009 lows.

I am bullish on CSCO. CSCO has double bottomed over the long term. Buy with a 5% stop but if it breaks below the double bottom, sell short.

I am bullish on ESRX but buy the breakout. Wait, have patience!

Here comes KLAC with a beautiful chart. Buy with a 7% stop.

I like NVDA here. Buy with a 7% stop. 

I will visit these names after 4 weeks and we will assess our performance of this basket.

Thursday, December 8, 2011

Market update

Folks, 1st things 1st. It is easy to get distracted during trading/ investing. Trading and investing need 100% of you in a perfect state of mind. If you are not in tune with  the market, then your trade is a lost cause. Today morning I read a signal on my charts, I placed a short sell TNA but that didn' execute well. My VST trades are more often terminal trades, sometimes they get extended for many days though. I get in to the trade with a small expectation because of the terminal nature of the trade. When I did not get enough TNA and market was going down within 10 minutes, I felt very bad. When you want to short sell, remember you are fighting everyone else. The odds are stacked against the short sellers. Buyers don't have many rules. Short sellers can't get enough trades, then your short trades may be called..the list goes on. TDAmeritrade is turning short selling into nuisance. During peak hours, exactly when I want to place a trade and hit short sell order button, the order says "WAIT REV.." What review guys? If the short sale is not available, let them make the system to outright reject the trade. I will move on to the next thing to find within few seconds. If the order is waiting for 3 minutes to be approved, what does it mean? It means the guy on the other side can reject my order for 1001 reasons, not just because there are no available shares. It is more frustrating if you have a partial fill. I had to short sell today at a lower price again today but see not everytime you get an opportunity to fill at lower price and still win. It kind of set me off today morning but overall it was a good day. The brokerages, investment managers, nobody encourages short selling. They set weird rules to offset you from short selling. So, be ready to take such risks when you want to sell short.

I analyzed my charts and it looks like there is unfinished business on the downside. I suggest my swing traders to stay in cash. The next signal you are going to get from me is a buy, I don't know at what level. But, you stay in cash. period. Because the market gapped up multiple times and stopped you out. Fine with my system, you will get your chance. Please wait in Q.

The market is sick and 1 chart straightaway shows it. The NYA50R declined today by 22.5%. Translates to 22.5% of the NYSE stocks fell below their 50 day moving average. May be the ticker changes on individual names may be small but I told you during the weekend that market managers tend to buy stocks which are above 50 DMA, 100 DMA, 200 DMA etc. The fact that even after multiple days of rally, the market could not take all these stocks so much higher above 50 DMA to be able to be above 50 DMA on a day like this (2% sell off) speaks volumes about the vulnerability of internal structure of this market.

Look at the NYA200R. It is at 29.32. So, with a rally of several days, all the market is able to do is to keep only 29% of the stocks above 200 DMA. Yeah? That is pathetic and sick.

If today finished close to even, I was going to write we were close to a buy signal. But, not anymore. All I can say for swingers is to stay in cash. That is only because I am following my system. I have to adhere to the rules of my swing system. Buy signal comes after sell signal and so on. If I followed several untested (by me) systems, I would ask you to sell short with good stop. That is where the market is.

Saturday, December 3, 2011

Is Santa Claus coming to the stock market?

The chart is self explanatory. There are several ways to define a bear market. Classic text book definition uses the term bear market as market below 20% of the peak. In my opinion, we can use meter checks like how many stocks are above 50 DMA, 150 DMA, 200 DMA etc. I am using the NYSE stocks above 150 DMA as a barometer here. What happened to this index is not good for the market in the long term. Long term model following this index chart above stays in cash even though the  big picture still tells us that we are in a bull market. So, is Santa coming to the stock markets? I doubt it but with a gun to my head, I have no idea. There are mixed signals. I am taking a day, but if compelled a week at a time.

Friday, December 2, 2011

Sweet candy!

"What would compel me to short it here is if we see a lower high on the RSI (14) against a higher high on the price."

The above is from my previous post.  I got the lower high today morning on ES hourly with RSI14, that is sweet candy to me. I am entering a VST trade based on this.

Thursday, December 1, 2011

Negative divergence

The chart above is /ES hourly chart. You can see the price developed negative divergence with the RSI(14) indicator as opposed to the coordinated move on the previous line. I expect /ES to be lower in few hours than now. Hence, I close all my VST positions and move to cash. What would compel me to short it here is if we see a lower high on the RSI (14) against a higher high on the price. Am I expecting a down day tomorrow? Possibly! But, this divergence could be resolved overnight. The chances are slim for overnight resolution because of the divergence. Don't worry about the accuracy of the trendlines. The concept is important here but not the lines. 

Tuesday, November 29, 2011

Monday, November 28, 2011

Market update

I have a VST buy signal from overnight. Will enter SPY long as soon as premarket trading opens at 8 AM ET with a 2% stop.

I still have 10% of the short TNA swing position. Stop for this is at the open position 43.4$. For those ST swing traders, I cautioned you to take 50% off the table on friday. That post came in after hours, but was good enough for you to close half of your position as it was SPY. However, none of my systems signaled a buy on Friday or reversal of the signals.

The reason for my post asking to take profits on TNA and also swing SPY short is to ensure that you lock the profits, regardless of the market direction the next day. I have taken short TNA position at 43.4$. At friday's close of 33.67$, we were looking at a 22.5% gain in 4 sessions. In stock markets, bulls win, bears win and greedy pigs get slaughtered. I don't want to be a greedy pig. Hence, I took 90% of the position off in 2 stages. We had 7 days down before today, and to expect another day would only be greedy.

The ST/ swing sell signal is still intact. /ES is up by 2.8% in today's premarket. I believe it will hold up to gains in real time trading on SPX. That will not change my swing sell signal though. We will still be in a swing sell signal even if we close 2.8% higher today which only means that the downside objective is not fulfilled yet. I believe that this down leg is not over yet. We got our swing sell signal at 122.25$. We took a 5% gain on half of the position at Friday's close of 116.34$. Our stop for the other 50% is at 1% above 122.25$. Or close the swing position when we get a cash signal. Even that way, your gains for the swing position will be 4%, only because we took 50% off the table.

For any system that you follow, I told you that asset allocation and market discipline is very important. Without these 2, you will have any net gains over the long time.

Friday, November 25, 2011

Swing trading update

Swing traders, take 50% of the short position off at SPY 116.2$. We had the signal at 122.15$. TNA short position is reduced to a mere 10% now. I will make a detailed post later in the weekend.

Sunday, November 20, 2011


AMZN is in a downtrend. I expect it to continue and hit the lower trendline of the megaphone pattern. I see a bounce there and then I expect AMZN to go down, and down. 10 cents EPS/ qtr and > 200 PPS? You got to be kidding me. Sure, billions of $ in revenue, great traffic yada yada. It all comes down to earnings per share! Wall street is not short of pumper analysts and greedy hedge funds - so take it from me. A buy of AMZN even at this level doesn't make any sense. Sell all rallies!

Panera Bread is in a sector which is very hot right now - Speciality eatery. While I say the rally is not sustainable, I am not looking for any long term downtrend atleast at this time. Time is not ripe for a super decline for this ticker. Not yet. Right now, I am looking for a gap fill as marked. We had a down gap on the previous earnings release. The ticker jumped straight above the gap on earnings release this time. We have the 100 day EMA below the double gap and I expect it to fill it.

Thursday, November 17, 2011

ST signal

My swing/ ST system entered short sell signal today. Sell short SPY at 122.1$ ie., today's close with a 5% stop. VST is already on sell signal, I missed the VST signal yesterday because of the chop that preceded for 2 days. Never mind!

Wednesday, November 16, 2011

Cash is King!

Summary of the market:

  1. The market did not break out above /ES 1260 as expected. Rule # 1: There is no gift horse in the stock market.
  2. I had mixed signals throughout the day, from buy to sell to buy to sell...that for a period of 1 full day makes me suspect if the market goes up or down tomorrow. I had not gotten such type of day with mixed signals for a long long time. Till there is clarity, move to cash. I was stopped out today at the end of the day. Down but like I mentioned in my previous posts, I am able to afford it.
  3. In the chart below, look at the highlighted triangle. If SPY falls below, I see a big air pocket below the break down. Target can be anywhere but lower at ~ 110. SPY could breakout above as well but that is to be determined. When there is big TBD, I am moving both VST and ST models to cash.

4. I could not get this post on time because of rapid move during the last hour. What does this tell you? Nobody but you will be able to close positions when needed. You should be able to organize stops for your portfolio. If you can't do that, stay out of the stock market.

ES update

A picture speaks thousand words. Over the weekend, I decided to ignore the news that is coming out of our media. I have always followed my proprietary signal but going by the psychology, news will take a toll on our brains. Hence, this decision to not open any news websites. My charts will dictate my path and I will follow the charts with adequate allocation and discipline to get stopped out. There are always going to be challenges and if any traders/ investors thinks it is a cakewalk to win continuously in stock market, they are lying to themselves. Having said, it is our aim to maximize the returns of our hard work and I must say I have been quite successful in doing that. 

Another point I would like to make is I am catering to a specific set of audience. I managed funds from my families, relatives and friends. I used to explain my decisions to them using emails. I had to learn how to blog because it was getting hard to post my views only in emails. I could keep this blog open only to them but when I am doing the hard work, it is fair to say that I would like my views to reach outside that group. It is no harm to open my blog to everyone on the www. However, unless you tell me what your needs are, it is hard for me to understand what issues I have to address. For example, I have an ongoing conversation with AH on one of the blog posts. His capital is less than 25k, it is not unusual to have a capital of less than 25k $ invested in the market especially in the wake of problem scenarios like MF Global.    If day trading is not what you do or you are restricted to only less than 3 round trip day trades, unfortunately I must say that you need to stick to swing trading. I will do my best to include my swing trading signal in my blog posts as I am already looking at the charts from all time frames.

I am looking at /ES hourly chart above and what a mess it has been overnight. I was getting mixed signals overnight, as of now the signal is on buy. Like I said above, the food doesn't come to your mouth so easily. I decided to look outside my signals, I found something interesting and reliable. RSI is not my signal but I look at different patterns every single day to find any clues. On Tuesday, RSI formed a positive divergence with the /ES price on the hourly. I have marked it on my chart above. RSI formed a double bottom while the price posted a lower low. Since then, RSI has been in a higher low pattern which is encouraging on the long side. I remain on alert, open to both long and short possibilities to change positions as needed. I am long at this time, having taken 65% off the table yesterday. I have nothing to lose after a great run in the last week but I adhere to my stops and suggest everyone to follow adequate market discipline as always.

A close above 1260 on the daily time frame and I will add more money on the longside with adequate stops.

Tuesday, November 15, 2011

Waiting for a US Dollar index breakout

Fakeout = 57%, Pullback = 49%

Market is inversely related to the Dollar index but I will post any signals as and when they come. Stay tuned!
The last triangle that I posted last week got filled to the target.

What is happening in the 'Euro' land?

I have no idea. I didn't even read the news, I am not going to. I opened my Euro chart and I see the chart below:

Eur/ USD chart on the daily and hourly timeframe. If you zoom the hourly chart, it is still inside the trendline.

Yesterday we had a sell signal before close. /ES is down 1.3% from the close which is roughly ~ 1% from our signal. When I get a VST signal, I am honestly not looking beyond 1%. If I get lucky I will take it. Otherwise, 75% of my position will be out on a 1% move. The signal has a success rate of over 95%, but yes I have had failures like the 2.5% overnight gap up 3 weeks back against my signal. Prudent as it would seem to me with my VST signals as they are signals in the terminal phase of the move, I would take as much profit as I can off the table and make sure we score a win again. Use premarket trading too, that is why we play SPY. Don't stare at the screen when you see the profits. ST signal is still on a buy. Adios!

Sunday, November 13, 2011

Don't lose sight of the forest

I am sure many of you have not heard the word "bull market" for a while. Our air has been filled with bearish sentiments, bearish rants for a while. Even though there are few bulls around, I haven't seen anyone say for sure that we are still in a bull market with a valid reason. We have permishbulls who make bull market calls everyday without rhyme or reason, I ignore such professionals for the same reason that I ignore permabears who are maniacly depressed every day. I wanted to examine the market's long term trend from a technically valid point of view. You should not lose sight of the forest for the sake of the trees. I don't hold fundamental or political views to be of much importance and significant enough to bear weight on my trading. I do have my moments of political rants but that has no affect on my trading. I trade short term and very short term, because I can say for sure that nobody has any grip over the long term view. We must hold long term view but to have complete control of your capital, short term trading is still better. You have to work hard for every penny while you are trading short term but like I said, your odds of winning are better in the short term. You can always set aside 10% of it on your long term view and rest for Intermediate term, short term and very short term.

I am both a bull and a bear, I am flexible to skin the game on both sides.

The full analyst side and blogger sites are fully drunk with comparisons of 2008 with the current period for at least the last 5 months. If it happens, congratulations to everyone but me. While it may still happen, I don't see that at this point of time.  I myself see that we have deviated from the 2008 comparison. I would say they may have been right till the 1st week of October. October's market rally completely changed the game in bull's favor. The Bears may still have a chance, but you need to look at the current trend (and not dream of the future trend) to tell what market you are in. We have been in a Primary Bull market since March 2009, we continue to be in the same. It looked like we may sink into a bear market, but we did not. The market gyrations in the last 5 months have definitely caused enough damage, so non-stop rally case to > 1400 within 2 months can be put to rest because we first need some consolidation here for the bull's case.

Bull case: The best scenario for the bulls is to consolidate in this 1200 - 1300/1350 range for a while like atleast 2 months, gather lost momentum and zoom upward breaking previous high of 1370. The presidential cycles, seasonal cycles rhyme with the bull's case as well.
Bear case: The best case of bears is go lower from here but October's rally has delayed the bear case for atleast 2 months. The October rally that followed is nothing short of a miracle as it changed the game completely.  In the next 2 months bears have to show strong conviction, otherwise bear case is dead. When everyone on the street and wall street are uber bearish, the options house will have to push the market higher and that is exactly what they did. The house never goes broke, please remember that. The options house definitely made enough from this wild swinging while investors and traders from all terms bet their money on put options and lost.

Neutral case: I predict lower than 1100 but higher than 1000 by March 2012 because the chart below points to a cycle low in March 2012. Cycle low doesn't mean we have to go down from here. The cycle low could be higher from here which simply means for the next cycle, the bottom is in. My best guess is we may visit 1150 in March 2012 before going higher towards next year's presidential elections. Before 1150, I think we will see 1325 - 1350 though. Predicting long term cycles to the T is very tough but we can use long term charts to say general statements like "we are still in a bull market....", "we are in a bear market....", "we avoided bear market.." and so forth but not to say we will see bull market for the next 12 months. That is not possible to predict. It is completely futile trying to predict targets except for fun.

As of now, evidence points to the continuation of the Primary bull market that began in March 2009. When the charts change, I will make it a point to visit this topic for sure. I will take time to post it on this blog.

  1. CCI moving back above 0 indicates resumption of bull market.
  2. TRIX cross over did not occur yet, no confirmation of bear market. TRIX is lagging but the last cross over happened in May 2008. This cross over is not even close and will not happen in the next 2 months, unless major damage occurs before that. But, notice that TRIX is trailing in its momentum compared to the previous 2 bull markets, atleast at this point. Further down the road if the bull market continues, TRIX may rise to the 2007 bull market level but that is to be validated later, can't predict now.
  3. Ultimate oscillator had the first kiss of 30 line indicating bearish trend in 2007, so far we had none. Even if it may not touch 30 (like in 2000), I would like to see this spend sometime below 50 for me to say this is a bear market.
  4. Rate of Change had a small tick below 0 but nothing major of a bear market  here. The previous bull market had multiple touches (or close) to the 0 line before resuming upwards.
  5. MFI is still in bull mode and did not even come close to 50. Strong evidence of the money flow.
  6. Slow stochs indicate neutral stance now and are pointing upwards. The chart doesn't have full stochs, but that shows the same thing. Fast stochs show that they have crossed above 50 after being below for 4 months pointing upwards.
  7. Cycles point for a low in March 2012 but that low could be indicating a bottom for the next cycle which means it could be higher from here and not lower. I don't have that visibility.
  8. DJI and COMPX pretty much show the same. NDX is very strong and we haven't even come to a bear mode in NDX's case. SPX chart showed some bearish tinges before October but NDX chart didn't even come close. Keep your eyes on AAPL, they will propel AAPL up like a rocket. Let it take time to gather some AAPL bears and bottom for the short term. Then the bears will provide needed momentum to go up.
  9. MACD fast crossed slow line but note the histogram size comparison vs 2008. We are not anywhere like in 2008. SPX rallied for 1 - 1.5 years even after bearish cross in 1998 - 2000.

I am aware of Lakshman's recent ECRI work. We may still enter a recession but that doesn't mean we have to go into super bear market mode. We had minimal impact of recessions on the stock markets from 1982 to 2000.

My long term chart is only to view the big picture. I certainly don't trade the long term charts. I do hold partial positions from the bull market start in 2009 but most of the portfolio I trade is short term, very short term. No patience here to trade long term. I am happy with my short term trading. I certainly don't weigh my entire portfolio on long term views. What if my long term view is wrong, is the question. If my short term view is wrong, no problem. I will get stopped out which will give me another chance. Betting on the long term is like win big or lose big.

None of the 3 cases are guaranteed at this point. While the evidence points upward, we can go into a bear mode albeit it will take time and only if bears show very strong conviction in the immediate future. For the Intermediate term, I vote for neutral case with consolidation. For the long term, I see currently a continuation of the Primary bull market.

I don't have opinions on the super cycles or Grand super cycles or any other such fictionary stuff.  I stay away from Elliot waves. 

For the latter part of this rally, they are pushing commodities upper while holding the tech sector back. They could rotate other sectors later which means they can resume the tech sector up while holding commodities back. When that happens, you will see a real serious violent push in the market with escape velocity. 

Saturday, November 12, 2011

Timeframes and Asset allocation

Am I day trading or swing trading?

I suggest you to first read this post , reread that post, understand it because it will help you understand my trading methodology in the long term if you are following my blog. Read Introduction also before you proceed.

Time frames:

Often my clients are confused, so do I see confusion among blog readers. We need to step back and analyze different time frames first. I am breaking each time frame on the basis of my charts.

  1. Monthly, quarterly, yearly charts. When I use these charts, it is for the very long term/ VLT.
  2. I use weekly charts for the Long term. Long term/ LT
  3. I use daily charts for the Intermediate term. Intermediate Term/ IT
  4. I use 4 hourly or hourly charts for the short term and very short term. ST/ VST.
  5. ST/ VST positions are often closed on good profits, not waiting for the reverse signal. For IT/ LT, I use scaling in and scaling out technique. I do not trade VLT positions, as they are only traded based on signals.
  6. Regardless of the timeframe, follow risk/ reward and market discipline. More on that below...
Asset allocation:

On any timeframe, if you are trading an individual stock, use 5000$ as position size if your capital is 100,000$ which will be 5%. Often times, there are small investors whose capital is only 5,000$. Should your position size be 5%? Unfortunately, if your position size is 5% of 5,000$, I must say that will not yield any good results on an individual item. You have to trade atleast 5,000$ on an individual issue to make any profit. 

If you are using SPY (as an example), I can recommend using 100% of your capital provided you follow rules. I use SPY mostly, so most of my rules are centered around that. 
  1.  Follow your instinct. If you are not comfortable, step aside, think and then come back.
  2. If you want to follow someone's advice, fine but take your time to think. Follow rule # 1 in this case also.
  3. If you are trading SPY, use 2% as stop for the short term. Use 5% as stop for the Intermediate term and long term. If SPY gaps  more than 2% or 5% (which are not common) against your position, close the position. Reassess and then enter again.  Both of them are not common, but comparing both, I would say 2% gap downs are more than 2% gap ups. 5% gap downs are rarity, 5% gap up? Good luck searching for that. No 2nd discussion on stops, it will help you in the long run even if you miss 1 or 2 opportunities.
  4. If you are on a vacation or in a place where you are not able to monitor your position, avoid trading. If you have to invest, you must still follow rule # 3.
  5. I already covered Leveraged ETFs in the link above.
  6. Options: I trade them at my own risk. I don't recommend options. If I trade options and you admire or follow that, it is your own risk as well.
  7. Using 100% of your capital may make your nervous. I developed my proprietary systems, on all terms in such a way that you will not lose money in the long run. Whipsaws, stops and loss trades may occur but if you follow my system for more than 3 months, you will be in a profit. You can papertrade (without using real money) for 2 months to see if I am correct or wrong on VST trades. On ST trades, you can evaluate for 6 months. I can post my backtest results, but since you are skeptical, it will not help in anyway. Following the system for sometime will be the only thing that comes close to truth.
  8. Entry: For very short term, I post my entries and stops. If you are late by 0.5% on the very short term trade, your chances of profiting may reduce by 50%. Nevertheless, you may still profit. On a short term basis, entering more than 1 day late or 2% above my buy/sell may reduce your chances of profiting. I trade SPY based on /ES which means I often enter or exit in after hours trading. Read the link above for after hours trading.
  9. Exits: This is the most important part. I enter positions based on my signal. If a signal reverses, I follow the signal or 2% stop whichever comes first. In case of profits, I scale out of the position. I am advocating using 100% of your capital as entry, if your trading vehicle is SPY. For VST trades, closing 25%-50% of your capital size on a 1% profit will ensure that will keep your profits intact.  For the remaining position, you can use your open price or 0.5% below (in case of long position) or 0.5% above (in case of short position) that price as your stop. If SPY gaps more than that, close that position. You can take profits all along the way if SPY continues above. In recent history, the longest time my VST system was on a buy signal was from 10/5 - 10/17 during which time SPX went from 1125 to 1206. To maximize the gains in that period, you could have taken 1% profit on 1st 25%, then reduced the position size for every 1% profit. You could have had no position at SPX 1200 or above, more on that in the rule 10 below. Even if you closed your entire position for a 1% rule 10 below For ST trades, you take 25% position size off on a 2% profit. You can then wait for my get out of my long/ short signal or if you hit the 5% stop first, follow it. Lock profits as you see them, taking profits at any point never hurts - don't stare at your screen. You must grind this statement in your brain before you even start trading.
  10. My VST system gives enough signals in a year that your profits can be well above 40% for the year. It is based on very short term trading, repetitive, high probability but terminal signals. Because of the high probability and many signals you get, you can close your entire or partial trade for a 1% profit as you see them. I know you will feel hurt when you take 1% profit and SPX goes from 1122 to 1206, don't feel bad because this system is based on scalping. You cannot foresee your profits or losses, I may say. You may ask how can scalping be a good technique? Because you take profits all along the year. If you invested in year 2000 and you are buy and hold, your returns on SPX are 0%. If you invested in 2010 at the same time, your returns are 0%. You may say, if you invested in March 2009, your profits are now 80%. But, how do you know when to take the profits? You never know. Many people got stopped out during many violent turns of the market as early as within 1 month of March 2009 while some of them are still invested completely. Some out of the latter may not close their positions even if SPX goes back to 666. I don't know. I view trading capital markets as a journey. You must know when to get on the bus and when to get down. If you take the bus at SPX 666 and got down at SPX 750, you may feel bad looking at the market today at SPX 1264. Don't feel bad. You always have the chance to get on the bus at any time and get down. The markets will be open tomorrow, next week, next month and next year. Don't worry about having been left out of the market any time, follow your system and take your profits. Is the VST system for daytrading? Not necessarily true. I have had my VST signal remain on the same signal for anywhere ranging from 1 day to several days. I don't trade on time or price targets. I take it from signal to signal but take profits in between. I let me decide my price profit targets based on my methodology. My ST system gives you enough signals for your profits to be above 20 - 25% annually using nothing but SPY. Usually my ST signals last more than 20 days but there are whipsaws during which you will be stopped out.
  11. If you are not comfortable following the rules, please stay out of my system.
  12. Regardless of whether you follow my rules and system, you can always follow my general market calls and stock recommendations that I post on this blog. You can develop your own risks and methodology following my market calls but you will maximize the returns in the long run if you follow my system. If you follow your own market discipline, make sure you create a good method.
  13. Signals: In my VST system, I have entry signals only. Entry signals are buy (go long) and sell (go short). In VST, I get the signals based on terminal moves and hence, be quick to take profits. Exits are based on the methodology above (profits or stops), and no signals. In my ST system, I have entry and exit signals. Entry signals are buy (go long) or sell (go short). Exits are close out longs, close out short signals. Entry signals are slightly delayed. Exit signals are more sensitive and are quick. In ST system, entry signals are delayed but not terminal. They are in the beginning phase of the move. In both VST and ST systems, there are whipsaws. You must follow my system for certain time to see profits for that exact reason. You should remember that when the ST system is in buy/ sell and VST system gives the opposite signal, you should be quick to take profits on the opposite signal. Right now, on 11/12/2011, the ST system is still on a buy - so any VST system sell signal should be considered as counter trend trade and you should be quick to take profits while leaving some on the table just in case the ST system also turns to sell. On the other hand, if ST system is on a buy, and VST system gives you a buy signal, you can be relaxed a bit - nevertheless stick to the profit/ stop taking methodology.
In this blogpost, I posted about
1, Timeframes
2, Entry, exits, stops, profits
3, My VST and ST systems.

Friday, November 11, 2011

US Dollar update

US Dollar index punched right down through the 50 DMA (green line). Next target is 200 DMA (red line). Euro broke out of the 1.368 line. Next target is 1.3964 obviously. For newbies: US Dollar index is inversely correlated to the market, Euro is directly correlated to the market - that is the correlation for a decade now. It remains so, until it is changes.

I am bullish on the market on all terms. But, keep your portfolio in sight and have your stops adequately set. Don't drink to the tunes of the market. Good luck trading to you!

If you read last night's post, it should be clear to you what my set up was. Market seems to be in a hurry to achieve the target today. Link

Thursday, November 10, 2011

Overnight breakout moves

Let me introduce you to symmetrical triangles first. Go to Bulkowski's site and read the entire page. We will apply the "trading tips" area of the page to my chart below. Link

The chart is /ES hourly with RSI(14) indicator below. Price has been trading in the triangle for the last 2 days. I was scared of the breakout in an opposite direction to my trade, hence I had to get out today. Let us now apply Bulkowski's ideas to this chart. 

Using the measure rule, our trading target (base of the triangle ~ 1245 - 1218 = 27) from 1240 should be 1267 on the /ES, which ~ converts to 1270 on SPX i.e., 200 DMA. Breakout volume is light, obviously this being a nightly move. Throwback rate (failed move) is 37% and pullback (to the point of breakout) is 59%. Beware of these things. I used the RSI(14) EMA for confirmation. Usually RSI is not my buy or sell signal, my system signal is a different one and most of the times it results in a terminal move. I haven't gotten a signal yet but mine is late but with high probability, keep in mind. I reckon RSI(14) is good enough in this context. If you read at the apex of the triangle, it is converging at 3 AM ET which is the opening time of European markets. Humdinger, isn't it?

Respect the channel

Respect the channel, only as long as AAPL is within the channel. Sell outside the channel with a stop. The 200 DMA is at 362$, keep that in mind.

Intermarket correlations

The soaring eagle in the chart is the Italian 10 year bonds that is the talk of the town today. Let it cool down, wait few days and then buy the US market - that is the strategy for the Intermediate term. Meanwhile, you can play ping pong between ranges in the market. I reckon the low for the market in the short term is not in. You should be selling strength, as in today morning, on rallies. The lower line is the German 10 year Bonds. The closer line to SPY is JNK, short for Junk bonds.

Sunday, November 6, 2011

Why am I not invested 100%?

At every point in the market, there is this lingering thought that makes you think why you are not invested 100%. There is a time you have to be in cash, there is a time when you have to be invested 100%.

My market signals are positive, in bull mode in all time frames now. We missed the (short term) bear mode on friday by 5 SPX points in the afternoon. Crude oil, Gold, Silver are in bull mode in the short term. In the long term and intermediate term, crude oil is in bear mode.

Dollar index is in bull mode as well in all time frames. When the Dollar index (risk off trade) is in bull mode, I have to be cautious. In addition to this, I am looking at the credit spreads are being widened. I am not following the political drama in the Uropean continents at all. My focus is simply on my technical analysis. I am still long the market, albeit cautiously. I don't believe in hedging because I want to be certain on the market direction. If I am wrong, I am wrong. If I hedge, I don't think I can make any profits when it matters. I reduce my positions when there are cross currents.

I have a 2% stop for the current position. If SPX clears 1257, I will add another 1/3 with 1250 as the stop. If SPX clears the 200 DMA at 1273, I will add another 1/3 with 5 points lower as stop for that size.

Have a great weekend!

Wednesday, November 2, 2011

Bear flag?

Bear flag with likely resolution downward?

Chart is /ES hourly.

US Dollar update

An real time update of the USD shows that our risk off currency is hanging to its support. If the 50 DMA breaks, then we could see a rally of atleast 2% in the markets till the USD will reach the 200 DMA support. If that support also breaks, then you could put on an Intermediate term market rally. Keep a close eye on the Dollar index

Tuesday, November 1, 2011

Buy on market strength

STMP is talked about as NFLX of 2008. You know the growth story that ensued until the recent collapse. Look at the massive increase in volume. Scale in upwards, is the plan.

I like the chart of LTD.

It is all about the Bucky!

In a post 10 days back, I said the US dollar should get support at the 200 DMA. USD went below the 200 DMA only to reverse back above both the 200 DMA and 50 DMA within 2 days. Will USD stay above these 2 supports? You could use these support/ resistances as a reference to enter the market long or short. USD is inversely correlated to the market, keep that in mind.

I am posting the USD chart in the same format as in 2 weeks back. I see further weakness in USD in near future although USD seems to be firming a bit too much in just 2 days. But, having seen this market move 150 SPX points roundtrip in 5 sessions, I urge you to be cautious if you are long or short. Be nimble, and take small positions unless you are super confident. This market is certainly not for the faint hearted!

USD chart as of close yesterday. Stockcharts updates at the end of day. But, as of today morning, USD is at 77.33 in real time which is way above the 50 DMA as shown in the chart. It would be interesting to see if these supports hold.

p.s: Recently, I started tweeting. My twitter page is this

Thursday, October 27, 2011

Shorts can stay solvent longer than you think

Chanos made good money shorting Chinese stocks since 2010.

Chanos in Bloomberg

The Chinese stock market's performance over the last few days is insipid and uninspiring to say the least. While global markets rose anywhere from 15 to 20% in 2 weeks, SSEC's gain was limited to 3%.

Short sell FXI on a SSEC break of the October lows.

Technology not confirming the rally

Boom Boom Tech not confirming this rally. When was the last time that all of QQQ, AAPL, GOOG, INTC, MSFT, IBM underperformed the market. They don't have to outperform the market every single day but on a day when market is rallying hard, they should be outperform the market. 

Having said that, I don't believe this is the time to sell short. I believe I see the market higher than today in 2 weeks, 1 month time. Before that, there could be corrections. That means this is not the time to buy either. You don't want to buy at the top, just in case this is the top.

Monday, October 24, 2011

Hanging Man

I posted this on 10/16/2011.

1, Market followed in a textbook fashion till now. We had a lower low towards 1187 and then we hit 1257. Where from now? The market is still in a uptrend, till the next sell signals arrive. Don't be early to sell short.

2, VFC: It looks like the channel held VFC back today. There have been several attempts to break above, albeit unsuccessfully. What do you call the candlestick today? Hanging Man! I feel comfortable selling short here with a proper stop. Tomorrow should bring us confirmation of the hanging man patten. Tomorrow should also bring us AMZN's earnings results.

VFC daily chart here

Saturday, October 22, 2011

US Dollar Index

The US Dollar index is definitely in a bearish trend. For now, the 50 DMA provides support. US Dollar index is a risk off trade, and is inversely correlated to the US stock market. I expect the 50 DMA to break next week and the 200 DMA should give good support. Will 200 DMA hold? The MACD is turning down which indicates the continuation of the trend down. The histogram also ticked one down than the day before. For the MACD to turn up again (to turn this chart to bullish), it will take atleast few days time. Meanwhile, the candles should bounce on the 200 DMA. There is also the previous breakout support at ~ 75. If the 200 DMA doesn't hold and the MACD continues downward, then it is ultrabearish for the Dollar index and uberbullish for the market. You can also note that Eur/USD is just pips away from the upside resistance. Both these currencies can play pingpong in a small range for the next few days, and markets will definitely take it as positive. 

Wednesday, October 19, 2011

Market signal

/ES gave me swing sell signal afterhours. Trade here . I will write some rules (over the weekend) while I am trading these signals. Be patient.

SPY P/C ratio is a bit high at 1.88, so there may be some hesitancy in the sell zone. Regardless, I have to take this trade on my signal to follow some discipline here.

Earnings results: The never ending Oxymoron

Just like the NY Athletic Club, earnings results and the stock run that follows almost always never matches. Isn't that why I always suggest you to stay away from Las Vegas unless your pocket is itchy? If you had an extended run on the same ticker for sometime, that's a different thing and rightly so, you could just hang there with buying some put protection.

I present 2 results on a single day and the way their stocks reacted. IBM delivered a very good quarter yet again but for stocks that have run for a long time before the results, very good simply doesn't translate into after run.

Goldman Sachs on the other hand delivered 2nd loss only in 12 years being on the public stock exchanges. GS was up 5%. 

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