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.

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.

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.

The power of leveraged ETFs

The stock market indices have been down for the last 4 months. The peak was marked on May 2nd for this year. The trend was consistent till August 9th. The trading has been choppy since then. IWM which is a Russell 2000 index based ETF has been down ~ 20% in the last 3 months. SPY which tracks SPX has been down ~ 12% over the same period of time.

With IWM down 20%, you would expect TWM which is 2x inverse IWM to be up 40%. But, it is only up 32%. Most of the 8% loss (or decay if you call it) has been in the last 45 days since August 9th when the market was choppy. Same goes for TZA which is 3x leveraged daily ETF, tracking inverse to IWM, which is up only 41%. You would have expected TZA to be up by 60%, but it shows a decay of 19%. TNA which is 3x leveraged daily ETF tracking IWM is however down by 56%.

Also, note that the margins held in your brokerage account are 60% for 2x ETFs, 90% for 3x ETFs. These ETFs swing anywhere from 15+% to -15% on any given day. Can you take that volatility? Unless you are daytrading why would I recommend any leveraged ETF for you to hold overnight? You are better off trading plain vanilla ETFs like IWM, SPY - both long and short.

Choosing an index to trade?

In this blogpost, you will find
1, When do I prefer to trade individual stocks/ securities?
2, What ETFs do I use to trade? Which index do I prefer and why?
3, Can we use leveraged ETFs?

When VIX is below 20, I would like to trade individual stocks on an Intermediate term. When VIX is above 50, I would like to start nibbling at individual stocks increasing position size as VIX increases for the long term. When VIX is between 20 and 50, I am comfortable trading for the short term, more into ETFs. I defined my short term, Intermediate term, and Long term trades here.

If your total portfolio capital is small (say 5000$), trading ETFs will help as you need not be scared about volatile swings in the individual item and face loss. For example, if you have a stock XYZ in your portfolio, and that company posted bad news, earnings result, or downgrade by analyst, and it went down by 10%, you will face a haircut of 500$ which is significant for a 5,000$ capital. To make it back is not easy. I personally would be uncomfortable trading individual stocks if my capital is small. If you trade ETFs, you don't have to worry about news, patents, product releases, earnings reports, downgrades. If you trade ETFs, you can save time by analyzing the general market trend instead of going through all the above. Whether your capital is small or big, I prefer ETFs unless you have a compelling arguement where you stand by your own risk.

If I choose to trade the major indices, I prefer the SPX via SPY or the Russell 2000 index via IWM.

SPY and IWM match my preferences for
1, Being highly liquid: You always need to buy a stock or ETF which is highly liquid and highly traded. Highly traded means you have narrow bid x ask spread and which will give you a chance to get out at any point of time, even during extended hours - should there be a high gap up or down (for or against your position). Unless compelling and long term investment, you never want to be in a stock which doesn't trade much in extended hours. Our goal is to have control on every penny of our money, as much as we can.

2, Basket of stocks: SPY represents SPX which is an index of 500 stocks. SPX's price is not influenced by one of the stocks ever. Same with IWM. On the other hand, NASDAQ100 via QQQ has giant market cap names like AAPL, GOOG, QCOM, AMZN which form 50-60% of the index. One of those names can easily influence the sway to one side on major news on these companies which will mean that the technicals basing on which we buy or sell the index is thrown to the dustbin. In the same way, $DJI also consists of only 30 names which means one of them could easily influence the index.

I prefer SPY and IWM for that reason. If you are comfortable with a high beta, go with IWM. Otherwise SPY should just do fine. Great people master simple things perfectly, they don't master perfect things.

I don't recommend trading leveraged ETFs, I may trade on my own but that is at my own risk. If you see me buying TNA (which is 3x daily bullish IWM), then my recomendation would be for you to buy IWM.