Thursday, April 23, 2009

State of the Market - 4/23/09

It was a total chopfest today on Wall Street, as after breaking down a bit at the close yesterday, stocks did very little today but see-saw up and down. They started a bit higher on earnings news, fell quickly, climbed right back up, and then fell quickly again. From here, around 11:00, they basically based sideways. During lunch, they rose back up, tried to break to intraday highs after 2:00, but that also quickly reversed. Around 3:30, they started spiking right back up and did finish higher into the close. It was very similar to yesterday except in the opposite direction. Volume as of now appears to be lighter than yesterday.

Technically, it looks like the markets are just locked in a little range right now. For the S&P, 830 and 875 seem to be the top and bottom, while for the Nasdaq, it seems like 1600 and 1680 are the boundaries of the current range. It's possible that we could be forming a rounding top here, but it could also be that we are just consolidating before moving higher. On the sixty minute charts I showed yesterday, the S&P still looks to be forming a possible head and shoulders pattern but the XLF showed relative strength all day and just poked its head above a downtrend line on those charts late. We'll have to see if that means anything tomorrow. Last week, I thought to myself that we may just chop around a bit before rolling off, just to frustrate bulls and bears alike, and that's looks to be what's happening. Unfortunately, I didn't pay too much attention to those thoughts in my own trading.

I had another fun day in the markets. I only made one small trade although I took the trade in my IRAs as well. I have really been trying to focus on earnings trades as I got away from paying attention to them recently and missed stocks like FEED and even RCRC that I talked about yesterday. So last night, when I saw LNET up big after-hours on an earnings beat, I paid attention, especially because the daily chart looked very bullish. I put a limit order in after-hours at $2.20, which is were it was selling at the time in the after-hours, but it was never hit, so I went into today with no position. Someone got very lucky getting there.

Today, it gapped up to around $3 at the open, and I basically waited until it formed a consolidation pattern before trying to get in. Maybe I should have just bought right away. You also may say it is completely foolish to buy a stock that was up 100%, but these earnings plays can move much more than you think, and I thought it was worth trying. It did form a flag pattern intraday, so I entered very small positions around $3.30. I put my stops around $3.05, a little under the bottom of the consolidation, which would have put my loss around 8-10%. It tried to break out, reversed, and then went back into the consolidation. At 10:20, it shot straight down, taking out a bunch of stops I'm sure (including mine) and then reversed immediately back up. My stops were hit at $3.05 and $3.01. At that point, I figured it would probably close around $4 or so because I was out of it, and shut it down for the day. Oh yeah, it did hit $4 right around 12:30 and went as high as $4.20. So that was a nice 20% intraday gain that I missed out on. And the beat goes on for me. I realize it did fall back down in the afternoon but I would have at least moved stops up and captured a decent sized gain.

I really don't know if this is bad luck or bad skill right now, but this example basically sums up what the past month or two have been like for me and my trading. It seems like I can do no right regardless of what I try. When I set my stops too tight, they get hit and the stock moves the other way without me. When I loosen my stops, the stock falls apart and I just end up with a larger loss, and in some cases I STILL get stopped out. When I am choosing between two possible trades, the one I pick does nothing while the one I pass on takes off.

I hate to say it's bad luck, because I ultimately realize it is me who is controlling the strings and making the decisions, but that's what it feels like right now and that is one reason my confidence is seemingly gone. It's almost like I go into a trade now expecting to lose just because that's how it's gone. Then I pass up trades that probably are good trades because of this feeling. I know all traders go through times like this, and I am sure I will have other periods like this in the future, but right now it is very tough to deal with. I am now down about 13% for the year. I will work my way out of it - I have done it in the past - but as always the toughest thing about that will be not trying to get it back all at once and I think in a way that's what I've been trying to do.

I apologize if the venting is not interesting to some of the readers out there but part of this blog's purpose is to share the thoughts and lessons learned by a trader and I hope that my stories can actually help some of you out. Hopefully you can learn something from my struggles from time to time. It is not always easy as a trader, and you are always going to have periods when you struggle. Regardless of what you read online, no trader is perfect, and they all have rough periods from time to time. The better ones have less rough periods and hopefully I will eliminate a lot of them as I grow and gain more experience. I think learning to deal with them properly can help lessen the frequencies of those periods.

We'll see what tomorrow brings but right now, there isn't much to do on either side from where I sit because it is just too choppy out there. The bears did not follow-through on yesterday's late swoon at all, but until late in the session, the bulls didn't show me much either. In addition, the whole spikes or drops in the last half hour seem fishy to me. Two days in a row we've seen a move like that but still have gotten nowhere. Overall, there seems to be some indecisiveness out there, and until things clear up, it may be tough to make a lot of money. I will continue to look for possible earnings plays but that's about it - don't feel real comfortable shorting or going long here. Good luck Friday.


Anonymous said...

I stopped trading actively for the last six months because I could see a change in the market. And I don't mean the drop.

The change seemed to affect traders like you and me. Traders who read the technicals. Traders who study charts. They started to lose on almost every trade. Why? Because the phrase "this is a trader's market" really means something. The professional are preying on the amateurs as, more than ever, it's the only way for them to make money.

Think of it like this. They have a program that spits out the most likely (highest percentage) move that the "dumb" money will make based on a reading of a chart which anyone amateur can read. Then they will make sure their buys and sells take advantage of your move. I'm not saying they have a program for this, but I'm saying that's the idea of what they're doing.

So, my point is, that it's not you. But you need a new strategy for this market. I've been trying a few, but so far, don't feel comfortable with any of them to jump back into trading. Reading the charts isn't cutting it in this market. Of course, I could be totally wrong. But until I figure out a new strategy, I'm staying away.

Now, I have noticed something about your trading, though I don't know if it'll help. And remember this advice is coming from another person flush with "dumb" money!

You seem to not follow your advice. For example, you said you'd short the S and P when it got to certain level, then you didn't do it, but, instead said you were going to wait for comfirmation. By the time you waited, you missed your own call. If you had shorted, you would have made a successful trade. I've seen you do this quite a few times because I kept thinking he was right, but then I see that you didn't take the trade.

By the way, I do the same think myself, but I haven't been trading because as I said, I keep thinking that the professionals are really taking it to the market these days, wiping out everyone else.

Serg said...

I agree with Anonymous. I have the same feeling that something is not quit right. It looks like the technical analysis makes trades worse not better. It supposed to give us an edge, but instead it gives an edge to somebody else.

Definitely, there is something to think about.

Mac said...

I think you probably have something Anonymous. I don't know why, but it almost feels like my stops are getting run more than any other time I can remember. And patterns that you see set up and look really good aren't necessarily acting well. I don't know if it is because of all the government interference in the market has made things so news-driven or what. I don't think I am doing much different from what I did last year, but the outcome has definitely been different.

Mac said...

Interesting article about the ETFs and how they have possibly been affecting things. One big difference from this year to last is the triple ETFs. That could explain some things too.

Anonymous said...

I'm the anonymous one from earlier who thinks that smart money is getting smarter and more focused because they have no choice. So retail traders are getting taken to the cleaners. ETFs could play a role, but I'm going to have to study that more.

I do think news plays a huge role. That is actually one of the methods I'm trying to decide about. I'm using it to paper trade to see how it works. Of course, it's not a precise system, so I'm trying to figure out how to quantify it. I'll let you know if trading news is more effective than trading technicals.

BTW, I don't blame government interference for my trading troubles. The whole existence of government is to keep a society functioning. Right now, we need government to avert a complete economic meltdown. I believe we should have nationalized the banks, cleaned them up and spun then back out like Sweden did. I feel we're not going far enough and just prolonging the inevitable.

Anyway, sorry to digress on political matters, but the point is that government interference or not, it's the news aspect of that and other news that I'm concentrating on. This is more powerful than technicals right now.

Also, like Mac said, it does seem that all stops are being taken out. How can that be? It seems that market makers and smart money are making sure this happens because there isn't enough money for us retail traders to even pick up the crumbs anymore. The crumbs are what the smart money is eating nowadays!



Anonymous said...

You could always try Costanza trading. Basically work out what you think will happen and then trade the opposite :-)

bmbull said...

I agree with all of the above -- all are/could be contributing factors.

But in this case of LNET, I have to consider that we're talking about a stock that was at 53 cents a few weeks ago, and was often trading less than 100K shares a day. Suddenly, it's 1.50, and then yesterday, it's 3 bucks, and trading more than 2 million shares. You have to expect some pretty bizarre moves out of a stock like that -- just the fact that it was there in the first place is bizarre in and of itself.

And over this past 5-6 weeks, the last 2-3 in particular, the speculative 'froth' has found quite of few of these low-priced, low-volume stocks, run them up and bounced them around. And the spec money just jumps from one to the next, chasing the next 'big move'.

At least that's the way I see it.

swingtrader said...

I have been there Mac - and it is usually during a phase when I was simply trading the wrong stocks or not adjusting my approach for setting stops. I have also fallen into the trap of looking at too many indicators and trying to dictate the market action instead of letting the market tell me what to do.

Lately I have tried to focus on NDX stocks because the NDX is the only major index that has broken out of a double bottom on its weekly chart, and that has worked fairly well (i.e. BRCM, AAPL). The other indices are still in a bottoming phase and will drive you crazy trying to trade them, especially intraday.

I have not been stopped out as much lately because I eventually closed out the intraday charts and focused on daily charts. I also adjusted where I set my stops - making them wider to prevent being washed out of trades that are still in good shape. I try to set my stops at the price where the pattern will fail or I will be proven wrong, and adjust my trade size for that. When I do this, my trade size is smaller because I have a flat $$ amount of risk for each trade. This approach has helped keep me in trades that worked and gotten me out of those that failed. This is not a new method and you probably already use it, but I have found it extremely helpful for me. Wider stops are not a bad thing - they keep you trade size lower during weird times and keep you from churning the account too.

I also am somewhat selective on which stocks I trade - I stay away from stocks below $10 completely other than the XLF. I also stay away from stocks with low liquidity. Since every index (sans NDX) is in the bottoming phase, most stocks will have the same movement characteristics.

One thing that always helps me get through losing streaks is just sitting down and look at the loser trades from set up to exit and make sure I was following my plan on those trades. If I was following the plan and was just wrong, I considered adjustments. If I was breaking rules, it helped me focus on the rule. Every strategy will have some losers - figuring out which ones were just wrong and which were not in compliance with the plan can be tricky, but it is a great way to monitor yourself and make sure your plan is good.

Hang in there Mac - you didn't get this far by kicking yourself.

bmbull said...

And while we're on the subject of speculative froth, how 'bout DDRX? From 21 cents to multi-year highs above 6 bucks in less than 6 weeks.

Anonymous said...

hang in there with your trading. this market has been giving me fits as well and my confidence is not nearly as high as it was at the beginning of the year.

be sure to trade smaller, take your time, trust your setups, don't "reach" for new things just to "get it back" and then also be patient.

remember, the banks reported the profits they did because they ramped up their proprietary trading - this means that the sharks are IN the water and the market is largely in a no-little-guys frame of mind. there are better periods to come in which to make money - why not wait for them instead of playing the game you're not meant for? love your blog - its in my bookmarks now...keep up the good work and i hope your losing streak abates.

Anonymous said...

That's well put. The shark are in the water and the little guys should stay out.

That's what I was saying, but you backed it up with more evidence. The trading desks of the smart money.

That's why I have to disagree with those who keep saying hang it there and go on to say use wider stops, etc. That won't and doesn't work, IMHO. Not right now. If you try it, Mac, I bet you'll get the same results.

I like the post about the penny stocks. I notices that to. Is it possible the dumb money is gravitating towards those stocks and technical trading still works there?! Any thoughts on that.

Meanwhile, trading the stress test worked. Trading the news worked today. Everyone knew the stress test wasn't going to show that Citibank et al. was insolvent (even though these big banks are toast) so the market pushed up a little. I didn't trade it as I'm still testing my trade the "news" theory over trade the technicals.

Anonymous One

bmbull said...

@Anon one:

I don't know if it's the smart money (I doubt it), dumb money or just the 'fast' money that is chasing these stocks -- some of them would have to be considered the 'plankton' of the market, as Gary Kaltbaum would put it. But I'm pretty sure that this money chases them because they are so very low priced that a high percentage move can result if they start to pop.

I guess my point was that I'd find it difficult to believe that any chart, indicator, or trading methodology could be expected to work very well on a stock that has risen 6x (or much more in some cases) in the past few weeks, and is suddenly trading more than 10x its usual volume.

Generally, these things get run up big for a while and then just go POOF -- and it's over. That's when the 'smart' money that's left will move on to the next one, while the dumb money will start buying the dips and get crushed in the inevitable collapse.

Just my opinion -- for what little it's worth.

swingtrader said...

IMHO, the sharks are always in the water. They were in the water in the 90's, they are in the water in the 2000's. They are there today, will be tomorrow.

Point is, you have to adjust to the market or stay out. IMHO you have to view it as market behavior and adjust to it. If you can adjust to a market that nullifies a trade setup in the last five minutes on a Friday (see ICE), then by all means, trade. If not stand aside. You have to be prepared for wacky stuff to happen.

Sure I have had some losers - we all do. But we can't blame a losing streak on the market. Not every approach works for every market.