Sunday, May 3, 2009

A Few Charts to Watch and Some Introspection

Hope everyone out there is having a great weekend. Sorry for the lateness of this post - I was doing yard work today and hoping to cut the grass. Got about two minutes in, hit a small root, and my mower went dead. This is the third time I've used this mower - brand new Snapper. Even worse is that the very first time I used it, it did the exact same thing - hit a small branch and went dead. I returned that one and got this replacement but now, I think I will just a different brand. I can't believe a mower just stops working after hitting one root. What good is a mower period then?

Anyway, I thought of doing a video but with the indices up eight straight weeks, I don't feel really that excited about buying stocks here. There are some that are holding up very nicely and forming consolidation patterns, and I will show those below. This market keeps chugging along so you just never know. I'll also go over the indices and what things look like.

My basic outlook is that the indices still need to pullback before I would go heavily long because this is what healthy markets do. They don't run up without pauses, because that leads to exhaustion on the buyers side and then a quick fall. A slow, steady climb is what you want to see. So with many indicators at very overbought levels along with the Nasdaq right below its 200 day moving average, I'm not that interested in buying here. That MACD divergence is still present as well. At the same time, however, I realize we could continue higher like we have the past three weeks while at very overbought levels. If I play anything below, I don't know that it would be anything but short-term.

S&P 500
Nasdaq

Here are some of the better looking setups right now - mainly longs but I put a few shorts in there too. I am not seeing that many short setups right now and I have to respect that. Meanwhile, most stocks are holding their gains very well and consolidating nicely. That is bullish action and I have to respect that as well. I would watch the solars in particular as they are approaching resistance. It will be interesting to see if the FSLR earnings report will carry over to the whole group.

LNET, CAEI, ISRG, FEED
PIR, KONG, PLT, MHK
CAR, STAR, CBAK, FRPT
JASO, CSIQ, CSUN, SOL
MYGN, PPDI, TRH, VMW
ALL CHARTS FROM TELECHART,
COURTESY OF WORDEN BROTHERS, INC.


What I also wanted to do in this post is get some thoughts out about my recent trading slump and what I can do about it. This is both for my sake, as I think it is very beneficial to look inside yourself a bit from time to time to see what you are doing right and wrong, and perhaps for the reader's sake as some may find it beneficial as well to see what a trader goes through sometimes from a psychological aspect. Maybe some of you have gone through the same thing. If it doesn't help, then I apologize for the rant.

To be honest, I have felt a bit unlucky recently because if you follow this blog, you know I have had some good ideas on the long side from time to time during this rally and have posted them here, but even when I went long, I have been inevitably choosing the wrong stock when faced with a choice between two or three. I have also been getting stopped out of stocks only to see them run up without me. It seems that for the past month or so, whatever I do is wrong. Then when you start seeing that happen, your confidence starts to wane and then you don't trade properly and then the cycle continues. As I've discussed before, this type of slump happens to most traders out there (if they say it doesn't they are most likely lying) because this is a very difficult job. For me, being only a part-time trader, it is even more difficult at times because of time constraints, especially with two young kids and moving to a new house. All of these are not meant to sound like excuses - they just are what they are.

That being said, I can't deny for a second that I have missed this two-month rally and that is mainly because I couldn't put my personal opinions aside and just follow what the market was doing. It is my fault and my fault alone I have not captured some nice gains during this rally. There were many gains to be had, and perhaps there are many more gains to capture in the next few months. But some of the typical pitfalls of trading got in my way and that is why I am where I am. I wanted to expand upon some of those here.

I believe I have no problems with the technical aspects of this market. There are always things you work on and look to add to your trading arsenal, but overall, I believe I can spot charts on the long side and short side well and rarely miss a big winner in my scans. That doesn't mean I trade them all (I wish) but I at least spot them and usually can catch a few winners from the lot. Likewise on the indices - I feel I usually have a pretty good idea about what is going to happen short-term on the S&P and Nasdaq. I knew there was a follow-through day on March 12 and that it could mean a new rally was starting. I am not a perfect technician, but the technical aspects of trading are not my problem. Right now, the psychological parts are the problem.

I think one of the biggest mistakes I have made recently is not being flexible in my thinking. It is ironic because that is something that I usually preach near the end of my posts when things look up in the air. But looking back now, I realize I have been very unflexible in my thinking and it cost me. I was so locked into a capitulation sell off scenario in early March that when it didn't happen and the market turned somewhat quietly, I refused to acknowledge a possible rally forming. This is ironic as well because I stated back in early March that the other option for the indices besides capitulation was just a quiet turn and a slow and steady rally upward that would be hard to see until later. That's what happened and I refused to recognize it. My ego and stubborness got in the way here.

I have also been so locked into the disappointment I have about what is going in Washington D.C. and on Wall Street in terms of these bailouts, rules changes, etc. This is what I have been talking about when I have mentioned my trading "conscience" the past few weeks. I feel so strongly that what is going on is dishonest, disgraceful, immoral, and unAmerican that I have almost subconciously wanted this rally to fail and fail badly so that their tricks could be exposed for what they are. However, once again, although those feelings I have are legitimate, they should in no way affect my trading and I have to get better in that regard.

It usually happens in trading that when you think you know it all, you learn a big lesson. Coming off of last year, I was pretty confident in what I could do this year - maybe too confident. I noticed myself not reading over some of my favorite books and not doing my scans as diligently. (The baby probably had a bit to do with that too) Mr. Market is always ready to knock traders down a few pegs when they get too full of themselves or too sure in their ways, and maybe that happened here. I know that I did get away from a lot of the things I normally do and believe in, and that has affected my trading, obviously in a negative way.

Overall, I am still confident that I can take this drawdown and learn greatly from it. I hope I can use it as a reminder to stick to my rules and not my opinions when trading. Drawdowns are part of trading but they can be beneficial if you learn from the. I am down about 13% for the year, which isn't a big deal and I still have lots of time to get that back up into the plus column. Hopefully I can be more open-minded, less biased, and get back to what made me quite successful last year. I know I regret missing this rally, but I am going to look forward now and hope for the best. So as you read my commentary over the next few weeks, I hope that you will find it more market based and less personal opinion based as I think that will helps us all.

With the stress test results being released later this week, I am sure things will be volatile. Overall, the market continues to hold up well, especially in the face of bad news (swine flu, C and BAC needing more funding, etc). You have to respect that - I've kept expecting a big selloff, but it just hasn't occured. However, after eight weeks in a row of gains, a pullback still would not be surprising at all. As long as the market doesn't sell off sharply and can hold support, even all the way down to its 50 day moving averages, then I think a pullback could be a good buying opportunity. If you're a bull, a slow, lower-volume pullback would let the stocks that have rocketed out of bases recently to digest their gains, setting them up for further gains when and if the market starts moving back up.

Now if we get a lot of heavy selling on a pullback and more distribution days and also see a lot of the charts I posted above break their consolidation patterns sharply to the downside, then maybe the rally we just had is it and we fall back into the jaws of the bear. I have no way of knowing which of those two outcomes will occur, but those are the two I am looking for and will do my best to play the one that happens properly. Take care and good luck next week.

5 comments:

Jeff said...

Thanks for your honest! There are just too many technical bears so the market keeps going higher.

rol lew said...

hi mac,
very good reading, as usual. it is not possible for anyone to make money all the time in stocks. sometimes you win - sometimes you lose. cannot be avoided. my thoughts on today's post is - i hope you will not try to make back the 13% lost, in one big trade, or 2 big trades. my thoughts in this situation are, just try to get on base, bunt if you must, just try for a few little singles. make them ugly if you must. time for billy ball! stay away from the double play. 13% down can turn quite quickly into 16% down. so try instead to make it 12% down.
you know that you cannot steal first, so you have to go up to the plate & do something - i.e., you are still up to bat, you cannot leave the ball park.

do you know of any high probability trades that could give you a 1% return this month?

those are my thoughts...thanks for your post & your hard work. i have no doubt that you will soon put a few runs on the board.

Anonymous said...

I appreciate you Mac, you are honest and generous. I share your loss! I was up 20% this year before give it all back and more shorting this move up.

swingtrader said...

Not that I am a trading genius or psychology major, but what you expected the market to do was dictating your trading. Your trading should be dictated by what the market actually does, not what you expect. Easier said than done.

Your posts seemed to really focus on your expectation, even though you mentioned other possibilities. You also seem to like to select lower priced stocks to actually trade (i.e. stocks < $10). If you are selecting stocks from a sample that all fit your methodolgy, maybe you need another filter for your trading. I would go through the trades you didn't select that worked and see what (if any) traits they had that the losers did not. Just a thought.

Best of luck to you Mac...

Onetradedave said...

Your post is right on with me. I could have written it myself around the end of March. Since then, I have tried a few temporary things; shrunk my time horizon to days rather than weeks, taken profits earlier and not worried about the missed home runs, expanded my trading universe to include issues I normally dismiss.
I look forward to your success.
Dave