Long Overdue Update

Well, as you know, MVIS took off without me. Luckily though I had set a buy-stop at $4.15 for 2K shares. Those filled, and I picked up another 1K at 4.22. The fact that it started moving the day after I sold out is just uncanny. The market really can make one question his own existence. Sometimes I think there is a super-computer at Scottrade that sends my trades to others so that they can trade directly against me. Of course, I know that is silly. But sometimes it certainly feels that every move I make is the exact opposite of what I should do.

I have managed to shake off my earlier blues, and have returned to a semi-calm and collected state of mind. What I have realized is that I cannot shake my belief that we are in a period of correction that will likely last for several months. I hesitate to call it a bear market. I feel I must be positioned for it. If I am to be a trader, I have to be able to profit in times when the market is not trending up. Granted, there is nothing wrong with going to cash, sitting on one's hands, etc. But for me, there has to be a marriage between all those elements.

For right now, realizing that I feel strongly that the market is in a downtrend, I must not take on any additional longs. Sure, I bought MVIS. I've also bought ALDN and OXPS. For the latter two trades, I have stops set well below the average daily range, and I will ride these out for better or worse. Consider them a long hedge against my belief that the market will continue correcting.

I have also begun buying puts. I bought 10 Jan 52s for the Qs. I will also be looking for puts on the SPX and the DOW.

I have also shorted GES and EMN. I will continue trolling daily for shorts.

Again, I want to thank everyone that leaves me comments here as they help more than you can imagine. Even contrary opinions are very valuable. Ticonderoga left an opinion that this is a bull market, and he begged me to quit shorting the market. On face value, what he says makes a lot of sense. It forced me to really think about what my knowledge and experience up to this point has prepared me for. After much deliberation, I have to realize that often I am right, but early, and that often I am right, but lose conviction before the trade becomes profitable. If my belief is that the market will trend down for a bit, then I must act and hold to that conviction.

This weekend I hope to dispense with all the ruminations and get back to some charts. Specifically, I want to chart out what the indexes are doing, focusing on my plan for the coming months.

Oh yeah, I'll have Stockalicious updated at some point today with all my recent trades and latest positions.

One Step Forward, Three Steps Back

This year, and especially this month, has been very difficult for me. A run of bad luck coupled with some poor trading has resulted in my account being up only a few percent for the year. This is after being up almost 20%, twice.

In short, I feel much like this guy looks. Hat tip to Michelle Malkin for the image.

The run of bad luck started a few weeks ago with SLB closing down 10+ points after earnings. Then came TRAK, which gapped down 10 points, but managed to recover half of the loss. BLUD came along with its FCC investigation and cost me another 5 points. And who can forget BWLD, which cost me another 10 points? That's roughly 30 points lost, in positions which were worth almost 1/2 of my capital.

So when Friday comes, and the market looks like it might be gearing up for another leg down, my emotions got the better of me, and I liquidated most of my positions. This was pretty ridiculous, considering that I had charted out where I thought the Nasdaq might bounce, and the index conformed perfectly to the scenario I had charted.

But I didn't let the pain and frustration stop after liquidation. I then added index shorts. I should add that I did liquidate on bounces--it wasn't a free for all, and I did get some relatively decent prices on the double inverse shorts. However, this adding of index shorts likely just added another level of complexity for this coming week's trading. Complexity is not good right now.

As I consider where I am going wrong, I keep coming back to the emotional trading. In fact, the traders that I follow who are systems-oriented are all doing well for the year. I feel even more strongly now than I did earlier in the year that I have to decide on a system and stick with it. I could probably allocate capital to several different profitable systems and do okay. The fact is, I have to become more mechanical, and less emotional.

I definitely do not want to get back in negative territory on the year, so what I will be doing over the next several weeks needs to be done well, and done without emotion. To that end, I've polished off some old filters and screens I used to use. One in particular has backtested very well. I may start taking some of those signals again, as it has 74% win rate, and I really need some high probability trades to undo all the major gap downs and sell-offs I've endured.



The chart shows a perfectly executed pull-back on the Nasdaq. Most indicators are in neutral territory, with the Stochs showing overbought/sell signal. I still have the distinct feeling that the market is topping. However, the indexes may move too far against my shorts in the nearterm for me to hold them long enough to see any gains.

Put Money Where My Mouth Is

I picked up 100 WCG @ $26.65 for a trade. I'm trying out the RSI(2) indicator. However, due to the nasty investigation, I'm using a tight stop.

I'm out of the office for most of the day.

Evening Update

For some reason, it felt silly to do a new post just to update what the rest of my day was like.

BWLD gapped up this morning on weak volume so I sold 1/3rd of my position above $40.00 Had I sold all of it, I'd be around 1 grand richer right now, as the stock is trading 6 points lower after a .2 miss.

After looking at a chart of CATS (thanks Andy from the comments section) and watching the stock trade for 20 minutes or so, I decided to try out another RSI(2) trade. I bought 200 @ $6.06. I set a stop at $5.93, which was just below the low established the previous day. Then I left the office.

When I returned to the office about 15 minutes before the close, I saw that I was stopped out on WCG, for a $200.00 loss. CATS, on the other hand was up 6+%. Obviously, as some here have wanted to point out, the fundamental situation concerning WCG overrode any possible technicals. I liked the CATS bounce, so I left the position on overnight.

I also saw VDSI up 10+%, so I sold the shares I bought near the bottom, and left 2/3rds for later. It felt really good to have my patience rewarded here as I've felt like a fool for trying to catch this falling knife.

CPHD was also up 10+%, so I took 1/3 off before the earnings report tomorrow.

This leaves me with about 35% cash. I'd like to put some of that cash into more Gold and Silver.

As learning how to buy weakness has been a goal of mine all year, I am glad to see some of these buy-low trades start to turn a profit. I am especially excited about developing a screen to use with the RSI(2) setting.

Bob, Bears, Bulls, and Buys

Come writers and critics
Who prophesize with your pen
And keep your eyes wide
The chance won't come again
And don't speak too soon
For the wheel's still in spin
And there's no tellin' who
That it's namin'.
For the loser now
Will be later to win
For the times they are a-changin'.
Bob Dylan

With the bears now growling about the onset of Armageddon, I felt Bob's timeless lyrics were appropriate. Take a look at Tim Knight's post Sweet Relief if you care to read about the dark side.

My day started with me putting a market order in to sell my QID at the open, as I saw the futures were up, and I was going to be out of the office and away from a computer until the afternoon. Bad timing on that one. After my meeting, I met my wife at her office, pulled up a quote screen, and did a little dance as I was up another 1.5% or so. I decided to celebrate my unrealized gains by taking her out for a nice lunch. Again, bad timing.

By the time I got home, AAPL was in an all-out free fall. Rather ran reacting instantly and buying the panic dip, I went searching for news. Of course, there really was not any. I spent probably thirty minutes just watching things and looking for an explanation for the selloff. Now don't get me wrong, I knew things were extended and due for a pullback. It just looked a little more violent than usual.

Anyway, I did use the weakness to sell off some losers. I sold the rest of my PTT at $7.94, which means I was able to get rid of most my shares for a smallish loss. I also sold 500 AKRX @ $7.50 for an even smaller loss.

In the past, I have participated in panic selling. Today I remained fairly calm and objective. This is a big improvement for me. Now that doesn't mean I did everything correctly. I did sell 200 LLNW @ $11.02, which was not a good move, especially since they raised guidance after hours. I also sold my AAPL @ $160.80, when it looked like it was going to continue down into the close. I still got a nice gain on the sale. However, I bought back 2/3rds of the position for a tiny bit higher than I sold when it showed strength going into the close.

Another move that I am proud of, even if it turns out in the future to be wrong, is that I bought this dip. I added shares to my BLUD and BWLD positions. This is crucial for me because it is damn near impossible to buy low and sell high if I can't buy during panic. I did today.

As for the Nasdaq, I view today's move as a much needed pullback.



The chart shows support on the 10 day simple moving average. The strength of this rally can be measured by the fact that this is the first touch down on the 10DSMA since September 18th. The blue line I drew shows the lower trend line established from the August low.

The volume today absolutely shows distribution, and the Stochastics and RSI are overbought. However, there have likely been a lot of traders waiting for a pullback to get in on this rally. In fact, our very own Ragin' Cajun has been waiting with 50% cash. In short, I am still bullish here, but will be watching the moving averages and trend lines very carefully. If the Nasdaq looks like it wants to trade below the blue trend line, I will likely continue taking profits (assuming I still have some at that point) and will liquidate speculative plays.

Raised Some Cash

Today I sold half my SLB and GLD, making a small profit in both. While I think SLB is a great company, the chart is suggesting that there might be some consolidation ahead until the company reports earnings in a couple of weeks. GLD also looks toppy here, and barring any economic shocks, looks like it might retrace a bit before moving up again. Long story short: neither looked as if they were going to go anywhere big anytime soon. With so many stocks making double-digit percentage gains, I felt it was best to move some money elsewhere.

PTT, the gentleman's club play, has been causing me some grief. It was my second largest position, after MVIS. The stock has been very fickle of late, and has several times approached my maximum pain level before bouncing. Today I got tired of flirting with a large loss, so I sold 500 shares, or 1/3 of the position, for a small loss. I now feel better about holding the rest a bit longer.

Over lunch today, I was reading Sierra Mountain Investor's blog, and noticed he was buying LLNW. I looked at the chart, and it looked like a decent bottom feeder play. Also, Fly has been buying it. Well the stock went berzerk around 1:30. The momentum was unmistakable, so I bought 300 shares on the first pullback. I really wish I would have bought 1000. Anyway, LLNW was a pleasant surprise today.

Finally, I'm frontrunning Fly with my 100 share purchase of KTEC.

It is important to note that I own more stocks right now that I ever have. I used to scoff at diversification. However, I'm liking owning a nice group of solid stocks, mainly due to the fact that any given morning I may get caught up in a meeting, and not be able to log in to the account. Now, one stock tanking won't take my portfolio down 5%.

Patience Pays Off If You Miss The Breakout

For many traders, there is nothing more frustrating than missing a breakout in a stock. Many breakouts are explosive and catapult the stock up 5-10% above the pivot point or breakout level. Often, the temptation exists to chase the breakout. Patience may pay off if one waits rather than chasing such an explosive move.

William O'Neil recommends not buying more than 5% above the pivot point or breakout level. The rationale behind this strategy is that if a trader buys a stock several percentage points above the breakout level, he or she will often get stopped out or shook out when the stock retraces to revisit the previous pivot point. This often results in the trader missing the big move that results after such a successful test.

Let's first look at a chart of Southwestern Energy. The stock first brokeout in April, but the volume was too low to support the move. SWN then spends the better part of April and May consolidating at the area of the pivot point before it breaks out again in late May. Traders who chased this breakout were either stopped out or had their money tied up while the stock traded beneath their entry level.

The second breakout in late May is accompanied with much greater volume and catapults the stock several points past its pivot. Again, traders who chased the breakout watch as their position goes red as SWN retraces the move. However, the patient trader could find a better entry point on May 24 as the stock again tests its previous breakout level.

The next chart of Gerdau AmeriSteel Corp. shows two breakouts, both which retrace to test the pivot point before the stock explodes to make its big move. Traders who bought too high during the February breakout were resigned to watch their position stagnate for two months. Patience was rewarded for the traders who waited for a test of the breakout level. The late April breakout offers several days where decent entries could be had before GNA goes on to gain 25% over its pivot point.

Full disclosure: long SWN.

Why I Played Today As I Did

-$1,833

There have been a lot of comments generated by this morning's post, and I think that is very healthy, as there were several ways to play today's action. Each way is not necessarily more correct than another; it is simply a matter of bias, psychology, and risk aversion. In order to flesh out what happened, I will detail the thought processes which led up to me dumping everything except for one position.

Yesterday evening left no time for research. I had T-ball practice, then an engagement which kept me out past Midnight. When I got home, the Nikkei was down over 400 points. I thought, "Well hell....Tomorrow is going to be another gap down." As I went to sleep, I was already mulling over whether or not I would maintain my positions through the gap-down, and hope to sell later in the day, hold them entirely, or dump them on the open or pre-market. I often find going to sleep with these types of thoughts means the next day will bring frantic and schizophrenic trading for me.

When I got to work this morning and got my computer turned on, I saw that SMSI had been downgraded. The day before I was up 1K on the position, and now I was down 150 bucks. Furthermore, the futures were responding just as I had imagined the night before- we were going to gap down on the open. I was able to get a good price in the pre-market for SMSI, selling 500 @ $18.90. This was a brilliant move, as SMSI closed in the low 16s. Now I had to focus on the rest of my positions. I asked myself, "What do you think the market will do today?" My feeling was that the Nasdaq would close down between 20-30 points, and would probably continue that fall for a couple more days to the 2450 level before finding support. Based on this assessment, I decided first to try and liquidate in the pre-market any position that was priced closed to my entry, or break-even. I placed my limit orders, and nothing triggered.

By 9:20 a.m., new fallout from the Tech Tragedy was filtering into my office, and I could see that today was going to be extremely busy. Knowing that I was likely to be wrapped up away from the computer all day, I had to make a decision in 10 minutes about the rest of my positions. I could set stop losses, but many of my stocks were set to gap lower than where I would have placed the stop. I did not want to set the stops much lower, as that looked like a setup to be stopped out at the LOD. This left only one option- set Limit Orders and hope for the best exit prices.

I started with DIVX, as it was set to open close to my breakeven price. I set a limit for 400 @ $22.75. It triggered immediately on the open and I was out of the position for a very small loss. I also set a limit order for COGT, 500 @ 13.75 (my breakeven), but it gapped lower and didn't fill. Limits set for SWHC and SIGM also did not fill due to the gap down. I did not set an order for STKL.

I then got pulled out of the office for a few minutes and was basically informed that I was going to be in a meeting for the next few hours or so. I had just enough time to get back to my office. When I pulled up my platform, the Nasdaq was down ~17 points. I pulled up charts for all of my positions. Everything looked to go lower. I sold COGT on the market, 500 @ 13.526, as it was only a 100 buck loss. Next, I looked at SWHC. It too looked to go lower so I marketed it, selling 500 @ $14.18, losing 200 bucks. That left SIGM, which had gapped down almost a dollar. I had only 200 shares, so I said the hell with it, and marketed the 200 shares @ 26.807, taking a 200 dollar hit.

I now have only 1 position left that I might want to sell, STKL. I really like the stock, the chart, the company, etc. so I didn't want to sell it, but I had 1500 shares, which meant I was loaded up. I was able to watch it for a minute or two, and decided to sell it all, as I had a small profit in the trade. I dumped all 1500 @ $12.21. In hindsight, I should have sold half, as that would have limited my risk enough for my tastes.

Keep in mind throughout all of this that there are people coming in and out of my office, the phone is ringing, etc. My stress level was through the roof, and as I said earlier, something had to give. My trading experience told me to wait for better exits. However, at the time, the Nasdaq had not started back to close the gap, and I did not know if I would have time today to trade at all. Furthermore, the day started off very much like February's crash day, and there were no guarantees that any dip-buyers would save the day. I had in my mind my profits, which although relatively small, would buy things for my family, for example this playground set my 5 year-old is dying for. Remember I spend all my profits every year; I do not compound gains. And most importantly, I knew I wouldn't be able to focus on crucial things at work with the possibility of my positions imploding around me. These were my thoughts as I decided to liquidate everything.

In conclusion, most every position closed the day a dime or two from where I sold them. Looking at my decision from this perspective, I did pretty well. Yes, I noticed several of the positions did offer better exits before retracing into the close. I figure in the best case scenario, at most I could have saved $500-$1000 by not selling at the open, but only if I was in the office to trade, which I wasn't. The worst case scenario could have found the Nasdaq down 1.5%, and my positions down a lot more than I lost selling at the open.

All in all the Nasdaq had a fairly healthy consolidation day on lower volume. There was no crash, no explosions, etc. Had I done nothing, I may have 500 bucks more in the account than I do now. However, the key to winning in the market is taking small losses. I took a lot of small losses today.

Thanks for reading, and I hope this helps others out there as they struggle with similar biases and issues of trading psychology.

Late Night Thoughts

After spending quite a while on Stockbee's excellent blog, I have begun an informal examination of some of my paradigms and mental models as they apply to my trading and stock selection. In short, what Stockbee details is that stocks that have monstrous high volume moves tend to continue to have similar moves over time. These are the types of stocks I want to be in.

However, over the past year I have become extremely wary of trying to jump on stocks that have had huge moves for fear of catching the correction rather than the next leg up. I need to explore why my mental models are making me avoid these stocks. I feel I need to more actively screen for these high volume movers, and develop a system for finding a low risk entry. When the data shows that these types of stocks continue to have huge moves, it is stupid to not get involved at some point. Using TA for an entry, coupled with the edge this particular anomaly can provide might just be the jumpstart my portfolio needs.

One example of a stock having had a high-volume, explosive event is PNTR. I think this chart shows the potential to combine 3 elements to get an edge.


1. PNTR had a high-volume, explosive move. The edge here is knowing that these moves tend to occur again.

2. PNTR is providing a low-risk entry in that the trend has changed from correction and retracement of the huge move to higher highs, and higher lows (accumulation). Buying at the bottom of the current channel and placing a stop just below the channel should provide a good entry before the next move up.

3. Momentum, momentum, momentum. The edge provided by the anomaly of momentum cannot be overstated. I feel strongly that the highs of the explosive move will act as a momentum magnet, effectively pulling the prices back towards previous highs.

Finally, I would appreciate hearing from anyone out there who has run some backtesting or tracked long-term performance on stocks after they have an explosive, high-volume move. My apologies to Pradeep Bonde if I have at all misunderstood or misrepresented his data.