The changing market landscape

Well, I have to say that these are the most interesting times that I have seen in the markets since I started trading, and that includes the Internet bubble, and subsequent bursting of it. Since my last post, we have seen the market (NASDAQ) basically in a descending triangle, recently breaking below the lower trend line.

After the Fed announced that they would cover the bad debt that occurred for a variety of reasons, and then that the financials could not be to be shorted, we saw a huge up day on Thursday, followed by another on Friday. I don't like what is happening, since the responsibility is being taken off of the true offenders- the banks, mortgage companies, and those who knowingly took on more debt than they could afford- the homeowners and speculators. What bothers me even more, is that the government and the broken banks are pointing the finger at the short sellers. I do have a problem with naked short selling- shorting when the shares are not available (but this is legal), and I will agree that there has been a lot of piling on of the shorts, driving the stock prices of the banks into the ground.

In my opinion, a better solution is to re-instate the uptick rule for shorting. I think that this would add some level of order to the selling, and get things back under control. The shorting did drive the stock prices down, which changed some of the credit ratings, so there is a correlation here. All in all, stopping the short induced bleeding was a good idea, and I do think that the uptick rule should be put back in place, as I mentioned above.

My concern is the basic buying and selling relationship of an orderly marketplace is being messed up. When you have shorts selling, you are providing shares to the buyers. Now that short selling is being restricted, it may end up setting up a situation where there are fewer shares for sale, artificially driving up prices, as buyers compete for fewer shares. Now, what happens when the shorting is allowed to happen again- do we see another down slide, or does order return to the market?

In the meantime, I am not trading this market unless I see some sense return to it. I can't allow myself to trust this rally, because the true issues have not been resolved.

Keep your power dry, and control your risk.

Nasdaq at resistance

The charts of the Nasdaq look like it will be an interesting week. I have a weekly chart attached, because I believe that the weekly charts take a lot of the daily noise out of the picture, and allow me to see the larger trend better. In the case of the Nasdaq, you can see that price has pulled back from resistance in a bearish engulfing candle, but has not yet broken the channel that it has been in since March. Price this week has been less than the week prior, so I am not sure that this is a powerful bear signal.

We are entering a seasonally thin environment as we approach the summertime, and given the factors that are in play, such as oil, recession fears, etc, I suspect that we will see a break of the channel, and a swing to the downside. The other thing that I am noticing, is that there seem to be a lack of good trading patterns on strong stocks. I was also reading on Reuters this morning that the Chinese markets slumped today on the same fears that I mentioned.

A point that I touched on in an earlier post was how I use the Nasdaq to give a sense of the overall market direction. I will use the other key indexes, the DOW, NYSE, and S&P 500 for rally attempt follow through days, but I have noticed that the Nasdaq seems to set up more reliable patterns that any other index chart. By tradeable patterns, I am referring to 5 wave declines, 3 wave A-B-C pullbacks, double bottoms with tests of the midpoint, 2B bottoms, etc. When these set up, I can be pretty sure that the strong momentum stocks will move out of their patterns as well.

I'll include charts of examples of these in future posts. Until then, I hope that you had a great Memorial Day holiday.

Current trading environment

Well, it has been a while. This current environment has been getting the best of me, because of a lack of discipline on my part. The downtrend that we saw start right after Christmas really put me to sleep. I was so content to sit on my hands, that I did not take the normal day to day actions and tasks that I should have. By sitting and waiting, I did not watch for new opportunities as I should have.

In any case, I missed some good trades, but am determined to not let that happen again. I did take some resent trades with SINA and ASTI, but the Nas was pretty extended, and the environment was high risk. The trades went nowhere as the general market reversed. I have been finding that when I align my trades to what the market is doing, specifically, the Nasdaq, the odds of success increase greatly.

I have an order in for SPWR, which has formed a nice decline, finding support at the 38% fib value, as well as both the 50 day and 200 day EMA's. Here's hoping that the channel breaks to the upside. Feel free to click on the image for a clear, and larger view.

Here's hoping for better days ahead, and Happy Mother's Day.

The risk of NOT taking a trade

One topic that I have been giving some thought to, is risk. We all know that there is a level of risk associated with taking any given trade. Assuming that we have a method that allows us to measure the risk prior to placing a trade, we know exactly what the level of risk is. This can be measured in dollars, or percentage of account value- normally traders use percent of account to measure R or risk.

If your trading style does not allow you to measure risk (entry price - stop price x number of shares), this there are other discussions that need to take place! I cannot imagine NOT being able to meaure my risk/trade, but that's just me.

Recently, I have been thinking not about the risk of taking a trade, but the account risk associated with NOT taking a trade. If you are trading a strategy that has a fairly high probabliliy of winners to losers, and you also know the average expectancy (reward/risk) per trade, then you also know the dollar risk of not taking the trade when market conditions and specific chart patterns set up.

This way of looking at trade set up's has really changed my thinking. Now, current market conditions make it tricky to find good trade set up's, so it's easy for me to sit on the sidelines and wait for better days (and think about stuff like this).

BTW, I trade a fairly high probability swing trade method, and I track all R multiples in a spreadsheet, so I know what my projected reward/trade is, as well as loss risk. How can I measure reward before the trade is taken? By looking at the upcoming resistance levels that price will face, and taking those trades that should have a 3:1 reward profile or better. In many cases the reward price exceeds the 3:1 level, so I am really trying to measure a minimum reward level.

In any case, using 3:1 allows my to look at the risk of not taking a given trade, compared to the risk of loss.

Give this some thought, in relation to your trading method, and you may see things from a different point of view.

Thoughts for the New Year

First off, I want to apologize for the lack of postings. I allowed myself to become distracted with other issues, and this affected my blogging, as well as my trading. Trading well requires constant effort and self-work, and I allowed myself to lose my edge.

That said, I want to go through some of the goals that I have for 2008- these are related to Tharp's 10 tasks of trading, and are not tied to any profit goals. It is my belief that if I focus on the process of trading, and manage my trades according to my rules and strategies, then the profits will come.

The key areas of focus for 2008 are to take the trades that my screening software identifies, and manage them well (not taking profits too early). These tasks (as developed by Van Tharp from his modeling of top traders)-

Taking action, and monitoring the trade.

There are 10 tasks in total, and these are detailed in his "Peak Performance Course for Traders" program.

The other main goals are continuation goals- meaning that I am doing a pretty good job on those now, but I really need to make sure to maintain that effort. In addition to these, I want to work on continual improvement with regards to my trading, nutrition and exercise program, and spiritual development.

One thing that I have noted this past year, is that the Nasdaq seems to set up more reliable patterns than the other indices. I use the Nas 100 (NDX) to see how the large cap techs are doing, but the Nas sets up better support and resistance, fib retracements, etc., so I use it as my main market indicator.

Other than that, I will try to post weekly, share my learnings, successes and failures. Have a happy and healthy 2008, and good hunting!