It would be nice if the Clowns of
Capitol Hill was a reality television show, but unfortunately it is a
very real broadcast where the contestants get to vote off the
populace/viewers. With the first DOW component Nike reporting,
earnings season has kicked off, however it looks like the clowns are
playing kick the can. Yet again a government shut down is being
threatened and although this is more akin to powering off an
unplugged lap top, there will still be serious ripples in the market.
If ever there was a week to have a solid game plan, this would be
one of them.
Last week breadth was very stretched on
the shortest time frames I follow and that has waned somewhat this
week, however the longer term readings remain elevated. Regardless,
there is an identifiable headline risk this week that takes
precedence. With this increased market risk event on the horizon my
game plan for next week is to simply avoid opening new positions and
be acutely aware of my current risk level. Market breadth analysis
for this week is not so important to my overall outlook.
I am a patient boy I wait I wait I wait I wait My time is like water down a drain ... I'm planning a big surprise I'm gonna fight for what I want to be And I won't make the same mistake Because I know how much time that wastes -Fugazi
Albert Einstein stated, “Insanity: doing the same thing over and over again and expecting different results.” However, another genius would beg to differ as the following quote (one of many variations) attributed to Thomas Edison regarding his invention of the light bulb shows, “I have not failed 10,000 times. I have not failed once. I have succeeded in proving that those 10,000 ways will not work. When I have eliminated the ways that will not work, I will find the way that will work.”
Notable trader and “Market Wizard” Linda Raschke has stated the following, “I only had to make the same mistake about 100 times before I learned (i.e. you can get overconfident, start trading too large, and make other mistakes). I didn't learn from making the same mistakes just twice. It can take repeated bashing of the head for something to sink into the skull.” Today I felt like I needed a bit of catharsis and in the process share the frustration resulting from making the same mistake repeatedly as well as recovering and moving forward. I embody this Rashke quote in nearly all I do. I repeat the same mistakes, sometimes knowingly, and sometimes in the pursuit of a different answer (right or wrong) or a more elegant solution. I repeat the same mistakes because sometimes I don't learn the first time and sometimes I don't learn the tenth time and sometimes I may not learn at all; however, when I do learn it sticks and from that point forward the knowledge is mine. I've been repeating a similar mistake for well over three years now. The main reason I still have skin in this game is because I have learned to keep my losses small --with the occasional hiccup --and I have been marginally profitable even though it seems I've tried everything in the book to assure antithesis of this order. I've maintained the stance that I am biding my time until my experience catches up with my knowledge and have done my best to assure this is the case by limiting draw downs to my capital and being in general a risk averse trader while progressing into a risk aware trader. In part I've succeeded in this by trading small and being scared shitless. The second smart thing I did was try as best as possible to stick to one ideology and this was momentum. My tactics, entries, exits, holding periods, stop placement, position size etc... has been fiddled around with repeatedly and perhaps detrimentally, however my general approach has remained the same through out. My daily bread has been a focus on momentum stocks and range expansion but admittedly I've experimented around with these parameters which is a natural progression in trading because as experience and time in the market grows so does the understanding of the underlying mechanics and structure of the market. I don't begrudge myself for doing this at all. The third smart thing I did was seek help which was one of the most difficult admittance in the world for me to do as I am prideful of figuring things out for myself and doing things on my own. For whatever reason, when I made a commitment to improving myself as a trader I realized I would do what ever it takes hubris be damned to progress down the path even if it meant asking for assistance, something that mortified me. It meant accepting that I was human and I couldn't do everything on my own and it isn't necessarily being a burden upon another in seeking guidance. And so one day after a horrific trade (one that was actually profitable by the way but didn't follow my rules) I threw myself into the pyre and sent a raw journal entry to a total stranger. That journal entry became a blog post on philpearlman.com This was the beginning of the turning point for me. What was echoing within the confines of my mind was finally externalized and was a surprisingly uplifting experience. In the pursuit of my passion I exposed myself to another who didn't know me but merely accepted me based upon an imploring outreach to become better at what I wanted to do. For this I am eternally grateful and from this a new plot was being toiled.
So what does all this bloviating boil down to? I'm a phenomenal scanner. I can scan like nobodies business, but it's not about the scans. I've improved considerably at pulling the trigger on entries and taking my losses, so I'll give myself a pat on the back. I'm still pretty weak when it comes to filtering a lot of the trading data I follow into meaningful information and maintaining and tracking quality watch list. I still really, really, really, really suck at trade management. I suck so hard at this that I missed an opportunity to increase my account size by 20%.
How? I didn't follow the plan. Immediately after entry price continued in my direction for 2 more days --hooray --before it pulled back over the next 9 –Rut-Roh!-- and I sold when price returned to my entry point as I was unwilling to accept the possibility that this might turn into a loss after such a promising start. Of course the following day price put in a pivot low, above my stop level, and never looked back again. That trade was MAKO.
MAKO Entry
MAKO Trade Management
But wait, there's more. It wouldn't be much of a lesson if I was harboring feelings from a trade I exited August. How about a trade I exited last Friday under similar circumstances? Yeah, there's the rub.
Try, Try Again
So, I missed this because I repeated the same mistake that I have for over three years. But you know what: I went to the fridge, grabbed a carton of milk, poured some into a glass, returned the carton to the fridge, and then proceeded to tip over my own glass. I don't cry over this shit anymore because it's nothing new. As Beckett so cleanly started Murphy, "The sun shown having no alternative on the nothing new." I'm use to it by now. I'm not happy with it, but at least I know that even though I've suffered the same fate I no longer consider it neurosis because I'm in the company of Edison and Raschke, and more importantly I know that I'm capable of putting myself into these situations where luck can and will favor me because this time is different... at least in a few meaningful ways. Through all the trial and error over the past few years there are a couple of things I know- I've persisted and I haven't blown up. Along the way I've learned a few other things, most importantly that I'm finally beginning to get a rhythm and style and cadence that suits me and I am understanding the market on my terms, which is invaluable. I've taken the pot holed road of many weary traders and I've come to where two roads divide and I'm choosing not to take either because I'm going to blaze my own right down the middle. It may take longer, and it may not be as scenic, it may be filled with hundreds of mistakes, but in the end it will be more satisfying because it will be my path. So here's my deal to myself. I have three positions open that were taken with a similar set up and the exact same trading guidelines as the MAKO trade. I have not fucked these up. I do not have any false expectations that these will return 20% to my account, but I do feel like today's crack on the head was sufficiently skull numbing and the lump left behind will still be noticeably protruding for the duration of these trades that I will not make this same mistake. I have no delusions that I still won't make other mistakes and do so repeatedly because that's how I am, and even if that wasn't the case there are enough trader tombstones of those who didn't learn from theirs littering the landscape to keep things in perspective. On a side note, oddly enough, today while I was beginning to journal my response to the MAKO news there was a related post to what I was undergoing by Darren Miller published on SeeItMarket.com/ that I think is well worth reading.
AMBA
AMBA Hypothesis Prior to Entry
RKUS
SIGM
These are the trades that I will be moving forward with. The time ahead has the opportunities that the time behind didn't catch but showed the way.
They're at it again and they're worth
paying attention to. The last time these stocks were heavily in the
news I scoffed with derision but the egg was on my face for not
seeing the possibility. Instead I found myself staring
incredulously as these stocks marched up 100s of percent on what
seemed like air and marketing. But, after all, isn't that the drum
beat that many stocks march to anyways? There doesn't need to be
rhyme or reason for a stocks advanced, sometimes it just takes the
belief and perception of others and sometimes it just takes a belief
in a rising price.
Rare Earth and China News
“Rare Earth” is back in the news
cycle and many of these stocks showed high volume interest today.
AVL
REE
TAS
The last time this situation arose
stocks like MCP bolted and the music didn't stop for a year before
the penultimate chair was pulled. Lightning may strike twice with this group of stocks.
Constructive price patterns and long set-ups are still bountiful in this market. These stocks build the case that regardless of whether or not the general market is a bit extended here in the near term, there are plenty of candidates ready to resume the next leg up should money rotate into them.
I don't get giddy often, but when I do
I'm mindful to dismount the high horse and put my feet firmly on the
ground. I've been up the ladder and down the chute enough times now
that I'd like to believe I've wizened up to the fact that I should be
cautious under such circumstances. It has been during these moments
that I've managed to cough up my profits the fastest and find myself
at scratch and starting all over again. There's plenty of reason to
remain positive about the overall market, however right now is the
time to be cautious from my perch and being happy with my results is
one of the first signs.
There's two things in my trading that I
try to achieve: avoiding draw downs and avoiding troubling market
periods. To better asses the later I continue my daily process of
breadth analysis even though I must admit that this trading year has
been a bit difficult in this regards as there have been a number of
false signals given from my readings as well as some false
assumptions and poor analysis on my part. Be that as it may,
what this has illustrated much more clearly to me and I have to to
greater acceptance of, is that not everything works all the time.
I've been fooled and foolish over the past 9 months, but what has
been further cemented is sticking to my process and not the outcome.
Part of my process continues to include
the following check list:
Breadth Check List
Working from the top down I gleam the
following information: the Primary, Secondary and Thrust are all
bullish here. When these are aligned they tell me very simply that
long is the correct side of the market and in turn so should my bias.
However, this is not a simple hot/cold scenario. The underlying
numbers are also important. The following spreadsheet image
backtracks from today through July 29th (dates not shown
due to screen real estate).
Market Montior
The numbers that are of most interest
to me are the number of stocks in my universe up/down 4% daily, the
number that are up/down 25% in a quarter, and the number that are
up/down 50% in a month. What the underlying numbers illustrate is
that over the past few days there is a similarity to the readings
from late July through early August where the market stalled out,
volatility began to increase, and a modest pullback ensued. So while
all elements are aligned and my longer term bias is long, in the
short term I am leaning somewhat bearish and as a result am cautious
about the current state of the market.
Moving down the list I have a number of
public canned breadth indicators that I follow. The first two are
the % of NYSE stocks above their corresponding 10 and 20 period
moving average, both of which are above 70 and I consider that an
extreme zone. What this indicates to me is that on the shorter term
the market breadth is very stretched here and exhausted and in need
of rest. The T2108 which is the number above their 40 period moving
average is at a more modest 63, but intraday this reading clipped
above 70 two sessions back. The next two are the % above their 50
period moving average on the NASDAQ and NYSE.
T2108 Intraday 70
In conjunction with an intraday reading
of 70 on the T2108, the Mcllelan Oscilator clipped a very extreme and
rare 300 reading before quickly snapping back and on a closing basis
ending the week at 93 indicating that some of this exuberance has
been tempered.
T2106 Intraday +300
Looking at the $BPNYA, $BPSPX, and
$BPCOMPQ it can be seen that these are at extreme readings of 73, 79,
and 69 respectively. I believe what is also noteworthy about these
three breadth indicators is that there has never been a significant
enough pullback over this trading year to pull these readings below
70 for very long. That these readings have remained elevated above
70 for much of the year with the exception of the $BPCOMPQ which
lagged early, it's been clear thus far that the signals from them
have been less than reliable and better left out of the analysis
picture all together.
$BPNYA
$BPSPX
$BPCOMPQ
So now that I have a picture of the
landscape I'm traversing upon, the next step is to bring it all
together for a game plan going into next week. For this I have a
series of questions such as: where are we in the longer term scheme,
what is the predominant theme (growth, turnaround, value, junk,
sector), what are the breadth trends indicating, and what scenarios
should I plan for over the next 5 days.
Ultimately the answer to these
questions is somewhat illusory, but the main point I try to focus
upon are the two aspects of my trading I mentioned at the beginning:
limiting draw downs and trying as best as possible to participate in
a market that works with me on my time frame. So for this week I'm
going to approach the market with caution and observe how Monday
plays out and what tone might be set for the remainder. From a swing
trading perspective I think it's best to wait for some clarity and
not push marginal edges here. As it stands I have two outstanding
positions at full risk, 2% of my account, and the others I hold have
break even stops. I have taken myself off of margin going into the
weekend due to a time stop and profit target exit and am comfortable
with current account risk and see little reason to add to on Monday
or Tuesday.
I know from experience that when I
start pushing the pedal here I tend to have too many positions open
with out enough profit buffer to reduce risk exposure and find myself
subject to pull backs and 5-6%+ draw downs. Opening up a new swing
this week under the current market conditions based upon past
experience would result in a higher probability of being stopped out
due to the breadth being extended on the shorter term time frames or my own negligence is taking on too much risk. With earnings season in a couple
of weeks there will be plenty of catalyst based stocks to
build a watch list for the next three to six months, so patience
until then is prudent.
Volatility remains high as noise of the
continued politicking about Syria and the Middle East plays out among
the string pullers whose slightest twitch or twist of phrase seems to
have the knack of dragging the market down a percent in moments.
This creates some trickiness from my perspective due to the fact I
keep tight stops and these intraday gyrations often result in
whiplash, so for this reason I'm still somewhat cautious about the
market here in lieu of a death by a thousand cuts scenario, but in
general there are some positives of note suggesting the pullback may
have found the bottom.
The first positive I saw this weekend
was that the % Stocks above their 40 period moving average has risen
above 30. In previous discussions on this I've mentioned how I
prefer that this dip below 20 which tends to lead to longer duration
moves, but I'm not going to nitpick that it only dipped to 22.
T2108
The McClellan Oscillator closed the
week at 19, neither overbought nor oversold.
T2106
A quick glance at the daily charts
shows the SPX and Russel below their 50 period moving average and
exhibiting a pattern of lower highs and lower lows, but the NASDAQ
has been holding firm and is only .89% below its 52-Week high and has
held above its 50 MA during the entire pullback. From my perspective
it isn't so much that the Russell must lead above all else, the
NASDAQ will suffice as well which it has been as of late when
compared to the others.
RUT:SPX
COMPQ:SPX
RUT:COMPQ
What I found noteworthy is that while
the NASDAQ dipped a modest 3%, the percentage of stocks above the 50
period moving average dipped to below 40 which indicates that there
was a heavier rotation occurring under the surface that was masked by
a sideways consolidation.
$NAA50R
While I expect this to continue to be a
hiccup to hyperventilating type market where a cross word uttered
will spook traders, the underlying breadth and strength of the NASDAQ
coupled with set-ups has me positive on the overall market. It's important to keep in mind that regardless of what the breadth signals suggest as probable or the media and talking heads suggest is inevitable, ultimately it comes down to the set-ups. If they are there, tune out the noise because the story that individual stocks tell is the only thing that matters.
The shipping theme continues to emerge with the $BDI breaking from a range that formed trough to peak from February 2012 through April 2012.
$BID
Individual shippers and perhaps the ones worth paying attention to further down the road also have been breaking out with 5 on my list having moves of 4% or greater today. Many of these have been in deep neglect and at or near historical lows. One of the inherent problems with these types of stocks is the lack of linearity as price has a tendency to jostle haphazardly. Now that the $BDI has broken out and should the shipping theme play along, this type of price action should wane as persistent buyers step in. This will also show up with more consistent momentum rankings on a 3 to 6 month time frame.
