YELP, I Need Somebody

During this past month I returned to the classics and have spent some time rethinking what I learned from Livermore and Wyckoff in particular. I find great value in reading the same book 10 times in a row, however I often find greater value in returning for the 11th reading after time has passed and experience has been gained, even if it is one sentence or a turn of phrase that resonates. As it is the end of the month and I am reviewing a number of charts, I had a sudden connection between one of them and a concept I've been pondering as of late, the Three Wyckoff Laws.

The three laws are as as follows:

The Law of Supply and Demand: When demand is greater than supply, price will rise to meet this demand, and when supply is greater than demand, price will fall until it has been absorbed.

The Law of Effort vs. Results: Every action must have an equal and opposite reaction. Price action on a chart must reflect the volume action below and the two should always be in harmony. Divergences and disharmonious price and volume often presage a change in direction.

The Law of Cause and Effect: In order to have an effect there must be a cause. Further, the effect will be in direct proportion to the cause. In other words, a small amount of volume will result in a small amount of price movement and a large amount of volume will result in a large price move.

One chart that stood out today when doing one of my month end scans was YELP. I wanted to keep the chart clean so I kept it sparse with 4 points of interest in this analysis.

YELP

The green line is the high of the IPO date in March 2012 that was unbroken until May 2013 at point 1)

1) My philosophy about IPOs that I've adopted from Dr. Wish is that the break of an all-time-high after 3 months is a significant price point. Given that this took well over a year adds to its importance. That it did so on the highest volume on a monthly basis outside of the IPO debut strengthens the validity of it. Filtering this price volume action through the three laws I walk away with the following thoughts:

Supply and Demand: There is a supply/demand imbalance here as price is rising

Effort vs. Results: Is there harmony between price and volume? To verify this two questions to ask is what is the width of open to close and high to low. If there is effort which in this case the largest volume over the past 12 months, then there should be an equivalent result, a candle with a wider range and a close nearer the high

Cause and Effect: For the month of May 2013 there was a 14.5% appreciation in price from the previous month. To verify whether this is harmonious action it is important to view the relationship to the preceding months. November 2012 established a pivot low that stood firm and on a percentage basis May had the highest price appreciation and the highest volume thereafter.

2)

Supply and Demand: There is a demand imbalance as price is still rising.

Effort vs. Result: Is there harmony between price and volume? In this situation price closed well below the high, however there was also a large gap up which on a monthly chart will be rare because the gap can only occur on the first day for this to be so. In essence this can be viewed as strong but also cautionary action which switching down to lower time frames could give clues about.

Cause and Effect: As this is the highest monthly volume of all time there should be corresponding price action which in this case is verified by the closing up 24% from the previous month which at one time was a much higher 36%.

3)

Supply and Demand: Price closed higher so there is still a demand imbalance

Effort vs. Result: Is there harmony between price and volume? In this situation there is obvious concern as the difference between the open and the close is only 39 cents. Further there are wicks high and low suggestion indecision on the part of traders at this price level, so the consensus as of now is balanced.  Given the volume and price action, is balanced what one would expect to see in this effort vs. result situation or is this a red flag even though the candle is green?

Cause and Effect: This is the largest volume on a monthly basis in the trading history of YELP and yet price only appreciated 2.37% on a closing basis. Therefor this is an anomaly and not the expected price effect given the volume cause. The float turned over 3 times so this churning may very well be distribution from strong hands to weak hands and reason to be cautious and on alert for declining prices moving forward.

One of the things I've learned from going back for the 11th time is being more observant of the price action on higher time frames and approaching the price/volume action without prejudice and with a set of rules for interpretation. After all, price and volume are just data points and a chart is an abstraction of them, nothing more or less.  My knowing that this chart is YELP elicits certain responses and biases that are difficult to ignore, but in having a process and filtration system some of that can be alleviated.  Based on the evidence I'd say there is reason to be on watch for a change in character and direction for YELP.

Weekend Review 10/18/2013

With a debt ceiling reprieve the market continued to march along, but in reality it never really showed much concern to begin with. So, for the folks paying attention to the market alone and ignoring the news it was a very good week indeed. For folks waiting until afterward it was a very good couple of days. Now that the anxiety has expired and the jubilation has commenced, is there reason to be cautious here in the midst of exuberance?

Looking at the breadth numbers I follow the market is heavily extended here and the probabilities lean towards a correction. Will this be through time, rotation, or price remains to be seen. Will there be one at all remains to be answered, but it looks likely.  Coupled with these readings, the COMP, RUT, and SPX popped outside their Bollinger Band today and since indexes have a strong tendency to mean revert, this event is confirming from my view point.

Extreme Readings

% of NYSE > 10MA

% of NYSE > 20MA

T2108

$ NASDAQ > 50MA

NASDAQ BB

RUT BB

SPX BB

The data suggest I should be cautious over the next 5 days. Putting this information into context and a plan based upon my experience, I'll be less likely to trade break outs on shorter time frames and near their highs.  The rational behind this is that follow through during a pullback becomes an issue so avoiding extended stocks and looking for pullback candidates that are breaking out will take priority.  Additionally I'll be more focused on A-grade set ups and whittle my watch list down to stocks on a weekly time frame that are setting up near their 10-period moving average. Some candidates I'm eyeing:

AVG

DGLY

DWCH

ENTA

MKTG

TUES

Also, the meat of earnings season is underway and I'll be dedicating time this week tracking those that meet my requirement and fleshing out a core watch list to trade off of for the next 3 to 6 months. One stock I'll be keeping a close eye upon and look at building a position is ZHNE.  I have a higher degree of conviction in the potential of this candidate and will look to commit some size and hold as a position.

ZHNE

I'm With These Guys

There's an old adage, you are only as good as the company you keep. When it comes to my trading I've come to the conclusion that I want to be with these guys.

NBG

RVLT

SCTY

More and more I focus upon trading plans that put me in the company of these guys and honing how I can exploit this on my time frame. These guys be found on the daily, weekly, or monthly charts, but they have tendencies and nuances that are particular to the time frame referenced. A recent example is a previous post about my trading plan for RVLT. A current trading plan is one I drew up a few days back for SCTY.

SCTY Model Book

Going into the last half of the month, 53 momentum stocks are currently running at their highest 12 period volume on the monthly time frame. This is my hunting ground for some more of these guys.  These Guys (Finviz Screen)

Trading Is Not A Zero-Sum Game, It Is -EV

Trading and Poker as a zero-sum game is the new efficient market theory. I can't count the number of times I've heard that trading is a zero-sum game repeated without any fact based evidence what-so-ever. Let's look at the definition of a zero-sum game first:

a zero-sum game is a mathematical representation of a situation in which a participant's gain (or loss) of utility is exactly balanced by the losses (or gains) of the utility of the other participant(s). If the total gains of the participants are added up, and the total losses are subtracted, they will sum to zero.

So first let's disprove poker.

Buy into a 2/4 limit hold 'em with a $100 rack and post on the big blind. For sake of argument let's assume this is a 2-1-1 blind situation. If the first three hands are discarded, 4% of the rack is gone. If this is a full game of ~8 players and a hand count per hour of 35 you should be blinded 4 times. Without playing a single hand approximately 16% of equity will be lost in an hour.

Now to disprove trading.

I have a $1500 account. I buy 100 shares of XYZ at $10 for a total of $1000 and a commission of $7. I now have $1000 of stock and $493 in cash. I sell $XYZ the next day for $10 and a commission of $7 to you who has a $1500 account but with $1 commission. After this trade I have $1486 and you have $1000 in stock and $499 in cash. Let's repeat. I now have $1000 in stock and $479 in cash and you have $1498 in cash. If this repetition continued further, even though I bought and sold the same number of shares for the same price, soon enough I won't even be able to buy the same number of shares.

As long as there is a rake in poker and commissions in trading the game will always be -EV. The typical claim that trading is a zero-sum game is concluded briefly with, “For every winner there is a loser.” However, even this is not completely true as shown in the trading example. Further there is plenty of evidence that the game of trading is really a wealth transfer from the many to the few. A number of account studies have shown unequivocally that 90% of them are net negative and the owners of these accounts have a strong tendency towards the disposition effect: cutting winners short, letting losers run, and adding to losers but not to winners.

This is just one of many market maxims that when not vetted and taken at face value can lead to erroneous conclusions and outcomes, poor habits and thinking. One that I've recently thought about is “Trade what you see, not what you think.” The problem with this is that we now know through behavioral sciences that both are faulty and can not be relied upon unquestioned. When looking at a chart our eyes are subject to optical illusions and blind spots, and our thinking is subject to misidentify a trend based upon a sequence of 2 in a row among other behavioral biases.  Not only are they problematic individually, they can become more so when used in tandem. The moral of this story is: question first, verify second, believe third.  Reality based, evident backed trading trumps assumptions and maxims.

Back to Our Regularly Scheduled Program

Weekend Review October 11, 2013

By Friday, Tuesday did not happen; and so it goes during highly volatile and emotionally driven news cycles such as the debt ceiling and shutdown of the American government. On Tuesday it appeared that big money was stepping aside as well watched and highly liquid stocks sold off hard on heavy volume but by Friday the indexes bounced back just as swiftly with gains of more than 2% on Thursday alone. With a looming deadline this upcoming week, less is definitely going to be more.

I don't know if the market is pricing in a default or pricing in a resolution. Even when either of these events occurs there is still no telling which direction the market will react as it could be a sell the news event regardless. We don't have to look much further back then the 2008 Lehman collapse to know that the market is not always prepared and is willing to suspend disbelief of the improbable because it just can't phantom it actually happening, and this is where the real danger lays.

This is not the week to make assumptions on how the Clowns of Capitol Hill are going to behave. There is a core group of ideologues who clearly have little understanding of anything at all and are acting in an irrational manner with little concern for the potential effects of their decision making. As push comes to shove I do not underestimate the reptilian part of their brain kicking into high gear as the stress and tension mounts resulting in dangerous consequences and precedence.

I know that I trade my beliefs and I also know that there is a fringe group in the US that governs by theirs. This is an important point because when there is a belief system that is subscribed to 100%, one only has to look at the patterns and events that have happened before to be aware of what people are capable of doing. It is misguided to think that it can never happen here even though it happens everywhere else on the globe. It is misguided to think that it can never happen here even though historically some of these things we believe we are above have happened here already.

My preparation for this week is worse case scenario. I'd rather prepare myself for the most negative outcome possible than be optimistic that just like the movies the powers that be are going to wait until 00:00:01 to cut the red wire. Even then it still might blow depending upon market reaction.

Wax On, Risk Off

One of the luxuries of being a blip is the ability to go from 0 to 60 to stopping on a dime with minimal energy spent and impact felt. Those who trade with size and move markets can not do so with nonchalance. They can try to slowly liquidate and pass off from strong to weak hands, but when they want out of a room that's well over capacity and there's only one exit it becomes completely evident what they're up to. This is why it's important to pay attention to the stocks that trade with the highest dollar volume and/or are often spoken of and about as leaders.

Today the market moved from risk on to bum rush the exit as many of these stocks have been taken to the woodshed. The preponderance of evidence now indicates there is a change of character in the market and attention must be paid to it. In my weekend review I noted to pay particular attention to the bigger monied stocks as breadth indicators were sending me a mixed message and I felt it prudent under the circumstances to defer to the behavior of individual stocks. Early in the morning many of these spoke, or rather shouted. that the minefield was live and heightened caution warranted.  

AMZN

FB

PCLN

SPLK

YELP

The preceding are just some of the momentum stocks that took it on the chin today.  In total 361 stocks in my universe were down 4%+ today on higher volume.  Coupled with this, the well known fear index $VIX has been spiking too suggesting that concern about the general market has heightened over the past couple of weeks.

$VIX

These are the moments when gains can evaporate, or worse, become loses.  It's of utmost importance to have a game plan of action as to what to do when the calm water becomes a furious whirl pool. A week back I penned (figuratively) a post about mistakes and moving forward. I still have the two open positions I mentioned --AMBA and RKUS --with strict guidelines as to how I will trade them, so in this regards today's action is just noise and does not effect me in the least. My swing trades however, have been abandoned with profits and losses booked as they are on a completely different trading plan and time horizon, and are cut without hesitation when it's clear large distribution is hitting the tape in an extended market.

Moving forward I expect the continued noise of the debt ceiling to be in play so capital preservation until this resolves is the number one priority.  Earnings season will be in play so rebuilding watch list during this period will be where I'll put some of my energy.  Going over previous trades and noting where I've improved and what still needs to be worked on will be my focus.  From every pullback and correction comes renewed opportunity and a robust playing field to take advantage of.