TraderFeed

A Look at Weakness Among New 20-Day Highs and Lows

2009-11-08T14:18:00.000-06:00

On the radar: we see generally rising prices for the S&P 500 Index (SPY; blue line above), but a recent pattern of weakening 20-day highs minus lows among NYSE, NASDAQ, and ASE stocks, as reported by the excellent Barchart site. Much of that weakness can be traced to relative weakness among small cap stocks. For example, my ever-trusty Decision Point service notes that 58% of S&P 500 large cap issues are trading above their 20-day exponential moving averages, but only 38% of S&P 600 small caps and 45% of S&P 400 midcaps. I will be watching closely early this week to see if the market bounce from recent lows can broaden. If not, I will be viewing that bounce as part of an longer-term topping process that goes back to momentum highs in September.
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Sector Update for November 8th

2009-11-08T10:28:00.000-06:00

Last week's sector review noted deterioration in the Technical Strength of the sectors, but viewed the action as an interruption of a bull market rather than the start of a fresh bear. After weakness early this past week, stocks rallied into week's end, taking us back toward the bull highs. As we can see above, none of the sectors is showing a strong bullish trend as of Friday's close, but five of the eight are in bullish short-term trending mode, two are neutral, and one is bearish.

(Note that Technical Strength by sector varies from a very bullish +500 to a very bearish -500, with scores between -100 and +100 showing no significant directional tendency).

Here is how the sectors look as of Friday's close:

MATERIALS: 60
INDUSTRIAL: 80
CONSUMER DISCRETIONARY: 200
CONSUMER STAPLES: 240
ENERGY: 140
HEALTH CARE: 140
FINANCIAL: -180
TECHNOLOGY: 240

We can see that the consumer-related sectors made strong week-over-week gains in Technical Strength, as did Materials and Industrial shares. Financial stocks remain the relative strength laggards, participating poorly in the late week rally.

I am watching the 1064 area closely, as that represents prior resistance from the sessions at the end of October. We broke above that level in Friday's trade, and I'm looking to see validation of that breakout early this coming week. If we get that, particularly with solid upside breadth, a test of the bull highs should be in the cards.

The uneven nature of participation in the late week rally, however, leads me to question whether we will sustain that breakout. I am uncomfortable with the weakness among sectors that, thus far, have led the rally since March--including small caps and financial issues. I'm also concerned that, even after last week's bounce, we're still seeing more 20-day lows than highs among NYSE, NASDAQ, and ASE shares.

Failure to sustain the move above 1064 would lead me to look for a retest of last week's lows, but would also invite perceptions of a longer-term head-and-shoulders topping pattern dating back to the September momentum highs. This latter scenario would suggest a break below those lows from last week and is one reason I am defensive here.
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Self-Coaching: Posts Worth Reviewing

2009-11-07T20:23:00.000-06:00

* Trading and finding the heroic within ourselves;

* Perspectives on greatness, happiness, and performance;

* Self-regulation and training: sustaining a steady state as a trader;

* This post on Bernanke and the U.S. dollar remains relevant today;

* Learning to take heat on trades;

* Identifying a trend day in the market;

* Recognizing range days in the market;

* Ideas re: trading stress and emotion;

* Anxiety and micromanaging your trades.
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Overcoming Slumps in Life and Trading

2009-11-07T12:04:00.000-06:00

You know, there are those periods in life where nothing is clicking. Even the fortune cookies at the local takeout mock you. One trade after another goes south. Why bother?

We all get to that point: the same statistical laws that ensure occasional strings of losing trades also guarantee runs of negative life events. And that doesn't start to factor in the various ways in which we can contribute to those runs through the self-amplification of negative thinking.

So many slumps begin as ordinary runs of misfortune. Once they get inside our heads and affect our next actions, they become slumps.

A key skill is recognizing when strings of losing trades or life events represent mere bad luck and when they reflect deeper problems that need to be addressed. Anyone can have one bad relationship, two, three...at some point the common denominator in the misery becomes oneself. Similarly, a losing week at trading, a second, a third...all can fall within normal expectations. At some point, however, the pattern diverges so much with expectations that changes need to be made.

Too often, however, traders will become impatient with even normal periods of flat performance and modest drawdown and begin tinkering with their methods. They abandon what they do best in search of answers outside themselves. They don't realize that trading, like life, rarely offers a smooth, upward curve of successful outcomes. There are long, flat periods at times, and there are periods of setback.

It is often worth learning from periods of underperformance and tweaking what one is doing. That is different from abandoning core strengths. Always, always identify what you do best and what works for you. Then build on that, make it more consistent. The way out of a slump can often be found in those things that you are doing that are not in decline.

More:

Breaking Trading Slumps

Coaching Yourself Out of Slumps

Steps Toward Breaking Slumps

Saturday Perspectives and Insights

2009-11-07T08:15:00.000-06:00

* Prop firms implicated in insider trading scandal;

* Mutual fund investors chasing overseas and commodity returns, bonds--not US stocks;

* Interesting look at high frequency trading and one firm accounting for 15% of all volume;

* Worthwhile video perspectives on reading the tape and trading the market open;

* Trader Planet offering free e-book on riding out the economic storm;

* Thoughts on diversification and hedging;

* Broad measure of unemployment over 17%;

* Unemployment getting worse, not better;

* Lessons from von Mises; also, why runaway inflation is inevitable.
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Eliminating Bias in Trading

2009-11-06T18:57:00.000-06:00

A reader asks a good question: "Do you have any good post on eliminating a strong bias? I am so clouded by a bias, I can't trade objectively."

I find this to be a more common problem than is typically acknowledged, particularly among short-term traders who hold positions intraday. They find themselves caught up in strongly held, longer-term opinions about political and economic developments, which makes it difficult to trade against those views.

For example, it is very difficult for an advocate of limited government/individual liberty/free markets (which, parenthetically, are different from the kind of statism represented by the last Republican administration and the current Democratic one) to feel particularly bullish on the future of the U.S. or even global economies. While I have philosophical sympathy for such a perspective, it doesn't change the fact that markets tend to rise during periods of central bank ease. Fighting the Fed is generally not a good way to make a money as a trader or investor.

Too, some traders naturally fall into trend-following or countertrend trading styles. While either of those can be successful, becoming married to trends or fighting strong ones can be a quick way to the trading poorhouse. The opposite of being stuck in bias is being mentally flexible: recognizing when trends are likely to continue and when they are vulnerable to reversal.

Three practices help me sustain mental flexibility. The first is a thorough review of market indicators, intermarket patterns, support/resistance areas, value areas, etc. From the data, I require myself to formulate hypotheses about the action that I anticipate. By forcing myself to ground my views in the data, I try to minimize subjective bias.

The second practice that helps me stay mentally flexible is following a few basic trading rules. I am not allowed to sell a market that shows strong NYSE TICK and positive cumulative Delta (i.e., net volume at offer vs. bid); I'm not allowed to buy a market that shows weak TICK and Delta. In other words, because much of my trading is intraday, I'm not allowed to fight the intraday sentiment trend. At the same time, I'm not allowed to buy the market when TICK is positive or sell it when it's gone negative. I have to execute ideas countertrend, even as I try to ride a trend. In this way, I follow the market; I don't impose my views onto it.

Finally, a third helpful practice is framing all trade ideas as "what-if" scenarios. If the market breaks support on high relative volume and very weak TICK, I would do X. If the market's selling pressure dries up near support, I would do Y. Included in those "what-if" scenarios are plans for stopping out of a trade, plans for adding to a trade, etc. By requiring myself to look at bull and bear possibilities, I prepare myself for either.

No one--myself most included!--can eliminate bias altogether. The key is staying as grounded in markets as possible: listening to them, rather than talking at them.

More:

Listening as a Core Trading Skill

The Importance of Listening to Yourself

Midday Briefing for November 6th: Range Within a Range

2009-11-06T12:49:00.000-06:00

As you can see from the S&P 500 e-mini (ES) futures, we've been trading in a range today, which I've also been viewing as a multiday range. Although we're near the day's highs in ES, many of the correlated risk markets (oil, gold, euro, Aussie dollar, 10 year Treasury yields) are off those highs. I'm continuing to view this as part of a bottoming process that began with momentum lows earlier this week. Should we hold those lows and see non-confirmations from indicators, indexes, and sectors, I would shift to a very bullish intermediate-term stance.
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Morning Briefing for November 6th: Prospects for Wide Trading Range

2009-11-06T09:29:00.000-06:00

What I'm watching this morning is whether we can stay above the 10/29 highs in the major averages. We saw a sharp drop on the jobs numbers this morning and then a sharp bounce to preopening highs early in the regular trading session. Failure to sustain a move above the 10/29 highs sets up a wide trading range and should eventually lead to a break of the overnight lows. I would see such action as part of a potential bottoming process vis a vis the momentum lows we saw early in the week. If that scenario is correct, we should stay below this morning's highs.
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Trading Psychology and the Risk of Ruin

2009-11-06T07:23:00.000-06:00

A reader commented on the recent post on mood and trading that he was battling his own moods after losing 17% of his equity in three trading days. Admirably, he expressed the desire to keep it together for his family.

But, of course, this isn't a mood problem. It's a problem of risk management.

If you trade frequently, it's only a matter of time before you experience runs of three, four, and five losers. That can be losing trades, losing days, or losing weeks. The laws of statistics dictate that if even if you are right on your trades 60% of the time or profitable 60% of days or weeks, you'll have a run of four consecutive losers 2.56% of the time. Trade enough and it *will* happen.

Of course, if markets change and you hit a period where your win rate declines, the odds of those consecutive losing runs increase significantly. With 50-50 odds of winning, you'll get four consecutive losers about 6% of the time.

So why is that important?

You need to be able to weather those periods financially as well as psychologically. You can't be so leveraged that a normal run of losers will generate deep losses in your account.

Recently, the day's high/low range for the S&P 500 average (SPY) has expanded, with quite a few days above 2%. The 20-day average range is about 1.3%. There are only two ways to lose 17% in three days: trade very high volatility instruments or trade with very high leverage. Both can be deadly when you are dead wrong.

What is helpful for me is defining a drop dead level for the year. In other words, what is the maximum I'm willing to lose in a year before I close shop entirely? Let's say for argument sake that I'm willing to risk 15% in a year to make 30% or more. That means that, if I start to approach the 15% limit--perhaps at 5% increments--I will scale back my trading size/risk, realizing that I'm not trading well. If I'm proactive in such scaling back, I should never hit my drop dead level and never blow out my account.

Such an overall risk plan helps an active trader set daily loss limits. Knowing I could have losing streaks by simple random chance and knowing that 15% can knock me out of the game for the year, I'm not going to want to risk more than 1% of my capital in any given trading day. That, in turn, will guide position sizing for each trade.

When we trade so large that strings of losing trades or days can take us out of the game, that is called "risk of ruin". If you have an edge in the market, it's only a matter of time before you accumulate profits. Everything else is risk management and making sure you stay in the game.

More:

Risk Management and Trading Psychology

Risk Management and Emotional Self Control

Questions to Ask When Emotions Affect Trading

A Further Look at Market Laggards

2009-11-05T17:54:00.002-06:00

We've seen a rally off the recent market lows, but several areas of the market are lagging. Above we can see that bank ($BKX; bottom chart) and insurance ($KIX; middle chart) remain well off their highs. The financial sector is one I'm watching closely; it led the market meltdown and then led the risk rally since March. Its underperformance now is unsettling to the bull case.

Also clearly underperforming is Japan (EWJ; top chart). This is another situation I'm watching closely, given troublesome longer-term fundamentals, including high levels of public debt and problematic demographics.
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Midday Briefing for November 5th: A Look at the Laggards

2009-11-05T12:38:00.000-06:00

Although we've taken out yesterday's highs in the ES contract (top chart above) and are consolidating near the 10/29 resistance, note that many sectors are lagging and having trouble breaking yesterday's highs. These include financial stocks (bottom chart), as well as energy shares, materials stocks, and consumer staples issues. I note also that gold, oil, the euro, and the Aussie dollar have all stayed below their Wednesday highs. I'd like to see greater participation from sectors and intermarket themes in order to decisively take out that 10/29 resistance in ES.
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Morning Briefing for November 5th: Off the Lows

2009-11-05T08:18:00.000-06:00

We have bounced nicely off the overnight lows in the S&P 500 e-mini (ES) contract (above) and now are trading well within yesterday's trading range. Holding above the Wednesday lows would set up a potential patterns of higher lows after the recent correction and would have me looking for an eventual retest of the bull highs. For that scenario to unfold, I'd want to see us stay above yesterday's pivot level on selling pressure (see Twitter post for pivot and profit targets). Failure to stay above that pivot level would keep us in rangebound mode and would keep me far more defensive. As I'm writing, the U.S. dollar is off its highs for overnight trade; I'll be watching to see if that continues, as it should keep pressure on stocks. I'll also be watching financial stocks and the Russell small caps, which helped lead the downside late yesterday. Their lead should help us establish direction during the day.
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Trading and Mood

2009-11-05T06:48:00.001-06:00

Special thanks to reader Adam for pointing out this excellent article on mood and its effect on leadership.

Why is this important? Because you are the leader of your own trading business.

As the article indicates, how we think affects how we feel--and that helps to shape our actions. Moods are contagious: we are less productive when we are mired in frustration and powerlessness.

Trader 1 loses money and doubles down on efforts to take away lessons for learning and improving trading. Trader 2 loses the same amount of money and uses the occasion to vent disgust with himself and unseen others that "manipulate markets". Who is more likely to trade well the next day?

If you are your own employee, how well are you managing yourself? What kind of morale do you maintain in *your* trading business?

Adam says it much better than I do: "Markets are mirrors that show us to ourselves the way the world sees us."

More:

Overcoming Mood Problems in Trading

Wednesday Inspirations

2009-11-04T19:11:00.000-06:00

* Great article: how our brains interfere with taking losses;

* Nice article from Smita Sadana on resisting temptation in trading;

* Thoughts on the mechanics of trading and hitting;

* Interesting visual representation of historical price action in stocks;

* Questioning economic growth in China;

* Limits on credit card rates weighing on banking stocks;

* Making a political case for further stimulus in the U.S.;

* What Dr. Brett listens to while collecting links: an ode to obsession.
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Midday Briefing for November 4th: Sector View

2009-11-04T11:55:00.000-06:00

The sector spectrum view from FinViz shows more green than red, as we've been trading stronger relative to yesterday's close. As you know, however, I like to track the market's strength and weakness from the current day's market open, not the prior day's close. I note that the Russell 2000 stocks are down from their open, as are financial and materials stocks (XLF, XLB). Among the 40 stocks in my basket, 23 are trading up from their opening prices, 17 down. That is not exactly ringing strength. I will be watching the response to the Fed announcement closely; at this point, it seems as though traders are taking some profits off the table ahead of the expected volatility.
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Morning Briefing for November 4th: Working on a Breakout

2009-11-04T08:29:00.000-06:00

We've broken above the 11/2 highs on the heels of U.S. dollar weakness and firmness among commodities. That means I'm looking to see how we behave around the 1050 level in the ES contract (above) to see if we can sustain the breakout going into today's Fed announcement. If not, that places us in a wide trading range defined by yesterday's lows and today's highs, with a target at yesterday's pivot (see Twitter post for pivot and other price targets).
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Reflections on Commodity Strength and the Macro Investment Picture

2009-11-04T07:21:00.000-06:00

While stocks have pulled back in recent days, we continue to see firmness in commodities (DBC; top chart), especially gold (GLD; middle chart) and oil (USO; bottom chart). In a contracting world economy, we would expect commodity consumption to be lower and commodity prices to collapse. This would put pressure on the currencies and stock markets of commodity-producing nations.

In an expanding world economy, we would expect to see rising commodity prices, reflecting growing consumption of commodities especially by rapidly growing emerging countries. That should be supportive of the currencies and stock markets of commodity-producing nations.

The commodity markets at present speak more to the possibilities of runaway growth than to economic contraction. This is one reason commodity producer nations such as Australia and Norway have hiked interest rates: their concerns are for inflation, not deflation. Meanwhile, the U.S., U.K, and Japan find themselves staving off economic weakness with continued monetary ease and fiscal laxity.

I continue to believe that the relative stock market performance of emerging markets (EEM) to established markets (SPY), as well as the performance of commodity markets, will be excellent gauges of anticipated global growth. As long as the U.S. has to transition from a consumer/consumption economy to an export-driven economy, we should continue to see a falling U.S. dollar over time and no rush to raise short-term interest rates. Once that transition has taken hold, we could expect to see a sustained steepening of the yield curve for Treasuries and more serious concerns over inflation.

If this scenario continues to unfold, it is difficult to make the case for concentrating one's assets in U.S. equity and debt markets: headwinds of a falling dollar make those investments questionable relative to the assets in growing countries with relatively strong currencies and firm-to-rising rates.
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Trading and Response Inhibition

2009-11-03T21:30:00.000-06:00

A trader recently told me of an interesting problem. He had no trouble making money during the trading day. His problem was holding onto the money. Basically he kept trading until his profits were gone. After repeating this pattern day after day, he was left with the frustrated sense of being a talented trader who had nothing to show for his talents.

His problem is in an area that cognitive neuroscientists call "response inhibition". Response inhibition is the ability to suppress actions that are no longer useful, so that attention and behavior can be channeled more fruitfully elsewhere. A function of the frontal cortex of the brain, response inhibition is central to executive control: without the ability to hold off unwanted behaviors, we cannot direct ourselves toward meaningful goals.

People with attention deficit/hyperactivity disorder have particular problems with response inhibition; this appears to be at least partly a heritable characteristic. This raises the interesting possibility that people are wired differently for response inhibition, with varying degrees of control. It also suggests that, just as children with ADHD can learn skills related to attention and rule-following, people may be able to learn response inhibition as a skill.

We generally think of trading simulations as teaching the ability to trade. For some, however, their value may be even greater as tools for learning to not trade. In other words, simulations can be used to exercise one's capacities for self-control. One way of accomplishing that would be to limit the number of "clicks" allowed to the trader during a trading session: if only a limited number of trades can be placed, the trader's task becomes one of finding the best opportunities to make the clicks. Most importantly, the trader learns in ambiguous situations to *not* click: to inhibit the trading response.

It is common to hear traders describe trading as 90% psychological. It could be, however, that the lion's share of trading is neurological: dependent upon our wiring for planning, control, reasoning, and proper response inhibition. Training programs teach people to make trades; some traders, however, could equally benefit from a gymnasium of the mind that trains them to refrain from action.
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Power and Powerlessness in Trading

2009-11-03T14:27:00.000-06:00

Do you trade from a position of power or powerlessness?

Real power is being able to *not* trade when conditions are not right for you.

Real power is being able to trade larger--and not manage positions differently--when you have strong and well-grounded conviction in an idea.

Real power is missing a trade and quietly knowing you can get the next one.

Real power is seeing a great idea not work out--and then using that information to reverse your position and win.

Real power is seeing a swipe against your position as opportunity, not threat.

Real power is calmly placing your trades where you see others getting frustrated.

Real power is seeing a position go your way and know that a scratch is the worst you'll do on that trade.

Real power is spending hours in preparation, seeing the scenario you've prepared for, and then acting with decisiveness at the right time.

Real power is being able to walk away from the screen while a position is working itself out.

Real power is riding the moves you see, rather than feeling the need to predict the ones that haven't materialized.

Real power is knowing that you can lose on any particular trade or trading day and still finish the week in the green.

Real power is a full bank account to support you during lean trading times.

May you always trade from a position of power.
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Midday Briefing: Stocks in a Range, Commodities Higher

2009-11-03T12:13:00.000-06:00

As you can see from the chart of the S&P 500 e-mini futures (ES), we are thus far trading as an inside day, helping to sustain a trading range that goes back to Friday afternoon. It would not surprise me to see that range hold up into the Fed announcement tomorrow. Meanwhile, the big breakout story for today is gold, which has sharply risen to new highs despite U.S. dollar strength. Oil has also turned around and is moving higher on the day. Relative strength among commodities is among the factors that lead me to believe that we could ultimately resolve the current trading range to the upside in stocks. The commodity ETF DBC, for example, is trading well off last week's lows.
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Morning Briefing for November 3rd: Dollar and Stocks

2009-11-03T08:15:00.000-06:00

Going into the open, we can see the parallels between trade in the U.S. dollar (vs. euro; top chart) and trade in the ES futures (bottom chart). Note, however, that we're making new dollar highs early this morning, but still trying to hold at the Monday highs in stocks. As long as the USD is rising, taking traders out of the pro-risk carry trade, I'm reluctant to buy stocks for more than sharp, brief, short-covering rallies. Note, too, that we're heading toward a Fed announcement tomorrow afternoon, which may lead to greater restraint in trading than we've seen in recent days.
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Trading and Self-Integrity

2009-11-03T05:46:00.000-06:00

If you had asked me my favorite song back in my student days, hands down it would have been Roxy Music's A Song For Europe. It isn't easy to turn something like lost love into a thing of beauty, but such is the transformative power of art.

There was a time I would have liked to have been a full-time, very active trader. I worked diligently to position myself for that opportunity and, when the time came, I found that it wasn't what I had hoped for. Something was missing: the something that had brought me to psychology in the first place.

And that sabotaged my trading. The day I realized it was when I found myself chatting with other traders to the point where I was alerting them to great setups--only to then miss them myself! The social contact meant more than the trading.

Ironically, it took stepping away from trading to eventually develop the trading I do now: a very opportunistic activity where I will find one or two very high probability setups in a week and otherwise stand aside and focus on my main work. And had I never stepped away from the old trading, I would have never discovered my own transformative fusion of psychology and trading.

The moral of the story is that trading has to fit into your life; your life can't fit into trading. Be who you are, and you will have the opportunity to become the best trader you can be.
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Ideas for a Monday

2009-11-02T18:15:00.000-06:00

* We continue to see a significant number of stocks register fresh 20-day lows. That number exceeded 2500 today. I'm reluctant to play for any enduring bottom without seeing greater drying up of selling pressure (NYSE TICK) and new lows. It's a bounce, but maybe only an oversold consolidation;

* Vitamin D and moods and other worthwhile readings;

* Very interesting study of a trader and his performance statistics;

* A look at Fed policy and fiscal challenges;

* Threat to Fed independence?

* Studies like this are quite valuable if you know how to use them.
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A Quick Look at Enhanced Volatility

2009-11-02T14:34:00.000-06:00

Note the price ranges for the various five-minute bars in the ES contract, with many periods moving 10 ticks or more. Volatility not only affects daily trading ranges, but also the ranges of short-term periods in the market. When traders don't adjust holding periods to increased volatility and trade their usual size, they undergo enhanced P/L swings. That, in turn, can lead to increased emotional swings.

Interestingly, a trader may not be willing to triple his or her size from day to day, but will trade identical parameters in slow markets and in ones that are three times more volatile and busy. The frequent sweeps up and down across the five-minute periods this afternoon have been particularly frustrating for traders, as P/L can swing greatly in a short period of time.
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More Worthwhile Resources From FinViz

2009-11-02T12:08:00.000-06:00

* Excellent way to track incoming news and blog posts;

* Visualizing the last two weeks in the market, sector by sector;

* What insiders are doing in the stock market;

* Visualizing the currency trade.
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