DummySpots.com

[From 2/27/07]

Got a few things to talk about today. First, the morning action and how easy it is sometimes for good traders to get whipsawed out before a big move… and how we must Endeavor to Persevere, keep our chin up, and follow our plan.

(Or not- sometimes it is best to know when to say when, as I think W.C. Fields said– “If you fail, try again. Then quit- no use being a damned fool about it.”)

My first position this morning was long the Qs. That’s right, LONG.

My StrategyDesk screener was sitting there with Dell at the top of my “prospects” list early-on (after about 0945, the list had anywhere from 5 to about 20 stocks setting up at any one moment; I order the list by volume when it gets long, and work on the ones at the top). Dell was set up, but just wouldn’t break to the downside.

I generally keep a chart of the Qs open for reference, and noticed that as Dell was failing to break to the downside, the Qs had actually set up and broke out– for a long entry! My old friend the OGRe (Opening Gap Reversal):

At this point, I was comfortable that the Qs were heading to close the gap, and I might as well change my scanners over to start watching for other long setups. However, I got straightened out pretty quickly as things rolled over and headed south violently on the 1055 EST bar:

Typically, after gearing up for shorts, then going long on a reversal, when that long is then stopped out, it’s easy to say “Forget It!” out of frustration. However, it’s often on that stop of an entry taken on a reversal that the big moves take place with very few people on board, most on the sidelines from having been stopped out. And as we know, the market loves to make its big moves with as few people on board as possible.

I was stopped out of my long, and once again went back to watching for shorts, especially given the suddenness of the move at 1055. It was at this point that Dell broke short as well:

I did manage to get short here. I know there were many stocks which made bigger moves, and I did cover too soon (trailing stop too tight and thinking “it’s almost out of steam”… old and still-too-frequent errors). However, I read the play correctly, I positioned correctly, and I caught a chunk of the Big Move. No regrets.

On the 200-point gap- I’m still waiting to hear an even close- to- reasonable explanation from the talking heads. After all the bragging by the exchanges after the turn of the century how they had massively upgraded their systems and no volume known to man could bog them down… “the computer that calculates the average got logjammed” … um, nope, not buyin’ it. I’d find it much more believable to read that the multi- hundred- billion- dollar hedge funds (that cross most of the market’s volume via super-fast, super-powerful computer-generated trades) had unleashed a massive “sell program” which, in a matter of seconds, completely constipated the exchange. Supposedly no one can “lean on the market” with quite the weight of a Jesse Livermore in his day, but these guys can certainly walk bids and asks around a “bit”. Not manipulating, mind you. That would be wrong. Just the, ahem, unintended effects of lots of big trades.

And then there’s the arbitrage question: if the stocks which constitute the Dow were falling, and the “computer that calculates the average was logjammed” and got behind, how many billions of dollars were made in a matter of five minutes by computer programs buying those 30 stocks and simultaneously shorting the Diamonds or the Dow Futures as the spread between the combo of those 30 stocks and the index which is supposed to represent that combo got farther and farther apart, only to snap back together in one near-instantaneous 200-point leap?

On the latest CNBC “competition”- what do you do when you’ve got everything to gain and nothing to lose? You go for broke, of course. That’s why these marketing shams never reveal anything about actual trading.

How to win something like this? It’s not SKILL! Get a bunch of people together. Get a list of very volatile, low-priced stocks. Have each person pile his or her entire “fake money” stash into one or two of those stocks. Chances are very good that someone will “make” a boatload, and hey, there’s no downside. This is putting Fooled By Randomness to work. You could even agree that if someone out of the group wins, you all go on a cruise or something. I’m sure that’s how many, many people are “playing” this thing. It’s just a game, after all. They would never do that crap with REAL money.

This is also why contests like this end up crowning some clown as a “brilliant investor,” when all they’re actually doing is crowning the one who got lucky. In life, sometimes it’s hard to tell the difference. Many of our major institutions are run by lucky idiots. Fooled By Randomness, again. Read it.

Favorite Talking Head Quote of the Day- some “expert” was being asked what he thought about the prospects for China as an overseas investment, what with the falling of their stock market and all.

His response? “Stock prices falling is just an equity market phenomenon. We believe China’s economy will continue to be strong and therefore China itself will continue to be a good place to invest even if their stock market falls.” Or something to that effect. My only thought was, “And how, Mr. Fancy Pants, do you propose that people invest in China, if not via their equity market??”

That’s “all I got” for the moment. I had a long day at work, and I’m hurting, exhausted, and a little hung over from the moving adventure last night.

Cheers, ya’ll.

• Supper Tonight: Wendy's Single Combo plus a Frosty for dessert. Tonight, I deserve it.

I believe I’ve found the source of StrategyDesk’s volume-calculation “problem” … and I think I smell a rat.

First, the volume. What traders are used to getting when we ask for “1-month average volume” (from ANY application) is the average daily trading volume for the last month (i.e. 30 calendar days or 20 trading days thru yesterday or today). The fact that StrategyDesk has no function for Average Volume is, as Blue would say, a big ole CLUE in itself… AvgVol[30] for 30-day average volume, for instance. Is that too much to ask? How could someone NOT have that function in TRADING software? Keep reading.

We can, in fact, get a decent approximation of the average daily trading volume for the prior CALENDAR month by using the (Bar[Volume,M,1]/20) formula. However, as a trader, that’s not what I want, as I discussed in an email exchange with Gabriel this evening:

Whereas Advanced Analyzer, for “Vol Ave 1 Month” gives what appears to be the last 20 trading days’ total volume / 20, a “20-bar moving average of the volume,” so to speak, StrategyDesk does indeed seem to go by calendar months, which sucks really bad, and as you say, requires us to calcluate the average volume for the PRIOR calendar month, very inaccurate as we have to ignore up to 3 weeks’ worth of more recent data in a number which only involves 4 weeks’ worth total, and when the last few weeks are in fact much more important in determining whether the stock is a candidate. Argh. Guess if we insisted on using this POS, we could use (week-1)+(week-2)+(week-3)+(week-4) and divide THAT total by 20, but then again we could just use a pencil and hand calculator…

I also discussed the fact that SD gets excruciatingly SLOW if you ask much of it. I would never recommend that anyone program this v1.0 thing to actually trade for them, which it claims it can do. If its screener is running a couple of minutes behind, and triggers the trade, well, anyone who’s daytraded knows what can happen.

Set it up to take some of the load off, and give you a shorter list of better candidates by filtering down for things like intraday pullbacks near moving averages, as we discussed in the last post. Then use your eyeballs to make the final decision.

Oh, and that smell…

Mr. Krabs: [sniffs the air] Do you smell that? That smell… a kind of smelly smell… a smelly smell that smells… smelly. Anchovies!

Ameritrade did indeed acquire StrategyDesk from outside, as they seem to do everything. Advanced Analyzer, (formerly BigEasy Investor) is a fully-functional and very respectable end-of-day screening and research program, although it’s a little 1998 in its functions. HOWEVER, StrategyDesk is the product of a company called Think Tech, Inc., which Googles out to be ONE GUY named Jiri Janecek.

StrategyDesk is giving me PTSD flashbacks, because it appears to be the type of software I’ve spent my career in healthcare having to suffer with— the CRAP produced by well-intentioned programmers based on what they THINK I do, and I have to spend much of every day working around the problems caused by the discrepancy between what they think I do and what I actually do.

If StrategyDesk does indeed turn out to be the product of a programmer who takes market data feeds and arranges to manipulate them based on what he thinks traders need based on what he thinks traders do, well he’s done an admirable job… for a non-trader. But it means the software will never evolve to the point of being fully functional. It would also explain the lame documentation. Whereas the general public would be stupified by the pretty EMA and stochastics formulas and all, to us they’re like a second language. You wanna program for sewer workers, you’d better know your shit, so to speak.

One of the greatest things about blogging is how much we learn from each other. I think our trading evolves much faster that way than working in a vacuum. For instance, in the comments of my previous post Gabriel enlightened me to the fact that StrategyDesk (hereafter SD) does indeed have a formula for monthly average volume. So my life suddenly became much easier due to some simple generosity.

Let’s get into the meat of this thing a little. Here’s a better-annotated shot of my intraday SD monitor screen with the three windows I keep open. Click for a larger version:

In particular please notice the “Sym” (symbol) and “Inv” (intervals) buttons on the charts. If the Inv buttons are the same color, every time you click a ticker in your screener list, both charts will switch to the SAME time interval. So, make sure the Sym buttons are the same color (so all windows will change to the same ticker when you click it), but that the Inv buttons are different colors, else you’ll get frustrated pretty quickly as your “minute charts” keep changing to “daily” or vice-versa.

To enter a screening formula, highlight the Screener window, then click “Screener” in the toolbar of the MAIN Window. Yes, poor programming. The screener toolbar should be in the screener window. Instead, the MAIN toolbar changes based on which window you last highlighted. Perhaps in a later version…

Under “Screener” in the toolbar, click Add Screener or Edit Screener. This will bring up the Screener Settings window, which is where we do all the “under-the-hood” work. Here’s a screenshot with an important warning:

As of v1.0, SD doesn’t support different directories (”folders”) for groups of formulas- they’re all under the Formula Library list, which can get unwieldy really quickly as you save all your tweaks. For now, I’d suggest you begin each of your custom formulas with a particular letter or symbol so they’ll all stay grouped together within that long list. For example, I start all of mine with a number sign “#“, so the title looks like “# 15-minute Dummy Spot Test“. That way, when I drop down the Select a Formula list, all of my custom ones are grouped together.

Time for that formula! As I’ve said before, your rules have to be extremely specific to be useful. What we’re going to do here is write a formula which will give us, in real-time:

Pretty specific! But that’s what we need if this is going to be really useful. We’re wanting to use this tool to narrow the field the way we previously had to with our eyes, and free our eyes up to pay more attention to the prime suspects as they appear.

Let’s walk through the construction of this formula:

• First, price and volume. The formula for stocks with a prior closing price above 20 is Bar[Close,D,1]>20. The “D” is for “daily bars” and the “1″ tells SD to look at the bar “1″ day before the current day.

  The formula for volume (thanks, Gabriel!) is (Bar[Volume,M,1]/20)>200000. This takes the previous month’s volume and divides it by 20 (trading days in a month), and we’re wanting stocks for which the result is higher than 200k.

  2/25/07 Warning: I’ve been toying with this formula more tonight, and there’s some problem with this volume statement. The lack of documentation by Ameritrade makes this a trial-and-error arrangement, so I haven’t isolated the problem yet. I will post the update/solution once I work it out or someone emails it to me; until then, consider eliminating this statement from your formula and pre-screening your stock list for volume.

  2/26 - formula has been edited and should work reasonably well; please see next post for more details.

• Next, our gap. The formula for a gap simply divides today’s open by yesterday’s close, and, for a 1% gap, looks for a result greater than 1.01. It goes like this: Bar[Open,D] /Bar[Close,D,1]>=1.01

• Now for our 30-minute bar formulas. The high of the current 30min bar would be written Bar[High,30] and the low of the previous bar would be written Bar[Low,30,1] (remember, the “1″ tells SD that we’re talking about “1″ bar prior).

  For our formula, we want the previous 30min bar (bar “1″) to have a lower HIGH than its previous bar (bar “2″), so we would write the formula as follows: Bar[High,30,1] < Bar[High,30,2].

• The formula for a 5-period exponential moving average of 30min bars based on the closing price of each bar is this: ExpMovingAverage[EMA,Close,5,0,30]. I know having to write “ExpMovingAverage” and then having to write “EMA” is redundant. Poor programming again. They should hire someone who actually uses the program as a consultant. Or maybe my 7th grader- she’d catch that one easily.

  Since we want our previous 30-minute bar to have a low which is within 1% of the 5ema, we’d write that part of the formula like this: Bar[Low,30,1] < (ExpMovingAverage[EMA,Close,5,0,30] * 1.01)

• Finally, now that we have a pullback and a price which has come within spitting distance of the 5ema, we want SD to only notify us once the current price reaches more than halfway up the previous bar.. in other words, when it may be approaching a breakout. No need to waste our cerebral processor cycles otherwise– we’ve got better things to do.

  Our formula to say “Last price higher than 50% in the previous bar’s range” requires us to take the high of the previous bar minus its low, divide by 2 (thereby giving us “half” of the hi-lo range), then adding that number back to the low for our cutoff price.

  The way we write that part of the formula is: Last > Bar[Low,30,1]+((Bar[High,30,1]-Bar[Low,30,1])/2).

Ok, bored yet? Let’s put it all together so we can move along to more entertaining subjects. Here’s the completed formula, with each part (hopefully) explained above:

Well, all the formula yakking is great, but what does this accomplish? For your viewing pleasure, here’s a chart from Wednesday which shows the kind of setup we’re trying to catch with this scan:

Well, that’s that. It’s just a basic start, but maybe it’ll give you some ideas. Feel free to copy the above and edit it as you see fit to make yourself a scanner. I’d also encourage anyone who comes up with a useful scan to share the formula in the comments so we can collectively speed up our learning curve.

Cheers, and best of luck!

I’m going to focus tonight on what I feel is the most important ability of StrategyDesk: its real-time scanning capability.

First, you’ve got to have a very clear idea what you want to do. You never realize how “flexible” all your trading rules are until you try to put them in writing, or even better, program them. You’ll often find that your “rules” have so many “exceptions” that they aren’t really rules at all. More like suggestions, if that, and your constant bending of them causes you great agony in the end.

I’ll write more about this in a separate article, but in scanning for potential daytrades what we’re trying to do is simultaneously narrow the field and improve the quality of candidates with each “rule” or criteria we add. For instance, the first “cut” many daytraders make is with gaps. Not all stocks that make a big run start with a gap, and not all gaps result in big runs (in fact, if you read my ramblings I’m sure you know one of my favorite plays is on an Opening Gap Reversal), but requiring a gap can drastically reduce your workload and improve your odds- you might be looking at a list of 100 stocks of which 20 are likely to be strong winners, as opposed to 5000 stocks of which 50 are. Yes, you cut out some winners, but you improve the quality of the remaining field by an exponential amount.

Ideally, we’d continue to add this requirement and that filter, and end up with a list of 5 stocks with 4 very likely winners. That’s a little pie- in- the- sky (at a certain point additional criteria do more harm than good), but you see what I’m getting at. We can’t mourn for every winner we may have excluded; that’s not what’s important. What we want is a small, strong set of candidates, and then we use our chart-reading, executions, stops and money management to spank those puppies.

Ok, so we’ve fired up StrategyDesk and arranged our layout. I close everything except three windows:

(not clickable, just for show)

• Window 1 is my intraday chart, ranging from 3min to 30min bars. I do not use this chart to make trades! It’s too clunky. I have Medved Quotetracker (another freebie) running on the other monitors for that.

• Window 2 is a daily chart, about 30-40 bars long. I cannot overemphasize the importance of knowing exactly where a stock is on its daily chart when you’re trying to daytrade it. Daily bar support/resistance levels play a large role in intraday thrusts and reversals, and without them you’re driving blind.

• Window 3 is my Screener window, which shows the real-time results of whichever scan I have running at the moment.

Let’s Build That Screener!

For this example, I’m going to use a setup that most of you have seen or traded already: the famous 30-minute pullback to the 5ema. Sounds pretty simple, no? Au Contraire! Read on…

I like stocks over $20, and I like stocks with reliable volume. You may not agree, and you may make millions on lower-priced, thinly-traded stocks. More power to you. But they give me gas. So the first thing I want to do is reduce my universe of candidates to stocks over $20 with a 30-day average daily volume of over 200,000 shares. So far, I have found no way to screen for average volume with StrategyDesk, other than to take today’s volume, today minus one, today minus two, etc for the past month, then add them up and divide by 30. Yeah, you gotta be kiddin’ me.

Also, StrategyDesk won’t scan “the stock market” as it is. You must choose a list of stocks on which the Screener operates. Here is where I saw an opportunity. But more about that in a minute.

SD (I’m tired of typing the name out) comes with only a handful of default symbol lists: The NDX, the S&P 500, the OEX, the S&P Midcap 400, the Dow, and the Nasdaq Financial 100. That’s right- the Nasdaq composite is not included! However, this is relatively straightforward to remedy:

• Go to the Nasdaq Market Site. Locate the option to download the Composite list to a spreadsheet.

• In the spreadsheet, delete all the rows and columns except for the ticker symbols. Now drag over them (guess you could do this without the deleting, but it’s clearer this way) and Copy & Paste them into Notepad.

• Once you have that long list (over 3000 stocks!) running down the left side of your Notepad window, do a Save As- and here’s the tricky part: save the file in your TD AMERITRADE\StrategyDesk\Symbols\Stock Indexes directory, and save it with the extension “.sym“. It’s still just a text file, but this way the Screener will recognize it as a symbol list.

Voila, you now have the Comp at your disposal. Now that we’ve walked through how to do it, you can collect any variety of symbol lists you like, and as for the Comp, you can see I’ve been there and done that, so feel free to grab the .sym file from me.

The opportunity I saw with this crazy symbol-list stuff was that I could include my volume screens via a pre-screened symbol list. I fired up a different program (Advanced Analyzer, yes, another freebie) and set up a screen for all the stocks over $20 and with average volume over 200k. I exported the results of that screen (about 1000 stocks) using the method described above. If you want to grab that one too, here it is. And now, only 85 lines of html later, we’re ready to start writing formulas.

My apologies, but it’s late, I’ve installed a new stereo in my car today, wired HyperLites onto my motorcycle, grilled for the girls, watched a movie with them, and gotta get up at 0530 to go to work. Will do my best to finish this article tomorrow night.

First, a quick look at The Market Today. As you know, the Dow and S&P remain firmly in their uptrends, and both set new highs again today (for the Dow it was another all-time high). I don’t think that’s news to anyone. What may have fallen by the wayside is the fact that the Dow Transports also hit another intraday and closing high today:

That’s what the Dow Theorists would call a bit of confirmation (the stock market version, not the Catholic one). Very rosy news (couldn’t help the pun, with Valentine’s and all), but there’s one more bit of confirmation that would make the picture complete:

Yep, the Nasdaq 100 is still going solidly Sideways, in a formation which, over the last 3 months, looks a bit like a Head and Shoulders (and yes, I’m a bit delirious tonight and started to link to this).

However, we’re also less than one good solid “up” day from breaking out to a new high, so the next few trading sessions will be veddy interrresting. We’re near the top of what would be the right shoulder if it fails from here without breaking the former high of 45.40.

Was lucky enough to work late today, so had an hour or so after the market opened to doodle around with Ameritrade StrategyDesk a bit during market hours (so far I’ve been using it for End-of-Day backtesting). I must say I was certainly still frustrated with the clunky interface, but again pleased with the program’s potential. I set up a test alert screen to kick out stocks which had gapped up, were in the top half of the day’s trading range, and were within “x” cents of the last “y” minutes’ high (I varied this one, for instance, within 10 cents of the last 15 minutes’ high).

StrategyDesk’s charts are simply a pain in the butt, so I just used it for the screener. I had it on my left monitor, Quotetracker (main window) on my middle monitor, Firefox with 3-4 tabbed sites (Yahoo, Prophet.net, Order entry) on the right monitor, and various QuoteTracker charts scattered across all three monitors.

When I cross-referenced the stocks the StrategyDesk screen burped out with my usual Prophet.net screen, I got some very promising results. For instance, early-on the combo was sitting on CIEN and AMAT like Dickey Betts sitting on that last riff in Ramblin’ Man.

After firmly establishing the major tonality with a singing bend of the 9th or 2nd (A) from the Aeolian mode to the major 3rd (B), he basically treats measures 1–6 (I and IV) as a G tonality and emphasizes the root (G), 3rd (B), and 5th (D) notes from the G major triad. Measures 11 (vi) and 15 (I) are the only time that Betts uses the b6th (C) from the Aeolian mode as a quick pull-off to the B (major 7th of C and 3rd of G) for melodic variety. (from the “Fender Players’ Club”)

Yeah… whatever. But AMAT was a good early-day play, and CIEN just ran and ran thru midday, so I’ll be doing more research in this general direction.

A couple days back an astute regular commenter pointed out the huge down day on Mastercard (MA). I had mentioned that we might get a setup out of it. Well, Fan, here’s our pullback:

The pullback broke through the 61.8% Fibonacci level, but that’s not a deal-breaker, just something of note which takes the probability of our setup down a few percent.

The volume has been diminishing beautifully on the pullback. Classic.

What do we do? I’ll be looking to enter short on a resumption of the downtrend tomorrow, if it happens. A continuation of this “up” thrust much past the 50% point (108 and change), and we’ll go into wait-and-see mode, as there may be too much buying interest to go short. If I do Get Shorty, I’ll set a tight stop just above the pullback high, calculate the difference between that and my entry point (tah-dah! “R“), and size my position accordingly.

Cheers… let’s watch…

• Supper Tonight: The fabulous chicken and egg (how synergistic) sandwich with caffeine-free Sam's Choice diet cola. Yum.
• Watching: "The Departed" if I can stay awake

Had I pretended to have a crystal ball and said back on Feb 1 “GET SHORT ON GOOGLE, THIS POS IS GOING STRAIGHT TO THE LOW 450s!!”, I would now be tooting my horn and implying some mystical insight. And I would be absolutely wrong. This stuff is about recognizing probabilities, not predicting the future, and there’s a world of difference. Google did form a Marubozu. The Marubozu broke in the probable direction and did in fact telegraph the significant selling pressure that existed at the time. And the stock has followed the most likely path:

However, this was only the most likely of any number of possible paths. We must always always always position with all of those possibilities in mind, not just the one we salivate for. I preach as often as possible that considering how much you stand to lose on each trade rather than just how much you'll make if you're right is one of the great milestones on the road to trading success.

Having considered all appropriate eventualities (sound like a freakin’ politician, no?), what do we do? Sit there paralyzed in fear and not take the trade? NO! Absolutely take the trade, especially the rare super-high probability ones like this, and then manage your risk (i.e. all those “other” possibilities) via your continually-evolving position size and stop management strategies.

Oh, I almost forgot the title of this post– Google has entered the zone of resistance near its previous significant low; depending on your time frame, now’s the time to exit (super-short swinger), to pull your stops down tight (swinger with longer-term ambitions), or leave your stop alone and see if we push through 450 after the requisite noodling (in for the longer-term ride and willing to take a goose egg if it reverses all the way back up).

Cisco’s recent chart pattern looks very similar, and it may start back up as well. It’s not at a level of big resistance, however, so on it, I’ll be watching to either get stopped or add on a retrace- and- breakdown.

Cheers, and best of luck.

It’s Sunday, I wanna talk about something else.

I decided a few weeks back that it was time to drop some weight. I’m 6′3″ and wear the extra pounds pretty well, but I’d drifted up to 230, and with the 40th birthday and all, I decided it was time to get back down to my fightin’ weight of about 200-205.

So far I’m down about 12 lbs. The picture above has become my supper of choice lately. (For those of you who grew up after the industrial revolution, I do call the midday meal “lunch,” but for me, “dinner” is when I eat at a restaurant… if I cook it, it’s “supper”, and I can cook some mean supper).

I suffer through the day eating small portions of everything. I even was able to pass up the doghnuts the guys at work bought today. I think it’s the coffee that’s getting me by. But at night, I’ve been insatiable. Until I discovered the magic grilled chicken patty and eggs on whole wheat sandwich, that is. For some reason, it works. Especially with mustard, ketchup and a nice glass of wine

Kinda ho-hum on the swing trade front with these two. Here’s Google:

Today opened 73 cents below yesterday’s bottom. So it could technically be called an OGRe, but I’m not biting. That’s 0.16% of the closing price, not significant enough for me to even call it a “real” gap. So I’d leave the stop alone above yesterday’s high of 474.35.

Cisco had some buying as well:

The fact that the buying didn’t take the price any further into yesterday’s range is actually considered a bearish signal. But do note that today’s action went down to 2 cents from the bottom of the gap, then rallied. There’s some support there we’ll need to blow through to head on down towards the bottom near 26.

• Watching: The Science of Sleep- quirky, not as good as its cousin Eternal Sunshine, but the language shifts and resonating relationship dynamics make it well worth watching (www?)