DummySpots.com

One of my original intentions in creating DummySpots some hundreds of thousands (millions?) of words ago was to share a bit of what I’m thinking as trades unfold. I’m getting back to some of that. If you trade regularly, I doubt my pointing out where (anything) stands in relation to its 200-day moving average will be of much use to you. You’ll already know that, or have decided it’s not pertinent to your trading style.

Instead, I’m offering what I see based on the methods I use, mostly short-period RSI readings, especially the RSI(4).

As always, if it looks at all like I’m telling you to take any particular trade, please see my disclaimer in the sidebar.

Here’s what’s currently pinging off the cold metallic walls of the cavern where my brain should be:

(Click for the readable version)

Please feel free to share your own expectations (or your opinions on mine). Dialog is always welcome, and it’s a great way for us to learn from each other.

From yesterday: …causing me to get filled on a day that closed below my target. We’ll see how this hashes out tomorrow.

Yes, hash is quite an appropriate word.

Also from yesterday: The less-likely alternative would be for the bottom to fall out.

Did I say less-likely? I meant to say MOST LIKELY!

I’ve read somewhere that the market is actually a big leading indicator for most everything else (despite what CNBC would have us believe), and many of the reports and “news” we hear are really post-facto, with the best example being the LTCM debacle back in ‘98. None of us knew what to think when things fell apart in August (August? Are you kiddin’ me?). Then along about October or November, the fact emerged that the entire world economy had almost collapsed overnight. Kinda like, “Oh, by the way, we averted nuclear war by only a few minutes one day last year, but it’s OK now, so… no worries!”

So, stocks are being sold:

While bonds are being bought very heavily by someone, somewhere (note this is the yield… it goes down as the price of the Treasury Note goes up, i.e. under heavy buying):

Is this a little pullback in our long-term uptrend? I don’t think so, but I’ll trade my system regardless (which means I must now ignore the next “buy” signal I get and take the one after that… weird, but generally works better on days like today and 2/27).

I think stocks are being sold, bonds are being bought and yields are dropping precipitously in anticipation of something we “average” people don’t see yet; some economic news which eliminates any possibility of the Fed raising interest rates (not that there is such a possibility right now anyway), and in fact points to the possibility of lowered rates. That would only happen as a way to increase liquidity in the face of some severe, “unexpected” developments.

My two cents still says those developments have everything to do with real estate. Sub-prime, my ass. Easily three-quarters of the “prime” borrowers I know have financed, re-financed, “cashed out equity”, and “traded up” repeatedly until they currently teeter a few percent from owing more on the house they’re staying in (that ain’t ownership) than it’s worth. As more of them get sucked under by the whirlpool of decreasing home values, that whirlpool will expand, deepen and strengthen.

A friend called me up today (hey Read!) and we were talking about the nice uptick in volatility we were getting. Not exactly the words we used. But I told him how, back in the spring, I had considered stopping trading altogether, ignore the short-term action, and begin relentlessly buying a few shares of QID (the ETF which moves 2% up for every 1% that QQQQ moves down) once a week until I was 100% double-short. I had that much confidence in my… lack of confidence in the economic numbers we’re being fed. Fed. I’m all full of puns tonight. Must be the fatigue.

I didn’t do that. I like to trade too much. And by too much, I mean in magnitude and in sheer quantity. I’m convinced that a solid trading plan which profits in uptrends and downtrends is probably the best fit for me.

But, as I document here with great regularity, I could be wrong.

Now, back to the night job (mondo backtesting project… did you know there have been many many instances where “Buy & Hold” over a 10-year period actually produced a negative return? More later…)

I heard on the radio this morning that the last time the Dow had such an extended rally of up, up, up (what is it, 21 out of 24 days?) was when Rock Around the Clock was popular, 52 years ago in 1955. Oh, BTW, isn’t it true that because of that song, since the 1950s greater than 90% of Americans mispronounce the name of Halley’s Comet? (Sir Edmund’s last name is correctly pronounced the same as Halle Berry’s first name).

(Update: On the 1000 EST outro, CNBC noted this song too. Someone there must listen to NPR as well.)

And this type of extension happens about as often as that comet comes around. Is the rubber band about sixfold overdue to snap back? How many times has the S&P closed below its 10-day moving average in the last month? Are the people furiously shorting this rally brilliant or are they complete idiots? Testicles the size of melons or marbles missing upstairs?

When assumptions based on historical “evidence” utterly fail (the market “never” does this and home prices “never” go down), then what? Crazy to short against such strength? Even crazier to buy into such overbought-ness?

LP, in response to that last comment, you’re exactly right. I’ve had to work 15 out of the last 17 days, and the other two I was driving my three princesses (and one of their ICK! boyfriends) to Dallas for two fun, painful days at Six Flags. A few rounds on rides like The Titan give the old man a 3-day backache. Today is my first “real” day off, and I’m hoping to get in a daytrade or two, between cups of coffee and ibuprofen.

Remember, none of these indicators predicts the future! They only help you to see when probability is likely to be on your side, and your trading skill and money management do the rest. A stochastics reading of 90 means nothing if a stock has just broken out of a range.

That’s me, from 2005, and repeated in the sticky page up in the navigation bar I called Dummy Wisdom.

See, I know the rules. We all do, except for the neophytes. That’s not the problem. The problem is in the execution. Remembering to follow those rules. And I still fall off the wagon every time I turn around.

The S&P had the big selloff, then bottomed, then rose on decreasing volume. Then it started throwing off topping candles. This chart is the best example I’ve ever seen of why we need to wait for confirmation of what appears to be a bearish topping formation:

The dojis and hanging men have cried “Wolf!” over and over, only to be cancelled by another up-thrust. And the whole time everyone and their brother has oscillators showing overbought.

Anecdotally at least, it seems to me that the only times I remember everything getting pegged against the redline for this long (where so many shorts and longs get stopped from the excessive extension) are when we’ve been at the first thrust of a major trend, usually in the opposite direction of the preceeding one. I plan to do some “real” research on this in the near future and see if it holds water, or if it’s just wishful thinking brought on by the nostalgia hidden behind the cobwebs in the attic of my mind.

I’m off to Six Flags with my girlz. Ya’ll have a good weekend.

How’s that for a teaser title?

In trading, our job is to read the chart to the best of our abilities, then to position so that we stand to gain significantly relative to the loss we will sustain if our initial stop (and we’ve always got to have one) is hit.

The S&P has rebounded back to the top of the Big Drop Day of 2/27/07. This puts us just into a major area of support/ resistance, and we should be prepared to see some action.

From here, of all the possible scenarios, there are three which I think stand out, and I’ve been considering how I’ll trade each of them. Let’s take a look at them.

Scenario One is where we head down from where we are now, at the bottom of the S/R band:

The diminishing volume leading up to the last close makes this setup very plausible, and it’s where I came up with the plan to add to my short position on a failure from here, moving my stop down to the top of the resistance band or even slightly into it.

Scenario Two would provide an extremely strong signal and trade opportunity. This is the setup where price climbs through the resistance, pops up above the February highs, then fails back below those highs:

Such a failure would be swift and strong, likely falling rapidly to the March lows and probably below. I’m talking, of course, about the start of a Bear Market.

Scenario Three is the optimistic Dorothy setup where we get to go long:

On a strong thrust up and away from the Support/ Resistance area, I’ll wait patiently for the first pullback on decreasing volume, and I’ll get long with great vigor. Of course, I’ll get stopped out of my shorts first.

Why am I keeping the shorts on? Well, first, it’s been cold lately with that Canadian air making it all the way down here. Pa-dum-pump. No really, it’s that I’ve got a position I’m comfortable with and I’m waiting for a signal to add to it, or else my stop will be triggered. All I have to do is follow my plan. Second, I think that the last (long optimistic Dorothy) scenario is the least likely of the three.

I could be wrong. I often am. However, this game is not about being right all the time. It’s about how you position, and then how you manage those positions so that you lose small when you’re wrong (and you’re gonna be), and so that you gain as much as possible when you do happen to get up on your board and ride that big wave towards the shore. Shoot the tube, baby, shoot the tube!

My McShort of Apple (NASDAQ: AAPL) hasn’t materialized:

The volume is still puny, so I’m certainly not going long (not that I’d go long Apple anyway; that would be heresy). So still in “watch and wait” mode.

Same story on the Qs (NASDAQ: QQQQ):

I would note that, with the 9999:1 positive tone from all the talking heads (and headlines) today, I’m still so very skeptical. A breakout above the February highs will change that, but nothing less.

And did you notice anything curious about the largest percentage gainers list? Yeah, me too. Only two over-$15, heavy volume stocks on that list. Very, very thin. Doesn’t quite jibe with the “raging market” mood.

I won’t be convinced that the bull is coming back to the barn until I hear some more cowbell on this one. Let’s watch…

Wow, some really good news must have come out on that one. Maybe Cramer talked about it. But it’s held up well after that spike, no?

That, my friends, is the VIX. To me, it looks like it had a massive change of direction back on February 27 and has been catching its breath since. Perhaps it’s in the old refractory period, waiting for the Viagra to kick back in. Getting ready for another up-thrust (which would be a market thrust down).

Looking at this chart, I can’t imagine it dribbling back down to 10 over the next few months, which is what would be required for a major market rally. Can you?

Been a while since I posted some charts. That’s been intentional. I haven’t done the statistics to verify it yet, but over the years I’ve come to believe that the weeks after a day like Feb 27 are good times for swing traders to take a break. Daytraders, well, happy days are here again, but I only get to daytrade one day a week (maybe). For the swingers, and especially for the long-term traders, the wild oscillations after a volatility spike usually just serve to stop those positions out over and over. It broke, I’m short! Buying’s coming in, I’m long! It’s failing, I’m short! …stopped out at every turn.

I think, for many prudent long-term traders, Feb. 27 stopped them out (i.e. they went from long to cash), and they haven’t gotten a signal since. Swing traders got a nice little intermediate double-bottom, but the long trade off of it is now losing wind. Here’s the big picture on a weekly chart:

(DOWNthrust and pullback)

Me, I have one little short I put on with a stop above the Feb highs, and otherwise have been just daytrading a little and paying attention to other important things. Y’know, life.

I do like the way my old favorite McShort (AAPL) is looking:

I’ll be sorely tempted if that one rolls over. With CNN, CNBC, Hollywood and 99% of the blogosphere so certain that Apple’s such an obvious buy, I can’t help but look for a place to sell it.