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First, let’s take a look at that huge Bearish Engulfing candle on Google:

And it’s not just a long black line (which would be a potent signal in itself), it’s a Marubozu, one of the strongest of signals. Imagine you’re playing p*ker, and you get a suited Ace-King as your hole cards, and you’ll get the picture. The odds are stacked very (very) heavily in our favor.

How to “play” this “hand”? I can only speak for me (and remember, I’m the pro-est of pros when it comes to finding creative ways to lose money), but with the bottom of this big boy at 481.53, and the only near-term support (and wimpy, at that) is the 1/23 bottom of 477.29, I’m crossing all my fingers and toes and hoping for a sucker retrace tomorrow, preferably a nice little candle whose bottom is around 480 and whose range doesn’t top 490 or so — that thar’s a Fib retracement of the Marubozu, for you Fibonacci fans.

If such a candle does form, I’ll be shorting a break of its low with great vigor, as my friend Glenn would say.

If tomorrow opens up, then fails through the bottom of today’s range, I’ll probably look to short at the break of that 1/23 low.

I’ve been horribly busy and tired lately, but have spent a few minutes toying around some more with Ameritrade’s StrategyDesk 1.0. It’s got to be one of the most poorly documented pieces of software I’ve ever seen that wasn’t produced by Microsoft. I did have one funny, and somewhat tragic, moment with it. I was working on coding one of my old spreadsheet- based strategies into it, and thought I had it close enough for a dry run, so I selected September ‘06 thru January ‘07, and told it to backtest.

I was agape… aghast… dumbstruck… dumbfounded… there in front of me were the results: 80 trades triggered for a total gain of over 75% in four months. My first thought (since I have teenagers) was OMFG! … but it only lasted about 3 seconds. You see, I’ve churned out hundreds of formulas and strategies over the last 18 years or so, and some looked so promising I thought I’d need to trademark them and hide them in a vault somewhere. But in practice, the most valuable purpose any of them has served has been when I folded up the paper they were scribbled on and used it as a coaster for a cold beer.

So I began to look closer. Sure enough, I had failed to click the correct button. “Save” or “Add” or “Apply” or whatever this one said, and the backtest that had run was on a formula they included as a sample. Want to know what this magical super-secret formula was? Buy above the 10-day moving average, sell below it. And the test stock just happened to be one that’s been trending very strongly the last few months: Apple. Dammit. However, this is another great example of how, given the right circumstances, a simple strategy can kick some serious ass while we’re all out in the briars and brambles getting cut up looking for an overly complex one.

But this StrategyDesk program has potential, although it’s very much like receiving a big grill with five hundred parts and no assembly instructions. Please, AMTD, get to v1.01 ASAP! Also, as I know Ameritrade has a habit of buying other people’s software and renaming it (see Advanced Analyzer and remember BigEasy Investor), if this is a program someone recognizes, please let me know what it used to be called– maybe those people still have a functional user’s manual.

Any other Jungle Book fans out there? Well, either way, an Elephant Never Forgets. Last November I wrote a couple of pleasant little articles on Genentech (ticker: DNA). In the first one, I noted that a break of the 85-86 area could provide an entry for longer-term, um, investors. (If you’re reading ‘em, check out the follow-up post, as well.)

Well, over the past three weeks we’ve seen a nice gap-up breakout, then a rise and retrace:

Nice place for a tight stop if this kind of slow-moving behemoth trade is what blows your skirt up. Give it a look, see what ya think.

• Watching: Idiocracy, Little Miss Sunshine and SherryBaby (didn't know Maggie Gyllenhaal was such an amazing actress)

Back in my January 11 post, I noted that we needed to redraw our longer-term trendline on the Qs due to their having hit a “higher high.” Well the S&P did the same thing last week, so we’re a bit overdue in redrawing that one. Here’s the previous trendline with the December break:

The previous high was 1431.81, set on both 12/18 and 12/19. A new high of 1433.93 was hit on 1/16, and another one (and the current “highest high”) on 1/17 at 1435.27. This requires us to take a few steps back and redraw the trendline so that it goes through the most recent “minor low before the highest high”:

As you can see, this resets the S&P to “still in an uptrend” status, just like the NDX. What to do about it? Well, for one, it cancels our plans to get short on a retrace- and- failure. For that plan, we now need to wait for a break of the current, correct trendline. In the meantime, we may be looking for a spot to get long if a setup, um, sets up.

Now for the quiz. Here are charts of some famous Nasdaq stocks from the last few days. Can you name ‘em?

No, no. Don’t bother naming ‘em. What I’m actually trying to show here is how similar the first three are, and how the fourth has formed a different pattern. The first three are AAPL, GOOG, and QQQQ. That fourth one is CSCO, and notice how it’s showing some leg.

Here’s the complete chart:

If the top of that hammer were a bit lower (where it left the entire tail hanging down checking how deep the water is), it’d be classic. Its being “in the pattern” makes it a somewhat weaker signal, but still might be good for a long daytrade or swing trade entry tomorrow. And lest we forget, as goes Cisco, often goes the Nasdaq. Let’s watch…

The Qs broke above the magic 44.86 level today, clearing the range of the last couple of months, and printing a “higher high.” As a correctly-drawn trendline should go thru the lowest low preceding the highest high, today’s action redefines the longer-term trend from this:

To this:

The December downturn is now a pullback into the uptrend, instead of its break and failure. Hindsight is everything, no? This is another wonderful example of how things aren’t nearly as clear during as they are after.

I’ve mentioned recently that I was optimistic about the slight spark in the economic reports which may indicate a bit of growth, a touch of inflation, and even (gulp) a little strengthening of the dollar. This would be great news for our economy, and for the stock market. Whether the apearance of strength is real or just a mirage remains to be seen (I believe the correct expression is that we Need More Cowbell).

Cowbell aside, the chart is what matters in the end. With the new high, we at the newer, more patient DummySpots are watching for a thrust and pullback on diminishing volume, at which time we will look to enter in the direction of the primary trend, which is now, of course, up.

First, Friday’s action on the Qs:

Friday printed another Thrusting Bearish candlestick within this apparent topping formation. For a longer-term trade, I’m still watching for a break through the 43.20s, and if we get that break, I’d now set my “loosey-goosey” stop at the second high of the formation- on 12/5, at 44.55, and my position size accordingly. For example: With an initial potential loss, or “R“, of about 1.30, if I wished to risk $100 on the trade, I’d need to short $100/1.32, or about 75 shares.

I’d like to point out here that, had I left my stop alone when I got short on 11/27, I’d still be short and in pretty good shape. A little more patience is often the key to better trading. A concept to which I’m sure many of you can relate– we’re often faced with a choice between making money and trading. Sometimes making money requires you to sit still. Sometimes not trading is the hardest part of all. Check out Lloyd’s pursuit of fewer, better trades over at The Miseducated Daytrader for some great, introspective thoughts on the subject. Also X’s post Chasing Success, Again — which induced a lot of reflection in most of us.

Also note that we keep coming back, over and over, again and again, to the fact that success is not in how many setups you can spot or what expensive software you use… it always comes back to something more personal, more psychological… something inside.

On to Apple…

A retrace into the drop, lower volume, finished below the halfway point between the day’s high and low. Short still intact. Higher low, so stop stays the same.

Gold pulled something of a fakeout:

It gapped up on the open, then reversed and fell throughout the day. I was looking for an entry above 63.13, which was triggered, but the OGR (opening gap reversal) was the signal to take that trade back off, for a loss of about 15 cents.

Was gold’s action correlated with the dollar again?

Well, duh!, of course it was! Dollar gets stronger, takes fewer of them to buy the commodity, price of commodity in dollars decreases.

A commenter (thank you!) on the previous post pointed out the beautiful Bearish Engulfing candlestick at the top of a long uptrend in Goldman Sachs (GS). It was textbook, with multiple levels of resistance right at the $200.00 level. However, the break didn’t happen- $200 held to the penny, and we got a strong rally thru the end of the day:

A couple of things about Friday’s action concern me:

• The stock formed a Long White (blue) Line- the buying pressure continued throughout the day

• Friday finished at 205.10, above the 11/27/06 high of 203.35, and, for you Fibonacci fans, also above the 61.8% retracement of the previous (Bearish Engulfing) day’s range, or 204.14.

This action on Friday appears to show some remaining buying interest in GS, and although I’d still love to get a shorting opportunity on this stock, I think I’ll now take a little longer-term view:

Dave Landry’s Big Blue Arrow is one of the finest indicators around. I think he’s got trademark rights on the color blue :), so I drew a green one. No doubt which way the big arrow is pointing on this longer chart.

So, what to do? Right now I’m watching for a breakdown past the 11/28/06 low of 191.50, a followthrough downward thrust, then a retracement (up) on decreasing volume, at which point I’d get short, as my friend Mr. Bananaweeds says, with great vigor.

Geez. I’m dyin’ here. The temp has dropped 40 degrees since lunch. My cat met me at the door and said “meow?,” which, translated, meant “Dude, WTF??“. Tonight I could really use a cup of warm apple cider with just about that much Jim Beam stirred in.

Ok, November’s over. EOM markups, if there were any left, are done. Let’s get ready for activity to pick back up.

Also, something I’ve neglected to point out thus far- the action in the VIX. I had a post back waaay back in January talking about the VIX Fade Trade. Well, you’ll note on the chart below that on Monday the VIX hit 12.33, or about 15% above its 10sma:

As usual, the rubber band has snapped back, and we’re back to a point in the middle of the median of the average, where the market can comfortably surge in either direction as far as Uncle Vix is concerned.

Apple is set up for a nice trade. Here’s a chart of the rangebound action of the last five days:

We could trade a break of this range in either direction. Me, I’d prefer down because as you know (or in case you didn’t know), it is my destiny to short AAPL. Long uptrends in Apple aren’t money-making opportunities for me; they’re pauses between short sales. It’s not logical, it can be downright crazy, but like the Queen and her Skoal, it’s my own little indulgence, with proper management it costs me virtually nothing (and one day will make me the King Of The World HA!), and I long ago stopped trying to make sense of it.

The dollar broke (weaker) from its little pullback I mentioned yesterday, and of course, so did gold. Unfortunately, gold and [insert name of your favorite gold stock here] gapped up and didn’t give us a clean entry:

What to do? If tomorrow opens inside today’s range (63.90-64.43), then walks through the top of it, I wouldn’t at all mind going long at 64.44 with an initial stop of 63.89, for an initial risk (tah-dah! “R“) of 55 cents per share, with a position size chosen accordingly, based on how much I’m comfortable losing.

To the Qs!

It’s been a while since I’ve followed an ongoing swing trade day- to- day. I forgot how much fun it is. All that sh*t that looks so clear and certain in hindsight can cause some butterflies as it’s unfolding, can’t it?

The Qs printed a little doji with (just barely) the narrowest range of the 3-day “up” move:

If I had no position, I’d see this as a prime trade setup:

• If it opens within today’s range and heads down through today’s low, I’d use it as a pullback- into- a- downtrend shorting opportunity, with a stop either at 1) the top of today’s bar if I were feeling aggressive (usually am) or 2) the top of the recent uptrend (44.86), with a correspondingly smaller position size based on risk (less aggressive, wider stops, looking for longer-term gains… the “sensible” alternative)

• If it opens within today’s range and heads up, I’d let it be. Wait for a break of 44.86, maybe a little thrust- and- pullback action, then get long.

• If it gaps in either direction, we’re in daytrade territory, with a possible swing trade entry to boot, depending on the action.

However, I do have a dog in this race and a horse in this fight. I’m short with a stop of 44.62. That stop will not move, as today’s low was a higher low, and I don’t move short stops on higher lows. Second basemen either.

What I will do is quite simple: 1) get stopped out or 2) add to my position on a break of today’s low with a simultaneous lowering of my stop for the overall trade to keep my risk constant. I fully expect to have this dilemma resolved within the next couple of days, most likely tomorrow.

Cheers. Where’s the blanket?

• Listening To: The Essential Charlie Rich
• Temperature Outside: Cold as my ex-wife's short little feet

The Qs acted pretty well today (considering that I’m short):

They opened down, formed an OGRe (opening gap reversal), and climbed higher by the close. This formed what’s known as a Thrusting Bearish candle formation. It should indicate a lack of buying conviction, which should result in further selling which should make the shorts (including me) more money.

However (and there always seems to be a damned however doesn’t there?), focusing on this just because it’s what I want to see, and ignoring any conflicting signals could be detrimental to my Pork Rinds and Beer Fund. And there were certainly some conflicting signals today:

• First, the Qs themselves. Itself. Whatever. Note what happened the last time they had some selling action then formed a Thrusting Bearish candle:

  

  Next day was a monster “up,” followed by a serious rally.

• Next, note that although a big stock like GOOG also made a bearish formation, a bigger stock in MSFT made a bullish hammer. And then there’s Cisco. The masochists who’ve read this site for a while may remember that I made a big deal when Cisco broke out back on August 9 and none of the talking heads on TV even mentioned it. Cisco proceeded to lead the market into the bull rally we’ve seen since then.

  Look at what CSCO did today:

  

  For you home gamers, that’s a massive Bullish Engulfing candle (I think that one’s pretty self-explanatory). Not only that, but it’s a huge move on a huge stock. Nearly five percent on a 164 billion dollar company in one day!. About 8 billion bucks gained. That’s a sh*tload of capital. We’d be fools to ignore it.

So, cut and run on the short trade? Of course not! I’m just extra-cautious looking at that CSCO action, and not bragging at the water cooler just yet. Here’s where the CSCO event has its effect: on my stop management. Although the swing short is still perfectly intact and behaving, I’m gonna be more aggressive with my stop due to the Cisco factor. Let’s look over my options:

• [I should note that I’m talking about a short entry below 44.25 with an initial stop above the 11/24 high of 44.86 for a total initial risk (tah-dah! “R“) of (44.87-44.25) 62 cents.]

• First, there’s the Dave Landry method- leave your friggin’ stop alone! Close half the position and move the stop to breakeven when/if it reaches “2R,” or 43.01. It hasn’t yet, so do nothing.

• Next, there’s my “you’re only in it for a minute” stop method, which is to set the stop at the high of the prior bar for shorts. That would put my stop for tomorrow at today’s high of 43.84. (Guess what would happen then)

• Finally, there’s my patented DummySpots 20% trailing stop method. Take the previous stop (44.86). Take today’s “lower low” (43.34). Calculate the difference (1.52). Move the previous stop by 20% of that difference (~0.30). 44.86 - 0.30 = 44.56.

With this trade, I’m committed to being a little less aggressive with my stops, and giving the trade some breathing room. So #2 is out.

If CSCO follows through (upward) and the rest of the market goes with it, my stop will get hit wherever it is. If the market continues to fail, there’s no way the Qs will go all the way back up to 44.86 and then fall. Something below that is more reasonable. So #1 is out.

Ok Goldilocks, #2 is too hard and #1 is too soft, is #3 just right? Well, almost. I see from the chart that the high of the break day (yesterday) was 44.61, very close to my calulated #3 stop. So I’ll exercise a little executive privilege and put my stop where it’ll include both of those prices: at 44.62.

Ok, I need a beer.

In a comment to my last post, John W points out that DNA may not be a great buy-and-hold candidate:

Let’s say you get about 19 points in the next 5 years that takes it from today at 81 to 100. Thats about 20% which parses out to about 4% a year rough averaging - currently you can get 5.25% out of 6 month CDs

I’m not exactly sure where the 19 points in 5 years comes from (Genentech’s up about 300% in the last 5 years), but I agree with John’s conclusion. I think “buy-and-hope” is mostly a successful marketing phrase repeated at every opportunity by people who want you to give them your money.

I thought I was relatively clear that I was not recommending for anyone to run out and buy Genentech at the current level of 81, or any other stock at any level, based on anticipated increases in revenue or another fundamental measure. But I’m very grateful for observations such as John’s, because it helps to remind me of something I’ve said in past posts, which is that the market is an elephant and we are blind men, in that we can all look at the same picture and see it in completely different ways. I see a potential swing trade setup on a breakout, others see what they judge to be a low-reward candidate for a long-term position. That’s wonderful, because it’s what “makes a market,” and explains why some people are buying while others are selling.

I can honestly say that the concept of “5 years” when it comes to the stock market never crosses my mind. I can only think of two instances where I’d be in a stock for five years:

• I get into a swing trade which proceeds to go in the direction of my entry for five years straight without ever hitting my trailing stop, for a multi-thousand percent gain. I don’t think that’s possible, but here’s to hoping!
• I die with an open position, and my daughters don’t realize it for 5 years.

This really got me to thinking- if I had the patience to watch a stock over the years and stay in a position for months (I don’t), what would someone like me see in a stock like DNA? Of course I went directly to The Charts, and what I discovered was surprising.

Caution: This is total hindsight, and everything’s always easier and clearer in hindsight. But it was very educational for me, and hopefully some other folks will find it of use. I’ve tried to annotate each chart and describe what I see [tips hat to Michelle B.].

Let’s start back in 2003. Continue reading this post »

I’d like to share a tidbit with ya’ll about Genentech, and specifically, about Avastin sales.

Monoclonal Antibodies are all the rage in drug research right now. You can usually spot them by the “mab” in the actual (generic) name of the drug (infliximab, basiliximab, abciximab, e-i-e-i-o). Many of them act as immunomodulators, and along with the theory that many of our current chronic diseases actually have an autoimmune basis, have caused a paradigm shift in the treatment of things like asthma, Crohn’s Disease, and rheumatoid arthritis. (P.S. Stay on the lookout, much of cardiovascular disease has an autoimmune component as well, and cardiology is where the drug companies see BIG $$$.)

Genentech is a leader in developing MABs, and their cancer pipeline is very strong. Their drugs include well-known names like trastuzumab (Herceptin®) and rituximab (Rituxan®).

Bevacizumab (Avastin®) is the new kid on the block- it’s only been around a couple of years and has been mostly used for colorectal cancer. But anyone who deals with chemo (Avastin’s not chemo as in “cytotoxic antineoplastic” like cisplatin or fluorouracil, but chemo as in “used to treat cancer”- it’s actually an anti-angiogenesis drug) recognizes it immediately- it’s the one that routinely busts the purchasing budget. This drug is expensive with a capital EX.

Until very recently (i.e. the last couple of weeks), the vast majority of Avastin you’d see would be dosed at 5 mg/kg, or 375mg in a 75kg patient. Every once in a while there’ll be a 10 mg/kg dose, but they’re rare. Those doses have been the only approved doses for its only indication so far- metastatic colorectal cancer. Avastin comes in 400mg and 100mg vials, but we usually just buy the 400’s because we use so much of it already.

Now the news: You may have read that Avastin’s been approved for NSCLC. What you may not have read is that NSCLC is the most common form of lung cancer, the second most common cancer overall, and the most common cause of cancer deaths in the U.S.

So, we’re gonna use it on a very common cancer. That’ll increase sales. Yeah, but then there’s the fine print. The dose of Avastin for NSCLC is 15 mg/kg! The first few times I was in the “cage” (one of our cleanrooms) making chemo and ran into one of these new massive doses, my reaction would be WTF?, but on our usual double-check of our double-check, I’d see that the oncologist was using it for the new indication, so the dose was kosher. We’ll now be routinely seeing doses of Avastin well over 1000mg per patient.

The upshot - the use of Avastin will go up dramatically, because we’ve added an indication, and the dose for that indication is three times what it would have been for the previous one.

According to Genentech’s press release of 10 Oct 2006, sales of Avastin were $435 million out of total product sales of $1,941 million, in other words, a very significant amount, which means the increasing or decreasing sales of this drug can have a major impact on this big compay’s bottom line. I’m here to tell ya, they’ll be increasing.

What does this mean for our trading? Should I run out and buy DNA (Genentech)? Hell no! What are you, a fundamentalist? Leave the fundamentalism to Jerry Falwell and Robert Tilton (that video’s given him new life, no?).

Let’s Look At The Chart:

Where’s DNA gone in the last 9 months? Nowhere. What’s its 52-week range? 75-100, or so. Could we wake up soon with anti- drug- company “reforms” from the new congress? Absolutely. What if some new horrible side effect emerges with large-scale post-approval use of Avastin? Its revenue goes to zero and Genentech is defending lawsuits.

So why am I writing this? So that, in the more likely scenario that none of the above gloomy events occurs, Genentech’s revenue from Avastin will be accelerating very rapidly as its use for NSCLC expands. Avastin already has to be drop-shipped (i.e. directly from the manufacturer) in most areas because it’s so expensive, and we’re all having to vastly increase our already jaw-dropping inventory levels.

If the increasing Avastin sales begin to affect the chart, a break above 85-86 could provide a very nice trade entry. A nice, longer-term trade entry, not a few-day swing. This thing moves too slowly. Dust off your longer moving averages and weekly candles, and check up on this one from time to time.