The Insightful Trader

Those of us in the investment world, even if you’re relatively new, have always been taught that you should have a thorough knowledge of any investment you make. Though this may be true of any investments that you plan to hold for any amount of time, for short term traders I ‘d like to put forth the proposition that this may be hazardous to your short term fiscal health.

As a trading coach and a long time trader I’ve seen it many times, heck I’ve even done it myself, where your familiarity with a given stock or group of stocks leads to poor trade management. Whereas if you just happen upon a trade or a stock that perhaps someone else mentioned, then you’re much more likely to follow your signals and maintain your stops without any preconceived notion or expectations of the outcome. If the trade works, fine, if it doesn’t then that’s ok too. You followed your rules.

This first came to my attention several years ago when I started noticing certain traders who regularly traded the same given group of stocks would tend to be more lax and give a given stock more leeway or have higher expectations of the results than the trade setup suggested. Say for example Trader A likes to trade the oil stocks and he just knows oil is going up, thereby his stock should be up that day too irregardless that it’s beenup 5 days in a row, is right at a major resistance point etc. you get the picture. If you had never traded that stock in your life or could care less about the price of oil, then your expectations of a given outcome are going to be completely different and probably more objective than trader As.

I recently made the same mistake when the financials had all made a 200% move thinking there was no way they could continue. What started out as what I felt was a fairly conservative contra play using an inverse ETF and options, relatively quickly went from being a  short swing trade into a long term holding. Conviction in the market can be a killer if you’re not careful.

We all hear it and say the words, but as we all know the psychological part of trading is often more important than the actual skill set in many cases. Just remember to set up your trade parameters for whatever time frame and be adamant about following,  BEFORE you make  the trade and especially so if it’s one of your favorites.

With the recent breakout of gold on the daily chart, gold bugs are ecstatic, as they can now point their fingers and say “We told you so” and indeed gold has had a remarkable run over the past number of years as seen by the chart below.

I have to admit to being somewhat of a precious metals advocate myself, but probably more of a silver fan and not obsessively so at that. One of those things that I think everyone should have some of in their portfolio. But is the overwhelmingly bullish stance on gold justified?

I don’t know about you, but I get awfully nervous when nearly everyone lines up on one side of a trade. Since there seems to be as much, if not more concern about deflation, than inflation among the world’s central bankers including a newly released UN report calling for continued loose money, then perhaps what we’re seeing is a longer term hedge. But according to a recent report from John Mauldin, gold hasn’t had a good correlation with inflation for nearly 30 years. So if that’s the case, what’s that do to the price movement based on future inflation concerns. Is there some other catastrophe lurking out there unforeseen by the rest of us mere mortals?

What of the dollars resilience in all of this? Although hit some the past several days again, it’s stubbornly refusing to make a swan dive, though short term we could see some further weakness technically.

You can see from the attached chart where our next support levels are, with fairly significant support at the 76 range, and then at 74.50 we have have the 78% fib retracement range.

So let’s look at the gold charts again here. As seen below, we broke above our down trend line on the daily.

Looking at the daily, we see that although we’ve broken the line, we still need to get a close above 1007 to confirm. Now looking at the weekly chart, it gets a little more interesting.

Though an attractive potential  inverse head and shoulders formation, as you can see, we’re not out of the woods yet. And even if gold can close above 1007 on a weekly candle, we’ve still got potentially strong resistance back into the 1030 level.

So, in summation, don’t put your blinders on just yet. Though gold is definitely looking strong, and the momentum traders are frothing at the bit, the potential for large and or quick gains from this point may be more daunting than most realize. And if you take comfort from the fact that everyone else you know and read are as bullish as you may be, then take a minute and think about what the the least popular trade you could possibly make is.

I think it’s getting time for everyone to tighten their stops on any intermediate swing trades. Though I feel we could have another little push up here, our rally is getting a little long in the tooth. Back in early March, I stated that we seemed to be hunting for a bottom. Now I think we’re hunting for a top.

First of all, as you can see from the chart below on the SPX daily, we’re banging our heads against the upper TL. This chart is representative of most of the major indexes. Though many Elliot Wave theorists feel that we could have another push slightly higher in a 5th wave extension and a slightly higher move puts us in a thin  area of resistance that could carry us to the 1100 range I believe it’s time to be extremely cautious here. Nearly every major sentiment indicator is screaming over-bought and though this alone is not reason enough to sell, history has proven that it is definitely a red flag. We’re over the critical 38% fib retracement, about 40% now and though the 50% has a nice ring to it, are too many people anticipating it?

 
Additionally, the dollar seems to be hunting for it’s bottom in the near term if it hasn’t already found it and gold seems to be acting toppyas well. And though it’s hard to think of selling when the Fed has an open purse policy, are we running out of arrows in that quiver. With the clunker rebate winding up last week and many of the other programs winding down, have the give-aways started to cease?

Also, see the chart below. The Chinese market has been on fire this year until the past few weeks. In fact, it looks as though it’s forming a nice bear flag at the moment. Since the Chinese have been leading the recovery, especially in certain commodities, cracks are starting to once again appear in their economy. This can’t be good for the resource stocks, even though the impending threat of inflation at some point may keep a floor under some of them.

One further note, I’ve started posting some of my trades and other info on my twitter account. Be aware however that these may not be suitable for everyone, use your own judgement and analysis.

What an ugly day. No one was spared today. The only winners today were the inverse funds and the VXX.

The financials were the leaders down today as the Dow dropped 200 points and closed at its low of the day and the SPX lost 3% to drop 28.19 points as well as  closing back under it’s critical 200ma. But nearly every group participated in the downside. The BKX dropped nearly 7%. The exchange stocks got hit with CME down 24 pts andICE down nearly 10 points. Energy stocks were not far behind with most being down anywhere from 5-9% as oil sold off $2.49 to close at $67.06. Oils and oil service stocks were not the only losers as the coals and solars got hit also, with most the major coal related stocks down in excess of 10%. Solar stocks were right there with them with FSLR dropping a whopping 11+ points.

Not to be spared, other glamour stocks such as RIMM, -$4.67 and BIDU, -$19.58 shared in the joy as Techs came under fire after staging a nice rally over the past few months. AAPL was the best performer, only dropping a couple of points.

The carnage started during the night as gold, which has been weak, started dropping about 3am before finally recovering some to close at 922ish. But gold was simply a reflection of the entire commodity trade. Everything and anything commodity related was hit. Potash, the golden child of the commodity stocks, after staging a huge rally from the 50 range back to 120 the past few months has now dropped 30 points in the past week.

So where to from here? As you can see, though we’re oversold on some of the short term indicators, we’re not really close to any major support area until we get down to the 880 area.

It looks like the euphoria has finally started to wear off the past several days as continuing unfavorable fundamental data has started to catch up with our counter trend rally. All the talk of green shoots, upon closer examination, turns out to be just wild onions. Though we are short term slightly oversold after the past several days and could see a relatively small bounce over the next few days, many are starting to look at the market with a little more jaundiced outlook after a strong three month rally.

The fact that some stocks were able to beat their greatly revised  outlooks during earnings season is behind us now. Though there is still a lot of money sitting on the sidelines  and I’m sure nervous about missing any further upside moves, I believe the awareness is slowly sinking in that the hangover from the SEC’s neglect and the Feds multi-year loose money binge for the greater part of this decade, has not even really begun to subside. Have another bloody mary and make it a double this time. It’s got to feel better at some point. So the realization is, or at least should be, sinking in that there’s probably no rush.

Though a technical trader by trade, I’m a fundamentalist atheart and the fundamentals are nowhere close to giving me a warm and fuzzy feeling. The Fed continues to paint themselves into a corner. At what point do they cry uncle. Trillions spent in bailouts have done little if any to reduce the pain for the overwhelming amount of the so called ‘middle class’ citizenry. Mortgage rates have started back up, though for all practical purposes are still at multi-year lows. Hundreds of thousands have been laid off in just the financial sectors, the primary beneficiaries of the government largess. Seventy million plus baby boomers are looking at a whole new meaning to the word ‘retirement’ due to the decimation of their retirement funds and of course their favorite backstop, their home equity which has been vaporized. And of course, several new studies released this past week show that we’re still not at the bottom in housing yet. This doesn’t count probably hundreds of thousands of people sitting on homes trying to weather the storm who will promptly put their homes on the market at the first glimmer of a rebound, much as a novice trader will do who didn’t keep his stop and watch his stock fall 50% will sell at the first little bounce trying to preserve some equity.

Despite the Feds continuing spending, the average consumer remains ravaged. What token tax credits and/or cuts given are now being sucked up by basic necessities like food, credit card rates approaching 30% and now fuel prices which have increased nearly $1 per gallon in the past  several months. For the average family, the fuel price increase alone will suck up $1000 year. The recent drop in the dollar will only increase inflationary pressures. Let’s not even talk about how much extra the upward move in interest rates will cost our government, uh, that be you and I. 

It seems to me that our government’s whole attack on our problems have been to stimulate consumer spending, in other words, more of the same that got us into this situation. Has anyone besides me ever stopped to think that maybe all of us in the baby boomer generation, besides being spent out, just don’t want anymore ‘stuff’. I mean think about it, in our 30s and early 40s many of us were on a buying binge. Remember all the T-shirts with “He with the most toys wins”. Now in my 50′s I’ve got way too much ‘stuff’. We’ve had our Mcmansions. I don’t need or want anything else. In fact wish I could easily get rid of a lot of the ‘stuff’ I have already. The older we get, the more we realize that none or at least very littleof it, matters and it’s a chore keeping it up ar storing it. Plus many of us in this generation are now faced with taking care of elderly parents and relatives. Ferrari’s and Lexus’s don’t handle hospital and nursing home parking lots well. The net result is that probably 70% of the purchasing power that still remains in this country could care less about buying more ‘stuff’ that our government believes will save our economy. Frugal is the newest hip word.

The absolute worse thing about the whole situation is the legacy we’re leaving our children. I think in the recent downturn, many of the older ones have seen some of the pitfalls and are more frugal than we were at their age. But they’re now facing decades of paying for our mistakes withhigher taxes for their lifetimes because our healthcare and retirement systems were so mismanaged and misallocated.

 Reading a report from Tom Dyson of the Stansberry group yesterday, Tom, who likes to visit rail yards and even occasionally hop a train, to get a feel for economic conditions reports that rail traffic remains anemic and there are thousands of railcars sitting, rusting in storage. So no early signs of pickup from that perspective. So for those of you who missed the rally, I say sit back and relax, you’ll get another shot, unfortunately maybe at even better prices.

The market exploded upward today as buyers, worried about missing the rally, came in strong today. After a gap up this morning, and only a minor pullback at lunch, the market surged upward during the afternoon, led by of all groups, the financials to close at the highest level since mid January. We’re now positive on the  year.

Much as I was worried about several weeks ago, as the market has slowly churned higher the past week or so, seems as if money of the sideline got real nervous that we may not actually get a pullback to make their buys. So when in doubt, chase.  The Dow closed up 214 while the SPX added nearly 30 points to close at 907.24. Nearly everything was strong today including all the energy related sector including solar, Semis and Ag. But the star of the day was the financials with the BKX tacking on a whopping 15% today. The reason was that the small uptick in housing stats led many to believe that the banks are now out of trouble. Good luck. Guess these are the same banks who had to connive and use every trick in the book just a week ago to show any earnings. Even the report leaked that WFC would have to raise additional capital could not dent the enthusiasm. The top performers were JPM, WFC and AXP, up anywhere from 10-24%. Just amazing.

In other markets, gold barely finished on the positive side after being up big early in the day and silver finished in the red after being up early. The dollar was down just slightly.

I’m enclosing two charts tonight, the 5min showing the break to the upside today and the 60min SPX showing we’re not quite out of the woods yet.

Ok, I admit it. I don’t have a clue what’s going on at the moment in the market. Two days in a row now, we’ve been down strongly overnite and during the pre-market, but within 30 minutes of the market open, it’s like it never happened. Typically, we’d get some bounce from the pre-market selling, and then we’d see some downward pressure come back into the market. Hasn’t even been close. Though we ended slightly down on the day, this market is not in any hurry to roll over. Buyers seem to be lurking behind every corner.

Even though the market seems locked in a narrow 25 point trading range, there have been some nice moves for intraday traders in certain stocks. BIDU had wild day and DNDN had some extreme trades that brought out the exchange to review before saying trades were legit. Nothing like a 50% drop in a few minutes. Should be active  tonight if they get reopened. In after hours here PNRA getting hit for having expected earnings which weren’t bad, but disappointing enough for it to be down about 10% as I write. Of course it’s had a spectacular run since November. For other non news stocks we’ve had just enough to pullback to relieve most the overbought indicators on the indices in general.

Techs, which have been the flavor of the day lately, had a pullback today led by BRCM and MSFT. Ag stocks were basically flat while solar and energy stocks were down slightly. The financial stocks were down slightly with the BKX down about 3%. In other markets, gold got smacked for about $14 or 1.5% to close at 894ish, it too in the middle of its recent trading range, while silver got hit for nearly 4%. The dollar continued showing some strength.

Now seems to be a good time to keep your head down unless you’re extremely nimble, until we see some direction.

After suggesting a couple of weeks ago that I foresaw the 875 level as a possible bounce level, we hit 875.63 before backing off the past few days. However, we haven’t had much of a pullback as the market ramped the last 30 minutes yesterday into the close.

Amazon reported better than expected, may be time to take  some profits if you haven’t already done so, for those of you who followe us into that trade. MSFT was about inline. Techs continue to lead this market with some amazing moves in the sector the past week.

In other fronts, the dollar got beat up pretty good during the night, while gold hit the 911 range overnite. Gold will be coming to it’s resistance level here shortly. I took a small position in GLD yesterday thinking that we may have seen the bottom. If we break the 870ish level from which we made a double bottom last week, then I’m gone.

Where do we go from here? Our intermediate rally is getting a little long in the teeth and we’re probably due for some pullback. The question is, have we already seen it with the 50 point pullback we had earlier in the week, before we push further. In my humble opinion, earnings have held up a little better than I anticipated,  though admittedly many companies are simply beating the revision, the absolute numbers still not that bad in some sectors. Forget the banks, they’re all manipulating and no one including themselves, know what they’re really worth. As you can see from the chart, some key levels to watch both upward and downward. We have a potential H&S formation forming on the SPX here that bears watching. A break below the mid 820 level sets us up for a potential pullback to 780ish range.

After rallying an additional 80 points the past week or so, the market finally gave up up some serious gains today. It peaked right in the middle of it’s resistance area at 864. Financials were the big losers today led to the downside by GS which gave up nearly 15 points despite doing a good job of beating its numbers.

Most of the major indexes dropped considerably, with Dow giving up 1.7%, the SPX -2%, and the Russell 2000 slightly over 3%. The SOX held up relatively well dropping only a slight .24%. Think this may change based on INTC’s release after hours tonight. Though the earnings were okay after heavy revisions down, the outlook was not pretty and INTC was down about .50 in after hours trading. This could weigh on the sector in tomorrows trading.

As stated earlier, financials, after being the leaders in the recent up move, took a pounding, coming in for some serious profit taking. It’s notable that SKF was up almost 10% today and FAZ nearly 20%. In other markets oil was slightly lower, as were the precious metals while the dollar was mixed, though it seems to be rallying some here overnite. Don’t forget we have the Beige Book release tomorrow after lunch. Usually good for some fireworks.

Where do we go from here. I think we’re in for a small pullback and have drawn some natural support levels seen on the chart below. I ‘ve also included the most recent video from Market Club which shows possible fibonacci retracement levels. If you noticed the VIX today, was down slightly, even as market dropped. Hmmmm

Positions in stocks mentioned – long FAZ, SKF

The market recorded another up week this week, marking its 4th in a row. After a strong sell-off Monday to pull back to the S&P 780 level, we now stand at the 840 level with another positive week behind us. Of course this just puts us back to where we were in mid February, but it’s a welcome relief.

Today was one of the choppiest days we’ve had in awhile, rallying into the close to finish up only +39 on the Dow. Techs, other than MSFT, were leaders, led by RIMM which reported much better than anticipated after the close Thursday and managed to hold it’s after market gain today to finish up over 10 points for the day. KLAC, GOOG,IBM and NSM did their share too. The SMH closed at 20 even, up over 20% the past 3 weeks. The Q’s finished at their highest level since the end of October.

Other stocks of note today were AMZN, which broke above some horizontal resistance in the 77 range and closed over 78, not that far from its high of the past year. When everything else is still trying to regain lost ground, AMZN is now up over 100% from it’s low at 35 in November. The financials had another good day, especially in the last few minutes when JPM surged over a point in the last 30 minutes of the day. The exchange stocks did well today with CME and NDAQ  doing well. GS surged another 5 points+. 

Ag stocks were up slightly today, while solar was pretty much a mixed bag even though energy stocks had a good day led by the oil service sector. OIH gained 3.72. Real estate stocks did well as witnessed by the nearly 10% move in IYR, the DJ Real Estate Index. The weak group today were the metals as gold and silver both continued their drop. Gold was off another 12.90 to close under $900 at 896. The result was continued pullback in the precious metal stocks. The dollar made an important breakout above the 100 range against the yen today and was basically flat against the Euro.

So where do we go from here? It’s starting to look a little toppy short term, but not extremely so. Everyone is talking about the 850 level being an important resistance point, but I feel we could push higher than that to maybe the 875ish range before we hit too much resistance. With the incredible move we’ve already had, it’s hard to get excited about chasing anything here, but as we know the market can keep climbing on weak volume. There doesn’t seem to be much selling coming into any pullbacks. Everyone is giddy over the Feds recent moves and the worldwide monetary expansionist policies. Even a terrible jobs number was met with the refrain that the worse is over. All I can say is keep tight stops but don’t get caught trying to pick the top either.