Friday, October 31, 2008
Wednesday, October 29, 2008
Tuesday, October 28, 2008
Monday, October 27, 2008
Sunday, October 26, 2008
DENNIS GARTMAN’S NOT-SO-SIMPLE RULES OF TRADING
1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position… not ever, not never! Adding to losing positions is trading’s carcinogen; it is trading’s driving while intoxicated. It will lead to ruin. Count on it!
2. Trade Like a Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.
3. Mental Capital Trumps Real Capital: Capital comes in two types, mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.
4. This Is Not a Business of Buying Low and Selling High; it is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.
5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it however, and fewer still embrace it.
6. “Markets Can Remain Illogical Far Longer Than You or I Can Remain Solvent.” These are Keynes’ words, and illogic does often reign, despite what the academics would have us believe.
7. Buy Markets That Show the Greatest Strength; Sell Markets That Show the Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest.
8. Think Like a Fundamentalist; Trade Like a Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem.
9. Trading Runs in Cycles, Some Good, Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In “good times,” even errors turn to profits; in “bad times,” the most well-researched trade will go awry. This is the nature of trading; accept it and move on.
10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we’ve known have the simplest methods of trading. There is a correlation here!
11. In Trading/Investing, An Understanding of Mass Psychology Is Often More Important Than an Understanding of Economics: Simply put, “When they are cryin’, you should be buyin’! And when they are yellin’, you should be sellin’!”
12. Bear Market Corrections Are More Violent and Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on.
13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow… usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.
14. Be Patient with Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year… and our profits grow accordingly.
15. Do More of That Which Is Working and Less of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; cut back or eliminate losing ones. If there is a “secret” to trading (and of life), this is it.
16. All Rules Are Meant To Be Broken…. but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.
Friday, October 24, 2008
Wow what a day in the markets. I never was convinced on the rally from mid morning onward. I took a nice short in the futures around 1:30 pm et and covered for a great trade shortly thereafter. You really got to have a scalper's mentality on days like today. I shifted away from my short side bias after the 15 and 30min SPX chart started to perk up but in the last hour of the day there was some serious choppy action. Right at 3pm et huge buy volume came into the ES and pushed the futures up about 25 pts in minutes. Everyone got a little happy that we may have a positive close on the day and maybe salvage a decent weekly close. Not quite sure who the hell was buying all that paper at 3pm et but its irrelevant now as the market used the last 10mins of the day to sell off from roughly 890 to 865 on large volume.
This is not a good way to finish a week in which many hoped we could bottom out after testing the lows from Oct. 10th. I hate to be the bearer of bad news but I think we are going down next week. Today was almost like a wasted day because any rally that had hope just faded away. Some think we should have had a bigger washout at the open when the futures were limit down. So another 300+ selloff is almost like a cheap trick that the market is playing on the optimistic. Art Cashin was on today talking about some kind of lunar cycle in astrology next week. He claimed (quite seriously) that these planetary shift or whatever the hell is going on, lol, might signal a bottom. Ok I'm sorry I'm not an astrologer, but I do wanna check my horoscope now thanks to Mr. Cashin, lol.
Anywho, I'm a chartist so regardless of what the heck is going on with Mercury and Venus I see a breakdown coming next week and if we cant hold the 845 level we may see things unravel at rapid speeds. There was nothing bullish about the way we closed the week and I just dont quite see why this market would go up Monday. Anything can happen of course but I just have a feeling we see lower prices next week and perhaps, just perhaps, this time we get a true washout without the aid of the gov't artificially creating a floor.
Enjoy the weekend people. Get outside and breathe in some fresh air with family and friends!
Thursday, October 23, 2008
Well that was a roller coaster if I've ever seen one. SPX started the day near 900, rallied in the first few hours up to 920, then fell off a cliff to 860 and by the last hour of the day staged an unreal rally that ended around the 910 level. Seemed like the last hour rally was massive short covering off an oversold condition. It was almost as if the Plunge Protection Team themselves was in the pits buying the SnP's on the offer, so don't stop believin' that we can rally I guess, lol.
I took off my SSO puts yesterday at the close for a handsome profit since Tuesday's inside day pattern. This was part of a strangle I initiated by going long both the Nov 35 calls and 32 puts. The puts doubled and then some in one day! The value of the puts that I sold surpassed the total cost of the strangle I started with originally so essentially I am now holding "free" calls that have 4 weeks to make money and my worst case senario is I break even on the entire strangle. Now that's what I call a good risk/reward.
Overall the close was positive and strong enough for me to start to develop a new bullish bias going into Friday. However, if we can't get over that 920-940 level with volume tomorrow then todays buying into the close means nothing. We need a continuation Friday to confirm what we saw today. Then, maybe we can look for more upside next week. But honestly I hate to think of next week when its still 4-5 days away lol. This market can do so much by then to change things.
Bottom line, the trend is still down on the daily, 60min, and 30min charts so dont fall in love with the upside traders, I dont care how magical CNBC makes it out to be. Trade safe.
Wednesday, October 22, 2008
Tuesday, October 21, 2008
Monday, October 20, 2008
Sunday, October 19, 2008
Saturday, October 18, 2008
Today I write not to gloat. Given the pain that nearly everyone is experiencing,
that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.
Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging
fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.
There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.
I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.
So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don’t worry about my employees, they were always employed by Mr. Springer’s company and only one (who has been well-rewarded) will lose his job.
I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life — where I had to compete for spaces in universities and graduate schools, jobs and assets under management — with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.
On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government.
Capitalism worked for two hundred years, but times change, and systems become
corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man’s interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft’s near monopoly. I believe there is an answer, but for now the system is clearly broken.
Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won’t see it included in BP’s, “Feel good. We are working on sustainable solutions,” television commercials, nor is it mentioned in ADM’s similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country?
Ah, the female. The evil female plant — marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell
you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let’s stop the rhetoric and start thinking about how we can truly become self-sufficient.
With that I say good-bye and good luck.
All the best,
Well lets all just try to take a lesson from Mr. Lahde's highly opinionated and awesome letter. There needs to be changes in this country from the top-down. People should be held accountable for their responsibilities to a much further magnitude, whether its in DC or corporate America. So, now I ask who is gonna step up to the challenge?
Friday, October 17, 2008
With options ex today I was also surprised to see a relatively calm atmospehere to the price action. Usually you see either a chopfest all day long or just massive swings intraday. But I guess since that is now the norm, lol, it makes sense to see options ex present us with something a bit different. The market never ceases to amaze me.
Had some great earnings to GOOG last night after the bell so that was encouraging to see that the recession is not completely killing advertising spending. Next week the earnings calendar really gets going and I will try to go over a detailed outlook of this over the next few days.
Given that options ex is a bit quirky usually I would like to see the action Monday to determine where this market wants to go but as of right now I am liking what I see on the daily chart after yesterdays outside reversal. The 60 min and 30min of the ES futures look more bullish than they have in weeks imo. If the SPX can gather some steam and hold this 900-920 level with authority then I will be advising some trades to the long side. Also, if we can get this VIX down a bit lower to like the 40s or so then I would finally be willing to throw out some new options trades. Lately, I havent been holding much of anything overnight unless I'm hedged completely because it simply hasn't been worth the risk. Especially when you can make a fortune during insane intraday swings we have grown accustomed to in this environment, then go to sleep in cash. :)
With that said, I will be looking to research a few names over the weekend to perhaps recommend some great options trading ideas for the coming weeks. If you made it through this week, congrats, you are no longer an amateur! And to all the new readers thanks for visiting The Trading Pit during your day.
Thursday, October 16, 2008
Well, its been a busy day on my end so that's why I haven't been able to post till now. My trading and watching of the markets during today was cut short of the norm because of other obligations I had to attend to but nonetheless, that was one hell of a outside reversal, wasn't it?!
An outside reversal is a day where we gap down (starting lower than the previous days close) and reverse mid day to close near the highs and today those highs were substantial. From bottom to top today we rallied about a good 750 points or so. This kind of reversal pattern is quite bullish normally and I would expect it to give us a boost into the next few days.
My main observation today was that there seemed to be a "wall of worry" effect in the markets. Everyone was very bearish after we gapped down hard, we saw the VIX hit 81 at its peak early on, credit spreads narrowed (more so in the afternoon). And with all that there was nothing announced that was dramatically worse than yesterday. Initial claims actually came in slightly better than consensus, but still high. Yet, it seemed the negativity had soared overnight for no material reason. This is the "wall of worry" effect and it usually builds to a point where the fear just cant be justified by the price action so the markets start to grind higher and eventually it squeezes the shorts into covering their bad bets.
The rally really took off today after the key 220 pm ET reversal area that I watch for each and every day for a possible change in trend. We raced into the close to finish with the SPX around 946. We are still well below the 1020 level I am watching for this market to retest eventually and perhaps form that larger inverted H&S pattern on the 60min chart I outlined in yesterday's post. Its not out of the question that we race towards that level in the next few days, especially since weird things can happen on options ex day. I tend to think the market will be stuck in this current range (SPX 890-1000) for the next month or so. I dont forsee any huge rebound above this range, nor do I see a break of last week's lows occurring.
With that said, Friday is options ex and that day is famous for being one with choppy waters, and sometimes even better to not trade. However, if today's burst of buying continues you can see a heck of an exaggerated move to the upside. Trade safe and remember in a New York minute, everything can change!
Wednesday, October 15, 2008
Tuesday, October 14, 2008
So before I go into where I think the markets are going into midweek, let me just ask the monkey on his thoughts of a market rally.
Lol, well unless you go to that site then you have no idea what I'm talking about. Anyway, the rally monkey is always right and kudos to Adam at Daily Options Report for bringing it to everyone's attention one day before the biggest rally known to man.
Ok, seriously lol, not a slam dunk that we get a sustained market rally into the end of week but one thing could be pointing in that direction. Its options expiration of course, and that means the moves can be exaggerated to a degree. On these weeks I tend to see bullish action and the end of week moves follow the early week's to some extent as we watch the option shorts and longs battle it out for positioning. Options ex is notorious for whipsawing traders out of their positions so I would expect a choppy market these next few days with volatility abound.
As for levels the SPX opened up on steroids this morning as the futures were literally trading around 1060 (we were at roughly 860 on Friday morning to give you some perspective). We got a nice little selloff after the open but seemed like we wanted to hold the 1000 level and we did. Until about 1:30 pm ET. That's when I saw a bear flag developing on the 15min chart of the futures and got the signal to go short the market. It worked out well as we then dropped to nearly 975 on the futures before recovering most of that retracement by days end.
So overall, I would interpret this as constructive profit taking, and we didnt close near the lows which is always something good. I wouldnt be surprised if we retraced some more of Monday's insanity the next few sessions but as long as this market stays over the 920-940 area on the SPX I would expect this intermediate term snapback to feed upon itself and continue in the coming weeks. Trade safe out there.
Monday, October 13, 2008
Nothing like a nearly a 1000 point up day for the cheerleaders on CNBC to proclaim they were right on the bottom or whether this and that happened the way they called for. Folks like Dennis Kneale and other bobbleheads that flip flop like a fish on a slippery dock will probably feel vindicated this weekend at their NYC cocktail parties that they "called" the bottom in Citigroup or they "knew" the VIX wouldnt rise further. But what purpose does this actually serve? None.
See Mr. Market showed the average Joe a painful lesson today. Sell into the CNBC induced panic last week and then completely miss the mother of all short squeeze rallies in the face of watching the very people on financial television who panicked you outta the market last week, cheer the market all morning long as if the world changed over the weekend. This basically proves that you cannot and should not sell into any sort of market panic. If you have waited thus far to sell whatever you hold, then youre better off holding off the panic button and waiting for the snapback rally that invariably comes everytime. You most always get a higher price to sell for if you wait, if getting out is your objective.
I've never seen CNBC go this fast from panic to euphoric over one weekend. Its really incredible that they call themselves "unbiased" on those commericals they produce.
I would remind you that we just had a 1000 point rally in the course of a day. 104 handles in the SPX. Which is just unheard of. We should take a breather Tuesday...hell maybe even lose a couple hundred points. *Gasp*. It would only be healthy for us to retrace a third or even half of todays gains. Some would say we need a confirmation day but I would argue that we had about 3 in one today, lol.
It does look like last Friday was some sort of intermediate term bottom marked by all the classic contrarian signals. But whether or not we race higher from here is another question. I doubt it. We still have major issues. The unfreezing of the credit markets would be one thing that can give this rally legs. However, if I was a betting man, and I am, then I would say that we trade in a wide range thru year end and attempt to establish some sort of basing pattern with an eventual retest of last weeks levels probable. Bottom line is that this remains a day traders market and we like it that way!
Sunday, October 12, 2008
Friday, October 10, 2008
What would Axl Rose do in these markets? He would probably say go long the market because this G7 meeting over the weekend will solve all our problems!! Um no.
Unless something extraordinary comes out of this meeting over the weekend (which is what the market is pricing in now with the insane rally in the last hour of the day today that lifted us back to breakeven essentially) then I say we come right back down Monday morning to todays lows and finally have the long awaited Monday-Tuesday washout that smart folks like my main man Art Cashin have been calling for since June.
I keep saying that government intervention does not create stock market bottoms in the long term. It only provides a suckers rally that usually comes right back down. I only see one thing that could be announced from Washington DC or for that matter the G7 that would actually be constructive to restore confidence in the eyes of Americans and their investments.
They need to come out and say,
"We are buying SnP 500 futures because we will not let this market go lower. We have met with top money managers and hedge funds from Wall Street and have come up with a plan to clearly show this market has value and is a fundamentally long term buy. We will continue to buy US equity futures to show this value until it is recognized by all who have lost confidence."
The public is scared to own stocks. Period. Yes I know the credit markets are frozen and businesses cant borrow money but the panic in the markets is because of public fear in the eyes of the average investor in middle America. Fear that we have not seen in decades. I dont think 9/11 even measures up to this quite honestly. Confidence needs to be restored and you will not see that until officials put their money where their mouth is.
That being said, I believe we could see something positive next Monday. You should be moving your 401ks back into stocks right now, assuming its not already. This may be the greatest long term buying opportunity we have seen in decades. But you wont make money if you wait till things are rosy again. Dip your toes in now and then scale in further as we recover.
Since this s*** began I have said the bottom will come when all these morons on CNBC stop ASKING whether or not we have reached a bottom (Yes, Dennis Kneale and Power Lunch I'm looking at you).
If you study bottoms and extreme panic anytime the past 20 years, you'll see that bottoms are only formed once everyone is too tired of calling "the bottom". At true bottoms, everyone is in so much pain from riding their stocks into the ground that they have essentially given up on "bottom-calling". The last day or two has been the least amount of this questioning on CNBC, which tells me they have given up.
Its time to buy stocks people, dont tell me I didnt warn you in 6 months or 1 year.
Thursday, October 9, 2008
The selling continues and we are really seeing some really ugly levels on the indexes now. Yeah the brains on CNBC will tell you the Dow closed at 8279 but what really matters is the SPX. This broadest measure of the market closed today at 909. We are now down about 40% from the highs and getting dangerously close to retracing ALL of the gains from the prior bull market of 2002-07.
We have pretty much blown through all sorts of support like a hot knife through butter. Looking all the way back to the end of 2002 and early 03, I see some support at 900, 880, 875, and 850. Below that and we have serious problems. I dont think we will see those levels but we could see the high 800s Friday.
I fully expect us to gap down Friday as the futures are already at 895 as I type after a low of 881 when Asia opened down gi-normously. As of this posting all Asian markets are down between 4%-9% with Japan taking it on the chin at 9%.
This week it has been strictly a scalping market and I will be looking do just that again Friday. But honestly if you arent experienced and dont have to trade, then don't. This is the most volatility I think we will see for a very long time. The VIX topped at 64.92 today! Implied volatility in the options market is simply off the charts. We are setting up for a huge snapback rally in the next few days but I fear it wont be Friday. Looking back in history there are almost no occasions where a market bottom comes on a Friday.
Monday Jim Cramer came out on The Today Show to tell everybody to sell stocks NOW if they need the money in the next 5 years. Lol, ok where to start...first off Jim is now one of my favorite contrarian indicators out there. Love the guy for his passion, and he did get me into this market when I first started out but damn how bad can your timing get. Second, we are down 35% from the all time highs one year ago and NOW Cramer tells folks to sell...lol you cant make this stuff up. Don Harrold sums it up nicely in the above video.
Cramer throwing in the towel down here at DOW 9500 might just be the greatest buy signal of all. What bugs me is that he loved the market all year and kept people thinking that with every rate cut we get the better off we are. Which is not the case. He kept people in the nat gas and commodity plays wayyy too long and when a poor Cramerican called his show and asked what to do about their losing positions he said buy more on the way down (always a losing strategy after a bubble pops).
So the majority of his sheep rode losers into the ground and NOW he tells them to sell if they cant take the pain? Come on Jimbo...
Wednesday, October 8, 2008
Tuesday, October 7, 2008
Today was as textbook as it comes. It was steady in the early going only to break down under 1060 on the SPX just about the time Bernanke started speaking. Bush came out and delivered an encore of NOT restoring confidence, and then the market tanked even further after midday.
As you can see from the 5min intraday chart it was a great opportunity to sell the futures on every lower high that was met with resistance and downtrending 20 and 50 moving averages. These patterns are bear flags and are high probability setups to enter trades in any market, or stock. We had numerous bear flags on the index today and each one resulted in a breakdown and wicked selling into the close. If you can time this sort of pattern with an indicator as reliable as the stochastics as shown at the bottom of the chart, you will have great risk/reward trade time and time again. And the name of the game is to always find the best reward for the least risk. The trend is your friend and until a trend reverses you have no business trying to go against it. Your probability of success in trading will rise drastically if you trade in the direction of the trend.
So have we bottomed? I dont know but I will try to focus on that topic in my next post. All I do know is that it is way to late to go short on anything and a bit too early to go long. So watch and wait. Develop your patience and discipline. Scaling into positions might be a good idea the next day or two because I think we are very close to a big snapback rally. This is definitely a daytraders market.
Monday, October 6, 2008
Sunday, October 5, 2008
I am primarily a short term trader focusing on swing trading stocks and options, as well as day trading the futures. I have a passion for learning about the markets and love to encourage people to get involved in the trading/investing game, because in my opinion its the greatest game on earth. Through this site, I plan on putting all my market thoughts and actions that I share with friends and family into one convenient online location so everyone can come together to one place and view my latest posts day or night.
Who knows, maybe you can even learn something along the way :)