Slope Of Hope with Tim Knight

Bear with Caution (by Pikertrader)

Hey its Pikertrader, first guest post but have always commented on the site especially back in the day when Tim hid his love for AJC.  I remain cautiously bearish right now and have very tight stops for a few reason. 

Day ja vue:  Remember last July, when everyone was discussing the same head and shoulders pattern as they are now.  This famous pattern's neckline broke and all the bears cheered only to be beaten like a baby seal for the next 6 months as the market rallied on "green shoots", amazing bank earnings and just a economy that grew on good ole fashion productivity! (Bull$@#)

Second caution sign comes from the daily chart. MACD is showing some signs of bullish divergence, as it fails to make new lows with SPX. 

Lastly there is a strong bearish sentiment in the market shown by the Put/Call Ratio.  And we know the Masters of the Universe don't let the crowd win.

So remain cautious because if this is another Head and Shoulders, fake you out and beat the bears pattern, it won't be fun being on the short side. But divergences and past patterns aren't crystal balls so anything could happen, like another 5%- 7% decline to the 980-950 level.   

For more daily charts and updates after you have read all of Tim's stuff go www.pikertrader.com

Heads, Shoulders, and Poisons

Why is everyone expecting the head and shoulders pattern to fail, thus delighting bulls and mauling bears? Because it failed last summer, that's why.

And that's a pretty dumb reason to expect failure.

I mean, if people honestly expect everyone to get faked out, wouldn't a true fake-out be for the head and shoulders to fulfill its prediction? After all, "if it's obvious, it's obviously wrong", right? (Tim rolls eyes). I think people are over-thinking this, much like this clip:

Shorting Washed-Up Technologies

Although I base my trading on charts, I get some of my ideas simply by observing companies which I think are past their prime and seeing what they look like from a chart perspective.

For instance, I've always thought Yahoo was a 1990s has-been. I'm flabbergasted they are as big as they are, frankly. Can you imagine what the morale must be like there? They've got a CEO who seems to drop F-bombs at every opportunity, and everyone who works there knows that those who ditched Yahoo and switched to Google have made themselves rich with stock options, while YHOO stock has been a complete dog.

Another similar stock I decided to look at - - and short - - is Research In Motion (RIMM). Simply stated, where I live, everyone uses Apple products. If you don't use an iPhone, people wonder what's wrong with you. Running around with a Blackberry, typing little emails with your little thumbs just makes you look like a dork. So RIMM has become ungodly uncool over the years, and that compelled me to take a serious look at the chart - - and short it.

There are other tech stocks in a similar vein that I'm short (Unisys, for instance), but I'd love to hear your ideas. What other tech stocks are yesterday's news and have been left behind by craftier, more innovative outfits?

Thank You For Q2

Hi Everyone,

This is going to be just a quick thank-you note to all the Slopers. I am still up in the Sierras, typing this from the lodge (where WiFi actually works). It was actually sort of comic today, since I had to keep running from the little beach we have on the lake here back to my computer to check positions and close out the quarter.

Anyway, this is quite sincere - - I want to thank everyone for being here over the past quarter. When Q1 ended, I was pretty despondent. Things weren't going well. I was losing money. I was questioning myself as a trader. I was really starting to wonder what I was going to do.

Through a combination of persistence, deep thinking, fortitude, and gathering together on a daily basis with all those who participate in this board, I was able to turn things around. With all of its ups and downs - - including an ungodly high price set in April on the indexes - - this quarter has turned out to be a winner. I feel 500% better about life, about trading, and about my prospects.

And, even with one hand tied behind my back this week (being on "vacation"), I've been trading pretty decently. Now that we've broken the neckline, I'm not sure if it's going to be party-time or if this is just a cruel fake-out. I am, however, 100% short right now, with a large quantity of carefully-chosen positions.

My point, however, is to thank this community for its existence, particular the dozen or so crazy regulars (Leisa, Iggy, Market Sniper, Vicous, FIC, and all the rest of you lunatics). I owe a special thank-you to Leisa, who was especially helpful in the "dark times" of Q1.

You guys are terrific, and I hope you had a good quarter too.

- Tim

The Informational Advantage- What do you Know that Other People Don’t

[Editor's note: I'm out for the balance of the day, and I will not return until after 6 p.m.  This is all that I have in the hopper, but I have a comment cleaner that I think that you will find useful]

Bank of Japan Deputy Governor Kiyohiko Nishimura discusses "informational advantage" this week at the Lujiazui Forum on economics and finance in Shanghai:

"In my understanding, the Volcker Rule [proposed legislation restricting banks from making certain speculative investments] is designed to deter banks from taking excessive risk in capital markets, where volatility is inherently high and in which bankers do not necessarily have informational advantage in predicting market developments.

Rather, the Volcker Rule urges banks to return to their traditional stronghold of commercial banking business, in which they can utilize their informational advantage based on long-term relationships with their customers."

Informational advantage is a key investment concept. What do you know that other people don't?

If everyone knew everything, investment wouldn't exist. The market would price all investments (stocks, bonds, commodities) perfectly. There would be no room to buy something under-priced and then sell it at a profit after it goes up.

But (fortunately or not) we live in an imperfect world. Some people know more than others. Investment opportunities arise when people who know less dominate a market. The lack of knowledge causes an under-pricing, which more knowledgeable buyers spot. Eventually the wider market sees the unrecognized value and the price rises, making money for the early buyers.

(Investment opportunities also arise when people with good knowledge fail to act rationally on what they know. This happens during panics and manias. Buyers and sellers know better, but their emotions drive them to set the wrong price.)

The key is recognizing where you hold the informational advantage.

As Deputy Governor Nishimura points out, banks' "fountain of knowledge" is the relationships they hold with their customers. Banks (by definition) hold detailed financial records about the people they deal with. Studying this, it's possible for a bank to make better judgments than an outsider about who is likely to pay back a loan and who is likely to go deadbeat.

This means banks have a leg up on everyone else in the loans business. Do they have a similar "insider view" of the stock market, where many of them have been increasingly investing over the last several years?

Maybe in specialized cases, but there's nothing inherent to the operations of most banks that would give them more information about stocks. They know just as much (or less) than investment funds, brokers and even individual investors.

The informational advantage can be especially strong in natural resources. Renewables, mining and petroleum are sectors understood by a relatively small number of professionals. Creating potential for mis-pricings of resource assets and stocks.

Teck has a huge informational advantage in analyzing zinc deposits. Built up over decades of expense in analyzing every ore body they could find on the planet. DeGolyer MacNaughton has an informational advantage in U.S. shale gas. GeothermEx (and now Schlumberger) has a big advantage in assessing geothermal prospects.

There are specialty funds that retain professionals from all of these fields in order to gain informational advantage. There are investors who travel to projects worldwide 340 days of the year to gain informational advantage. There are brokers who socialize with the industry's inner circle for most of their waking lives in order to get the informational scoop.

If you're investing, what do you know that most others don't?

Source: http://oilprice.com/Finance/the-markets/The-Informational-Advantage-What-do-you-Know-that-Other-People-Dont.html

By. Dave Forest

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Next Post will be at 6:00 p.m. EDT. You can find it by clicking on the New Post below. Be a friend and shepherd someone along.....

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Clarifying Mid-Term Downside Targets (by Facesincabs)

Clarifying Mid-Term Downside Targets

 

Now that 1040 on the $SPX has been violated (on Tuesday), I am beginning to clarify downside targets for a possible downside move.  You will notice that I am starting with a simple weekly chart using Elder's Impulse Chart settings (below).  As time progresses, I may find a need to move down a time frame to a daily chart and/or change my chart settings to refine and/or further clarify these targets.  I also like starting with the weekly chart because it helps us focus on the big events and reduce noise.

  (weekly)

 

Using this weekly chart, I would first point out that the tape action around the 1131 area technically signaled the end of the rally by rejecting its 200 EMA (see arrow) and then confirmed that rejection with a large bearish engulfing candlestick.  Some might consider this a right shoulder in a larger pattern, but I do not.  I basically see a "broadening top".

 

I would add that the action down from the top has clearly translated into a series of shock events for the markets (including fat finger day).  Personally, I have been trading the shock events rather aggressively for two months now.  It is a strategy that has worked well for me, but I would suggest that eventually those opportunities will disappear.  I am not going to be surprised by a light volume, rather boring, and meandering tape during the rest of the summer.

 

Should fierce selling visit us again and a major decline resume, my first downside target (and major test of support) for the $SPX is now 975.  This level not only corresponds with the August 2009 lows, but it also represents a 20% decline from the April 2010 high.  My lowest downside target (at this time) would be the 62% retracement of the recent rally near the 878 area (which also corresponds with the July 2009 lows).  Given the light volume expected over the summer, I would note that a move down could take several months.

 

Comments About My Perceptual Basis

 

Why is the 975 area important to me?  Because a decline greater than 20% would invalidate the currently perceived bull market.  There are still technicians out there that see "their" bull market continuing due to the large move made in the March 2009 rally.  Therefore, psychologically 975 is an important level to violate in the bull vs. bear debate.  I would similarly note that a market decline could easily end just above 975 (e.g., saving bulls from destruction of their perceived bull market).  So .... if you think that 1040 has been a difficult area to break, just wait till the $SPX gets near 975.

 

Finally, it may also be important to clarify here that my general personal perception is that we are in a secular bear market (going back to 2000 or so).  Therefore, the March 2009 rally is actually a counter trend rally, and we are currently in the process of resuming the broader secular bear market.

 

Next Post will be at 4:00 p.m. EDT. You can find it by clicking on the New Post below. Be a friend and shepherd someone along.....

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Some Relief for Energy?

[Editor's note:  Please see important note below on next post timing]

I think the bull run nonsense of 2009/early 2010 is totally kaput, but I also think there are so many battered issues that a bounce of some note is in the cards before long. Energy and retail seem like two sectors prone to the most relief.

Looking at the DIG (the ultra-bullish on energy) is a somewhat compelling case. For myself, I only have one large long now - XLE - but otherwise it's shorts across the board.

Next Post will be at 2:00 p.m. EDT. You can find it by clicking on the New Post below. Be a friend and shepherd someone along.....

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Island Reversal on BP

(editor's note:  see bottom of post for important information)

I mentioned the idea of buying BP yesterday. It's up about 5% or so since yesterday's post.

The notion is even stronger today, because BP exhibited a beautiful island reversal pattern. This is usually a very strong buy signal.

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Next Post will be at 12:30 p.m. EDT.  You can find it by clicking on the New Post below.  Be a friend and shepherd someone along.....

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Hole in Wall - Short Trade Set Up (by Facesincabs)

Short Trade Idea

 

A trade set up that I have used in the past is called a "Hole in the Wall".  I like to look for these trades especially after a major shock event day, like Tuesday.  I would note that both "Jack Damn" and I have mentioned this trade idea in the past week, so I thought that I would elaborate and share several charts with its features. 

 

With the gap down on Tuesday morning, we had several charts displaying the characteristics of this trade set up.  Here is a list that I noticed on Tuesday evening.  Please note that not all these stocks display the full features of the trade set up (e.g., some are just experiencing shock events), but AKAM and TIE provide the best snapshot pictures of a "hole in the wall of worry".

 

Here is an example that I will probably trade ... (click ticker for on-line chart)

(CTRP)

 

AKAM

CTRP ** see example

ENZN

FMCN

FXI

ILF

JOYG

LVS

SNDK

TIE

VIT

WYNN

 

You can get a description of the trade set up here ... http://www.hardrightedge.com/tour/gap.htm ... and you can read in depth about the trade set up in Alan Farley's book (Master Swing Trader).  Here is what I generally do with these trades:

 

1 - Make sure that 50% higher volume is present for the "hole" day.

2 - Make sure the stock ends the "hole" day in weakness.

3 - Lay down fib grids and look for retracement areas into the "hole" or gap.

4 - Compare these fib lines with a new fib grid of the entire wall of worry.

5 - Select the ones I like technically, enter the trade upon further signs of weakness.

6 - Set my stops using #3.

7 - Set initial targets using #4.

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Leisa here: I took the liberty of creating a chart book for you using a 60-minute chart for FIC's picks above. You can find it here

I also created this list in FINVIZ for you. You can find it here.

Top 10 Considerations when Picking a Stock

If you are actively involved in trading or investing, it’s inevitable – someone will ask you, “How do you pick a stock?”  The corollary is that those who like to watch Jim Cramer won’t wait to be asked.  They have stocks they want to tell you all about.  Followed by a “booyah” or two.

If you’ve been trading for any length of time with any measure of success – then you likely have your own system.   Maybe you’ve taken the time to write it down for meditation and refinement.  This is one man’s hack at that.  My system uses a trading timeline of usually at least a week, but the position could last much longer or be closed quickly.  It could be called swing trading, it could be trend following.  I’m not a day trader – I have a real job that I really enjoy and can’t/don’t want to follow every tick of the market.

Notably absent from this discussion will be when to close the position.  Profits, of course, are locked in at the close of the trade – but really they are set up when the trade is initiated.  Entry into any position must also include firm and clear expectations, with contingency plans if things turn out otherwise.  Those considerations will have to be the topic of another article.

Today, I’ll write from the bullish perspective – but this method can be inverted to identify shorts also.

1. Market Supply and Demand: I always start here.  Are buyers or sellers in control right now?  Is the tide changing?  My tools for measuring this are bullish percents and cumulative market breadth.  If the New York Stock Exchange bullish percent is rising, then demand is overpowering supply and prices must rise over time.  The reverse is also true – a falling NYSE bullish percent with supply overwhelming demand will lead to lower prices.  The turning points take some care to navigate, but established trends (especially as they pass the 50% mark in either direction) make for high confidence.  By the way, if you don’t understand how bullish percents work I highly recommend Tom Dorsey’s excellent book “Point and Figure Charting“.  I also mention cumulative market breadth, of which McClellan breadth is a variation.  This is a faster moving indicator than the NYSE bullish percent, and serves as a good confirmatory reference.  Again, the trend is key: I prefer the weekly chart of cumulative market breadth compared to a 5 to 10 week moving average.  Cumulative market breadth above the moving average shows that buying pressure is causing stocks to rise.  These indicators should tell me which side of the market to be on: long, or short. If supply is in control, I don’t want to look to buy long positions – I’d be swimming upstream!

2. Sector Supply and Demand: Same method and tools listed above for the broader market, applied to the sectors.  Just because the broader market is controlled by demand or supply, doesn’t mean that all the sectors are experiencing the same bull or bear market.  The exercise of looking at bullish percents or cumulative  breadth trends within each sector often doesn’t so much identify which sectors to invest in, as which sectors to currently avoid.

3. Sector Relative Strength: Having determined which side of the broader market to trade on, and narrowed down which sectors are of immediate interest – I want to focus on the best and strongest sectors.  Better and stronger sectors will gain value faster than the overall market, as well as their peers.  Put another way, if you’ve got a sector that shows demand to be in control within a bull market – but it’s not outpacing the market – maybe you should put your money elsewhere.  I should note that this isn’t an eternal chasing of performance.  I don’t want to be late to the party, but I’ll try to figure out which one looks like it’ll be more fun and then hang out there.

4. Screen for Fundamentals: Quality over penny stock speculation here.  You may have your own fundamental criteria for ratios like P/E, or you may prefer to use the ratings of a research firm like Standard and Poors.  Although the suspect and capricious debt ratings of S&P may be partially to blame for the housing bubble and subsequent recession, their company reports can help to weed out companies with obviously bad balance sheets.  It can be a bit of a beauty pageant to determine which of several leading companies have the strongest fundamentals, but the rest of the trailing pack is often easier to sideline.  Many online brokerage sites will give you access to these sorts of reports, I like to look at (on the long side) S&P four and five star rated companies.

5. Individual Supply and Demand: By this time I generally have a short list companies to consider, from a few to a few dozen within any given sector.  Here I like to look at all the charts iteratively and in somewhat quick succession.  This helps me to identify trends within the group, and also outliers.  The first thing I’m looking for is a buy signal on the point and figure chart.  I like P&F charts, as they clean the noise out of a chart and help “see the forest for the trees.”  I’m also starting to eyeball if there are clear entry/exit points on the chart, but there will be more on that in #7, “Support and Resistance”.  Before moving closer to buying, I really would like to see that the chart is on a P&F buy signal, for that is a clear and unambiguous identification that demand is overpowering supply and driving prices higher.

6. The Trend is Your Friend: From the point and figure chart, I’ll move to looking at a weekly and then a daily candlestick chart.  This part isn’t voodoo, it’s just being able to note the intermediate and short term trends.  I don’t want to fight the trend.  If I’m looking to buy, I want a weekly chart that shows steadily increasing prices.  Perhaps the chart fell recently (right now, most have).  Since the fall, has the bleeding stopped?  Has it established an unambiguous uptrend since bottoming out?  Is the overall line sloping up or down?    Here’s my favorite: if I didn’t believe the market was currently controlled by demand, would I be willing to short this stock? That question right there can really shake up the decision process and weed out “wish trades.”  This step and the previous is where I dismiss a lot of charts.  It’s common to be afraid to miss out on a lucrative entry – but lost opportunity is always preferable to lost capital.

7. Support and Resistance: This step could also be titled risk vs reward.  It is key to identify where I want to enter and then eventually leave the position.  Chances are (and I’ve made this mistake often), RIGHT NOW IS NOT THE BEST TIME/PRICE TO INITIATE THE POSITION.  Think about it – what are the chances that this process of research has not only identified the right stock, but you are also coincidentally poised at the ideal time to buy it?  This occasionally happens, or you could be near the right price.  In this game you want every advantage possible.  Again, lost opportunity is always preferable to lost capital.  It’s far better to have entry orders never execute because the stock never met your limit price, than to buy immediately and find that it was really at an inflection point and now in a downtrend.  Bottom line – if the stock has been wiggling in a channel, I should wait and try to grab it at the next swing low.  If it’s in a steadily plodding up trend, then I don’t wait for a dip that may not happen.

8. Insider Trading: I don’t start my process at insider trading, but I like to look here to identify potentially hidden gems.  The only insider trades that will really catch my attention is unusually large purchases – I don’t care about award of options, small purchases, or even sales.  On the bullish side, insider buying can be a real confirmatory signal.  Look, if some director or vice president recently parked a large amount of personal cash in their own company’s stock – then I’ll share some of that confidence and possibly prioritize this trade.  If there are no insider buys on record, or even just sales, that won’t stop me from buying.  Why don’t I care about insider sales?  It’s doesn’t send the same clear message as buying.  Who knows why they sold (perhaps even a large amount of shares)?  Maybe she’s buying a McMansion, perhaps he has to pay his kid’s college tuition, or somebody just bought a yacht.  Can’t tell from the SEC filing.

9. News and Rumors: Has there been a recent, dramatic price move by the stock I’m considering?  A gap up or sudden cliff, followed by trading in a tight range?  Check the headlines.  It could be that there’s something that the market knows about this company that you don’t.  These events could drive it to temporarily outperform the market, but that pace may not be sustained.  You have heard the axiom, “buy the rumor, sell the news”.  That’s great if you’re in a position to know the rumor in advance.  I don’t try to find those “hot tips”, but I do try to have a general idea of what’s driven unusual price activity.  If it’s not abundantly clear, I’ll avoid initiating that position.  Many times a crisis could have driven a stock way down, but once the storm has cleared the chart will pick up its previous uptrend.  That’s actually a really nice setup, because that publicity spotlight serves to expose many of the dark corners of the company’s operations – and they could be stronger after the housecleaning.  For this reason I’m watching BP.

10. Company Calendar: This is one last sanity check before initiating a position.  Is the company about to release a quarterly earnings report, and do those reports have a history of driving large price moves?  Is the company involved in a widely publicized class action lawsuit with a verdict expected any day now?  Is the stock I’m considering shorting a big dividend payer, and about to go ex dividend?  Those first two considerations may actually be reasons to initiate the position before the news release, but then I have to ask whether I’m gambling or trading.  The dividend question is one to consider on both the long and short side – and it could be the decision point, or no big deal.  A few minutes research can prevent being left holding the bag.

You’ll note that nowhere in this list is “company was the topic of a cover story”, “bottom fishing at the new 52 week low”, or even “mentioned by Jim Cramer”.  Especially not the latter.

I welcome your comments and insights, thanks for reading.  Please feel free to subscribe to my writing at AbjectAvarice.com .