Archive for November, 2008

Thanksgiving Week….

November 26, 2008 Leave a comment

Last week I looked at the Big Idea items that were still pending in order to get the uncertainty out of the markets, and we did get some items settled at the end of last week. For starters President Elect Obama named his economic team, which was well received by the markets. In addition he started pushing the notion that we will get a stimulus package very soon into his administration – once again the markets like that.

It feels like everyday we have had politicians talk about the TARP, stimulus package or something about the bailouts to Wall Street as well as Main Street. Despite all the changes in the TARP plan, the market has come to terms with the fact that the Government is going to throw liquidity at the problem. That was clear with the Citibank capital injection, and will probably be true next week when GM and the car companies come looking for cash. Also we have new programs that are helping companies, mainly financial institutions, raise capital. The last one was the FDIC backstopping debt offerings from GS and MS, to be followed by other issuers. GS raised $5bn in 3 year paper rated AAA, MS did the same thing. Everyday it seems that the FED, the Treasury, or the FDIC is doing something to inject capital into these institutions. As a tax payer you start to really wonder where this will take us… especially when you see the headlines from AIG, they get a $40bn capital increase from preferred shares sold to the government and they in turn use the proceeds to pay $25bn in loans from the government (yes the same government)… NICE deal.

The amazing thing is that for now the market is taking this set of news in stride. We had a nice rally at the end of last week, and we haven’t really given much back. The shorts have to cover eventually, and C at 3 or GM at 3 or any of the other stocks at depressed levels may be good levels risk reward wise. But you never really know,

Happy Turkey to all… Enjoy .. and as you know Keystone Traders will not be trading on Friday so have good long weekend.


Fear on Wall Street

November 22, 2008 Leave a comment

When will the selling end?

A question many will ask but nobody knows for sure. The Standard & Poor’s 500 index closed today at 752.44 breaking through levels not seen since 1997.  You could just feel the fear based on the intensity of selling and the increase in volume. As short term intra-day traders, we can not analyze all the news that Wall Street has to decipher. In fact, the amount of negative news hitting the news wires has done nothing but to put more panic into the american people. Every time Henry Paulson (  United States Treasury Secretary) gives another speech, the market sells off 300 points. Any time any politician gets on tv, the market tanks.

We are in a trading environment where we can not listen to the news and interpret it. Instead we must understand the market psychology. There is fear. Lots of fear. This means that there will be people selling! Selling their stockat every opportunity they have. We must use our charts to tell us when we may come into resistance, but until we do, we must assume that we will sell off.

Occasionally, we have rallies. These rallies will be nothing more than a few bottom feeders who feel that we have finally bottomed out. This buying will than create the short sellers to start to cover their positions which will then create more buyers. (usually the longer term investors who once again don”t want to miss out, which then creates the shorts to cover their positions. Until we cross over the 20 period moving average on the dow and hold those levels, it is just another bear market rally.

We have sold off almost 50% on the dow from the all time highs, so my feeling is we are closer to a bottom, however, the negative sentiment will not get better overnight. my belief is that once President Elect Obama gets into office, sentiment will get a bit better.  a new voice with a new vision will at least give the american people the hope that we ae not in a doomes day scenario, which again will create these bear market rallies.

The bottom line is that the recent market volatility will not disappear anytime soon. There will be those ebbs and flows. For us short term traders we must follow the intra-day order flow, however, we must realize that we are in a recession and that means the psychology of the people, is negative which will ultimately cause more selling, every time we get a rally.

Day Trading Technical Analysis

November 21, 2008 Leave a comment


Day trading Technical Analysis: 

On our 11/7 2008 Tech letter we pointed out key support levels along with fib levels.  Well the market has breached those levels and has headed lower. Everything is trading together both commodities and stocks.  Once a short term bottom is in place we should see both rally.

One thing to keep an eye on is the US Dollar.  During this melt down the dollar has been extremely strong.  Once the dollar puts in a top then the stock market and commodities should put in an intermediate bottom however no guarantees.

Keep an eye out for a short term snap back rally fueled by short covering and momentum traders. If this does occur we can see a sizable retracement.  Below are some key levels for your review.

 Dow Industrials:      Support: 7118 –   Resistance: 8000

Fibonacci support levels:  38% – 9083, 50% – 8907, 61.8% -8730

7100 is 50% from the 2007 highs.

7350 is 50% retracement from the 1974- 2007 bull market.

7100 -7400 represents 1998 -2002 lows.

S&P 500:   Support 750 – Resistance at 850

Fibonacci support levels:  31.8%-811.40, 50%- 831.56, 61.8% 851.71 100% – 916.97.  S&P was in a descending triangle and broke support.  It now measures down to the low 700 level. It does not mean it has to got there.

Spy:  Support 75 – Resistance 83.40

 This level needs to hold otherwise we will see more downside pressure.

QQQQ Support 2 5   Resistance 28

This level also needs to hold otherwise we will see more downside pressure.

Quote of the day: “Remember that stocks are never too high for you to begin buying or too low to begin selling”

Jesse Livermore

Keep in mind the trend is your friend.  Have a great day!!



day trading is a skill, not a job

November 17, 2008 1 comment

Most people who come to trading for a living are most likely leaving another job. They are usually leaving a salary or a  position they earn their pay by the hour. Believe it or not this is one of the hardest obstacles to overcome in your pursuit of trading for a living.

In order to NET money you must first adopt the mindest of being paid for your skill, your ability, not for your time. You must start to understand and believe you have a talent and you can be paid for your talent.

Doctors get paid for their skill, lawyers get paid for their skill. In order to net money consistently you must focus on mastering your profession, not how much time you spend at the office.

Be a professional and stop trading your time for money. Trade your expertise for money.

Bear Market Rally

November 11, 2008 Leave a comment

Yesterday morning the markets gapped open on the annoncement of China’s $586 billion economic stimulus package.  The dow reached an early morning high of 9133 which so happens was the 20 period ma on the daily chart.  The markets had rallied about 1300 points inthe last couple of weeks going into the election. There was some legitimate buying, meaning there were some great opportunities to buy some quality stocks on the cheap. This buying in turn created a short covering rally, which then created some more buying. This buying was now created because of the “missing the boat” scenario in which retail investors feel that they are going to miss the great opportunity.  The fact that the market sold off yesterday at resistance on positive news is a great reason to believe we have reached a short term high and we now can begin to feel more comfortable with our short positions. There is sill a lot of unanswered questions:  will ford and gm be bailed out or in fact possibly go bankrupt? Is goldman sachs hiding bad assets on their books?  Is the unemployment rate going to go to 8% as many believe?  Until we have some of these answers the markets are going to gyrate erratically as traders jockey for position. For us, we will follow the order flow. Right now the order flow is predominately to the downside, however, we will expect sharp moves to upside so we will always have trailing stops on our profits

Proprietary trading: different styles

November 10, 2008 Leave a comment

When managing a proprietary trading firm, one of the most important parts of our business plan was to acknowledge the fact that one style does not fit all when it comes to day trading. Everyone does not have the same risk personality. Therefore to build a profitable firm Keystone had to offer more than one trading style. After we bring on new traders it is our job to determine to the best of our abilities which of the two dominant trading styles does this person seem to be a fit?

There are two methods of risk for short term trading, it doesn’t matter what security you are trading (Keystone Trading Group only trades stocks at the moment). One method is to trade larger size in very liquid stocks for short term moves. The profit and loss on each trade is very well defined. You are not in the market for very long periods of time. Downside risk is usually a very obvious short term reference point which is what allows the short term momentum trader or scalper to trade more size per idea.

The type of trader who gravitates to this style of trading is usually someone who does not have a high tolerance for risk and also wants instant gratification. the upside to this style is that it is very easy to learn and one can start to earn money consistently in a relatively short period of time. If there is a downside to this style it is the profit potential per trade is techincally limited.

The structured method of this style makes it a great way for new traders to earn money while getting experience and it is also a way for experienced traders to earn a consistent living without doing hours worth of research. One thing that should be remembered before you take on this style, you must be disciplined and you must make quick decisions. You will be trading larger size per trade with a very defined stop loss, if it hits your number get out immediately.

The other style of trading that we teach is what would be called position trading. We would boil this method down to one simple concept. Is there order flow? Is there a recognizable trend right now (1-5 days) that you can build a position for? Is there an opportunity for you to put on small trades until one of those trades follows through so that you can add to your shares as it moves in your favor.

This style of trading requires discipline also but it is a little different type of discipline. This time it is the discipline to do nothing. Nothing to wait for a high probability trade to unfold and nothing when you are in a good position. You can’t get out of a good trade too soon, you must be patient to let your profits ride. You must have a few trades that you can “ride’ with the full position you accumulated so that you can make up for all those small losses.

The toughest part of this style is to truly understand that you don’t need many winning trades per week or month to earn a good living. As new traders are learning this they usually over trade because they think they must be involved to make money.

If you know the trade expectation before the trade (scalp or position) you will know how to work your share size. You will know your share size because you know the expectation for the trade before you place the trade.

Day Trading Technical Analysis

November 7, 2008 Leave a comment


Day trading Technical Analysis: 

Now that the elections are over it’s back to reality.  The markets staged a countertrend rally then a massive two day selloff.  The Dow and the S&P had formed bearish triangles and when that happens it usually favors more downside because these types of patterns generally trend in the direction they were formed.  

There can be two scenarios forming: One being the bullish case we rally from here and take out 8730 in the Dow.  we could see a rally to 10,500.  The Bearish case would be have a small bounce to the 9200 area then reverse and  take out the October lows. Below are some key Fibonacci retracement levels and as you can see they have been playing out nicely.


 Dow Industrials:      Support: 8200        Resistance: 9200

Fibonacci support levels:  38% – 9083, 50% – 8907,  61.8% -8730

If we lose the 8730 we could see the Dow at 8160..  The Dow needs to recapture this level quickly or risk more downside pressure.

S&P 500:   Support 850   Resistance at 986

Fibonacci support levels:  31.8%-946.32, 50%- 927.25 , 61.8% 908.17 .  If we lose the 900 level we could see more downside pressure.

Spy:  Support 85 – Resistance 95

Fibonacci support levels:  31.8% – 94.38 , 50% – 92.38, 61.8%- 90.38 . This level needs to hold otherwise we will see more downside pressure.

QQQQ Support 29     Resistance 32

Fibonacci support levels:  31.8% – 31.75, 50 %- 31.05, 61.8% – 30.35.


Quote of the day: “Remember that stocks are never too high for you to begin buying or too low to begin selling”

Jesse Livermore

Keep in mind the trend is your friend.  Have a great day!!