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Archive for April, 2010

Current Market Conditions

April 28, 2010 Leave a comment

Over the last few days the overall complexion of the market has seemed to change a bit.  The price action has seemed heavy with some very strong down moves in previously strong stocks and sectors. 

Now obviously I’m no expert on where the market is going.  For all I know the market may keep grinding higher and we could have a continued move to the upside.  But in my eyes the market seems to be entering an indecision/distribution phase.   This does not mean I am changing my long bias in the market, but I will begin to nibble on the short side more and more.  Looking at some sector performance, if we start to pullback a bit I may look to start some short positions in the financial sector as then have shown some weakness across the board.  This weakness may be caused by the unknown about what is going to happen with the financial regulation bill, but that is where the complexion of this market is changing.  Over the past year this market has shrugged off any bad news, now the bad news seems to be sticking and the selloffs are very aggressive.  The stocks in the financial sector that I am looking at are JP Morgan(JPM) and Morgan Stanley(MS).  There is a lot of support levels to get through so I will be initiating any of these trades to the short side with lower share size and expectations will be lower for the time being. 

Another sector that I am looking at if the market gets weak is a sector that has already been weak for the past year.  It is the agricultural chemical sector.  The stocks that I’m personally looking at are Mosaic(MOS), Agrium(AGU), and Monsanto(MON).  All of these stocks are in downtrends already so you have to believe that if the market starts a downtrend the momentum to the downside should increase. 

Even though it is very easy to say we have hit a “top”,we have to keep a bigger picture idea of where we are in the market.  We have been up for basically the last year with only small bumps in the road.  A pullback would not be entirely unexpected.  Even if we do pullback we are still in a bull market.  As intraday traders we have the flexibility to take advantage of any trend that the market gives us, but you need to trade with caution during these indecision phases.  Even though the market has started to feel different it is not a guarantee.  The only difference I will be making in my game planning is to include a few more short scenarios but I will still wait for the market to tip its hand.  Best of luck with your trading. 

Kyle

Importance of Finding Stocks or Sectors in Play

April 26, 2010 Leave a comment

As the market continues to grind higher I hear more and more from traders about the lack of opportunity.  Honestly I think these traders are looking for an excuse as to why they are not making money.  This market continues to provide money-making opportunities to traders who are doing well thought out research and coming up with a detailed plan for the day. 

As the market has slowed recently I have found that most of the opportunities are limited to certain sectors that money is either flowing into or out of during a certain timeframe.  Most of my money has come when a sector has a well-defined trend, where I know that I want to be long or short, and keeps that trend for a week or two.  The best example I can find of this has been the gaming sector since the beginning of March.  I had a game plan for the stocks in this sector and basically was just looking for areas to get long.  Some days the opportunity was there and some days it wasnt, but when it was there I made what I was supposed too.  Another example has been the homebuilders sector over the past week.  Stocks like Hovnanian Enterprises(HOV), Lennar(LEN), and KB Home(KBH) have made very strong moves to the upside. 

The importance of finding sectors in play is that you start to get a certain feel for how the stocks in the sector move.  I’m at the point now that I can tell if the casino sector is in play during the first few minutes of the day.  You know what levels the stocks in the sector have to be at to be in play, and you know when the order flow is just noise. 

Identifying where the money is and isn’t is one of the most important things a trader can do.  Finding institutional order flow and following can lead to bigger moves and easier money.  The key is finding these sectors in play, identifying them early, and to keep trading them for as long as they are giving you opportunity.  A good free site that I have been using to find different sectors in play is Finviz.  I go to the groups tab and search for 1-day, 1-week, and 1-month performance.  I find the best and the worst performers than scan for stocks that fit my own personal parameters.   Then lastly I rip through charts for the stocks in that sector and come up with a game plan.  Hope this helps everyone in coming up with some trade ideas and best of luck in your trading. 

Kyle

Greece: One More Foot in the Grave.

April 22, 2010 Leave a comment


And the hits keep coming for Greece. Today, Ratings agency Moody’s downgraded Greece’s sovereign credit rating from A2 to A3. They also placed it on review for further downgrades.
The Euro sank to 11 month lows breaking and then bouncing off an important support level. It made it as low as $1.3258 and in the last month has held this level. I will be watching for this level to break and hold to see a continuation of it’s down move and possibly a significant pullback in the US markets.

EUR/USD breifly broke support level after Moody's downgrade.

Eurostat, The European Union’s statistics agency, pushed up it’s estimates of Greece’s 2009 deficit to 13.6% of GDP from Greece’s earlier projection of 12.7%. Eurostat said they had concerns of Greece’s budget data.
Meanwhile in Athens, the streets are still filled with protesters and riots after police recently killed a 15 year old boy during the clashes. Window’s to shops are being broken and molotov cocktails being thrown as protestors express there outrage over the government proposed cuts of government jobs.
Now, I am all for a good protest. Having wages cut and welfare reform in an economy with 9% unemployment is definitely something to get the citizens roused. My question is, don’t they know that if these cuts aren’t made, there country will go even more bankrupt? So whatever wages they are fighting for will be moot, when the country no longer has money to pay them at all.
The truth is these measures should have been done a long time ago, before Greece got to the point of financial extinction. The proposed $45 billion bailout from the Eurozone members and the IMF is supposed to help them from going under. However, they are going to have to balance the budget at some point, so I’m not sure why they keep destroying their own city.
Even if they can get this $45 billion bailout, CreditSights (a independent fixed income research company), said the bailout may not be enough to save Greece from its debt problems.
Today’s market seemed to shrug off Greece’s woes and after a period of selling in the morning, reversed. As I write this, the SPY just turned positive on the day.

Well Bid/ Well Offered

April 20, 2010 Leave a comment

 

In this market environment we have to use all the tools we have to identify and maintain our edge in trading. One tool used in maintaining our edge is identifying well bid and well offered areas in the direction of the order flow in your stocks. Well Bid/Well Offered refers to inta-day institutional activity were you can expect buying or selling to occur once a specific level has been broken. This tool works especially well with strong stocks with weak opens (looking for well bid) and vise versa weak stocks with strong opens(looking for well offered).
 
 These areas are fantastic because they provide reference point were you can identify potential momentum moves and offers a clear level were you can manage risk. One of the problems that traders have is using this tool without putting it into the bigger picture/higher time frames.  By no means should this tool be the sole reason you want to be long or short a stock, but should be used as another building block to help you fine tune your trade scenario in a market with lower expectation of follow through.
 Charts

When Doing Bad is Good for Business.

April 20, 2010 Leave a comment


I’m reminded of the scene in the movie “Fight Club,” when Edward Norton is speaking to a woman on a plane and tells her about the formula his automotive company uses to figure out if they should recall a product.
“A new car built by my company leaves somewhere travelling at 60 mph. The rear differential locks up….The car crashes and burns with everyone trapped inside. Now, should we initiate a recall?”

“Take the number of vehicles in the field (A), multiply it by the probable rate of failure (b), multiply the result by the average out of court settlement (C.) A x B x C=XX.  If XX is less then the cost of a recall, then we don’t do one.”
“Are there a lot of these kind of accidents,” The passenger sitting next to him asks. He replies “You wouldn’t believe.”


The recent fine of $16.4 million levied against Toyota brings to mind this formula. The largest in US history, but nowhere near the cost of a recall.
In an earnings call on Feb. 4, Toyota estimated it had paid $1.12 billion on warranty expenses and $812 million on lost sales for a total of $2 billion. A heavy price to pay and quite an incentive to keep things quiet.
Now presently they have 41 class action suits against them and 13 individual lawsuits. Without the Governments recall, would the class action suits against them even have been brought? Then you are left with just individual suits claiming deaths or injuries caused by unwanted acceleration.
So as Toyota tried to slide under the radar, so as not to do the recall, their only punishment is a fine that is less then 1% of what would happen if they came right and out and told people.


Now getting to the SEC allegations of Goldman Sachs. The SEC alleges they knowingly put together these $42billion CDO’s and sold them, knowing they were going to fail.
Now if the SEC wins the case against the best lawyers money can buy, the resulting fine is going to be what $10million? Maybe the $15 million they made in fee’s off the deal. Compare that to the revenue of $51 billion from last year. Or even to the $16.2 billion in bonuses given out this year, not to mention the extra $5 billion they are planning on doling out for three months work.
The US public and agencies assigned to protect the little guy carry far too small a stick to handle the greed of big business. I mean we can’t even get finance reform bill off the ground to at least prevent the last economic collapse from happening again!

I think  we need to have penalties that will give companies enough of an incentive to re-think their dubious deeds.  Whether that is larger fines or imprisonment.

I mean if Goldman was fined $16.2 billion, the payout of this years bonuses,  they may actually care.

Trading in the Direction of the Higher Timeframes

April 19, 2010 Leave a comment

Recently with some of the breaking news that has hit the market(Goldman Sachs) the volatility in the market has increased.  The important thing to realize is the market will still trade in the direction of the higher timeframes.  The higher timeframes indicates what the bigger players in the market are doing.  Are they accumulating stock or exiting positions.  News that hits the market will act as a catalyst but will not change the overall trend of the market.  When you are trading a certain stock you need to get your ideas off of the higher timeframes and look for confirmation on the lower timeframes, then enter the trade. 

When I talk about higher timeframes I usually am talking about the 65 min chart and the daily chart.  If both timeframes line up I will be more aggressive with share size.  If they don’t line up I will scale back share size and expectations.  Two ideas I had going into today, long and short, show how trading in the direction of the higher timeframes is the easier money in this market. 

The first idea I had coming into today was in Las Vegas Sands(LVS).  I liked this stock to the long side because it has been one of the strongest stocks in the market.  The make or break level in this stock was the previous breakout at 22.50 which should now act as support.  If LVS gets below this level, the upside momentum could be done, and with my style of trading is a do nothing.  Right on the open LVS tested the previous days low of 22.35.  In this bull market buying a stock, that was weak the previous day, at the previous days low has been one of my favorite risk/reward scenarios.  I bought LVS when it got above the 22.50 level and held with an initial profit target of 23.50, because we couldn’t get above this level on Friday morning.  I was in and out of LVS as it was trading around the 23 area and sold in the 23.30 area.  I sold half into momentum and the other half when it pulled back after failing 23.50. 

Around this time the market started to lose some of its upside momentum.  I had a conversation with Pete this morning and he said he was looking exclusively at the financials in the morning.  One of the things that he said that stayed in my head all morning was that he wanted to wait for the first 30-45 min to settle in before he got aggressive.  I had Morgan Stanley(MS) on my radar to the short side, as it had been one of the weaker financials and if they all started to sell-off this was the one at the top of my list.  The first level I was looking at was the Friday afternoon high of 29.70.  As the market was losing some momentum MS happened to be forming a swing high around this level.  The plan was to get in below 29.60 which in my eyes confirmed a downmove.  The inital profit target was the 29 area because of the natural support that usually happens around whole numbers.  Now shorts in this market have been hard money but you have to take this trade.  Since the probability on this trade is lower it just means lower share size.  I traded around a core position as we paused around the 29.20 area and exited the entire position when we broke the figure and traded back up. 

Best of luck with your trading and have a great night. 

Kyle

“The Canary in the Coal Mine.”

April 15, 2010 Leave a comment


As in previous blogs, I have been keeping track of the progression of the Greece bailout. The US markets have been going up as the Euro is strong against the Dollar. Right now not even a spike in jobless claims can keep the US markets from going up, but the collapse of the Euro is still on the table. And since the Fed seems to be content keeping the rates in place until probably after September elections, the only catalyst seems to be the Greece bailout.
Where it stands now is the Euro-zone leaders have pledged $45 billion package of loans to Greece to keep it from the brink. However, this Tuesday at a meeting of the American Enterprise Institute, the fiscal outlook in Europe was identified as the leading downside risk to global economic recovery.
Nouriel Roubini referred to Greek Crisis as the “canary in the coal mine.” Saying that the fall of Greece could lead to the fall of Spain, Portugal and Ireland. And with this would be collapse of the Euro.
Desmond Lachman, a former IMF official and pictured above, said that in the near term the USD/EUR will likely move towards parity. He compared the Greece bailout to that of Bear Stearns by the Fed. Seven months after they bailed out Bear Stearns, the passed on bailing the Lehman Brothers rescue. Thus triggering the beginning of the global recession.
Can the Euro have that dramatic of an effect on us? That remains to be seen and can be a point of debate, but I certainly think it’s important to keep an eye on this as it recently has had a direct correlation with our markets.  A stronger dollar would expectedly take the wind out of the sails of the US markets.

EUR-USD grinding ever lower as dollar stregthens.