I've recently enabled the comments section for this blog. Please feel free to comment not just on the articles but also anything that tickles your fancy.
If you have questions or ideas for topics you'd like to see covered, I would enjoy your input. I am very new to blogging, this being my third week. I have much to learn and I'm sure you all have much to teach as well.
One caveat: since this is an educational and informational blog, I won't be able to respond to questions where a recommendation is sought. I will be posting many charts in the years to come in an abstract capacity, both historical and live, to show you how I use technical analysis to trade. You may take from them what you will, but they will never be recommendations. Technical analysis only increases our odds of finding winning trades, but here are no sure things.
Best regards and keep reading!
Sincerely,
Rob
The Chartographer
Sunday, September 11, 2011
Saturday, September 10, 2011
The CNBC Chop Shop
One of the first mistakes a novice trader will make is turning on CNBC looking for stock tips. After all, those slick Wall Street-types in the suspenders and expensive suits being interviewed on live television by those pretty reporters must know more about the market than a mere beginner, right?
Well they do. But not in the way you think. Their expertise is not in knowing the direction a stock will take -because not a soul alive knows that for certain- but in how to manipulate the media and small investor so that they find bagholders for the securities in which they make a market.
In gambling terms, Wall Street firms are the equivalent of "The House". Their version of a rake is called the spread. They make a killing whether you win or lose. And they love starry-eyed beginners who have visions of yachts, trophy wives and early retirement in their eyes. The way they generate more fees and find fresh bagholders is through hype and greed.
This is where CNBC comes in. Wall Street and CNBC have a symbiotic relationship: Wall Street needs an outlet to promote its securities and services and CNBC needs targeted ad revenue. Both have a vested interest in generating a bull market, since trading volume and financial television ratings are significantly higher in prosperous times.
As a result, CNBC has almost no news objectivity. Maria Bartiromo hitches rides on lavish CitiGroup corporate jets. Corporate CEOs like the since disgraced Angelo Mozillo of Countrywide are fawned over like golden idols. Bullish Wall Street analysts pumping their stocks are treated with the utmost reverence. Governmental officials like Hank Paulson, who also have a vested interest in bull markets and bubbles, were never pressed even as they lied through their teeth about the housing contagion. On the rare occasion a bearish guest appears, such as the proven-correct Peter Schiff, they are openly mocked.
Listening to CNBC, in any way other than as a contrarian indicator, will torpedo your account. If you had listened to CNBC over the years you would have bought tech stocks at the very top of the bubble in early 2000, bought homebuilder stocks in the summer of 2005, put a buy order on Dow 14,000 in 2007 and sold short when analysts turned bearish in March 2009 at Dow 6,500.
Do yourself and your trading account a favor and tune out the CNBC and Wall Street spin. Rely on your own research and common sense when trading. Seek out knowledge not hot stock tips. All the "booyahs!" you shared with Jim Cramer over the years won't mean a thing if you're broke.
Well they do. But not in the way you think. Their expertise is not in knowing the direction a stock will take -because not a soul alive knows that for certain- but in how to manipulate the media and small investor so that they find bagholders for the securities in which they make a market.
In gambling terms, Wall Street firms are the equivalent of "The House". Their version of a rake is called the spread. They make a killing whether you win or lose. And they love starry-eyed beginners who have visions of yachts, trophy wives and early retirement in their eyes. The way they generate more fees and find fresh bagholders is through hype and greed.
This is where CNBC comes in. Wall Street and CNBC have a symbiotic relationship: Wall Street needs an outlet to promote its securities and services and CNBC needs targeted ad revenue. Both have a vested interest in generating a bull market, since trading volume and financial television ratings are significantly higher in prosperous times.
As a result, CNBC has almost no news objectivity. Maria Bartiromo hitches rides on lavish CitiGroup corporate jets. Corporate CEOs like the since disgraced Angelo Mozillo of Countrywide are fawned over like golden idols. Bullish Wall Street analysts pumping their stocks are treated with the utmost reverence. Governmental officials like Hank Paulson, who also have a vested interest in bull markets and bubbles, were never pressed even as they lied through their teeth about the housing contagion. On the rare occasion a bearish guest appears, such as the proven-correct Peter Schiff, they are openly mocked.
Listening to CNBC, in any way other than as a contrarian indicator, will torpedo your account. If you had listened to CNBC over the years you would have bought tech stocks at the very top of the bubble in early 2000, bought homebuilder stocks in the summer of 2005, put a buy order on Dow 14,000 in 2007 and sold short when analysts turned bearish in March 2009 at Dow 6,500.
Do yourself and your trading account a favor and tune out the CNBC and Wall Street spin. Rely on your own research and common sense when trading. Seek out knowledge not hot stock tips. All the "booyahs!" you shared with Jim Cramer over the years won't mean a thing if you're broke.
Thursday, September 8, 2011
Tips for Improving Your Trading Psychology, Part II
3. DON'T THINK ABOUT THE MONEY (TOO MUCH, ANYWAY)
This sounds completely counter-intuitive considering the whole reason we trade is to make money. But you won't achieve greater results until you stop thinking about money. I've found this is a tough one for most people at times, myself included. When traders focus on the outcome of making money (or losing it) instead of the process behind it, it activates the greed-and-fear emotional centers of the mind.
I used to literally shake in anticipation when I placed a trade; partly out of fear of losing my hard-earned savings, partly thinking about getting rich quickly. I also risked way too much money on each trade. It put me in a tense mood for as long as I was in a position. Throughout the day, I would check the second-by-second changes on the 5-minute chart much like a bad baker keeps opening up the oven to make sure his cake isn't burning. I wouldn't give my trades a chance to work because I kept alternating between fear and greed. All perspective and rationale went out the window. Swing trades turned into day trades.
The way I combated this was three-fold:
A. I reduced the amount I risked on any one trade to 1-2%. If I was wrong, it was not enough of a loss to destroy my confidence or shake my nerves.
B. I dedicated myself to proper research with targeted entries and exits. Preparation fights fear and greed.
C. I mentally prepared myself to lose that 1-2% but not a penny more and, in fact, traded like it was already as good as gone. I told myself that if I made money it was just a bonus.. The end result was it completely dampered the greed factor by keeping my expectations realistic and it forced me to stay vigilant by never lowering my stop losses, thus taking fear out of the equation as well.
Now when I move in and out of a position, money is the furthest thing from my mind. I am merely focusing on my art. Do this and money is much more likely to follow.
Part III coming soon.
This sounds completely counter-intuitive considering the whole reason we trade is to make money. But you won't achieve greater results until you stop thinking about money. I've found this is a tough one for most people at times, myself included. When traders focus on the outcome of making money (or losing it) instead of the process behind it, it activates the greed-and-fear emotional centers of the mind.
I used to literally shake in anticipation when I placed a trade; partly out of fear of losing my hard-earned savings, partly thinking about getting rich quickly. I also risked way too much money on each trade. It put me in a tense mood for as long as I was in a position. Throughout the day, I would check the second-by-second changes on the 5-minute chart much like a bad baker keeps opening up the oven to make sure his cake isn't burning. I wouldn't give my trades a chance to work because I kept alternating between fear and greed. All perspective and rationale went out the window. Swing trades turned into day trades.
The way I combated this was three-fold:
A. I reduced the amount I risked on any one trade to 1-2%. If I was wrong, it was not enough of a loss to destroy my confidence or shake my nerves.
B. I dedicated myself to proper research with targeted entries and exits. Preparation fights fear and greed.
C. I mentally prepared myself to lose that 1-2% but not a penny more and, in fact, traded like it was already as good as gone. I told myself that if I made money it was just a bonus.. The end result was it completely dampered the greed factor by keeping my expectations realistic and it forced me to stay vigilant by never lowering my stop losses, thus taking fear out of the equation as well.
Now when I move in and out of a position, money is the furthest thing from my mind. I am merely focusing on my art. Do this and money is much more likely to follow.
Part III coming soon.
Wednesday, September 7, 2011
Bank of America (BAC) Abandoned Baby Candlestick
I am noticing some interesting chart patterns on the XLF (Financial Sector ETF) and on Bank of America (BAC) in particular. Both charts are showing an inverse head-and-shoulders pattern on the daily time frame but with significant resistance on the weekly charts. Hence, I am expecting a short-term bounce before the long-term trend asserts itself.
Also worth noting is the abandoned baby candlestick pattern on Bank of America. It is a very rare bullish three-day reversal pattern when a stock is in a downtrend. The first day is a down day. The second day is a gap-down doji where the shadows do not intersect with either the first or third day. The last candle is an up day that also gapped away from the second day. I've circled it on the Bank of America daily chart below.
A short-term strengthening in the Financial Sector would be bullish for the market since it is such a large component of the S&P 500. It could help the S&P backtest to the 1260-1280 neckline/resistance area before failing, which fits in with my original thesis.
BAC daily:
BAC weekly:
XLF daily:
XLF weekly:
All charts courtesy of http://stockcharts.com
Also worth noting is the abandoned baby candlestick pattern on Bank of America. It is a very rare bullish three-day reversal pattern when a stock is in a downtrend. The first day is a down day. The second day is a gap-down doji where the shadows do not intersect with either the first or third day. The last candle is an up day that also gapped away from the second day. I've circled it on the Bank of America daily chart below.
A short-term strengthening in the Financial Sector would be bullish for the market since it is such a large component of the S&P 500. It could help the S&P backtest to the 1260-1280 neckline/resistance area before failing, which fits in with my original thesis.
BAC daily:
BAC weekly:
XLF daily:
XLF weekly:
All charts courtesy of http://stockcharts.com
Monday, September 5, 2011
Tips for Improving Your Trading Psychology, Part I
If you ask any successful trader what is the most important factor to a long and prosperous career in the markets, invariably the answer is discipline. You simply must have the proper mentality or you will be like the 95% of traders who lose over time.
Those who wash out do so for many different reasons on the surface:
Insufficient starting capital
Trying to get rich quickly
Holding onto losses too long
Trading too frequently
Burning out
But, scratching beyond the surface, all of these are just symptoms of a trader having the wrong psychology. That leads to emotional trading, which over time will be the death of one's account. Being emotional is one of the best parts of being human...but believe me when I tell you it has NO place in your trading. You need to flip that switch into the off position from the time you do your research to the time you exit your position.
The good news is attaining the right trading psychology is entirely possible and ultimately quite enjoyable. Following these tips will yield bottom-line results and reduce your level of stress...and that is precisely what will keep you trading in the long run.
1. DO NOT BECOME A MARKET JUNKIE
People in this industry will tell you such bromides as "money never sleeps" or "you need to eat, drink and breathe the market". Please. What they are saying is they are slaves to the markets and thus to fear and greed. I've worked with people like this. Even if they made money over a short stretch they've usually given it all back in time because such a mentality leads to short attention spans, stress and a lack of proper sleep. This is a breeding ground for impulsiveness. They are in no condition to make prudent decisions, yet they trade way too often trying to greedily catch every move. They are usually nervous wrecks, coke addicts or on the verge of a coronary.
You, on the other hand, want to be a free human being who uses the market judiciously to achieve your long-term objectives. You do this by trading longer time horizons (swing or position trading instead of day-trading) and placing smaller trades risking less than 2% of your capital. You get to relax and see your friends and family when your day is over while they are worrying endlessly that their highly leveraged account could be blown up by after-market news. They are following every intraday gyration in Asia and Europe on CNBC at 3 a.m. while you are sleeping soundly. They are the hare whose heart will fail. You are the tortoise built to last.
2. CONQUER DOUBT AND IMPULSIVENESS THROUGH PREPARATION
Poor traders and novices chase price moves impulsively through fear and greed at the same time: fearing a stock will take off without them aboard and greedily hoping it will go straight up without a hitch. They do not know the Fibonacci retracement and support/resistance levels of the stock they are chasing. They do not realize that a stock will often come back to a targeted price. All they think is they have to get in NOW. They make their pricing decisions in the moment with lights flashing and the CNBC white noise blaring. They use market orders with no stops or exit strategy. They don't read charts correctly if at all. They don't prepare. Over time, they fail.
You make your pricing decisions when the market is closed, away from noise and hype. When you are serene. You've pored over your charts and know key support/resistance numbers. All trades are filtered through your pre-trade checklist. You place limit and stop loss orders and use trailing stops and/or adjust your stops manually when the trade is going your way. You're confident when you hit that Buy or Sell button that you have done all you reasonably can and that the risk-reward ratio was there even if the trade is a loser. You are prepared. Over time, you prosper.
Click here for Part II: http://swingtrading101.blogspot.com/2011/09/tips-for-improving-your-trading_08.html
Those who wash out do so for many different reasons on the surface:
Insufficient starting capital
Trying to get rich quickly
Holding onto losses too long
Trading too frequently
Burning out
But, scratching beyond the surface, all of these are just symptoms of a trader having the wrong psychology. That leads to emotional trading, which over time will be the death of one's account. Being emotional is one of the best parts of being human...but believe me when I tell you it has NO place in your trading. You need to flip that switch into the off position from the time you do your research to the time you exit your position.
The good news is attaining the right trading psychology is entirely possible and ultimately quite enjoyable. Following these tips will yield bottom-line results and reduce your level of stress...and that is precisely what will keep you trading in the long run.
1. DO NOT BECOME A MARKET JUNKIE
People in this industry will tell you such bromides as "money never sleeps" or "you need to eat, drink and breathe the market". Please. What they are saying is they are slaves to the markets and thus to fear and greed. I've worked with people like this. Even if they made money over a short stretch they've usually given it all back in time because such a mentality leads to short attention spans, stress and a lack of proper sleep. This is a breeding ground for impulsiveness. They are in no condition to make prudent decisions, yet they trade way too often trying to greedily catch every move. They are usually nervous wrecks, coke addicts or on the verge of a coronary.
You, on the other hand, want to be a free human being who uses the market judiciously to achieve your long-term objectives. You do this by trading longer time horizons (swing or position trading instead of day-trading) and placing smaller trades risking less than 2% of your capital. You get to relax and see your friends and family when your day is over while they are worrying endlessly that their highly leveraged account could be blown up by after-market news. They are following every intraday gyration in Asia and Europe on CNBC at 3 a.m. while you are sleeping soundly. They are the hare whose heart will fail. You are the tortoise built to last.
2. CONQUER DOUBT AND IMPULSIVENESS THROUGH PREPARATION
Poor traders and novices chase price moves impulsively through fear and greed at the same time: fearing a stock will take off without them aboard and greedily hoping it will go straight up without a hitch. They do not know the Fibonacci retracement and support/resistance levels of the stock they are chasing. They do not realize that a stock will often come back to a targeted price. All they think is they have to get in NOW. They make their pricing decisions in the moment with lights flashing and the CNBC white noise blaring. They use market orders with no stops or exit strategy. They don't read charts correctly if at all. They don't prepare. Over time, they fail.
You make your pricing decisions when the market is closed, away from noise and hype. When you are serene. You've pored over your charts and know key support/resistance numbers. All trades are filtered through your pre-trade checklist. You place limit and stop loss orders and use trailing stops and/or adjust your stops manually when the trade is going your way. You're confident when you hit that Buy or Sell button that you have done all you reasonably can and that the risk-reward ratio was there even if the trade is a loser. You are prepared. Over time, you prosper.
Click here for Part II: http://swingtrading101.blogspot.com/2011/09/tips-for-improving-your-trading_08.html
Friday, September 2, 2011
The Rally the Past Two Weeks Has Been Unconvincing
No one wants a bull market more than I do. They are far easier to trade and only a Grinch enjoys seeing their friend's and neighbor's 401(k)s taking massive hits. I want to be long America.
But I can only place trades based on what I see on a chart and what I know about the state of the economy. Neither fundamentals nor medium-term technicals are bullish and September and October are setting up for more fireworks on the downside.
The bullish case seems to center around two subjects: corporate profits and the Federal Reserve promising more candy to the markets.
The latter requires little discussion here as common sense tells us the previous rounds of governmental stimuli and Fed injections did nothing but exacerbate the mess in which our country finds itself.
As for corporate profits, while they have indeed improved since the initial economic crisis, this is likely already manifested in the rally in equities. But investors pay a premium for equities not just for profits but also for growth. And without growth, there is no reason P/E ratios can't go down to very low levels.
Corporations have hoarded cash and have not grown as witnessed by persistent unemployment. To climb on a soapbox for a moment, this is a highly myopic strategy on their part. The only way to spur growth is to reinvest profits into business expansion and hiring more people. There will be no pulling out of this near-Depression until the American middle-class is working in decently-paying, full-time jobs and can spend a little to fuel the economy. And hopefully save a little of their paychecks this time around. Wouldn't the long-term benefits of spurring growth and getting Americans working again be worth a few pennies per share to a corporation's investors? Sadly, I am not holding my breath.
Now, on to the technicals:
Two weeks ago on my blog, I warned that the first wave breakdown from the head-and-shoulders top on the S&P chart was likely complete and a retracement back to the neckline was probable. There was significant data pointing to this scenario; MACD Histogram divergence, a graveyard doji pattern and 38% Fibonacci support from the March 2009 lows.
This proved to be correct but I am looking to switch back to a short position soon as the rally has been unconvincing. It looks to be an Elliott Wave A-B-C correction of the first wave down. The next wave should be the deepest and longest. The Volatility Index chart confirms this as it is showing a bullish flag continuation pattern which is decidedly bearish for stocks.
There is also little room left for the rally to run. There is a heavy band of resistance in the 1260 area where the neckline, downtrending moving averages and the 62% Fibonacci support of the recent move all reside. Please see the charts and notes below for reference.
If the bulls can break above the 1260-1280 area I will reconsider my thesis. There is no place for bias in trading and one must always be nimble enough to exit when the market proves him or her wrong.
As always, this is for informational and educational purposes only. I am not an investment advisor. For full disclosure, at the time of this writing I am completely flat in my account but looking for an entry to short the SPY.
All charts courtesy of http://stockcharts.com
The Big Picture:
And the daily:
Finally, the VIX:
Thank you for taking the time to read this update! I wish you all a good night and safe and happy trading.
But I can only place trades based on what I see on a chart and what I know about the state of the economy. Neither fundamentals nor medium-term technicals are bullish and September and October are setting up for more fireworks on the downside.
The bullish case seems to center around two subjects: corporate profits and the Federal Reserve promising more candy to the markets.
The latter requires little discussion here as common sense tells us the previous rounds of governmental stimuli and Fed injections did nothing but exacerbate the mess in which our country finds itself.
As for corporate profits, while they have indeed improved since the initial economic crisis, this is likely already manifested in the rally in equities. But investors pay a premium for equities not just for profits but also for growth. And without growth, there is no reason P/E ratios can't go down to very low levels.
Corporations have hoarded cash and have not grown as witnessed by persistent unemployment. To climb on a soapbox for a moment, this is a highly myopic strategy on their part. The only way to spur growth is to reinvest profits into business expansion and hiring more people. There will be no pulling out of this near-Depression until the American middle-class is working in decently-paying, full-time jobs and can spend a little to fuel the economy. And hopefully save a little of their paychecks this time around. Wouldn't the long-term benefits of spurring growth and getting Americans working again be worth a few pennies per share to a corporation's investors? Sadly, I am not holding my breath.
Now, on to the technicals:
Two weeks ago on my blog, I warned that the first wave breakdown from the head-and-shoulders top on the S&P chart was likely complete and a retracement back to the neckline was probable. There was significant data pointing to this scenario; MACD Histogram divergence, a graveyard doji pattern and 38% Fibonacci support from the March 2009 lows.
This proved to be correct but I am looking to switch back to a short position soon as the rally has been unconvincing. It looks to be an Elliott Wave A-B-C correction of the first wave down. The next wave should be the deepest and longest. The Volatility Index chart confirms this as it is showing a bullish flag continuation pattern which is decidedly bearish for stocks.
There is also little room left for the rally to run. There is a heavy band of resistance in the 1260 area where the neckline, downtrending moving averages and the 62% Fibonacci support of the recent move all reside. Please see the charts and notes below for reference.
If the bulls can break above the 1260-1280 area I will reconsider my thesis. There is no place for bias in trading and one must always be nimble enough to exit when the market proves him or her wrong.
As always, this is for informational and educational purposes only. I am not an investment advisor. For full disclosure, at the time of this writing I am completely flat in my account but looking for an entry to short the SPY.
All charts courtesy of http://stockcharts.com
The Big Picture:
And the daily:
Finally, the VIX:
Thank you for taking the time to read this update! I wish you all a good night and safe and happy trading.
Thursday, September 1, 2011
Pre-Unemployment Report Long Straddle Strategy
The market has a tendency to trade in a range before big news events. One of the most important, especially in this huge recession, are the unemployment numbers. It is being released tomorrow morning. In the S&P chart, you can see two small candles(and I expect a smallish candle today) amidst a sea of big candles. Usually, this signifies a large move is coming.
Since we don't know how the market will react to any news, one way a trader could play the expected volatility is to purchase an option straddle. An option straddle is the purchase of an at-the-money call and an at-the-money put with the same strike price, same security and same expiration. Being long a straddle enables a trader to profit by a large movement either up or down. If the underlying stock or index stays relatively choppy or near the strike price, the trade will be a loser. There are many more facets to options trading and I will go into them at a later date.
Options trading is extremely high risk and only experienced traders should attempt it. But since this is an educational site, I want people to see the different strategies a trader will consider in different market dynamics. My indicators are mostly near-term bullish, yet there is significant resistance at the 1260 head-and-shoulders neckline and the VIX is in a continuation pattern indicating prices going lower. In such an inconclusive environment, a play on a day or two of volatility could be warranted. This is a trade I am considering, but I am in no way recommending you to follow.
All charts courtesy of http://stockcharts.com
Since we don't know how the market will react to any news, one way a trader could play the expected volatility is to purchase an option straddle. An option straddle is the purchase of an at-the-money call and an at-the-money put with the same strike price, same security and same expiration. Being long a straddle enables a trader to profit by a large movement either up or down. If the underlying stock or index stays relatively choppy or near the strike price, the trade will be a loser. There are many more facets to options trading and I will go into them at a later date.
Options trading is extremely high risk and only experienced traders should attempt it. But since this is an educational site, I want people to see the different strategies a trader will consider in different market dynamics. My indicators are mostly near-term bullish, yet there is significant resistance at the 1260 head-and-shoulders neckline and the VIX is in a continuation pattern indicating prices going lower. In such an inconclusive environment, a play on a day or two of volatility could be warranted. This is a trade I am considering, but I am in no way recommending you to follow.
All charts courtesy of http://stockcharts.com
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