Bearish Confirmation

As I implied in my previous post, the simultaneous rallies of both the dollar and equities were quite suspect... and would need confirmation. Today may be the actual confirmation that the environment wherein both are inversely correlated is still intact - as the Dow is currently down triple digits. This is a very bad sign in the short-term, because despite the good employment numbers, the equity markets took a nose dive. It may mean that the economic numbers had already been priced in during the unusual rallies in October and November (both historically bad months), and now, people wise enough to buy during those months may just be selling into the news.

I guess Santa Claus isn't coming to town.

Anyway, despite my bearish feel for equities, there are still a lot of opportunities out there since the markets are still flush with cash. The key, again, is finding the strong issues (ADX > 30).

Dow 11,000?

October non-farm payroll jobs lost went down to -11,000 from -111,000 the previous month - an astonishing number given that the consensus estimated it to be at -125,000. The bullish data may be indicating that the Dow may reach 11,000 in the next few days/weeks. And we can go on even higher if the bearish traders on the sidelines walk their talk and start buying stocks (or covering shorts) now that employment numbers are improving.

What's quite surprising are the simultaneous rallies of both the dollar and equities, which the world hasn't seen in a while. What does this mean? Are we really at a crossroads wherein the inverse correlation between the dollar and equities will soon reverse? Or, is this unusual move telling us that the recent rally in equities is a mere head fake?

No one knows for sure. My stand is neutral. I did say a few days ago that I was already short-term bearish on the markets. But if all the significant indices (Hang Seng, Dow, Shanghai) break out of their patterns, along with a sustained move in the dollar, then I will change my view and be more bullish at least until the earnings season in January.

The Dow entered its current bull market when the dollar started its bear market last March:

Philippine Market Tip #2

MWC: Manila Water Corp.

Technicals: The stock has been bullishly consolidating at its highs for the past few weeks, and the MACD indicates (near 0 line) that it may explode soon. Moreover, MWC is a defensive stock, so, chances are, it will hold even if the market crashes.

Entry Price: 16-16.5
Target: 18
Cut: 15.5-15.75

I'm still all-in in MPI so I'm not going to execute this trade. :)

Impending Doom?

The heat of the Dubai debacle is slowly fading away, as markets rallied massively the past few days. The central bank of the UAE soothed fears by saying that it would back up the deposits of local and foreign banks in the area. It also became public knowledge that the potential losses of global banks in the event of a default by Dubai are relatively small compared to the hundreds of billions lost during the bursting of the US real estate bubble. However, despite the brief and muted response of the markets, we should all be wary of how "fragile" and "panicky" investors and traders are right now. Using the Chinese market as a reference, these sudden and unexpected big down days may indicate an impending deep correction.

As you can see from the chart below, the Shanghai Composite (represented by HK:2823) also went down by as much as 10% (intraday) last August as people sold into the rumor that the Chinese government would start draining liquidity to prevent overheating the economy. After the big down day, the market then rallied for 3 days(bargain hunters), breached new highs, before correcting heavily for a whole month.

In my previous post, I already mentioned that the safest immediate buy for the Dow and the Hang Seng is at the 130 day SMA. But that doesn't mean that you shouldn't trade the bounce. As you can see below, the Hang Seng itself went up by a thousand points in just a couple of days. It filled the "Dubai gap" and is now right smack at resistance (trendline and 32 day SMA). Within the next few days, I expect it to retest the 23,000 barrier or hit the parabolic resistance at around 22,800 before going down.

The Dow, although seems resilient, is still the laggard. There is still nothing wrong with it technically as it hasn't broken any major support areas. But you have to be cautious of the multiple bearish divergences (upward price channel + weakening MACD) that are showing. The Hang Seng had similar bearish omens before it broke down.

So yes, I'm already short-term bearish on the markets. I will continue trading since the Santa Claus rally may still bring us to new highs, but I will not carry heavy positions overnight.

Blood in the Street

There was blood in the markets today, and unfortunately, mine was included. Dubai came out with a black swan report requesting to prolong its debt payments - causing markets to crash and credit defaults swaps to soar.

The Hang Seng Index went down by as much as 1,200 points - the largest one day drop I've seen in my trading career. As you can see in the chart below, the index broke down below its upward channel (confirming the MACD bearish divergence), the 32day SMA, and 65day SMA. The next support is at the 21,000 psychological level, but probably the safest buy would be the 130day SMA, which is around the 20,500 area. The Shanghai Composite also broke down last August, and it only bounced once it reached the 130day SMA. Thus, since China is the leader, my best bet for HSI and DJIA (Dow) would be to buy at the 130day SMA.


Man. I was all-in yesterday, so I got hit pretty bad. I got emotional during the day, so I kept buying up stocks hoping it would bounce right away. But the biggest rally it was able to sustain was a mere 100+ points. So yes, I dug a deeper hole for myself. I'm now down 54%.

I can't take this madness anymore. I'm going to make a trading plan this weekend and then consult my boss on Monday. I need to perform.

Happy Thanksgiving.

Strength is the key

The HK market was down more than 300 pts today following the big sell-off in China. The government is requiring the banks to increase their capital requirements; thus, speculation arose that these companies would have to place shares at deep discounts. With that news, the Shanghai Composite crashed from up 20+ pts to down 110+ pts.

The good news is, I survived. Luckily, I was able to gain about 5% from my investment in Brilliance Auto. Plus, I didn't get hit much in the afternoon because I was holding a defensive stock (HK:371) which was unusually strong today. I'm hoping that its strength will persist until tomorrow.

For the past few weeks now, I've been making money in down days and losing money in up days. I thought it was kind of weird at first, but upon further reflection, I realized that the reason for this anomaly is very logical. During down days, right off the open, it's stark clear to everyone which stocks have innate strength that even a tumbling index could not dissipate. However, during up days, it's not so clear which issues are strong enough to climb further within the day.

Thus, the lesson of the day is: if you're long the market, always look for strength. The ADX indicator (measures momentum) is your cheating. The higher it is (preferably above 35), the higher your chances of surviving a weak market. For example, as you can see in the image below, the stock I held today has been very strong. Its ADX is 50 (the black line), and it's above all the moving averages (also a sign of strength).

Philippine Market Tip

MPI: Metro Pacific Investments

Technicals: As you can see from the chart below, the MACD has just signaled a "bullish divergence," wherein the MACD has had a "low" and a "higher low," while price has had a "high" and a "lower high." This indicates that the momentum to the downside is decelerating, and the sell-off may be over.


Fundamentals: MPI controls defensive companies such as Maynilad and NLEX tollways, which means that their cashflow will most likely remain strong even if the economy stalls.

Entry Price: 2.5-2.7
Cut: 2.45-2.5
Short-term Target: 3.1
Medium/Long-term Targets: the moon :)... 3.8 then 4.4

I plan to enter this trade tomorrow. I hope I won't be too late.

Lack of Discipline

HK MARKET:

I may have dodged a bullet this morning since all the shipping stocks were down big, but I think I just set myself up to catch one on Monday.

I was overly aggressive all day trading just one stock, HK:1114 (Brilliance Auto), due to the strength in the auto sector (both technicals and fundamentals look very promising). I was already correct in the afternoon, selling right before the market had turned, but 30 minutes before the close, I became greedy again and had the itch to trade. So, I ended up buying back the stock without a good set-up. Of course it went down, and I had to cut 2 flucs below my buying price (2.24). I wasn't done. 5 minutes before the close, I noticed that the stock found support at 2.21-2.22, so yes, I bought my whole position again at 2.23. Argh. Talk about the lack of discipline on my part.

The Dow Futures are down big again, and because there are no economic reports due today, the main market movers are the strengthening dollar and the bad Dell earnings/guidance, which came out earlier today. I believe (or more of hope?) that the expected drop tonight has already been priced in the Hong Kong market. Or else, I'll probably get killed on Monday. Sh*t.

PHIL MARKET:

I lost money today. I bought MER at 231 and sold it at 229. I also sold my whole position in CPM at cost. I'm all cash right now.

Funny. I'm very disciplined in the Phil. market, but in the HK market, I'm reckless. Why? The only reason I can think of is the fact that I'm down in HK, and I'm up in the Phils.

Lessons for today:
1. Avoid buying back a stock 30 minutes before the close. Limit buybacks in the morning, or right after lunch. Also, in these cases, position size must be lessened.
2. Plans are useless if you don't have the discipline to execute it properly. My original plan was to cease trading after I had locked in my profit. I didn't follow it. Again. So i lost money. Again. Greed and Hope are really my biggest enemies.

Dodged a Bullet

The US market experienced a mild correction and was down 94 points yesterday. Intraday, it went as low as 160+ points due to so-so economic data (initial claims, leading indicators), but it rallied because of the statement of Steve Ballmer that Windows 7 is performing well beyond expectations. The shipping stocks, which we have been following very closely the past few days, went down hard and formed 2 day reversals.

Thus, I'm actually feeling good right now given that I sold my shipping stock (HK:2866) at the close yesterday. Yes, I dodged a bullet - which easily could have killed my confidence. However, I don't expect the Hang Seng to go down too much today since it has already been down for 3 days. Nevertheless, I will be very cautious as this may just be start of a deep correction.

Philippine Market

I've decided that I will also share some of my trading experiences in the Philippine market. As of today, I'm already up 80% year-to-date. This is in spark contrast to my very large drawdown of 46% in my Hong Kong account. Why the large discrepancy? Well, in our company (HK market), we're basically discouraged to buy and hold for more than a couple of days. We are being groomed to be day/swing traders that get in and out quickly. This kind of style is very difficult especially in a market that is very volatile, as we are usually prone to constant whipsaws. On the other hand, for my personal account in the Philippines, I have the freedom to buy and hold a stock for more than a week or even a month (but my maximum is 2 weeks), which allows me to maximize gains and ignore market noise.

So there.

I'm currently holding CPM. I already made money in the stock, (I bought it at 4.15 and sold at 6) so I can buy it back at any price if there's a good set-up. As you can see from the chart below, after three days of profit taking from 6.3 to 5.1, the stock has stablized and volatility has lessened, so I bought at 5.5.

Crowd Psychology

Crowd psychology almost always works. In our office, we use the actions and the sentiment of the majority as critical indicators to the next move of the market. Here are some examples:

1. Market Top - After a furious rally to the top of a channel, the house account usually runs out of money. And, almost always, the market either retraces in the afternoon, losing all morning gains, or it crashes within the next few days. It's also the time when everyone is so bullish and complacent.

2. Market Bottom - When everyone is so bearish, then it's a sign that the market is about to turn to the upside. I usually ask my colleagues whether they're buying to the close or not. When no one is brave enough to buy, it's usually a good time to probe the leaders.

3. The Happy Meter - Whenever more than a handful are rejoicing and making unrealized profits in a single stock, it may be a good time to sell. Looking at it from a larger perspective, it may mean that there are no more buyers to push up the stock - which means that the upside has already been capped.

Just today, I experienced the happy meter. Everyone who had shipping stocks today was ecstatic in the afternoon due to the sudden acceleration of buying. One was already thinking of going to a club and celebrating, others were already computing profit targets, etc. At the back of my head, I was already wary of a sudden reversal and, thus, I planned a tight mental stop. Lo and behold, about 20 minutes into the close, the shipping stocks did reverse. But of course, I didn't sell right away. I froze for about 5 minutes and hoped that my stock would still go up, and I paid a few dear fluctuations for it. (ALWAYS FOLLOW YOUR PLAN!)

Here's a snap shot of the intraday chart of the stock almost everyone had today (click to enlarge):

In conclusion, one should always be wary of how his/her fellow traders (as a group) are acting. A trading firm is a good microcosm of all the market participants in the world. However, one should also put into mind that, though very important, crowd psychology is only supplementary to proper technical and fundamental analysis, and must not be used alone.

Lessons

My boss is right, change is constant in the market. Even if you excel in technicals or fundamentals, you still have to know when to use either one or both. Exceptional knowledge of the markets is useless if you're always one step behind. There are raging bull and bear markets, and there are also periods of consolidation. If you want to earn a living from trading, then you'd have to notice these constant shifts in environment, and adapt quickly. And so, in order to prepare myself for the future, from now on, whenever I pick up some valuable lessons from my own experiences, my boss' tidbits of wisdom, and even my colleagues' stories, I'd write them down here.

So here goes:

Period: From the March 2009 bear market trough.

1. Keep out of the laggards. Your chances of making a quick profit are slim when you hold on to these crappy issues. Use the index as your guide to identify laggards and leaders.
2. Never do the revenge trade intraday unless there is a valid set-up. And even so, only buy a portion of your original size.
3. If your stock is not trending, do not anticipate the moving average bounce. Wait for the first uptick.
4. Look at the big picture first, and then enter using an intraday set-up.
5. Candle sticks are very important. When you think something is wrong, get out and just enter the next day if possible.
6. In overbought markets, do not load up in one issue overnight. The chances of experiencing a "Black Swan" - or something extremely unexpected - are very high. (i.e. placements, profit warnings)
7. Avoid buying stocks in the first 30 mins.
8. Large and fast intraday moves accompanied by strong volume are signals to sell a bit of your position. On the other hand, small, gradual moves are hold signals. The latter are more sustainable.

Poco a poco se va lejos

I'm sitting on my biggest drawdown ever (47%), and it has left me wondering... how the hell am I going to hurdle this?

August 2009 - the month I will always remember as a trader.

The losses started as a trickle - little by little the market churned me. It was just 1%-2% losses per day. Until the big drop came. I decided to hold a stock overnight that was strong fundamentally, even though it wasn't doing very well technically. The next day, it gapped down 12%. The company placed shares at a deep discount. I was devastated. From that point on, the losses have been piling up exponentially. I can't control my risk. My emotions have been running high. I've been cutting too late and taking profits too early. I simply am not in tune with the markets.

My psychological well-being has also been compromised. And it shows with the way I've been dealing with my co-workers. It seems like, lately, I am more concerned about HOPING that their stocks would decline, and their account balances would deteriorate to a level below mine. This stupid competitive or crab-mentality episode of mine has been distracting me from what should be my ultimate goal - improving and refining my trading in order to make up my losses and eventually, WIN.

GOD. The market is running high and I'm losing money. For days and weeks, I've been jumping around from trading right to trading reckless. Why? Because I've been hoping for that big break in order to bring back my confidence, which has been causing me to pick a stock, bet big and then, consequently, HOPE that it would go up without looking at the picture objectively.

I need to change. I know I can turn this around. I just need to be more patient and be content with singles and doubles. My losses started out with a trickle and then a big drop came... maybe if I traded better, my gains would start small, and then with a little luck, a big win would come around as well.

This will be my toughest test ever.

Little by little, one goes far.

Mini Crash

I just had the worst 2 weeks of my career as a trader.

From euphoria down to near depression just in a matter of a month.

How could have that happened? How could have I let that happen?

I was up and then I am down. Roller coaster it is.

I can only imagine how other traders felt when the market was at its worst. From the peak of the bull market down to the March 6 bottom - unbelievable.

I lost 16% in 2 weeks. What if I had started at the peak of the market? I might have wiped out my whole account.

I need to be more disciplined. I've been saying that since I first started but I still haven't changed significantly. Maybe that's the reason why people say the learning curve of a trader approaches its ceiling in about 5 years. It takes that long to master ones emotions, and to gain discipline. Or, it takes that long to become a machine.

Lessons:
1. You can't control the market. You can only control your risk.
2. When you feel like you "know" what you are doing. Stop and evaluate. Bring down your size and do so until you feel like it's "hard" again.
3. LEARN WHEN TO STOP TRADING. It's not just about churning; it's also about preserving one's capital.

The Path to Excellence

Must to my dismay, my team for the playoffs, the Cleveland Cavaliers lost to the Orlando Magic just a few minutes ago. I was really rooting for Lebron, who I think will really become the best player that ever played the game some day. But before that title, he still has to prove himself, not through individual awards, but through championships. He has to go through the same growing pains that Michael Jordan had to go through to gain the honor of being the best.

The whole situation that Lebron is going through somehow made me think about my own - in trading. I know I have the potential to be one of the best or at least end up as one of the better ones. But before I really realize that potential, I have to go through several difficulties and trials that would test my character. I need to experience losses and depression and everything else that could kill my spirit before I could really elevate my game.

So now, Lebron, like me, is going through a tough time. But I'm sure he'll get over it, the same way I will in a few days. And the sooner the moping ends, the sooner the healing and learning will happen.

But I'm fortunate, unlike Lebron, I don't have to wait a whole year before I could really redeem myself. For me, I'm over my last month's subpar performance (I did well relative to my first few months, but still below my expectations), and I'm now looking on to June. I will work harder, I will be more disciplined and I will not give in easily to my emotions.

Here's to a profitable month.