As you recall, yesterday was an inside day. We knew that we would see greater price action today. It was just unclear whether the action would be up or down. Now we know.
The market gapped up in the morning and made a dramatic move to the upside. I was not surprised because we were experiencing oversold conditions on a daily chart. See the 1-year chart for the S&P 500 Index at clearstation.com. Now, today can be best understood as a short covering day. In other words, investors and traders who were shorting the market had second thoughts and bought back their shares. This "forced" buying by short sellers propelled the market higher in a rapid fashion. A classic sign of a short-covering rally would be a gap up from oversold conditions in a rapid fire fashion up to resistance. Master trader Bruce Kovner has written that "the principal characteristic of a bear market is very sharp down movements followed by quick retracements....In a bear market, you have to use sharp countertrend rallies to enter positions." Jack D. Schwager, Market Wizards, page 70.
This circumstance is very striking. The fearful short sellers covering today are right about the direction of the market. The market will continue to go down below 1173. The short sellers fueling today's rally were just too early. I don't recommend short selling because investing for the long haul is less stressful. But it is instructive that you can be fundamentally right on the direction of the market but wrong in your timing. The smart short sellers were covering their bets on Tuesday afternoon when the S&P 500 Index hovered around 1173.
I would anticipate that the S&P 500 Index will hit the 1206 area tomorrow. That should prove to be a short-term top for this countertrend rally. Why am I so confident? Well, I could be wrong. No one gets the direction of the market right all of the time. However, I can list three reasons that signal a short term top is near.
Reason No. 1: The 0.618% retracement level.
Professional traders and money managers recognize that when a market retraces, a common retracement level is 0.618% of the previous move. The move could be up. The move could be down. It doesn't matter. When the S&P 500 Index peaked @ 1127 on November 5, I was fairly confident that that was a top of importance. 1127 represented almost a 0.618% retracement of the down move from 1576.09 on October 11, 2007 to 666.79 on March 6, 2009. I banked on major institutions and hedge funds having computer programs keyed into the 0.618 level. And the market came to a halt at that 1127 0.618 retracement level!
Similarly, the 0.618 retracement level of the 1227 (November 5) to 1173 (November 16) down move is 1206. Thus, I anticipate that high-powered computer programs will be fired up to sell the S&P at around 1206. I could be wrong but, if I am wrong, I would be surprised.
Reason No. 2: The Dumb Money Factor.
In an earlier post, I urged readers to do the opposite of dumb money. Dumb money would be retail investors who trade options on the index. They are wrong like clockwork. At the close today, options traders were as bullish as they have been in the past six months since June 28. And what happened on June 28? The market dropped 70 points in 3 days into July 1. So, the positioning of Dumb Money at today's close suggests that the market has more down side.
Reason No. 3: Corrective Wave Pattern (Elliott Wave)
Even if I ignored the 0.618 retracement pattern and the Dumb Money Factor, I would be mindful of the Elliott Wave pattern that corrections take place in an A-B-C fashion. First, there is the initial down move that takes everyone by surprise. That is Move A down. Second, there is the sharp short covering rally up to frustrate the short sellers who are right but weak. That is Wave B. In my experience, Wave B usually ends at the 13-day moving average. Finally, there is a Wave C down which suggests raw panic and capitulation. Wave C goes lower than Wave A and usually represents a good buying opportunity at the bottom. Today was Wave B. Wave C remains ahead of us.
Conclusion: For these three reasons, I see lower prices ahead. And then it will be a good time to buy.
I leave you with an insightful quote from trader Mark Weinstein about the art of using different tools and rules:
"It is experience and gut feel. I use all forms of technical analysis, but interpret them through gut feel. I do not believe in mathematical systems that always approach markets in the same way. Using myself as the "system," I constantly change the input to achieve the same output--profit!" Market Wizards, supra, at page 339.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Thursday, November 18, 2010
Wednesday, November 17, 2010
Market Conditions
The Standard & Poor's 500 Index opened at 1178.33 It made a low of 1175.82 and a high of 1183.56. The close was 1178.59.
Today was an inside day, a relatively rare event in the marketplace. An inside day occurs when the low and high of a day's price action are contained within the high and low of the previous day. Yesterday, the high was 1194 and the low was 1173. What does this mean? It means that the price is quietly consolidating before the next major move. It doesn't tell us whether the next move will be up or down. We just know that the next move will be greater than the price range today.
Professional investors and traders see inside days as days of opportunity. They will buy if the price tomorrow exceeds the high of today (1183.56). Conversely, they will sell if the price tomorrow exceeds the low of today (1175.82). Because inside days are unusual and rare, the pros love an opportunity to profit from a burst in short-term price action.
No one can predict how the price will break out of today's trading range. I wouldn't be surprised if the price bounced up and hit resistance @ 1207. If the market did bounce up to 1207, that would be a shorting opportunity. (A shorting opportunity means you would position yourself for a further drop in price.) The bounce up to 1207 would also tell me that the downside will be limited. When a breakout fails (and the breakout on November 5 has failed because the price has dropped back below the former high @ 1219), there is always a sense that the drop could really accelerate to the downside. This anticipation would make sense if yesterday's gap down held. However, if the gap down closed, then I would know that the downside would be somewhat muted.
If the price breaks down below 1175, I would be surprised in that the market is already oversold on a short-term basis(see the 1-year chart of the S&P 500 Index @ clearstation.com). A break below 1175 would probably travel below the 50-day moving average and stop @ 1158 or so.
Anyway, we are in a waiting period right now. Lower prices are ahead, whether they come sooner or later.
Have a good evening!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Today was an inside day, a relatively rare event in the marketplace. An inside day occurs when the low and high of a day's price action are contained within the high and low of the previous day. Yesterday, the high was 1194 and the low was 1173. What does this mean? It means that the price is quietly consolidating before the next major move. It doesn't tell us whether the next move will be up or down. We just know that the next move will be greater than the price range today.
Professional investors and traders see inside days as days of opportunity. They will buy if the price tomorrow exceeds the high of today (1183.56). Conversely, they will sell if the price tomorrow exceeds the low of today (1175.82). Because inside days are unusual and rare, the pros love an opportunity to profit from a burst in short-term price action.
No one can predict how the price will break out of today's trading range. I wouldn't be surprised if the price bounced up and hit resistance @ 1207. If the market did bounce up to 1207, that would be a shorting opportunity. (A shorting opportunity means you would position yourself for a further drop in price.) The bounce up to 1207 would also tell me that the downside will be limited. When a breakout fails (and the breakout on November 5 has failed because the price has dropped back below the former high @ 1219), there is always a sense that the drop could really accelerate to the downside. This anticipation would make sense if yesterday's gap down held. However, if the gap down closed, then I would know that the downside would be somewhat muted.
If the price breaks down below 1175, I would be surprised in that the market is already oversold on a short-term basis(see the 1-year chart of the S&P 500 Index @ clearstation.com). A break below 1175 would probably travel below the 50-day moving average and stop @ 1158 or so.
Anyway, we are in a waiting period right now. Lower prices are ahead, whether they come sooner or later.
Have a good evening!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Tuesday, November 16, 2010
Market Conditions - The Storm Has Arrived
Well, Barbara, the Storm has arrived.
Today was an uber bearish day. The market gapped down at the open. (Bearish Sign #1) The open was the high of the day. (Bearish Sign #2) The market fell throughout the day, down through 1190, 1180, and touching 1173 before closing @ 1178. (Bearish Sign #3) The market closed down more then 1%. (Bearish Sign #4) Gary Smith considers these days to be "true selling days." It is not a good time for stock holdings. Even the buying of U.S. treasuries by the Federal Reserve did not stir the market to rise. (Bearish Sign #5) Always remember that when a piece of good news comes out and the market continues to drop, then market conditions are poor for stock holdings.
Tonight, we are out of stocks. It is a good feeling. Smart investing requires good offense and good defense. The good offense comes when it is time to buy. Even though you might be fearful, you commit 100% to the C Fund and trust your observation and experience. The good defense comes when you reject greed and accept patience and discipline as true allies. When storm clouds are on the horizon, its time to step aside and wait.
There will be buying opportunities ahead of us. The opportunities oftentimes appear when no one wants to own stocks. We are now waiting for that moment. It will come. And when it comes, we will commit 100% into the C Fund. And we will beat the S&P 500 Index again this year.
As I type, the S&P 500 Index is up 5.65% for the year and dropping every day/smile.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Today was an uber bearish day. The market gapped down at the open. (Bearish Sign #1) The open was the high of the day. (Bearish Sign #2) The market fell throughout the day, down through 1190, 1180, and touching 1173 before closing @ 1178. (Bearish Sign #3) The market closed down more then 1%. (Bearish Sign #4) Gary Smith considers these days to be "true selling days." It is not a good time for stock holdings. Even the buying of U.S. treasuries by the Federal Reserve did not stir the market to rise. (Bearish Sign #5) Always remember that when a piece of good news comes out and the market continues to drop, then market conditions are poor for stock holdings.
Tonight, we are out of stocks. It is a good feeling. Smart investing requires good offense and good defense. The good offense comes when it is time to buy. Even though you might be fearful, you commit 100% to the C Fund and trust your observation and experience. The good defense comes when you reject greed and accept patience and discipline as true allies. When storm clouds are on the horizon, its time to step aside and wait.
There will be buying opportunities ahead of us. The opportunities oftentimes appear when no one wants to own stocks. We are now waiting for that moment. It will come. And when it comes, we will commit 100% into the C Fund. And we will beat the S&P 500 Index again this year.
As I type, the S&P 500 Index is up 5.65% for the year and dropping every day/smile.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Saturday, November 13, 2010
Understanding Contrary Opinion
One of my favorite books is Investment Psychology Explained: Classic Strategies to Beat the Market by Martin J. Pring. Pring was the publisher of the newsletter, The Pring Market Review, and a respected commentator on the market. I respect Pring because he nailed the essence of successful investing. As Pring saw it, "All of us are comfortable buying stocks when prices are high and rising and selling when they are declining, but we need to develop an attitude that encourages us to do the opposite." (page 1) John D. Rockefeller understood the point. In the later part of his life, he said that one should only buy stocks on down days and sell on up days. Hmmn.
The following are a few points that Pring observed about contrary opinion:
1. The practice of contrary opinion is an art and not a science. (page 110)
2. To be a true contrarian involves study, creativity, wide experience, and above all, patience. (page 110)
3. Investors tend to move in crowds that by nature are driven by herd instincts and the desire for instant wealth. (page 111)
4. When virtually everyone has taken the position the market is headed in a certain direction, there is no one left to push the trend any further. (page 111)
5. Contrary Opinion requires us to go against our natural instincts--a difficult task indeed. (page 113)
6. We need to be skeptical of the headlines and must try to identify the reasoning behind them. (page 124)
7. It is better to be early and right than late and wrong.
8. Don't extrapolate the future from the present. (page 127)
9. People like to conform. (page 130)
10. If an argument appears in the popular press, you can be sure that everyone who wants to buy is already on board. (page 132)
I leave you with this thought on Saturday morning--The Federal Reserve started buying bonds and treasuries on Friday. (Quantitative Easing II). The market did not go up on Friday. It fell. "A fully positioned condition by the majority of participants is revealed when a news event, supporting their position, fails to move prices in the expected direction" R. Earl Hadady, Contrary Opinion:Using Sentiment to Profit in the Futures Market, pages 63-64.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
The following are a few points that Pring observed about contrary opinion:
1. The practice of contrary opinion is an art and not a science. (page 110)
2. To be a true contrarian involves study, creativity, wide experience, and above all, patience. (page 110)
3. Investors tend to move in crowds that by nature are driven by herd instincts and the desire for instant wealth. (page 111)
4. When virtually everyone has taken the position the market is headed in a certain direction, there is no one left to push the trend any further. (page 111)
5. Contrary Opinion requires us to go against our natural instincts--a difficult task indeed. (page 113)
6. We need to be skeptical of the headlines and must try to identify the reasoning behind them. (page 124)
7. It is better to be early and right than late and wrong.
8. Don't extrapolate the future from the present. (page 127)
9. People like to conform. (page 130)
10. If an argument appears in the popular press, you can be sure that everyone who wants to buy is already on board. (page 132)
I leave you with this thought on Saturday morning--The Federal Reserve started buying bonds and treasuries on Friday. (Quantitative Easing II). The market did not go up on Friday. It fell. "A fully positioned condition by the majority of participants is revealed when a news event, supporting their position, fails to move prices in the expected direction" R. Earl Hadady, Contrary Opinion:Using Sentiment to Profit in the Futures Market, pages 63-64.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Friday, November 12, 2010
Contrary Opinion and the Fear Factor
The following is an essay I submitted to the website Market Oracle UK:
Contrary Opinion and the Fear Factor
By Wink Twyman
Last week, I turned on CNBC in the early morning hours. Anchor Sue Herera was in a bubbly mood. She said that, after the market’s performance that week, one commentator said, “You ain’t seen nothing yet!” Because I am jaded on media coverage, I immediately took Herera’s cheerleading as a signal that the top was close at hand. It occurred to me that the average investor and trader might take Herera’s words to heart, rush out to Scottrade or Charles Schwab, and plunk down their hard-earned money on “black,” I mean, the stock of their choice because the market was now safe.
The purpose of this essay is to show that it is never safe when commentators say, “You ain’t seen nothing yet!” In fact, this is often the worst possible time to buy stocks. Never buy giddiness or veiled hints that the best is yet to come. Oftentimes, while you are buying stage right, the pros are selling stage left.
The famous trader, Jesse Livermore, remarked that he was often tasked with the job of marking up stocks for sale to the retail public. The public never seemed interested in low prices. But once a stock started to move, the level of interest from amateurs would increase proportionately. It was understood behind the scenes that the insiders were already in. They were using the increase in prices to scale out of their positions. Now, the oddest point Livermore noticed was that the retail public would continue to buy on the way down! Apparently, hope springs external. The average guy would always hope that the next drop down was support and that this support would hold. Of course, there is no such thing as support in a Bear Market.
Livermore never knew CNBC. He died in the 1940s. But he would have recognized the game that was going on last week. Some things are timeless.
Nicholas Darvas was a Las Vegas dancer who stumbled into investing and trading during the 1950s. I love the Darvas story because he had the persistence and determination to figure out the system on his own. Darvas candidly wrote about his early days when he sought out stock tips and “financial advice sheets.” The commentators were always excited about the market. They urged readers to “Buy this stock now before it is too late!” And guess what? Darvas would rush out to buy the recommended stocks. The stocks took that as a signal to drift lower and lower. The pattern never changed. Eventually, Darvas woke up and opened his eyes. He realized that “when these financial tipsters advise the small operator to buy a stock, those professionals who have bought the stock much earlier on inside information are selling.”
It did not pay to be late to the party.
Gary Smith is another example of an average guy who read the papers and treaded water. For years, Smith wanted to succeed as a trader more than anything in the world. He worked tirelessly. He read The Wall Street Journal. He read Barron’s. He was influenced by the news of the moment. And still he went nowhere as a trader for sixteen years. It was only when he discovered contrary opinion did he turn himself around as a trader. Learning to ignore The Wall Street Journal, for example, was his saving grace.
These are just a few examples of contrary opinion. There are many, many stories out there in the wild and woolly world of financial markets. The take away point is that buying should be at a point of fear, not warm and fuzzy feelings or the urgings of commentators.
Consider that one of the best times to buy the S&P 500 Index this year was August 25, 2010. On that date, I urged my fellow investors in the Las Vegas Thrift Savings Plan (TSP) to move 100% of their retirement funds from the G Fund (essentially a cash position) to the C Fund (a diversified portfolio of stocks). I remember that day well. There was no giddiness from Herera on CNBC. No media commentators were crowing that “You ain’t seen nothing yet!” During my lunch stroll along the harbor, I saw the newspaper headlines proclaiming that the stock market had suffered a series of setbacks. When I saw that bearish headline, I knew my call to move 100% into stocks was the right call.
What were retail investors and traders worried about during the last week in August? They were worried about a developing Head and Shoulders pattern on the Index, (on no!), the Hindenburg Omen (oh dear!), and the Grand Cardinal Cross (oh my!). Most of all, there was fear in the air. Even I was fearful on the morning of August 27 as the S&P 500 Index dipped below 1040 and I was Bullish!!!
Ultimately, it is always a good time to buy when the fear factor has gripped the hearts and minds of Bulls, Bears, and the “Get Me the Hell Out of Dodge” Crowd. That’s how money is made. That’s how winning is done. Buy the fear.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Contrary Opinion and the Fear Factor
By Wink Twyman
Last week, I turned on CNBC in the early morning hours. Anchor Sue Herera was in a bubbly mood. She said that, after the market’s performance that week, one commentator said, “You ain’t seen nothing yet!” Because I am jaded on media coverage, I immediately took Herera’s cheerleading as a signal that the top was close at hand. It occurred to me that the average investor and trader might take Herera’s words to heart, rush out to Scottrade or Charles Schwab, and plunk down their hard-earned money on “black,” I mean, the stock of their choice because the market was now safe.
The purpose of this essay is to show that it is never safe when commentators say, “You ain’t seen nothing yet!” In fact, this is often the worst possible time to buy stocks. Never buy giddiness or veiled hints that the best is yet to come. Oftentimes, while you are buying stage right, the pros are selling stage left.
The famous trader, Jesse Livermore, remarked that he was often tasked with the job of marking up stocks for sale to the retail public. The public never seemed interested in low prices. But once a stock started to move, the level of interest from amateurs would increase proportionately. It was understood behind the scenes that the insiders were already in. They were using the increase in prices to scale out of their positions. Now, the oddest point Livermore noticed was that the retail public would continue to buy on the way down! Apparently, hope springs external. The average guy would always hope that the next drop down was support and that this support would hold. Of course, there is no such thing as support in a Bear Market.
Livermore never knew CNBC. He died in the 1940s. But he would have recognized the game that was going on last week. Some things are timeless.
Nicholas Darvas was a Las Vegas dancer who stumbled into investing and trading during the 1950s. I love the Darvas story because he had the persistence and determination to figure out the system on his own. Darvas candidly wrote about his early days when he sought out stock tips and “financial advice sheets.” The commentators were always excited about the market. They urged readers to “Buy this stock now before it is too late!” And guess what? Darvas would rush out to buy the recommended stocks. The stocks took that as a signal to drift lower and lower. The pattern never changed. Eventually, Darvas woke up and opened his eyes. He realized that “when these financial tipsters advise the small operator to buy a stock, those professionals who have bought the stock much earlier on inside information are selling.”
It did not pay to be late to the party.
Gary Smith is another example of an average guy who read the papers and treaded water. For years, Smith wanted to succeed as a trader more than anything in the world. He worked tirelessly. He read The Wall Street Journal. He read Barron’s. He was influenced by the news of the moment. And still he went nowhere as a trader for sixteen years. It was only when he discovered contrary opinion did he turn himself around as a trader. Learning to ignore The Wall Street Journal, for example, was his saving grace.
These are just a few examples of contrary opinion. There are many, many stories out there in the wild and woolly world of financial markets. The take away point is that buying should be at a point of fear, not warm and fuzzy feelings or the urgings of commentators.
Consider that one of the best times to buy the S&P 500 Index this year was August 25, 2010. On that date, I urged my fellow investors in the Las Vegas Thrift Savings Plan (TSP) to move 100% of their retirement funds from the G Fund (essentially a cash position) to the C Fund (a diversified portfolio of stocks). I remember that day well. There was no giddiness from Herera on CNBC. No media commentators were crowing that “You ain’t seen nothing yet!” During my lunch stroll along the harbor, I saw the newspaper headlines proclaiming that the stock market had suffered a series of setbacks. When I saw that bearish headline, I knew my call to move 100% into stocks was the right call.
What were retail investors and traders worried about during the last week in August? They were worried about a developing Head and Shoulders pattern on the Index, (on no!), the Hindenburg Omen (oh dear!), and the Grand Cardinal Cross (oh my!). Most of all, there was fear in the air. Even I was fearful on the morning of August 27 as the S&P 500 Index dipped below 1040 and I was Bullish!!!
Ultimately, it is always a good time to buy when the fear factor has gripped the hearts and minds of Bulls, Bears, and the “Get Me the Hell Out of Dodge” Crowd. That’s how money is made. That’s how winning is done. Buy the fear.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Waiting for a Good Time to Buy
One of my favorite moments is when I can e-mail Barbara and say, "Now is a good time to buy. The storm is past." I take great satisfaction in scanning the market every day and taking the pulse of market sentiment. Things are not always what they seem in the marketplace. I am usually most anxious and fearful when investors are giddy. Conversely, I am usually most at peace when the headlines are proclaiming that the market has had its worst week in such and such a time. Those times are usually good times to buy.
Market Conditions This Week --
1. The market closed down for the week. We had a true selling day (more than 1% down) on every single index except for the Dow Jones Industrial Average. According to trader Gary Smith, true selling days are good times to be out of the market. I agree. Selling pressure tends to feed upon itself. Fear is a more powerful emotion than greed. Every investor and trader who bought the euphoria of the Federal Reserve's Quantitative Easing (QE2) when the Standard & Poors 500 Index was above 1200 is now underwater. They are hoping that the market will not correct further. I fear they will have a few more days (weeks?) of worry.
2. The S&P 500 Index closed below its 13-day moving average for the first time since August. This daily close below the 13-day moving average is a bearish development. It suggests that the trend has changed from up to down for now. The probabilities favor lower prices, not higher prices, for the moment.
3. On a weekly chart, the S&P 500 Index closed down. Probabilities again suggest that this down week will be followed by another down week in the marketplace.
4. I got a wonderful sell signal yesterday at the close of trading. I know that this signal is not simple but bear with me. (I know you're watching, Barbara/smile). There are smart investors and traders. There are dumb investors and traders. Smart money tends to be right more often than not. Maybe, they are better connected or have deeper pockets or whatever. But they tend to get it right. Dumb money tends to get it wrong. You can make money doing the opposite of what dumb money does.
Smart money is composed of institutions, hedge funds, and wealthy individuals like George Soros and John Paulson. Dumb money is the retail guy who watches Jim Cramer on CNBC and decides to buy gold because Jim said so. (not a smart idea!) Dumb money reads an article in the Wall Street Journal and won't touch an investment because the reporter said so. (Not a smart idea! You can make money by fading or going against the media.)
We want to be like smart money, not dumb money.
Now, how do we track the moves of dumb money? How do we pick up the trail of dumb money and go the other way? One tool is options activity on the index. Studies have shown that dumb money gambles on options and that dumb money loses like clockwork to smart money, particularly at extremes. So, when dumb money is absolutely convinced that the market is going higher and they rush out to buy calls, then it is good bet that the market will do the opposite and head lower.
This contrarian signal flashed yesterday between noon and 1:00 p.m., the last hour of the trading day. I could not believe my eyes when I saw how bullish people were on options. According to my chart, people were buying calls (bets that the market will go higher) at the highest rate since June 28. What happened after June 28? The market dropped 70 points within 3 days. So, yesterday, I felt very confident that the market would be dropping, not rising, for a while.
When Will It Be A Good Time to Buy?
I am looking for several factors to come together. These factors are as follows:
1. The Relative Strenght Index (RSI) needs to fall into the 30ish level on a daily basis. Today, the RSI closed in the 50s. That's better than last week but not good enough for me to place that e-mail to Barbara.
2. The stochastics needs to drop to the oversold level. The stochastics is still hanging up around 79. That's not a good time to buy. A good time to buy would be at least the 20ish level. During the last week in August, I saw with my own eyes how the S&P 500 Index reached down into the single digits on the stochastics! I knew from hard experience and observation that those readings were unsustainable. It was a good time to buy.
3. Resistance on the S&P 500 Index was @ 1129 on August 9. This number is very, very important to me. I think about this number alot (more than I care to admit/smile.) There is an important principle in investing that former resistance turns into future support. In other ways, there are a group of investors and traders back @ 1129 who missed the boat. They misjudged how strong the rally off of the August 27 bottom @1039.74 would be. Now, they have had to sit out a powerful rally up to the 1227 level for 2 1/2 months. They are eager to get on board the train. They may also be investors and traders who went short the S&P 500 @ 1129. Bad mistake! These people are eager to cover and cut their losses and get out even.
So, there are communities of investors and traders with a vested interest in what the S&P does @ 1129. We are concerned as well because this area may provide a good time to buy. We simply have to see if the market reaches down to this area and whether the other signals (RSI readings, Stochastics reading) support a buy decision.
The hardest part about investing is having the patience and discipline to wait for a good time to buy. Its like staking prey, according to trader Mark Weinstein. Its like stalking prey.
Conclusion: Sentiment has turned in the market. What goes up must come down. Our job now is to have the patience and discipline to wait for a good time to buy. No one can predict the future. But we know that a good time to buy will have a certain character. We are waiting for fear. As Baron Rothschild once said, we are waiting for the proverbial blood to run in the streets.
Then, we buy.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Market Conditions This Week --
1. The market closed down for the week. We had a true selling day (more than 1% down) on every single index except for the Dow Jones Industrial Average. According to trader Gary Smith, true selling days are good times to be out of the market. I agree. Selling pressure tends to feed upon itself. Fear is a more powerful emotion than greed. Every investor and trader who bought the euphoria of the Federal Reserve's Quantitative Easing (QE2) when the Standard & Poors 500 Index was above 1200 is now underwater. They are hoping that the market will not correct further. I fear they will have a few more days (weeks?) of worry.
2. The S&P 500 Index closed below its 13-day moving average for the first time since August. This daily close below the 13-day moving average is a bearish development. It suggests that the trend has changed from up to down for now. The probabilities favor lower prices, not higher prices, for the moment.
3. On a weekly chart, the S&P 500 Index closed down. Probabilities again suggest that this down week will be followed by another down week in the marketplace.
4. I got a wonderful sell signal yesterday at the close of trading. I know that this signal is not simple but bear with me. (I know you're watching, Barbara/smile). There are smart investors and traders. There are dumb investors and traders. Smart money tends to be right more often than not. Maybe, they are better connected or have deeper pockets or whatever. But they tend to get it right. Dumb money tends to get it wrong. You can make money doing the opposite of what dumb money does.
Smart money is composed of institutions, hedge funds, and wealthy individuals like George Soros and John Paulson. Dumb money is the retail guy who watches Jim Cramer on CNBC and decides to buy gold because Jim said so. (not a smart idea!) Dumb money reads an article in the Wall Street Journal and won't touch an investment because the reporter said so. (Not a smart idea! You can make money by fading or going against the media.)
We want to be like smart money, not dumb money.
Now, how do we track the moves of dumb money? How do we pick up the trail of dumb money and go the other way? One tool is options activity on the index. Studies have shown that dumb money gambles on options and that dumb money loses like clockwork to smart money, particularly at extremes. So, when dumb money is absolutely convinced that the market is going higher and they rush out to buy calls, then it is good bet that the market will do the opposite and head lower.
This contrarian signal flashed yesterday between noon and 1:00 p.m., the last hour of the trading day. I could not believe my eyes when I saw how bullish people were on options. According to my chart, people were buying calls (bets that the market will go higher) at the highest rate since June 28. What happened after June 28? The market dropped 70 points within 3 days. So, yesterday, I felt very confident that the market would be dropping, not rising, for a while.
When Will It Be A Good Time to Buy?
I am looking for several factors to come together. These factors are as follows:
1. The Relative Strenght Index (RSI) needs to fall into the 30ish level on a daily basis. Today, the RSI closed in the 50s. That's better than last week but not good enough for me to place that e-mail to Barbara.
2. The stochastics needs to drop to the oversold level. The stochastics is still hanging up around 79. That's not a good time to buy. A good time to buy would be at least the 20ish level. During the last week in August, I saw with my own eyes how the S&P 500 Index reached down into the single digits on the stochastics! I knew from hard experience and observation that those readings were unsustainable. It was a good time to buy.
3. Resistance on the S&P 500 Index was @ 1129 on August 9. This number is very, very important to me. I think about this number alot (more than I care to admit/smile.) There is an important principle in investing that former resistance turns into future support. In other ways, there are a group of investors and traders back @ 1129 who missed the boat. They misjudged how strong the rally off of the August 27 bottom @1039.74 would be. Now, they have had to sit out a powerful rally up to the 1227 level for 2 1/2 months. They are eager to get on board the train. They may also be investors and traders who went short the S&P 500 @ 1129. Bad mistake! These people are eager to cover and cut their losses and get out even.
So, there are communities of investors and traders with a vested interest in what the S&P does @ 1129. We are concerned as well because this area may provide a good time to buy. We simply have to see if the market reaches down to this area and whether the other signals (RSI readings, Stochastics reading) support a buy decision.
The hardest part about investing is having the patience and discipline to wait for a good time to buy. Its like staking prey, according to trader Mark Weinstein. Its like stalking prey.
Conclusion: Sentiment has turned in the market. What goes up must come down. Our job now is to have the patience and discipline to wait for a good time to buy. No one can predict the future. But we know that a good time to buy will have a certain character. We are waiting for fear. As Baron Rothschild once said, we are waiting for the proverbial blood to run in the streets.
Then, we buy.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Saturday, November 6, 2010
What a Week!
This week, the market blew through resistance @ 1219 and set a new high for the year. The market's reaction to the Federal Reserve announcement was very bullish. So, I am a Bull for now.
Is this a good time to buy? No.
Even if the character of the market has changed, it doesn't pay to just buy any old time. Prices are high right now. People are excited. It is always a better move to Buy Low, not Buy High. Prices are most tempting when prices are high. But how many times have retail investors purchased a stock because of excitement and then watch the prices drift lower and drift lower?
What are good times to buy and add to the C Fund?
First, you want to buy fear. You want a situation when investors are fearful and on edge about the future. That is not the case now. Euphoria reigns.
Second, you want to buy at support levels. In other words, find a level on the S&P 500 Index where the price made a previous low and that low held. Why? Its about psychology. The investors and traders at the greatest risk are those who bought the breakout of the S&P above 1219, the former high for the year. I think prices are going higher but there is no demonstrated support yet @ 1219. 1219 must be tested. Next week will be important in this regard. The low this week was 1177. 1177 seems like a natural support for me. Should the S&P 500 drift down to 1177, you can count on two forces. Everyone who bought in a rush this week will be underwater and experiencing anxiety and fear. You will also have the opposing force of patient investors and traders waiting to ride the next move up. Waiting for support allows us to benefit from these two opposing forces.
Third,it doesn't pay over the long run to buy when technical indicators are crazed. The Relative Strength Index (Index) closed at around 78. That's abnormal for an entire index and not sustainable over the long run. The volume this week was not strong enough to support a breakout. According to famous investor William O'Neil, a breakout above resistance should be supported by at least 50% more volume than the previous 50-day moving average in volume. I ran some calculations Thursday night. I was shocked to find that the volume was paltry despite appearances on the surface.
In summary, I am a Bull now. The market is telling me that prices will be heading higher. The market is also telling me that I would be sorry if I bought now. The temptation is oh so great. That's greed. Let's put greed aside. Patience and discipline are better allies. Next week is a new week. Mutual Fund Monday should be up. But the rest of the week will be more instructive.
Prices never go to the moon. Nor do they drop to the center of the earth. We buy when folks fear the drop to the center of the earth.
Wink
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Is this a good time to buy? No.
Even if the character of the market has changed, it doesn't pay to just buy any old time. Prices are high right now. People are excited. It is always a better move to Buy Low, not Buy High. Prices are most tempting when prices are high. But how many times have retail investors purchased a stock because of excitement and then watch the prices drift lower and drift lower?
What are good times to buy and add to the C Fund?
First, you want to buy fear. You want a situation when investors are fearful and on edge about the future. That is not the case now. Euphoria reigns.
Second, you want to buy at support levels. In other words, find a level on the S&P 500 Index where the price made a previous low and that low held. Why? Its about psychology. The investors and traders at the greatest risk are those who bought the breakout of the S&P above 1219, the former high for the year. I think prices are going higher but there is no demonstrated support yet @ 1219. 1219 must be tested. Next week will be important in this regard. The low this week was 1177. 1177 seems like a natural support for me. Should the S&P 500 drift down to 1177, you can count on two forces. Everyone who bought in a rush this week will be underwater and experiencing anxiety and fear. You will also have the opposing force of patient investors and traders waiting to ride the next move up. Waiting for support allows us to benefit from these two opposing forces.
Third,it doesn't pay over the long run to buy when technical indicators are crazed. The Relative Strength Index (Index) closed at around 78. That's abnormal for an entire index and not sustainable over the long run. The volume this week was not strong enough to support a breakout. According to famous investor William O'Neil, a breakout above resistance should be supported by at least 50% more volume than the previous 50-day moving average in volume. I ran some calculations Thursday night. I was shocked to find that the volume was paltry despite appearances on the surface.
In summary, I am a Bull now. The market is telling me that prices will be heading higher. The market is also telling me that I would be sorry if I bought now. The temptation is oh so great. That's greed. Let's put greed aside. Patience and discipline are better allies. Next week is a new week. Mutual Fund Monday should be up. But the rest of the week will be more instructive.
Prices never go to the moon. Nor do they drop to the center of the earth. We buy when folks fear the drop to the center of the earth.
Wink
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
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