"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
Sun Tzu

Sunday, September 20, 2009

Swing Trading Portfolio Snapshot

Just a quick review of my current swing trading positions. In general, we are incredibly overbought. So at this point, I'm looking to scale out of or even close weak positions. Please note that I currently own LONG positions only.

Had a very strong move on high volume last week. A little bit surprising without any news. I plan to stay in this trade until $200 and then re-evaluate.

A IBD100 stock. Nice move, but declining volume. Time to take some profits on this one. Broke strong resistance @ 38. Keep ARO on the watchlist to get back in after some consolidation.

Railroad stocks are hot right now, CSX consolidated the last two weeks and moved close to key support level @ 44, which prompted me to add to my position last week.

Upgraded from Goldman last Friday, gaining momentum the last four weeks. Strong resistance @ 2 bucks. I think ETFC will break that level soon and move quickly to $2.3, where I plan to take partial profits.

Next two weeks will show if the move above $1000 was a false breakout or not. I think it will move higher. I just own a small position of UGL (2X ETF) and I would like to add more.

Homebuilder, short squeeze play. Reports next week, we'll see if we can get another boost in the stock price.

Very strong move last week, similar to AAPL. Plan to take profits @ 240.

My most speculative play in the portfolio. Chinese gaming stock. In a consolidation zone for two months, looks like it might break out soon. Not to late to get in.

IBD 100 stock, a little bit weak recently, need to monitor this one.

Very strong uptrend. Looking for consolidation down to $155 before I add to my position.

Paper stock, hot sector, but this one is consolidating. Keep it as long it trades above $47.

Interesting technical pattern, similar to what we saw with Gold some weeks ago (symetric triangle).
It is just a question of time when Oil will break out and march towards $80.

Friday, September 11, 2009

My Take on Gilead

The market is hot right now and it becomes more difficult to find interesting opportunities. Note that we are in a momentum environment, so trading has to be completly different then let's say half a year ago.

One of the stocks I like is Gilead:

Totally overlooked in recent weeks. Obama's health care discussion mess is masking some of the stocks in the sector. Gilead is a large cap swin flue play and Jim Cramer is all over that company (Don't know if that is good or bad, though :-) ). Swine flu headlines will come up in a couple of weeks. Gilead could benefit from Tamiflu sales, one of the few treatments for the disease.

The monthy chart looks very clean:

Strong uptrend for the last 10 years, some consolidation in the last 12 months, but forming a nice bullish wedge.

The behaves pretty choppy on a daily basis, so it actually doesn't look like a stock I normally would swing trade:

Since we got a potential catalyst coming, I would give it a try. Note that that GILD has totally underperformed in this rally (lower curve since April).
If you want to trade this: Stop @ 44. First target 53 creates a compelling risk/reward ratio of 3.5. Once the stock reaches the target, take off half the position if the stock shows increasing momentum. If the move is weak, close the position.

Thursday, September 10, 2009

S&P 500: Technical Picture until EoY (Update)

Yesterday, I wrote about the technical possibility that the S&P 500 could run up to 1125 points until mid November. Since we identified the technical picture, we now have to look for potential catalysts that could move us higher. Here is my favorite one:
Q 3 earnings season will start in a couple of weeks. I expect especially multinational companies to issue positive economic outlooks and raise their guidance for the next year, since we recently have seen encouraging economic numbers. In addition, the declining Dollar will help export oriented companies to improve their earnings. I do not think that Q3 earnings is fully priced into stocks yet.

So let's assume we would see a strong earnings season and more signs for a V shaped recovery would emerge. What'll could happen mid/end November? Since markets are a discounting mechanism, they could start to focus on a FED exit strategy. Rising rates and elimination of "quantitive easing" will be a critical moment for the economy and create fear among stock market participants.

Of course, you can entirly scratch the scenario described above if new developments are coming up. For example, I'm observing the developments in Iran. Oil could easily march towards $100 Dollars if Israel starts to get nervous; a development that would send stocks downward. The outlook for a potential war in Middle East is definetly not priced into stocks yet. BTW: this scenario is one of the reasons, why I started to build a LONG position in Oil.

So that's the nature of speculation: you create a thesis about things that the markets don't see yet and make your bets on it. Once you see these themes unfold, you start closing your trade. Buy the rumor, sell the fact. (I apologize for pounding this point so often).

Wednesday, September 9, 2009

S&P 500: Technical Picture until EoY

I'm not a person, who thinks that you can predict market moves using Technical Analysis alone. Nevertheless, it's sometimes interesting to see where markets could be heading and then look for additional factors outside TA to make investment decisions.

This morning, I took a look at the weekly chart of the S&P 500 and extended it until December 2009. Some very interesting observations can be made:

We basically have three "technical" phenomena in the chart:

1) A falling trend line
2) Fibonacci retracements (watch the 50% retracement)
3) A rising wedge, which usually is a bearish sign

If you extend all the lines until the end of the year, you can see that they all come together at one point (4). So based on this analysis and the assumption that the current move is just a bear market rally, we expect the S&P 500 to top at 1125 around mid November.

Granted, this prediction is almost too accurate to become true since it also includes a date. The convergence of three different technical bearish patterns is an interesting phenomenon and we'll need to watch the markets very closely at that point. One conclusion we can draw at least is that there is a lot of overhead resistance around 1100.

At first, the S&P has to make it through the 38% retracement, though.

Tuesday, September 8, 2009

Maybe a Simple Reason Why Gold is Moving

Looks like Gold broke the 1000 level this morning. Let's see if we can sustain the move in the afternoon. Dollar weakness seems the driving force since EUR/USD made a new high this morning as well. We can see a quick move if EUR/USD manages to blow through 1,45.

Remember, we had some positive economic numbers from Germany yesterday. So it looks like we are recovering relatively well (at least in Europe).

So here is a possible thesis for a LONG Gold trade:

Economists have been underestimating the speed of the recovery and are behind the curve with their interest rates. The low interest rate level will create inflationary pressure sooner than we thought.

Remember: this is not a prediction, just a thesis for trading (of course, you should have a thesis for every trade you're doing). I'll watch out for supporting arguments in the next days/weeks.
The market is a discounting mechanism, who tells us today what will happen tomorrow. Sometimes it is not clear, what the market is saying, because it'll take a while until you are able to see the facts. But that is the nature of speculation.

Monday, September 7, 2009

My 11 Most Important Trading Rules

Thought I just list them here as a reminder. I initially had ten points and came up with a eleventh one, which I didn't want to scratch:

1) Buy the rumor, sell the fact

2) Buy when the crowd sells and sell when they buy

3) Before getting in, know when to get out

4) It's all about the odds, there is no certainty in speculation

5) Be disciplined

6) The market is always right
7) What works today, will probably stop working tomorrow

8) Never ever stop learning

9) Be open to the idea that you might me wrong

10) Know what your edge is

11) Never chase the market

Summary of GOLD Arguments

I'm currently trying to understand the recent move of Gold, so I digged into various resources for arguments. Here is a summary of point that support/don't suppport the current move. Hope that helps you to pick your side of the trade:

Aguments why Gold should continue to rise short term:
  • Technical breakout from consolidation
  • China recently adviced people to invest in Gold
  • Seasonality: September has historically been a good month for Gold
  • Negative trend for the Dollar could push Gold prices up
  • Supply in longer term downtrend
Negative factors
  • Everybody seems to be behind Gold: contrarian argument
  • Falling jewelery demand
  • Inflation fears overblown: might become an issue in 2 years
  • De-hedging: stock markets become stronger around the world
  • 1000$ resistance is very strong

It seems to be difficult to assess what's behind the latest move. Volume has been strong, though, and I wonder if "someone knows somehting". Despite the fact that I own a small position in UGL, I expect Gold to NOT break the $1000 level this time.

Time will tell.

Sunday, September 6, 2009

Relative Sector Performance Review Sep 6

I often find new trading ideas by monitoring relative sector performance. Here's the chart for the last six months (proprietary method to calculate values):

Some things we can learn about the state of the market:
  • Defensive sectors remain weak on a relative basis, which is a bullish sign for the market
  • Financials actually have been the strongest sector in recent weeks. This might change, since
    many banks behave a little bit toppy. I'll monitor them closely next week.
  • Energy is catching up since over a month. The sector has potential to lead the market
    in the next weeks if oil resumes its march towards the 80 level.
  • Tech, the former leader, is stuck in the middle ground. Looks a little bit like it
    doesn't know where to go.
Overall, we might see a sector rotation from Tech to Energy/Industrials. The range of sector
strength remains tight (35 - 55%), so we are missing clear leadership. I would like to see a range like earlier this year with values between 30 - 70%, which would make it easier to spot opportunities with unique trading themes.