Diversified Trading Institute

Rebound Friday – Monday, August 30, 2010

The equity markets continued to decline last week but rallied hard on Friday to cut into the week’s losses.  The ESU10 S&P 500 futures contract closed last week at 1070.25 and dipped all the way to 1037.00 on Wednesday.  They retested the low Friday around the time of FOMC chair Ben Bernanke’s comments on monetary policy were being released by trading at a low of1037.25 before bouncing into a close at 1063.75.  The market is in a clearly defined downtrend and we expect resistance at 1075 should the ES keep bouncing higher.The Hindenburg Omen which we have written about over the past years has made its way into the mainstream media now.  Much of what is being publicized is incorrect and please note that like many indicators, there are different ways to filter and interpret the information.  There was another signal recorded on Friday and this cluster has been sufficient to put us in the extremely cautionary camp.  The fact that we recorded this signal on a day that was also a 90% up day is even more reinforcement that the market is under stress at the current time.  There may be a major problem in the market that is still unknown but caution is warranted.This is potentially going to be a slower week as we head into the Labor Day long weekend.  This is traditionally the last week of summer in many parts of the country and traders may try to work in one last vacation.  This may result in volume tapering off as the end of the week approaches.  We still believe that September and October are going to result in serious volatility and some big moves in the stock indexes.

Past performance is not indiciative of future results. Futures trading involves substantial financial risk. Please consult your personal financial advisor before using this information for your own trading purposes.

Trade To Trade Well, Not To Make Money!

I have repeated this statement hundreds of times to my students.  It seems like a contradiction but it really is not.  Traders who routinely make enormous amounts of money trading don’t mentally count the dollars while they’re trading. They don’t keep a mental calculator continuously running in their head to constantly keep track of how much money they’ve put into their account.  “Let’s see, I bought 1000 shares of Haliburton and it’s up one point, times one dollar a share, equals 1000 dollars!”  Nothing and I mean nothing, will blow your concentration and cloud your judgment faster than keeping that calculator running in your head, calculating the dollars you’ve made or lost each minute that goes by during the trading day. Another booby trap is to announce to the world, your husband, wife or even your dog that you’re going to make a specific amount of money trading today.  You’re setting yourself up for failure.  Setting as specific dollar amount you must bring home each day, especially if you’re a beginning trader, assures that it probably won’t happen.  This need to make a specific amount of money colors your view of the market and pressures you to open positions that are marginal trades because you have promised yourself or worse yet, someone else - that you’re going to bring home the cash!  Your pledge echoes in your mind, so you force trades.  Odds are, you lose money.  Now you’re embarrassed with yourself and you start questioning your self-esteem, which automatically leads to more losses. The cure for this illness: From this point forward, your goal is not to make money.  Your goal is to trade to trade well!  Money is a by-product of trading well.  A very interesting thing starts to happen when you focus on trading well.  Your profits will start to add up a lot faster than they did when making money was your primary goal.  This is simply because traders who focus on trading well cut their losses and let their winners run.  They protect their capital and leave unnecessary risks to others.  They recognize a choppy market and sit on their hands and don’t trade.  They make promises to no one, including themselves, about the money they want to take home.  Traders who trade well let the market come to them.  They are extremely patient and disciplined.  They wait for the perfect setup and entry point.   If that perfect point doesn’t come along, oh well, they wait for the next one knowing that another chance is just around the corner.  Once in the trade, they mechanically and methodically manage their position, taking profits at specific points, and moving their stop loss to protect their principal. Traders who trade well don’t trade simply for the excitement of the trade because they have become addicted to the thrill.  They don’t trade out of boredom or when they are sick or tired.  They don’t trade especially if they have stress in their life that disallows their full focus on the market.  Successful traders always abide by their trading rules and never stray from them.

Traders who trade well are perfectionists and are very wealthy as a result of their unwavering discipline.  You too should have this goal.

 Happy Trading!

Weekly Dollar Index:
The DX opens the week at 83.165. First resistance should be at last week’s high at 83.43. Look for 83.54 and 83.64, and then 83.875 beforehe DX climbs back to 84.72.On the support side look for 82.29 initially.  Followed by last week’s low at 81.995, and; 81.65, 80.775, and 80.34. Real support is at 80.17, but the market could challenge 80.00.

Past performance not indicative of future results. Futures trading involves substantial financial risk. Please consult your personal financial advisor before using this information for your own trading purposes.

Market Breaks Down

 After a 7 day consolidation the market declined sharply to end the week after Tuesday’s FOMC meeting. Spurred by disappointing economic and earnings news the ESU0 suffered a large loss Wednesday and drifted lower into Friday’s close. With a low on the week of 1070.50 the key swing low of July 20 may come into play. This level was 1050.75. One of the weakest sectors during the most recent decline has been technology and the NASDAQ fell 5% last week. High profile tech stocks including Apple (AAPL), Cisco (CSCO), and Intel (INTC) all sold off during the decline. The more balanced S & P 500 (SPX) and Dow Jones Industrial Average (DJIA) realized more moderate declines of 3.8% and 3.3%. The market has remained bullish since turning up in March 2009. However, with our long term timing model going back into sell mode in June, we remain cautious. Often the model will not necessarily result in a bear market while in sell mode, but has many times kept us playing defense during volatile market periods. Even with low rates of return on money markets and cash instruments, it is best to avoid market exposure during such volatile and negative periods in the market. The market appears vulnerable to more decline and we believe a defensive posture is logical.

Past performance not indicative of future results. Futures trading involves substantial financial risk. Please consult your personal financial advisor before using this information for your own trading purposes.

Bad Jobs Number but Market Bounces

The Friday morning report indicated that the employment situation in the U.S. continues to be bleak.  There were 131,000 jobs lost during July which was much worse than expected, and the number of jobs lost during June was revised significantly higher as well.  This will continue to be a drag on the rate of overall economic growth and the recovery in the housing market.  We have written for over a year that until the employment situation improves there will not be a lasting recovery in housing and thus the economy. This is already the worst jobs recession in this country since World War II and will likely take an extended period of weakness before recovering fully.  This continues to be a major theme for the markets as investors deal with a very slow recovery amidst zero interest rates.  Even though the Federal Reserve has basically taken away risk free rates of return by dropping rates so low, many continue to struggle with being in the market.  There are very few solid alternatives for savers to earn decent yields without accepting more risk.  It is almost as if investors are being forced to choose to earn nothing or be in the stock market.  With many of our indicators urging caution we continue to believe that earning zero and keeping cash liquid for upcoming opportunities is the best approach.  We have followed these reliable indicators for many years and while not 100% correct, they have kept us out of trouble more often than not.  The one encouraging aspect of Friday’s trading is that the market bottomed out early and bounced 16 S & P points into the close.  This could be light trading drift up during a late summer Friday or could have been a case of selling the rumor and buying the news on the poor jobs report.  Either way it is best to remain cautious heading into a new week.


Past performance not indicative of future results. Futures trading involves substantial financial risk. Please consult your personal financial advisor before using this information for your own trading purposes.

What Type of Trader Are You: Part-Time or Full-Time?

Before you start to trade, you need to establish goals in terms of how much time you can devote to trading.  Are you going to trade on a full or part-time basis?  Always keep in mind, as with any business, the more time you can devote to the business in the beginning, the better the business will be.
Many traders I know spend the entire day in front of the market. They are glued to their monitors from one to two hours before the opening bell until well after the market closes in the afternoon.  They take advantage of every profit opportunity offered during market hours.  I also know many traders who work other jobs and trade two to three days a week.  Their style takes advantage of trades that take two to six days or weeks from start to finish.  I’ve even traded with some hot shot traders who only trade one to two hours a day and make a fortune doing so.

O.K, now that you’ve decided how much time you can devote to trading, here are a few more questions to consider:

How many trades do you plan to make each day.  Three or fewer? How long do you intend for the position to be open?  Six days or possibly six weeks?  How much time do you intend to devote to “homework?”  As much as possible with no intention of doing it 24/7?  Do you plan on focusing on trading after work and on weekends?

If you answered yes to the questions above, you are a part-time trader.  This style fits most of the trading population.  Most folks have a full-time job and three and a half kids at home.  Time can be limited and, realistically, there is only so much time in a day. We all know that unless you devote some extremely focused time to trading, it can get very expensive. If you are fortunate, and can focus every hour of everyday on the market, the following tendencies would define a full-time trader:
 You will be in front of the market every day.  From before the open until after the closing bell.  You will also know when it is best not to trade and sit on your hands or step away from your machine should market conditions so dictate. You strive to execute and manage your trades with workman like precision. Your goal is to make fast profits, sometimes being in trades for only a few seconds.
You study more than you did in high school or college and love hearing those magical words from your spouse as you duck into another book store,    “Are you going to spend more money on another stock trading book?!”  and your objective is to trade stocks for a living.

 The lesson is to establish your goals early and your ability to focus will be much clearer and easier.

 Happy Trading!

Past performance is not indicative of futures results.  There is a risk of loss in trading.

 

 

August Outlook from DTI's Darrell Jones

The last full month of summer trading begins Monday and an important factor for this week’s trading may be the strong tendency for the first trading day of a month to have a positive bias.  We have reported this previously but the record of being long on the first day is outstanding over the past several years and it pays to respect this seasonal bias which is likely related to the flow of funds. The market corrected slightly last week as it traded down for the past 3 days.  The shorter term trend is still up but the market is in the area of potential key resistance as it has traded back and forth through its 200 day moving average lately.  The ESU0 should test 1112 then 1118 to the upside.  Any downside move would need to stay above the round number at 1100.  We expect the market to trade higher on Monday and plan to trade from the long side to participate in the mini rally. We continue to believe that a better directional move in the market will take place after Labor day but August can be volatile.  We will continue to have EPS reports and lighter volume trading which can combine for volatile moves.  Continue to manage your portfolios to take profits but participate in new opportunities at the same time.

 

Past Performance is not indicitive of future results.

                                                                                                                               Market Update

We discussed the compacted trading conditions heading into the week but Monday did not resolve much as trading was quiet.  However, the market has a large gap up opening heading into Tuesday and may be suggesting a range expansion.  The ESU10 is also making new overnight highs after 8 a.m. central time which is an indication of strength and there is definitely built up energy in the market.  We would be prepared to trade from the long side today and especially if the market confirms with a breakout to the upside after the first and second 30 min bars once the cash market opens.  Levels to watch include the 1087.50 gap close and should the market pick up strength the 1096 to 1098 area will be a target.  Good trading.

Past performance not indicative of future results. Futures trading involves substantial financial risk. Please consult your personal financial advisor before using this information for your own trading purposes.

EPS Season – July 12, 2010

Earnings reports for the second quarter begin in earnest this week and should add some volatility to the equity markets.  Alcoa Aluminum (AA) is the traditional stock that kicks off EPS season and will report Monday after the close.  Other stocks that report Monday include (CSX) a key transportation company and (NVLS) Novellus, a semiconductor equipment and materials company.  These three diverse companies could yield some early insight into the strength of the economy and the tone will be set for the other EPS reports that follow.The reason EPS reports can add volatility is the creation of catalysts to move stocks.  It often takes a catalyst to generate change in motivations of buyers and sellers with enough priority to create big moves in stocks.  This can happen when a company beats or misses an EPS estimate by a wide margin.  This can also happen when the forward guidance creates a stir or comments in conference calls send a key signal to traders.  Catalysts become more important during periods of low volatility in the markets such as summer.Volume can drift down during summer months and last Friday was one of the lowest volume days in many months.  Friday was also a very narrow range day.  Recall that we wrote recently about volatility being cyclical just as price is cyclical.  The low volume, narrow range day from Friday leads to higher odds of a bigger move and possible range and volume expansion on Monday.  Monday’s in summer can also be of the low volume variety so it is possible that a better breakout may occur on Tuesday after the EPS reports are processed. Do not chase price or force trades during low volume low range trading.  These are the most difficult environments to trade profitably and it is better to wait on the market to move and create more opportunity.  The ESU10 has had a nice 75 handle rally but volume has tapered off over the past few days.  Low volume rallies during overall down trending market environments usually lead to more downside.  Continue to be defensive but be on the lookout for a better break (up or down) to trade early in the week.
Past performance not indicative of future results. Futures trading involves substantial financial risk. Please consult your personal financial advisor before using this information for your own trading purposes.

Three ways to help reduce overtrading

 

Deciding on a definition of “overtrading” is much the same as defining “a lot of money.”  It is different for everyone.  Twenty trades a day is far too much for a swing trader and perhaps not near enough for a scalper.  Someone with a million dollar account will trade more than a person with twenty thousand in their account.  You get the picture.  So how do you determine a classic over trader on any level?  I believe my answer is the same as Socrates’ would have been, “do they make money on a weekly basis after commissions?”

 An area of struggle exists between goals and tilt levels.  A disciplined trader tends to make his goal within an allotted amount of trades set forth in his business plan, and stop trading when reached. Conversely, that same trader will respect his account balance and when his tilt number is reached for the day, he will stop trading.  I have noticed that discipline challenged traders who have lost money will trade sporadically throughout the day, throwing rules out the window just to try to make back what they have lost.  By the end of the day not only did they lose more than their trading plan allows for but they also ‘overtraded,’ which potentially makes losses far worse due to commissions.
  How does one cure this?  It is simple… look at personal trade data trailing the previous 4-6 weeks.  Provided that you do not have drastic swings in the number of lots you put up for a given trade, you can use the following information for analysis.

1. Break down the winning days and losing days and look at how many contracts were traded throughout each.

2. Figure out your average number of contracts on a winning day and the average number on a losing day.  The average number of contracts on winning days should be approximately the number of contracts you should trade on a given day.

3. If the number of contracts you trade on a winning day and losing day are the same then break down the time of day that you are making each trade as well as the amount of initial risk attached to each trade.

 
Along the same lines as day trading, swing traders can look at their average number of trades throughout the course of a month or quarter.  Due to market cycles this should help reveal what time of the month and year tend to produce the most profitable trades.  These exercises should help reveal patterns that will help you understand where your ‘sweet spot’ for contracts, time of day, and risk level lies.  Set your guideline around the average numbers of these analyses to help prevent overtrading.

 

Past performance not indicative of future results. Futures trading involves substantial financial risk. Please consult your personal financial advisor before using this information for your own trading purposes.