I am pleased to announce that Speaking of Trading is officially on Facebook. The link is: www.facebook.com/speakingoftrading
Give it a like! 🙂
After February’s very strong month, the market has had tough times lately. In the beginning of March, the major averages hit all-time highs and the Nasdaq Composite even climbed above the 5,000 mark, a level not seen since the dot.com bubble in March 2000. The party didn’t last and in the next day, we started to see the beginning of a down move. An excessive bullish sentiment and profit taking were just two factors leading to the reversal. Last Friday, the situation got worse when the Labor Department delivered a much stronger-than-expected jobs report despite the bad weather conditions in some parts of the country. When everyone thought that the rates would continue to stay at current levels for some time, the report caught many by surprise and the market plunged on very strong volume in an unequivocal distribution day. While a stronger economy is good, stronger rates mean less consumption due to higher borrowing costs to families and businesses. Since then, we have had a follow-trough to the downside in the major indexes with just one up day due to the overall oversold conditions, in a typical bounce move (probably today will be another one). Wall Street’s favorite gauge of market uncertain, the VIX, spiked to levels not seen in a month tough it managed to stay below 20. The breadth has been weak, and if in the beginning of the move leaders have hold quite well, when the selling pressure hit full speed, they had no place to hide and got hit as well. Amazon (AMZN), Netflix (NFLX) and Apple (AAPL) are just a few examples. There are some places that continue to show resilience like the biotech sector but one must be very selective at this moment. Yesterday and today the overall picture looks rosy and we didn’t see too much damage. Next week all eyes will be on the Fed as they hold their two-day March meeting and market participants will try to discern the dovishness or hawkishness of the outcome. Therefore until next Wednesday market will likely be in wait and see mode. That being said, in the long term I think the primary trend is still strong and I keep my bullishness in place. Short-term a defensive approach is highly recommended. If you are a breakout swing trader I would even be more cautious as breakouts tend to fail in these conditions. Regardless of the strategy that you follow, remember that even the best ones won’t work in all market environments and timing as proven to be a good ally.
Below are daily charts of the VIX and the S&P 500.
If you decided to become a trader, the first question you should ask yourself is: “Am I willing to lose money?”. If the answer is no, trading is not for you. If you said yes, then it’s time to serious start thinking about trading. By nature trading is an activity that involves losses and you need to be psychological prepared to deal with them. Every trader will lose money at some point and even the best traders on Wall Street they all had their bad moments. The key to success is to cut losses short and let the big winners run. Not cutting loses is one of the major causes why most people fail in trading. Instead of closing losing position and move on to the next one, many get caught in a dangerous process which will be hard to exit. As humans, it’s hard to admit we were wrong and a multitude of questions and doubts tend to invade our mind. What did I do wrong?; I am sure the market is being manipulated; the market is rigged; I should have sold when…; what if I just…; if this, if that.
Licking the wounds and blaming everything and everyone will not solve anything. Once in a while we all will be wrong, we just need to evaluate what we did wrong and move forward. Learning from our own mistakes is the best way to avoid new ones in the future. An easy way to see trading is like a house. Each trade you make is a brick, and one by one you will start compounding them in order to build the walls. Slowly and patiently with the right method(s) and tools, results will start to appear and your confidence will grow. Remember, we are here for the long run so don’t try to push things and stick to your method and rules. Patience is a virtue and will pay off one day.
If you are a swing trader, the first thing that you will need to beat the market is a strategy. Knowing when to enter, to exit, how to manage your trade etc. is the key to profitable trading. Unless you are a day trader/scalper, jumping in stocks that are trading on the news, could represent a serious risk and significant losses. I will take as an example a recent stock that has been in the news due to some problems. Lumber Liquidators (LL) was featured on CBS’s “60 Minutes” last Sunday, and when the markets opened on Monday, the stock gapped down and lost more than 25% of its value. Prior to that, when earnings were released (Before Market Open) on February 25, the company missed analysts’ estimates for the 4th quarter and in the conference call that followed, CEO Robert Lynch warned about the “60 Minutes” issue in order to manage expectations. Those two factors combined, resulted in a loss of more than 26% in monster volume in just one day. Since then, the stock has been trading in a chaotic fashion, with some up and down days. From the strictly point of view of trading, it doesn’t matter who is right or wrong, what is important is that you have absolutely no control in what is going on, and trading a stock at that stage is not recommended at all. These kind of issues are often and occur with many other companies. Keurig Green Mountain (formerly Green Mountain Coffee Roasters) (GMCR) had problems some years ago, Alibaba (BABA) is now having a tough time due to fake orders and the list is infinite. The bottom line is, with around 7000 stocks to trade, why would one choose to enter in a stock like this? Trade your method(s) and stick with it(them), as this is the only way to achieve success in a consistent way.
Below is a daily chart of Lumber Liquidators where what was said above can clearly be seen.
Apple had a tough last week. The stock hit an all-time high on Tuesday but overall the week’s price action was not good. A distribution week is a valid proof that some profit taking was taking place and like in the general market, after a string of up-weeks the stock needs a well-deserved rest. Apple is a heavily owned hedge fund stock which means that in a short period of time, things can change. At this stage for a long term pullback trade an entry could work, but for a breakout trade I would avoid it.
Below is a weekly chart of Apple.
February was one of the best months for the market in recent years. The indexes posted huge run-ups for the month, with the Nasdaq gaining 7.1 percent, the Dow 5.5 and the S&P 500 5.6. But as I mentioned here, in the last week the major averages didn’t make much progress. After these kind of moves, it is normal to see some pausing. However, last Friday brought a distribution day to the count and we witnessed some selling in rising volume. With the absence of any decent catalyst and with the release of the all-important jobs data on Friday I am now a bit more bearish in the short term and thus a more cautious approach is needed. Likely this week we will continuing going sideways or a pullback could be in the horizon. This doesn’t sound like the start of a new correction (although it is too early to be sure) but a 3-4 percent would be good for the market to reset some setups. The small-cap S&P 600 was up 6.4 percent in February and will also be more prone to some sort of pullback. With all that in mind, act a bit more defensive, take some profits and tighten your stops. Mondays are usually bad days for the market so don’t expect too much comprehension.
Below is a daily chart of the S&P 500.
After three strong weeks for the major indexes, the market is taking a pause. The averages are basically flat and consolidating previous gains. Despite the huge amount of economic data released (and with Fed’s Yellen in focus) nothing really has changed. It is clear that interest rates won’t be raised soon and the market seems to know that. With the end of the Greek drama (so far), the stabilization of the situation in Ukraine, the winding down of the earnings season suddenly looks like there is nothing that can move this market. I do think we are heading higher and this is just the market telling you that needs to catch its breath. Wall Street’s current darling (Apple) is in tandem with the market and decided to rest a bit as well. This pullback could be a good entry point for those that missed the train. The VIX is at good levels and the breadth has been positive overall. A plus, we haven’t seen distribution lately which is a sign that institutions are not dumping shares.
Below is a weekly chart of the Nasdaq Composite.
As an independent trader, you are solely responsible for your actions. Trading can be seen as one sequence of interdependent and linked procedures. There are three major procedures that constitute the basics of any trade.
It is your job to master each one of them and understand their connections. Like a piece of gear, if a part is broken or damaged the whole system could be affected. A well-oiled engine will run smoothly, so as a trading system with one well-defined strategy and sound rules. In the beginning you must follow the system blindly until it becomes part of you. Do it n times as practice makes perfection and this is the only way you can become more efficient. Once you dominate one procedure, the nuances will start to arise and some adjustments can be made (fine-tuning will be key). Then you can move to the next step and start doing the same, over and over, and so on… once the cycle ends, by trial and error you will be able to improve the next one, in an iterative way. Looping is the core of trading as you will make not one but dozens, hundreds or even thousands of trades across your career. Each one is different but the framework will basically be the same.
After a fantastic week for the markets, this one things look quite calm. This should be not surprising, as the markets need time to digest and consolidate the gains. While some of the major averages are at or near all-time highs that doesn’t mean you should jump in blindly and start buying anything. While in the latest week we have seen much of the volatility disappear, we should be aware that there are still some major hurdles ahead and things can change very rapidly. Below is a chart from the .VIX YTD. A reading below 20 is ideal.