Reminiscences of a Stock Operator Ch. 7 page 71 paragraph 3
"People don’t seem to grasp easily the fundamentals of stock trading. I have often said that to buy on a rising market is the most comfortable way of buying stocks. Now, the point is not so much to buy as cheap as possible or go short at top prices, but to buy or sell at the right time. When I am bearish and I sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on a rising scale. I don’t buy long stock on a scale down, I buy on a scale up."
"after the initial transaction, don’t make a second unless the first shows you a profit. Wait and watch. "
"Suppose he buys his first hundred, and that promptly shows him a loss. Why should he go to work and get more stock? He ought to see at once that he is in wrong; at least temporarily."
"Remember that stocks are never too high for you to begin buying or too low to begin selling."
Said another way, Livermore is telling us not to add to losers. When building a long position you want to be adding at higher and higher prices. Same holds true if playing on the short side. Add to positions at lower and lower prices.
When placing your first trade on a stock, you are expecting a move in a profitable direction. If the stock does not confirm the preferred direction right away, you have no basis to add to the position. Wait for the stock to confirm your thesis before making any further transactions. If the stock moves against you and takes out your stop, exit the position and re-assess.
Although adding to losers has never really been one of my major pitfalls, I have done it in the past. On those occasions I have lost money. Adding to losers is a manifestation of an unwillingness of the trader to admit they are wrong.
With many stocks at all-time highs it is also fruitful to be reminded that stocks are never too high to begin buying; they can go higher. A stock at an all-time high has no inherent overhead resistance; no trapped longs at higher prices eager to sell. The same can be said of the overall market.
Thank you for reading; Hope it helps and see you next time.
Consumer Staples - A Brief History
During 2015 - 2016, investors piled into many consumer staple names in a vicious search for yield. During this time, the $XLP outperformed $SPX. The out-performance peaked in February 2016 and has been under performing on a relative basis ever since. Beginning in late May / early June, the sector became oversold and had what I believe is a sharp snap back rally.
Where are we now?
The chart below shows the relative performance of XLP vs SPY. You can easily see the relative performance is back to the downtrend line that has been firmly in place for over a year. I question if XLP has the horsepower to break through.
Drilling down on some names
Yesterday an option trade piqued my interest. A whale came after Kraft Heinz with in the money Aug 65 Puts 3500x + paying $3.70 ask. Overall, PUT volume was 4x that of CALL.
That got me digging into the big XLP names. There are quite a number of big names that have key characteristics that give them a bearish set up.
Charts of Hershey's and Kraft Heinz Illustrate the point
Names for further study
HAIN / BUD / TAP / SJM / GIS / CL / KMB / CPB / PG
You will find the charts of these names showing many of the characteristics of those above.
IMO the downtrend in relative performance of XLP persists and the move over the last 6-8 weeks was an oversold bounce. Being earnings season, most of these names report in the next few weeks. Keep that in mind when contemplating any potential trades.
Thanks for reading; hope it helps
On Friday, July 13, both SPY and QQQ put in divergent highs on the 60 minute chart.
To those not familiar, a divergent high is one where price rises to a new high while the momentum ( PPO or MACD ) and RSI peak at lower levels.
While this bearish divergence can persist for a long time, it is something notable and bears worth watching. It will be very important to watch this relationship in the next couple of days. Does price burn through the divergences and push higher or succumb to the fading momentum? Stay tuned!!
Trade Tip - Zoom down on time frame to identify early turns in price
For stocks you are actively trading, consider creating a 60 minute chart on them. They will signal early turns in price. A 60 minute chart will enable you to fine tune an entry or exit.
Again, this is only really meaningful if you are an active trader and can jump in during the day.
Here are a series of 3 charts that I use to give me a quick snapshot of momentum trends across the SPDR sectors and a few other key areas like bonds, the Dollar and PM's.
Chart 1 Bonds, US Dollar, PM's and Gold Miners
Momentum for Bonds remains strong while the momentum behind the $USD is fading.
Momentum for the precious metals and gold miners remains in a persistent downtrend although with a push the gold miners could make a move above the zero line and DT resistance. If you look at the price charts of several individual gold miner names, they are behaving much better than the underlying metal.
Chart 2: XLE, XLB, XLI, XLF, XLU
Energy has pulled back to the zero line and is flattening; an upturn here would be very bullish. Industrials and Financials remain pretty weak. After a huge push up, momentum behind the utilities looks to be flattening.
Chart 3: XLK, XLV, XLP, XLY, XRT
Tech and Healthcare look strong from a momentum perspective. Indicators for both showing bull crosses either at the zero line or above.....bullish. Staples have flattened out. Retail is losing momentum. Consumer Discretionary has backed off, but is still positive and may be in the early stages of a bull cross move.
For many traders, the negative emotions of anxiety, fear and even anger elicited by either trade uncertainty or outcomes is real. For some, these morph into panic or paralysis. Regardless of how this condition manifests itself, it has a detrimental effect on our psychological well-being and to our trading P & L. These emotions do not lend themselves well to someone aspiring to be a long-time market participant. It’s just not sustainable.
I have a powerful way to deal with these emotions that I’d like to share. As you’ll soon discover, this technique works both inside and outside the markets.
Back in the day, there was a person close to me that used to know how to push all the right buttons to upset me. I am quite sure that the behavior that elicited my response was not intentional, but never the less, it really bothered me. Encounters with this person left me feeling angry and upset. It got to the point of me being angry and upset BEFORE I ever saw the person. Many times, I literally felt sick.
Solve the Problem: Employ and Develop your Inner Observer
George, my counselor at the time, introduced me to a powerful technique to solve my issue. Visualize yourself as a scientist / observer hovering above yourself and the situation…. anticipating, thinking ahead, watching, jotting down notes but not personally involved. When the barbs from the other person come, they are directed to a third person……not you the scientist / observer. Because you have extracted your emotional body from the situation, it takes all the energy and resultant negative response / reactivity away. When I practiced this technique, I found myself able to interact with this problematic person very effectively……he no longer bothers me. Doesn’t mean we’re all buddy- buddy now, but I no longer let his actions throw me into a tail spin the way it did before.
Now, when I am in any situation that is causing me to feel anger, stress, resentment or any other unwanted emotion to take hold, I activate my inner observer. I remove my emotional self from the situation and let my inner observer take charge.
Now let's consider the situation many of we traders find ourselves. Becoming emotionally attached to stocks and trades. Attaching our moxy as traders to outcomes either good or bad. Experiencing that roller-coaster of fear, elation, depression, anxiety, insert your emotion here. Not a great place to be.
When you've had enough of the pain and suffering that comes with this trading lifestyle, read further.
How to use your Inner Observer in Trading
How can we use this in trading? Remember, you are an observer of yourself, the trader. Hovering over your right shoulder watching, taking notes, giving advice from a third - party perspective. Your new-found observer friend might make some comments like this…..
Become friends with your Inner Observer
Your inner observer will help keep you on the path of becoming the calm and confident trader you want to be.
I talk to my inner observer all day long. My inner observer looks at my trades. He reminds me not to get married to trades, to honor my stops, to fill out my trade plan. We talk about all kinds of stuff. When I get mad at a losing trade he asks if I would get mad at a mouse for turning right instead of left. He encourages me to follow my process and to develop new ones that are even better. Yeah, your inner observer can be a real help. With some development and nurturing, your inner observer will likely become one of the best friends you ever had. One who keeps your feet on the ground and eye on the prize, especially during rough patches. I encourage you to make your inner observer part of your winning team.
For Further Study
8 minute Video with simple ideas HERE
Inner Observer Practice HERE
What are Self-Observation and the Inner Observer HERE
The Inner Observer HERE
Let me know how it works for you. Drop me note and share your story at firstname.lastname@example.org
Thank you for spending time here; hope it helps!!
Market Wizard & Fortune Teller Kyle Bass explained the Trump Trade and China Tariffs 18mo ago, and nailed it
About Kyle Bass
The billionaire hedge fund manager started his career at Prudential Securities in the early - 1990's. From there he went on to Bear Sterns in 1994 and at 28 became one of the youngest Senior Managing Directors in the firm's history. In 2000 he moved to Legg Mason to form the firm's first institutional equity office.
How to make a Billion Dollars
In December 2005 he formed his own hedge fund, Hayman Capital with $33 million in AUM. In 2006 he identified the US Real Estate bubble and promptly nailed the trade.
Find out more on Mr. Bass' history HERE
Bass the Fortune Teller
I ran across a video of Kyle doing an interview with Bloomberg in January of 2017. Maybe it's just me, but I found it remarkable. Prior to the 2016 election, Bass had already done his homework on Trump. He had no idea Trump would win of course, but he had the "what if" scenarios all laid out and the bazookas loaded. Remember the huge spike down in equities and currencies the night of the election? Bass was firing the other way. You know who won.
Here in this interview recorded 18 months ago, Bass presents the Trump trade with remarkable accuracy. He also foretells the tariff / trade war with China and potential fall out. There may even be a few trade ideas in there for you.
Listen to Kyle Bass tell the story himself HERE
Run time 15 minutes
Bonus Video - The Big Short Vol 2 China Banking
If you have not figured it out, Bass is a macro trader. He has a thesis that the Chinese banking system is a stone's throw away from implosion. He reportedly has over $1B on the Big Short Vol 2. Right or wrong, you gotta respect a guy putting massive Dollars on the line
Listen to the 15 minute video recorded in February 2018 HERE
Don't know about you, but I am both fascinated and inspired listening to true Market Wizards. I hope you found the videos worthwhile.
Thanks for visiting!!
Dr. Copper rug pull
Such beauty and power in a nuclear bomb blast. Photos like this almost make you forget the carnage going on below. The Copper bomb hasn't detonated yet, but the fuse has been armed and some folks are looking for their blast goggles just in case.
Last week I posted about the technical developments regarding copper's recent moves. In that article, it was pointed out that the technical price objective based on the chart pattern was $2.60 / $2.65 on a measured move basis.
With fresh tariff-related news flow, Copper has made a substantial 3% down move overnight from yesterday's close. The chart below shows the approximate area where the futures are currently trading. As you can see it is working its way down to an initial support level.
The next big support level shown on the weekly chart is a band between $2.40 and $2.47. While the current sell off tells us that Dr. Copper is worried about the world economic outlook, a failure at $2.40 would have folks cleaning out their basement safe rooms and checking on their inventory of freeze dried staples. We really don't want to go there.
Chart School - PPO Momentum indicator
Notice the PPO momentum indicator in the second panel from the top. Look at how meaningful the zero line is. The zero line acts as both support, resistance, and a toggle point between bearish and bullish mode. Notice how once Copper momentum dipped under the zero line in late Spring 2011, that zero line became powerful overhead resistance. It kept you in a bearish trade for over 5 years. In mid 2016, it got you out and signaled that something different was happening.
Go look at the PPO on your favorite handful of stocks. Look at the positioning of the PPO in relation to the zero line and what price is doing. At the very least it lets you know when to pay attention and that important things are happening, especially in longer time frames.
Thank you for reading! Hope it helps.
Defense Sector Overview
A quick trip around the defense sector and its pretty easy to see that the major defense contractors like $LMT, $NOC, $GD, and $RTN have hit some turbulence over the past 4-6 months. Lots of double tops have executed and most of these names now find themselves under their declining 200dma's and with substantial over head resistance.
Here is a daily chart of $DJUSDN, the Defense Industry group.
It serves as a good snapshot of what is happening. Price below the 200 with downtrend resistance and overhead resistance above. Sure the momentum and RSI have turned up with the recent bounce, but I believe the overhead resistance right here , right now will prove to be too much to overcome. Certainly a tough place to take a shot on the long side in my opinion.
General Dynamics - A clean look at an objective short
The same general picture holds for $GD as mentioned above, but here, at least to my eye, is a clean look at an objective short with a stop near by.
Here's what I see:
That's what makes markets. I'd love to hear your thoughts
Shoot me a note at email@example.com or leave a comment.
Annotated Daily Chart of $GD HERE
This morning, I take a look at the latest 5 week rotation of the SPDR sectors along with a number of popular tracking ETF's for various segments of the market.
Purpose and Usefulness of the Rotation Studies
In my world view, the direction of the broad market dictates roughly 60% of a stocks expected move, the sector dictates 20-25%, and the specific stock dictates around 15%.
If you can focus your bullish stock selections in leading and improving sectors, I think your odds are much improved in finding winners.
5 week SPDR Sector Rotation
The graph shows the path of each sector over the past 5 weeks relative to the benchmark of the SPX. You can also easily see the relationship between the sectors to each other.
The table below shows the absolute performance of each sector.
Popular ETF 5 week Rotation Study
I took a number of popular ETF's across industries to see what their recent rotation looked like. Some interesting findings. Again, the benchmark was SPX
Biotech ETF's IBB / XBI make bold moves into the leading quadrant. Retail ETF XRT looks strong. IYR maintains its strength while Semiconductor ETF SMH makes a small improvement.
Homebuilder ETF's XHB and ITB make slight improvements.
Oil services ETF OIH falls hard from a leading position. Banks, Gold, Gold miners, metals & Mining, and EEM weakened over the study period.
I hope these rotation studies give you some added insight to how markets are behaving and give you solid clues on where to hunt for good prospects.
Ralph Lauren and Foot Locker have very similar recent price action and chart set ups.
Annotated Daily Chart of $RL HERE Annotated Daily Chart of $FL HERE
Disclosure: No Positions at this time