Stocks for the Rest of Us
Archive for December, 2008
Thank Me? Thank Hank Paulson. I Didn’t Want To Give You Any Money In The First Place
Dec 24th
You have to love Chrysler. I get what they were trying to do but this is just ridiculous. Note to Mr Nardelli, we didn’t invest in Chrysler; we gave you a loan which we expect to be repaid. Not only that but we didn’t want to give you the loan. The money was basically stolen from us without our consent. I wonder how much it cost you to run these full page color ads in all the major newspapers? I wonder how many more cars you will sell because of these ads? I wonder how this will help Chrysler make better cars?
S&P Oscillator Is Starting To Look A Little Overbought
Dec 16th
We’re actually starting to creep very slightly into overbought territory on the S&P oscillator that I follow. It’s not terribly overbought but it does warrant caution and I would consider taking some off the table if you were fortunate enough to catch the last bounce. No one ever loses money taking profits.
S&P Oscillator
The Market Is Approaching The Top Of The Range; Get Defensive
Dec 16th
I’m getting defensive as the market approaches the top of the range. The rally today on the news that the Fed is basically doing anything and everything it can do to “help” the economy seems counterintuitive to me. How is it a good thing when the government has to step in and do all kinds of crazy tinkering that no one really understands to keep our financial system from failing? I don’t think it really can be so my guess is that this rally will eventually fizzle like the rest of the bear market rallies we’ve seen. People always say “don’t fight the fed” but it would appear that betting against the rallies that have followed fed rate cuts is a winning strategy.
For now I’m going to let the rally play out a bit. We might rally to 1000 or so on the S&P but I expect some retracement soon. Whether we’ve seen the lows or not is a fool’s guessing game but as long as you move quickly and keep losses contained you’ll survive.
Remember, The Primary Trend Is Still Down
Dec 10th
Be careful getting too excited here as the market rallies. A lot of stocks are up 50% from the lows and anyone who was lucky enough to catch that will definitely be unloading into the strength. If you’re already long you can try and ride the rally as long as possible but if you’re not long then wait for a better entry point. There’s going to be a good bit of resistance here around the 50 day moving average on all the major indices.
Keep Your Finger On The Sell Button
Dec 8th
It looks like the year end rally might come to fruition. As I mentioned in a previous post the ability of the market to shurg off the bad news and go higher is bullish. However, there’s still no reason to think that we’ve seen THE bottom and the stock market is going no where but up. Until more evidence surfaces this is still just another bear market bounce that deserves to get sold. If you caught the bounce, consider doing some selling into the strength. If you’re in a long only buy and hold type portfolio then you might want to consider putting on a hedge in the form of index put options or the SDS.
S&P 500 Oscillator Shows Market Healthier Than In Past Sell Offs
Dec 6th
Here is another way the S&P 500 oscillator can be used which might be helpful. When a market rallies, people often refer to the breadth of the rally to determine how “real” that particular rally might be. A good rally with good breadth is one in which the majority of stocks are rising. A suspect rally with bad breadth might be one in which only the leaders rally, bringing up the major averages but the majority of stocks were actually flat or down.
The particular oscillator that I use looks at the percentage of stocks above there 50 day moving average. What’s most interesting to me is the divergence between the S&P 500 price action and the S&P 500 oscillator during the mid-November sell off. We’ve got stocks starting to climb up above their 50 day moving averages. This divergence says that the market was actually healthier internally during the mid-November sell off then it was during the previous October sell offs. It also says to me that the mid-November sell off was most likely caused by a panic in a relatively narrow scope of the market, not a broad panic like we had in October. While this is relatively bullish and the prospect of a year end rally is enticing, I’m still cautious going forward. Check it out.
S&P 500 Oscillator
S&P 500
Pairs Trading: Why Running A Balanced Book Can Be Beneficial
Dec 5th
I didn’t realize it at the time but I was actually initiating a pairs trade when I recommended going long UNG and short XTO. A pairs trade is simply going long something and short something against it as a hedge. I really was bullish on Nat Gas and the move below $5 is amazing, however, by shorting XTO we’ve hedged our long position in the UNG and the losses we sustained in the UNG trade were more then made up for with the XTO trade. I always employ stop losses so I’m no longer long UNG and I continue to be short XTO. As Dennis Gartman always says “Do more of what’s working and less of what isn’t”. Pairs trading allows you to do just that.
How To Use Moving Averages
Dec 4th
Moving averages are a useful tool for analyzing trends in a stock, commodity, or ETF. They simply smooth out the day to day fluctuations in prices and give the analyst a cleaner view of the trend. The number of days used in the moving average will determine the scope of the trend you are trying to identify. Use shorter 10, 20, or 50 day moving averages for short term trend identification and longer 200 day moving averages for longer term trend identification. You’ll notice in my basic chart setups I almost always have the 50 and 200 day moving averages displayed. There are several different ways to use moving averages. I’ve listed the most common below and I’ll make additions in time so be sure to check back often.
Trend Identification
The most common use for a moving average is simply to see which way the trend is. If the moving average is sloping upwards the stock is in an uptrend. When the moving average starts to roll over that means a new downtrend could be emerging. A sideways moving average would indicate a stock that is currently stuck in a trading range. In the example below you can clearly see the transition from the upward sloping 50 day moving average to the downward slop.
Trend Identification
Resistance and Support
Another common use of moving averages is as a point of reference for resistance or support. In a downtrending stock the moving average can act as resistance to any short pop that will naturally occur. This is almost one of those things that becomes a self-fulfilling prophecy as so many people use the indicator in this way. Take a look at the example below. You can clearly see that each time the price moved up towards the 50 day moving average it was met with selling. Similarly, the same type of action can be seen in an uptrend only you’ll have the stock bouncing up off of the moving average rather then below it.
Resistance and Support
Stop Losses
Another way I like to use moving average is to determine entry points for my stop losses. The use of stop losses is controversial but for me it is a way to inject discipline into my trades and keeps me from losing more money then I’d like. Take a look at the example below. Towards the end of 2007 the S&P 500 made a decisive break of the 50 week moving average which had acted as support for several other corrections including the two corrections that took place in 2007. At that point I liqiudated a large majority of my holdings and it proved to be a good decision. Consequently, confirmation of this trend reversal came in may when the 50 week moving average which had once been support was now resistance and the market then proceeded to crash.
Stop Losses
Short PCU
Dec 4th
Copper prices seem to be hitting new lows while the equities are still hanging in there. I’m shorting PCU at $12.44. It appears to be up towards resistance at the upper range of it’s down trend. You can keep a stop just above the 50 day moving average.
Short PCU
How To Use The MACD Indicator
Dec 3rd
MACD is another useful trend following indicator in which two moving averages are layed over each other with the buy or sell coming from the signal line crossing over the MACD. The signal line crossing symbolizes a change in momentun. The standard calculation for the MACD line is the 12 day EMA – 26 day EMA. The standard calculation for the signal line is simply a 9 day EMA of the MACD.
While the MACD indicator is ok I actually prefer to use the Histogram associated with MACD instead. When the Histogram starts to roll over, that’s the signal to buy or sell. As with any indicator, it is best used in addition to other indicators as confirmation.
How To Use MACD