Keep the fighting spirits alive

Life really sucks when you're expected to have preferences while you actually have none. When you should have cared or said something, but you didn't, because you thought it's not all that important, or you're just reserving your words. The lack of preferences and caring makes you so numb that it's beginning to shield you away from such joyous experiences in life.


It is perhaps a disadvantage for me (every disadvantage comes with an advantage, if you choose to believe). I'll just have to find my niche. And I must be willing to admit it and fully embrace it.

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I was reminded today by a friend that I'm still young and I must not settle. His enthusiasm and optimism really inspired me. I know I should accrue more risk and let the chance work in my favor.

Indeed, just like in sports, games, and businesses, you apply the more risky strategy first, and then the conservative strategy (if you are ahead). If you're behind, you will not be behind by much.


I was reminded to be a five year old.

reason for the sell-off

We have a broad market sell-off today, resulting in a trending day. This should be totally expected and should not come as a surprise. Both currency and equities markets edged below some important technical levels. It could be argued the strength of the dollar lead the decline. Though I would not rely on that as a trade thesis. It's merely an after-the-fact confirmation/observation.


The pundits are too eager to tag a reason to the sell-off: "China", "Greece", "sovereign risk", "credit tightening", "jobs", etc. While it is interesting to speculate, the fact is, there is no right answer and it doesn't really matter. Some people out there sold, and the rest followed, or were forced to sell. 

Tomorrow is a Friday. Thursday's broad sell-off is not good new for the bulls heading into the weekend. There's reason to expect another trending day. You just need to be positioned to take advantage of it as it happens. As Richard Dennis puts it,

"Success in the market is not about ability to forecast, one just has be ready when it happens".

 

AUD/USD broke important support level right about 1 hour before 6:30AM PST

 

S&P futures followed the trend of AUD/USD, started trending before 6:30AM open

rationality, game theory, etc.

I actually liked a recent story on NBC News: Congress had voted to spend $2.5Billion to continue building Boeing C-17's despite the President and the Pentagon had urged to stop building them because there's already a huge excess.

Why waste $2.5B on C-17's that nobody needs? Congress voted in the name to save jobs! See, C-17 parts come from 44 states. Non of the politicians in Washington wants to be blamed for jobs lost in their states! In addition to the 43 planes built since '06, That's 53 C-17's (excess of $12Billion in aggregate) to save... 20,000 jobs! Nice played, Congress!

This is sort of like Prisoner's Dilemma, in which every politician acts on his own interest but collectively have achieved a worse outcome. It might be wise to use that $12B to create new jobs!

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On another note, while reading a book on game theory, I was inspired to develop a game theory model for approaching relationships. I wasn't getting anywhere far - human emotions are kinda difficult for a beginner (modeler, game theorist) like me to model. I wonder if there are any work on this... While I was searching on the net, I wonder how useful such a model actually is. Any empirical data on this?!

A voice of Fischer Black rings in my ear:

In the end, a theory is accepted not because it is confirmed by conventional empirical tests, but because researchers persuade one another that the theory is correct and relevant.

Schwager wrote another non-fiction

I finally began reading Jack Schwager's authoritative "Complete Guide to the Futures Market". Unexpectedly, it is a really fun read, humorous at times. I like how Schwager injects rationalities and personalities into the market participants. It was like reading a non-fiction. Even more difficult concepts are explained in a frank manner. It is seriously a good guide.

"King of the World"?! (Not so fast!)

Judged by apparent success of "Avatar", James Cameron is king of the world, says Business Week. I was listening to Business Week's Behind the Week's Cover podcast (I'd been a fan while John Byrne was hosting). But you have to ponder deeper into their verbiage.

I've not seen "Avatar", and only heard very few things about it (people claim it's worth seeing). Regardless I'll try to be as objective as I can.

Apparently, a lot of people like this film. Business Week says that it has brought $1.6B in revenue, sure to surpass another Cameron's classic and highest revenue'd film of all-time, "Titanic". It seems surprising to people that this is happening. The film must be THAT good in order for this to happen. I think otherwise.


Not saying it's bad movie. It doesn't have to be that great. Unquestionably it is the beneficiary of "winner takes all" effect that is so common occurring today. You know, people go to see this movie just because a lot of other people have seen it. I wonder if there is an estimate on that number. If they rank movies based on that number, Avatar would probably come on top.

Business Week reminds us that the money spent on this movie, the time it took, and the filming technology used was unprecedented for such a movie. This is what's making this movie stand out, and thus deserving of $1.6B revenue. Wrong. They fail to realize that there had always been a film in history that was "unprecedented". "Star Wars" was "unprecedented". "Titanic" was "unprecedented". "Spider Man" was "unprecedented". There was nothing unique about this film being "unprecedented".

It got worse when they brought up the 3D movie arguments. They say 3D movie experience will be a big hit, thanks to technological advances in professional film making. It will be the "differentiator" from current home theaters. But don't they know that there will be advances in technologies in consumer electronic? And often happens at a faster pace? Didn't we already have consumer P&S cameras that can capture 3D pictures (and perhaps movies) announced at CES this year? It's still a risky bet on 3D for movie studios/private equities. The fact that it is based on a new technology does not guarantee a safe investment.

Nothing new here. Let's move on.

trending days

The day's not over yet. I'm done for the day fairly early today as I do not want to get into emotional trading. Best thing is to stay away.

We now have two huge trending days in a row! My guess is that we're not going to see much of a bounce today, if at all.

Last Friday's market action (previous blog) was an early warning. We got congestion in that 113-115 range. Market fails to make new highs with great volume - often signs of market top. The breakout of that range makes a great directional trade and should be indicative of what's to come in the following weeks, if not months.


Yesterday was a good day. Shorted before the Obama news. The market was going to drop despite the news. The difference is that it makes a good "news" - newsheads now have something to talk about - the REASON market fell.

I was actually not aware of the news. Suddenly I see financials took a dive, especially GS, which had earnings that morning. Terrible for me, because I actually finished shorting, having just covered COH, FCX, BUCY, and now reversed to going long on EBAY and UNP. Admittedly, it was a quick scalp trade. Not waiting for exit signs/signals, I'm out of those trades before I knew it. Financials is supposed to lead, not lag. GS I was already having an outsider reversal at that time. I was out with minimal losses. Without the Obama press conference, EBAY and UNP could have worked out. It's perfectly fine that they are losers. It's part of the game. Unpredictability must be factored into the trading process.

This morning's open was below yesterday's low. Just on that, I thought today was going to be another trending day. I thought I was wrong at 8am when market made a new high for the day.

My shorts didn't go well. I waited a bit too long to cover on MON, resulting larger losses than usual.

Turned out today IS a trending day, a big one. Volatility spiked 23% (as of now)... and I missed many signals during the day. My conservative SPY June put is up 23% as well.


Why did I ...

Hindsight kills.

Why no 24 hour coffee shop in SEATTLE?

Can you believe it? Seattle, of all places, birthplace of Starbucks, Peets, and Tully's Coffee, and probably endless others to come, does NOT have a 24-hour coffee shop! WHAT? So I had to drive down to Tacoma for a shot of coziness. I felt like taking a drive down anyway. In the rain it was a beautiful drive (been watching Top Gear too much).

So when I got back, it was right around 7am. I missed the opening. But so what, I missed it. Turned out to be one of my  best trading days ever.

Here's my trading journal from today.
And the best of all is that I adhered to my discipline. I applied what I knew,
and it worked like a charm. The results (profits) are not spectacular. However
the process was commendable.
 
Going into today... I knew I had to give my full attention to the session. I knew I don't have to trade, I don't have to put up any positions. And if I do, I knew it was going to be small position sizes. This is designed to build up my confidence in trading.
 
Well, I turned on the computer, market is down about 1 percent, with volume expanding. It is
unusual because it is a Friday, and morning volume vastly exceed previous days if not weeks.
The gap from the open doesn't look like it would be filled. The speed of decline suggests
rejection of the level from yesterday which is near the year's high.
 
As usual, I looked at relative strength. X was among the weakest in the early morning. After
it reached a new high few days back, it is no surprising it is out of favor and institutions
are now dumping the stock. CNX, GDX, WDC were also among the weakest.
 
Then the volume subsided and the classic pattern is forming. So I went short. I got out soon
with minimal losses/gains because I thought probabilities are no longer on my side. I was
more likely to be wrong. Not that I knew I was wrong for certain, just that the disconfirmation
was too great. Some sectors have bounced a bit, which seems like a failed pattern while some are
not, still hanging on. The market at the time was still sliding down, however with volume
drying out. Obviously overall market momentum was slowing down. Plus, it is very oversold -
the signals didn't even form on the overall market. It is too much of a risk to stay
short. So I covered.
 
Then the market continued sideways with drying volume, with no real bounce to the upside, nor
real push to the downside. Then the pattern began to tighten, which gets really interesting:
first, no meaningful bounce suggest heavy institutional selling, and lack of buying conviction.
Volume drying out suggests everyone is sort of waiting to unload the remaining shares, hoping
for a rebound to unload. It's worthy to note that even at 8am PST, the volume is way above
normal, which suggest traders are all in for this one - and the morning move is meaningful.
Tightening of patterns suggests there could soon be another trade.
 
Indeed. WDC had one of the cleanest patterns. Upper time frame charts suggests there could
be more room to go on the downside. I begin scouting for the weakest to do a break out trade or bounce trade.WDC, OIH, SMH and SPY are the candidates. IB screwed up on my OIH short. My stop limit could have triggered at $.15 above my entry - I had to change to a market order after missing out. So I got in on the orders. Since
I got in on OIH late, it is the most painful. My losses began to accumulate. I knew it's not
the time to cover, as there's no reason to except it showed losses more than anticipated
(due to that 15 cents). Then finally I got stopped out as it went above a previous swing
high. However the overall market was still convincingly weak despite being very slightly
up (loss on SPY was negligible). This is demonstrated by very weak rising volume and the relative
weakness of the tech sector (my WDC and SMH are working). In addition, the downside break
out occured with huge volume and is confirmed across the board. Traders are all over this one.
The push back above the support occured with much less volume. I began to notice the
time sale chart. Red - green - white - red - white - green. No pressure from either side,
and it seems like everyone is waiting for the next move. From the tightening of volatility
and how the downward trendlines converge, there was no reason to cover. The next move could
be just around the corner. The entry was sound.
 
Then, as suspected, the upside momentum died immediately and downward volume  began to pick up,
and that pushed the market to the lows. No cover yet, as I knew my target. 113.20 on the SPY,
from 15min swing low/support line, which seems to be a solid support line. Then BAM, a huge
red candle with great thrust. quickly retreat about half that candle. No cover yet. This is
normal. I tried to picture all sorts of traders trying to battle it out. This is just some
traders who went long that got stopped out, and suddenly there's lack of immediate selling,
so it had to rebound. The next few bars occured with no volume - suggest momemtum will likely
continue. Meanwhile, my WDC and SMH are working out great - tech was weak, and they just
continued to drop 1 cent at a time.
 
Then BAM another drop. Less thrust this time. I noticed that SPY had just touched 113.20 -
and the selling had immediately stopped, seemed to be across the board phenomenon (from
the corner of my eye I noticed white bar BEGAN to build) - I said to myself - QUICK - GET OUT.
I was going to get out with limit, but SPY has already moved up a couple more ticks -
I'm out with market. So then and there, I'm out of all positions. A few seconds later,
SPY would had moved against me by about 12 ticks. And that was the bottom. 113.20, right
on the tick. That was the bottom for EVERY stock. WDC, SMH, and OIH. What an exit.
That was tight.
 
Took some time to calm myself down and congratulate myself.
 

 
The market only rebounded lightly. Still relatively tight range - I told myself, could
there be another entry?? The liquidation seems to be very strong and there's just lack
of buying conviction across the board. Considering it's a Friday, and people don't want
to go home with positions on a day like this, I thought there might be more selling
toward the close. So I kept a close watch. The
close was relatively drama free.
 
I was thinking how the recent conversations with traders has helped me, particularly
something that I've actually took note of:
1- hitting the bid/hitting the ask/market depth/dynamics - what does that mean? buy and sell? No. It says about agressiveness.
2- where does the money come from? institutions. We run before the institutions,
they are slow.
3- idea that to rely on psychology than anything else
 
To recap, the highlights are that:
1- ability to gauge market strength (spot aggressive buying/selling)
2- importance of sticking with the trend
3- utilizing time and sales/market depth to gauge buying/selling strength
4- anticipate and be prepared. Be quick.
5- I followed my process. I sticked around.
6- confidence that my analysis DO work!

Yes, today is a fairly easy day to trade. You should have seen the days when trades turn sour, which I will blog soon enough.