Four Q’s and Accidental Trading

Nasdaq 100 QQQQ ticker; 1 year daily interval, RSI MACD DMI

Nasdaq 100 QQQQ ticker; 1 year daily interval, RSI MACD DMI

What does it mean to “take a break”?

OK, for the last week or two I’ve ‘taken a break’ from trading. Pretty much cashed out the trading portfolio. (I’ve still got a large chunk in the core investment portfolio that were left to ride). A couple of days after I pushed back from the table (having made my monthly needs) and headed off to pay the bills, the dollar promptly began to tank as commodities and stocks started to rise (largely based on the dollar drop). At that point, Luis made a comment to the effect that the timing was bad. I pointed out that when I wanted to stop trading, I wanted to stop. To be “out”.

So now I’m starting my “re-entry” or “restart” behaviours. First we’ll look at that Nasdaq 100 chart, then I’ll make a few more comments about what it means to be an “Accidental Trader” and why it’s a bad idea.

Nasdaq

This is the 100 top “tech” companies in America. The way the index is created, though, lets a few large companies dominate it. IIRC, Apple AAPL is something like 20% of it now. So it’s a pretty good proxy for “tech” in the USA but it can move a lot based on news flow about a few companies or based on a couple of hedge funds deciding to ‘own tech’.

So what does the chart say? It “has issues”.

The issues may well resolve in the next day or two and give a better idea what’s going to happen next, but that’s in the next day or two and I’m doing my ‘restart’ now.

First, we look at price relative to the Simple Moving Averages lines. Price is well away from the lines and there is clear separation of the different time periods of the SMA stack. A ticker in a nice bull run higher. But being that far from the SMA stack is a warning. “Reversion To The Trend” will happen. Now it could happen by having the prices just run sideways until the SMA stack catches up, or it could happen in 2 months after a longer run up. Prices CAN “go parabolic” as the crowd rushes in. But it is still a warning that this is ‘late in the run’.

Next, the little red dots of PSR (Parabolic Stop and Reversal). They have ‘caught up’ with price. In fact, on one day, price went through them (giving a sell signal – and putting the next dot on top) but then reversed again (giving the next dot below prices). PSR is also saying “late in the game – reversion or sideways most likely. This could be simply a pause before a renewed run higher, or the start of a significant “correction”

Compare the height of this price run with the prior tops. We’re about where we were last April. But a touch lower. “Failure to Advance”? We’ll know in a few days if it punches through to the upside. But for now, it’s a warning. We’re looking at a load of folks who bought near that high and can now “get out” whole. That puts some resistance to upward motion. So for the last week or so we have basically “stalled”. Sure, some up days and some down days. “Violently going nowhere”. That’s a “Buy the dips / Sell the rips” day trading time. (So I’m more likely to do that than anything else at this point. Getting on a trend trade near the end is a bad thing, as you can ride back down the whole ways if the trend reverses, but you only rode up the last few floors… So one can ‘pick up the pace’ and trade a different time cycle until a good trend trade entry comes along.)

But price momentum, too, says “Time to sit out”. Great advice, but I’ve already done my “sitting out”…

Also, look back at that end of the year December / Jan 2010 top. Notice how both it and the April top have a ‘go flat’ before the fall? Notice how present prices have a ‘go flat’? Yeah, current news flow is different (with The Fed promising to inflate any asset it can find… and the BOJ Bank Of Japan offering free money to the world in an attempt to weaken the Yen) and yeah, this could be a pause before a renewed run (that does eventually happen in a recovery). But it’s the wrong time to make that bet. That bet gets made after the run renews. (Put a “buy if touched order” just above present prices and wait for it… then if it falls instead you don’t lose any money.)

The basic look of things, though, is a nice run ‘due for a correction’. If we get a couple of sharp down days in a row, or the news flow goes negative with a bad day, it could be a nice short. Though with the world economy doing better, not a short I’d hold for a long time.

RSI Relative Strength Index. Hit a “near 80”. That’s a warning. In a bull run higher, RSI ought to oscillate between 80 and 50. At trend reversals it can turn from 80 down to 20… Rarely do you get 80 hanging high as the run continues. Usually the best ‘sell point’ is when RSI has hit ‘near 80’, dipped, and risen again; but the next peak does not get as close to 80. You see this back in April. Right now we have a tiny “blip” that isn’t quite a second peak, but the whole thing still says “warning” and “consider a short position soon”.

MACD is being a pain. It’s got that “Bird Beak” look where it sets up for a crossover to the downside “exit call” then just goes sideways with a duckbill. That’s what it does when a run, instead of collapsing, continues but at a much shallower pace. Again you can see that back in April (though with a very long ‘beak’). This, too, is saying “late in the run, a hazard to get in now”. So at most I’ll do short ‘day trades’ to the long side. Buy the dips and get out if it rips up OR turns against me.

ADX – DMI We’ve got a 25 and dropping ADX line. The strong run higher trend is decaying fast. Looking at that black line, you can see that it has inflected downward some time back. We’re past the sweet spot of the run and headed into a reversal or choppy sideways. Further, the blue DMI+ line has crossed over to below the black line. That typically is the best time to start scaling out of a run and comes a bit before the trend reversal. We do not yet have “red on top”, but if the DMI- red line crosses the blue to the topside, that’s the “last call” to get out of the QQQQ and the first call for a “short the QQQQ” trade. We almost had that on the one big down day but had a “kiss off” instead (where the two lines approach to a ‘kiss’ then reverse away). Not entirely a ‘get out now’ but certainly not a ‘get in now’

Overall, my read on this is that the run is over for now (though news flow could change that) and I need to play short choppy day trades while waiting for a decent ‘entry’ on a trend trade. Either a clear resumption of the rising trend with good news flow, or a reversal on bad news. I also need to look at other types of vehicles to find a trade. I need to review commodities and metals, oil and bonds (a “bond short with TBT” ought to start working as soon as folks start to leave bonds on Fed actions.)

So I’ll be doing this same sort of analysis of each chart for them as the next day or two progress. If I find anything interesting, I’ll make a posting of it, but it will likely be Monday before I’m done.

Accidental Trading

It’s important to understand why you don’t want to be an Accidental Trader.

I decided to take time off. The schedule was not set by me, though. (My spouse needed some surgical work on a joint, I got drafted as nurse, and I’ve had my own issues to deal with involving some nerve root compression in a lumbar joint – damned shovel… never kick a shovel to cut sod…) My exit from the market was not at the ideal time, but I did a decent job of picking an “ok” time ( I did make my numbers for the month…).

So what does it mean to ‘take time off’ and to be out of the market?

It means that there will be 100 positions that do better than wherever you park your money. There always will be. The market aphorism for this is “There is always another train leaving the station”. And there is. Every single day, something is beating my choices, and something is being beaten by me. The goal is just to skew that ratio a bit in your favor.

But I’d already posted that metals looked good, especially silver and precious metals. I’d already posted that commodities in general looked good and it was time to be out of the US Dollar. (With a specific nod to Swiss Francs). So why in the world would I sell and go to dollars?

Because you don’t want to be an Accidental Trader.

Trading takes time and attention. We had a meeting of central bankers from several nations with the BOJ and the EU both making big decisions. The Bank of Japan decided to make ‘free money’ for the world (and a lot of it ran in to commodities). But they could just as easily have decided NOT to do that. The Fed announced a 2% inflation goal and more easy money (so more money ran to hard assets, commodities, and out of the US Dollar) but they could just as easily have said they were moving to a new austerity. To know which side of that trade to take, one would need to watch the news for news flow, to do an economic analysis and prediction of likely central bank actions. To basically be an active working trader. But that is not ‘being out’ and it’s hard to do when you are not sleeping, taking pain meds, and being a nurse.

You must pick a neutral position. For most folks that will be their ‘home currency’. My mortgage is in US Dollars as is my kids tuition. I lose nothing if I can pay those bills. If I bet on the Yen and the BOJ does another intervention, I can be down 2% in a heartbeat against my bills. Often, your home currency will not be the best ‘trade’. The Euro vs the US$ has been all over the board this year. To pick one over the other at any given time is a TRADE and needs full attention. So for me, the ‘neutral position’ is in US Dollars. Not an “accidental trade” where you take a position and then ignore it for a few weeks and hope it works out (because: “Hope is not a strategy”)

Similarly, I could have stuck with the SPY Index fund since “things were going up” and MACD had not yet had a crossover (the ‘setup’ turned into a ‘kissoff’ instead of a crossover). But then I’m still being an ‘accidental trader’. Remember the “Flash Crash”? Down 1000 points on the Dow in about 15 minutes just a few months ago? How about “black Monday” in 1987, with a 20%+ crash in a day or two?

There was a very famous investor (who’s name escapes me) of the pre W.W.II era who got married and took a honeymoon cruise. He new wife forbade him to trade while on the ship. So for a couple of weeks he was away from the markets. But he left his money invested and became an “Accidental Trader”. When the cruise ship docked, he found out that a great crash had happened and a large part of his wealth was gone. Now this trader was good enough to work it back over the years, but still: You never want to be an “Accidental Trader”.

My rule is that when I’m “out”, then I’m OUT and that for me that means parked in my “home currency” of the US Dollar. And while that will almost always under perform most investments (bonds, stocks, you name it tend to beat cash) it will more importantly tend to avoid any real movements against my obligations. I’ve mitigated the risk of a “flash crash” or a “black Monday” or even of a Central Bank announcement.

If you look at your positions and every day find something else that did better, you will slowly drive yourself crazy with greed. Trading from greed is a great way to go broke. Almost as strong as trading from fear. If you look at a portfolio and it’s down 20% and you don’t know why and with no background work, sell out, that is trading from fear, and a great way to go broke. Cash avoids both fear and greed when the Accidental Trader finally does take a look at their positions. And it is worth any amount of ‘potential gain’ to avoid those three: Fear, Greed, Accidental Trader.

Remember that every single day there is something going up, something going down, and a new train leaving the station. Taking some time to push away from the table and take your chips with you is a good thing. It lets you refresh the mind, body, and spirit. It lets you tend what needs tending in life. And if you don’t do it, well, a 24 x 7 global market can consume every minute of your life if you let it…

Conclusion

Having taken some time off, I find I’m likely going to be taking a bit more time out of the stock market as this does not look like an entry, more like an exit. I’ll be looking for about 3 days at various investment / trade types while I plan the ‘re-entry’ and not feeling the slightest bit of urgency to ‘get back in’. There is always another train leaving the station and it’s far more important to get on the right one that to just blindly jump onto whatever is moving now…

Oh, and FWIW, some Chiropractor time has got things more or less back where they belong and the spouse is now almost independent again. Life is returning to normal. I can sit in front of the trade terminal for more than 10 minutes at a time ;-)

One final comment: I’m going to be doing a bit of in-depth look at Brazil. They just had an election where the lead candidate looks to be a bit more communist / hard core socialist than Lula is. I need to know more before embracing Brazil again. They also doubled the tax on Foreign Investments in an attempt to dampen currency rises. This is usually a “Ministry of Stupidity Speaks” moment… so for now Brazil is off my ‘buy’ list, and will have to prove itself worthy to get back on. The chart looks like a bit toppy too, with a parabolic rise likely to have a ‘reversion to the mean’ moment:

Brazil EWZ and the Real BZF

Brazil EWZ and the Real BZF

You can see that a lot of the rise comes from the currency… that their government is now trying to drop…

About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in Economics - Trading - and Money and tagged , . Bookmark the permalink.

6 Responses to Four Q’s and Accidental Trading

  1. boballab says:

    EM

    Just make sure you are out again before wall street realizes that the lame duck secession is going to try and pass the rest of the Obama progressive agenda, including Cap and Trade while they still have a chance.

    Remember how Obamacare came into existence? The House passed a version, the Senate a different one and instead of the usual long drawn out conference affair with a revote in both chambers, The House”Deemed” to have passed the Senate version. The house has already passed a Cap and Trade bill, if the Senate can get any type through be prepared for Nancy to have it “deemed” through before they pry the gavel from her hands.

    Keep this in mind, the Republicans almost are assured of taking over the House, but even if they take over the Senate as well they will not have a filibuster proof majority. This means anything the Dems can cram through now will be protected not just by an Obama veto, but by a Dem filibuster at the minimum in the Senate.

    Once the herd on the street figures that all out just watch the stock market tank.

  2. E.M.Smith says:

    @Boballab: You are making assumptions about which way I would be “in” ;-) If I’m lucky, we’ll get some bad news flow and I can short this thing all the way back to the moving average lines!

    Yeah, there will be euphoria into the election, then the hangover after…

    Much easier to make money with a schitzoid market having manic depressive cycles than with a sedate one with confidence and a full value…

    But with “RSI” near 80 and DMI+ crossed over ADX, it’s just waiting for the MACD crossover and some bad news to make a decent short. Given how Brazil EWZ did today (underperform instead of the usual overperform) it may make the first better short. “The Ministry Of Stupidity” has spoken, after all 8-0

  3. GregO says:

    Chiefio,

    What do you think about the unemployment numbers?

    http://www.bls.gov/news.release/empsit.t15.htm

    U-3 gets all the attention, but U-6 is the broader measure.

    U-6 Aug: 16.7%
    U-6 Sep: 17.1%

    Betcha won’t see those numbers in MSM!

  4. E.M.Smith says:

    The basic issue is “folks like me”. I’m not in the unemployment figures, but I don’t have a job. Would be happy to get one, but not bothering to look right now (as the buildings I drive by where I used to get contracts are now empty with “for rent” signs in the windows…)

    So yes, the U3 is a political football and basically a joke. The real unemployment in some California counties is over 20-25%. We’re toast.

    And it will stay that way as long as there is every incentive to send capital and jobs to China and import skilled folks from India at 1/2 price.

    I’ve seen U6 on one of the financial channels. Fox Business? Or Bloomberg. Other than that, you don’t see it. It’s for econ geeks only… Even the policy wonks typically don’t look at it as it isn’t the headline number.

    It will be a VERY long time before the USA leaves the unemployment line. Even if The Fed does succeed in buggering the $ Dollar (even more…)

    You can’t starve yourself to a full stomach and you can’t tax yourself to prosperity (even if the tax is hidden as inflation).

    Prosperity comes form the free application of capital, labor, and ingenuity to the creation of products and wealth, and that comes from the expectation of gain. And if you don’t expect to get / keep any gain, well, beach time is free and reading a good book doesn’t cause a tax bite.

    “Tax Beatings will continue until morale improves” usually is a failed concept…

    I just wish we didn’t have to educate each new politician the hard way and on our dime. Someone needs to teach them how to read and give them an economic history book…

  5. Malaga View says:

    Life is a beach at the moment… and it is getting pretty crouded here as so many people are falling off a cliff… the lucky ones land up on the beach… but far too many are falling onto the jagged rocks.

    Unfortunately getting politicians to read (let alone understand) economic history books is wishful thinking…
    after all they don’t even read the bills they vote for…

  6. P.G. Sharrow says:

    It is very hard to educate politicians as they have their mouths open most of the time. Kind of like journalists. pg

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