Bulls vs. Bears

Since I am relatively new to the market I do not have any experience with this particular portion of the economic cycle. I keep hearing and reading two arguments that both make sense to me. First, is the obvious fact that if there is a general slowdown in the economy there will be a corresponding slowdown in corporate earnings, thus lowering stocks prices. Now there are many arguments about how severe the slowdown will be, but generally I think everyone agrees that there will be a slowing of the economy. The other side of the argument is that the macroeconomic picture doesn't mean a damn thing to where the stock market is going. Basically, by worrying about the doom and gloom will prevent one from participating in large market moves to the upside.

What does a small, inexperienced investor like myself do? Right now, I'm not sure. I would feel a whole lot better if the small cap growth stocks would perk up. I think this is my major concern. Should I stay long with these small caps, which offer a huge upside, or do I shift my money into a large cap ETF like the DIA or SPY?

My strategy for now is to hold on to my long positions and keep a close eye on their behavior. This time I will make sure the stocks give clear sell signals before I sell.

From the world of sports, the Dodgers clintched a playoff spot today! I just hope Nomar gets healthy before the playoffs begin.

An actual post

I haven't posted for some time, but considering I was engaged recently I'm sure you can understand.

I'm concerned about the performance of small cap stocks relative to the broader market. I'm not sure what is going on but the small caps are really lagging.

For you contrarians out there, here is a survey of top financial blogs and what they think about the current market. Looks like everyone is looking for this to be a top. I'm not so sure. Next week should be interesting.

Great Weekend

On Saturday, Sept. 23rd, Rebecca Wolfe and I were engaged to be married!

Are you watching NGPS?

Oh the pain! Being stopped out of my NGPS by a stinking nickle is feeling particularly nauseating today. Right now it is up over 7%.

I will never use a stop-loss order again.

Reading the tape

One thing that Jesse Livermore was always known for was his ability to "read the tape". When he was interested in a particular pivot point trade he would sometimes put out a huge buy(or sell) order and see how fast the shares were gobbled up. The orders would help him determine the demand for the stock and give him an idea of the path of least resistance, as he would put it.

The day after I posted my "watch list" I had some time at my desk and was watching the price movements of Silicon Image Inc. The price pushed towards $13 and I saw some big time ask orders being swallowed up without any problem. I'm no Jesse Livermore, but I was instantly reminded of his descriptions of tape reading and felt that the path of least resistance was to the upside. I started a position just under 12.90. As the chart shows, the stock declined and tested the 12.25 pivot point on lower volume. Looks to me like the path of least resistance is to the upside. On a strong move up I will add to my position.

And another thing, looks like I'm not the only one watching SIGM. Michael Ashbaugh posted a very similar analysis of SIGM's technicals today on MarketWatch. Looks like I might be learning something.

Update: I'm watching SIGM again reach towards new highs. It looks like there is still some overhead resistance at soon as the price reaches 13.05 and above.

Some very interesting setups and breakouts

The HDTV and VOD (video on demand) sector is really perking up. You've probably heard about this being the next big thing and I tend to believe it. Is now the time to get into these stocks? Since I don't have the ability to call these CEO's and ask them personally, I have to rely on the charts and let them speak to me.

First, check out Silicon Image, Inc. (SIMG), which is pictured above. The weekly is above the daily chart. I've been reading more Jesse Livermore lately and he always emphasizes buying at pivot points. SIMG just broke through a major pivot point recently, with big time volume to boot. The overhead resistance at 12.20 has been pretty strong since May 2005. The price is now testing the breakout point on smaller volume. If it holds on weak volume I think that I'm going to jump on board. The balance sheet is solid and earnings are gaining momentum. Another thing going for SIMG is the fact that it went public in the last 8 years. Willam O'Niel has found that most big winners have made their largest moves within the first 8 years of its IPO.

For some reason I went to the Yahoo message board for SIMG. The first post I read was some dude bragging about shorting SIMG at 12.96. Wow, does this guy have any clue whatsoever? It has to be a bullish sign though.

Speaking of shorts. The next stock I've been watching, which has almost 26% of the float shorted, is Sigma Designs, Inc (SIGM). (No I didn't find it because of the similar ticker.) These guy's fundamentals are really improving and if VOD really takes off, SIGM will be a huge beneficiary. The chart is working on the right side of a base and might be in the early stages of forming a handle. This will be tough to buy at the correct point because I think the large short interest will cause an explosion in price when(and if) it finally does breakout. This reminds me of another piece of advice Jesse Livermore gave. "Don't anticipate market moves with your hard earned cash." It is important to be patient and wait for the proper pivot point. It is ok to anticipate moves in your head, but that is it. What I think will happen is that it will form a handle and move, on light volume, down to the gap at 12.50. It is there that I think the breakout will begin. I intend to catch that breakout.

Finally, there is SeaChange International, Inc. (SEAC) . It is in the same sector and has a very similar chart. I'm looking for SEAC to react in a similar manner to SIGM. I'm looking for it to consolidate on weak volume and fill the gap between 8 and 8.25. I want to catch the breakout.

Help me Bill!

I'm pretty discouraged about my recent buys. First of all I wasn't patient with DRIV and dumped it WAY too early. Second, I was stopped out of my NGPS position while flying to San Francisco when my trigger price was exceeded by a friggin' nickle. The stock then had a 6% bullish reversal in the second half of the day.

I'm writing this blog for one simple reason. All of the great traders would record their market operations and analyze their successes and mistakes.

Let the analysis begin.

First, I have to ask the question: why did I sell DRIV? Did the base pattern fail? No. Did the market go into a downturn? No. Did the stock fall below 7% of my buy point? No. The only reason I sold it was because I didn't see any leadership. For instance, the dow and nasdaq were moving up, but the IBD 100 was falling. Usually the IBD 100 should be leading the dow and nasdaq. What is my reanalysis? I think it is pretty clear that the reason why the IBD 100 was going down because the index was riddled with oil stocks and there has been a serious sector rotation out of those equities. Of course the IBD 100 is going to drop until the oils are purged from the index. Also, I didn't consider the fact that DRIV could actually BE a new leader.

As if to rub it in, IBD published a story in the "Investor Education" section that I probably could have used a week ago. It was entitled, "Most money is made by waiting, not trading", which is a quote from Jesse Livermore. Basically it was about being patient and not selling too soon.

The NGPS sell was just unlucky and now I realize why so many great traders hate stop-loss orders.

So now what is my plan. First, and foremost is to not fight the tape. I have already started looking for good charts and proper buy points. I'm watching SIGM very closely. Most importantly, I'm re-reading some of Bill O'Neil's books (pictured above) and planning on not repeating my errors. Speaking of Mr. O'Neil, he will be on the Tom O'Brian show September 26th. You can listen to the podcast or just download the MP3 from the TFNN website.

Check out this scary plot! You can find it and an interesting argument about the near future of stocks here.

Is the Dow going to 20,000 or does it move down to the lower channel line?

I talked to my girlfriend today and came up with a new deal breaker. No religious fanatics allowed.

Running list added

I have recently thinking about the kind of people I would like working for me when I start my own research lab and thought it might be fun to make a list of "deal breakers" that might disqualify someone from working for me. I realize that I should probably focus on the positive side of things, but I've always been in the camp of "it's not what you like, it's what you don't like that defines a person".

The inspiration of this came when watching something on cable news about September 11th conspiracy theories. I can't stand people who will not accept the most likely explanation of some horrible event and reach for an irrational fantasy to help their small minds come to grips with what they have witnessed. What really gets me pissed is when these nut jobs delude themselves into thinking that they are "questioning the system" or "thinking critically" about the conventional explanation.

I do have a caveat of course. If you are between the age of 15 and 19 you are given a free pass because, hey, even I had my "the CIA killed Jim Morrison" phase.

#1 No Conspiracy Nut Jobs

#2 No Only Children: They don't work well with others and I just don't trust them.

More to come...

My personal bear market

Ok, DRIV had a big day today and I feel lousy that I sold so quickly, but I simply can't get past the feeling that I need to be on the short side. I got into the market during a top and whether this is the beginning of the second down leg of a supercycle bear market or another bull market surprise remains to be seen (see The Big Picture linkfest), but I just can't feel comfortable being on the long side.

Now I admit that going long on stocks has gone against my overall market thesis and has probably resulted in a self fulfilling bad trade. Without the conviction, I have been easily shaken out of my positions, breaking Rule #8.

Conversely, every trade I've made on the short side has resulted in success. It seems that there are so many charts that are perfectly set up for a short there really is no need to consider long trades right now. I know that I've been harping on the steel industry, but I have been watching this sector for some time now and, according to Bill O'Niel's method, the right amount of time has passed for successful short selling (5 to 7 months after the peak). O'Niel also suggests waiting until the price rallies above the 50 day moving average three times before initiating a short.

I shorted US Steel on Friday at 60.45 after it dropped past the 50 dma and caught a huge drop by the entire sector today.

I will also be keeping my eye on some of the IBD 100 energy stocks. These charts are setting up nicely for some short positions. Check out Holly Corp (HOC), Diamond Offshore Drilling (DO) or Cameco Corp (CCJ).

Finally I want to thank Mr Barry Ritholtz again for helping me clear my head. His recent post about all the idiots who send him hate mail was a real help (read "Where are the Trolls?"). If only I had the bankroll that his trader friend had.

Follow up to the last post

I'm in San Francisco right now for a conference and to hang out with my girlfriend. Before the flight out I set a stop-loss on my NGPS position. I wasn't feeling too confident about the recent maket moves on low volume so I set it at 41.30.

While on the plane the stock dropped on fairly big volume. Guess where it bottomed? Yup, at 41.25 and I was shaken out of my shares. NGPS then went on to have a big bullish reversal. Chalk another one up to "live and learn".

I should never have set my stop-loss so tight.

This is no rally!

I know IBD says we are in a "confirmed rally" but the leadership sucks, breakouts keep failing and I'm feeling very suspicious about the low volume gains. I really like Novatel (NGPS) but I just don't feel confident on the long side of things right now.

I'm short US Steel and I'm looking for some more short opportunities. There are tons of charts that are setting up nicely for that. I just wish the market would pick a direction and go with it.