You never know

You guys know that I have had a short bias on the stock market for over a month and viewed this upmove as a pullback to short into. It seemed to go as planned, as the volume on each day's advance was below the volume of the down bars and stocks were finally approaching reasonable resistance points. However, the market has kept on going for the past couple of days, and even the weakest stocks have pierced through logical resistances (in this case, 50 day moving average)

Every set-up in the market is just that, a set-up. There are no promises that any will work and that's why stop losses are important in order to prevent large losses if the set-up does not work. One can never be so stubborn headed in any pattern trade for the market can do absolutely anything. You can bet that I was shorting all the weak stocks on my watchlist at their appropriate resistance levels and was saved from losing big money by being stopped out at their supposedly resistances. One must realize that patterns and trends are only after-the-fact moves. The sole reason that technical traders still rely and use them is because of our belief that markets do trend and do repeat themselves (although we cannot be sure which patterns work until they do).

On a different note, my longer-term view for the market is that we are currently in the beginnings of a bull market phase. Why would I be "bullish" when I am shorting now? I view this downturn was just a healthy correction for the market, as bull markets usually include at least 2 corrections. I view 2008 to March 2009 bottom as a capitulation for all sellers. Although there was not a single day in which we could point to as capitulation, the months leading up to the bottom saw incredible volume and volatility in the crash, which is characteristic of a capitulation move if it were to be a single trading day. Also, the move since March has been nothing short of incredibly strong. I believe at this time, this current correction may take a while longer to gather enough steam for the bulls because of the force and volume of the downmoves 2 weeks ago. Of course, these are just all musings until it actually happens (and obvious leadership has not emerged yet) but if the market does not become unglued to have another quick and ferocious downmove, I will maintain my long-term view.

Feel free to post comments, I will respond and appreciate every one. Also, if you would like me to discuss a certain topic in my next post, post it in the comment section as well. Until then, never leave home without a stop-loss. If there are any questions on the lingo used in this post, feel free to ask as well.

Trade Preperation, Execution and Follow-up

The success of a trade never starts once the stock goes in your favor, it begins on the drawing board. Even if you luckily enter into a position that works wonders, if you would have prepared for the trade, you would have even more conviction to crush the play. Here is an example of how I prepared for my short in PWRD:


1. I first look at the overall market health, as 60% of any stock's move, in general, can be attributed to the overall market. I look at the SPY and the QQQQ, the two index ETFs, as my guides. I see that the markets broke down from their range 2 weeks ago on heavy volume, have made 3 months lows (you'll see the red candle bar on 1/29/10 for both indexes being lower than the December lows) and the 3 day rally from that day was on much lower volume than the preceding downmove (volume bars are on the bottom of the charts).  As a short-term trader, the market looks ripe for another downmove, even though it is "extended" from the high (more than 5%).

2. I now look for good risk to reward opportunities along with technical patterns. Because of the sudden and strong downmoves in the market, many stocks are already extended and have fallen to prices where it would be risky to initiate shorts. Some examples of these extremely weak stocks I have been following but are extended include X, CLF, NTES, STP. You can see from their charts that most have come off close to 20%, if not more of their value already. But the one stock that looked decently priced to me, was clearly in a downtrend, albeit not as weak as the others and has a tradeable pattern was PWRD. I have only provided intraday charts to clearly show the pattern but if you look at it's 2009-10 daily chart, and focusing in on the months of September until now, you can see that the stock has not made new highs, sloshed its way in the 40s and has made successive lows. The big price point for this stock is 39 on the daily and intraday charts in this pattern. For the past trading week, it has been trading between 39 and the low of around 36.70. I now have a pattern I can work with. Now begins planning the execution phase.

3. Because all traders are risk-reward creatures, price is very important to limit your risk. I shorted small size at around 38.50 prior to yesterday just to be in the play. While the market was pulling back higher on lower volume, I closely watched PWRD to see how strong it was relative to the market's rally attempt. It always stalled close to 38.80s, but would never actually trade towards 39. In face of yesterday's last hurrah, I shorted 50% of what I wanted my full position size to be in the 38.80s and set a stop above 39. The reason why I did not short all that I wanted at once is because even though the stock is in a range and I am shorting it at a great price, my intention is for the stock to break down out of the range and trend lower, so I want to have some ammo left in my pocket in case that happens. Until then, it is just stuck in a range. After executing the trade, it's a wait and see approach, usually involving me sitting on my hands and telling myself not to cover for the small money, but to be patient for the potential big move.

4. Plans can change after you execute your trade. Thursday happens, leading to declines of 3.09% and 2.89% in the SPY and QQQQs respectively, big percentages for the overall markets. Today is most definitely a day-traders dream, as stocks without news were falling like flies left and right. I did not initiate new shorts because the market opened up weak, creating even larger risk if I were to initiate positions on the weak stocks. So I watched my stock and overall, I was disappointed at how well it held up to the market. The downmove was not on high volume, the price did not reach the bottom of the range and many times, the stock looked like it was asleep.  While I will still have my overall position stop above 39, I will cover half of what I have above 38 if the stock will breach that price to lock in some profits and reshort the position if it approaches 39. If the stock continues in my favor, I will add to my position below the low of the range and adjust my plan accordingly depending on how it acts.

Feel free to post comments, I will respond and appreciate every one. Also, if you would like me to discuss a certain topic in my next post, post it in the comment section as well. Until then, never leave home without a stop-loss. If there are any questions on the lingo used in this post, feel free to ask as well.

P.S. For those who know about moving averages, I feel like the main reason why PWRD has not acted very weak is because the 200MA is at 36.16 give or take, which is close to where it is trading now. If the stock breaks below that with heavy volume, I will be a happy man.