And here is the SPY Up Signal! 12/23/11

Got the second Up signal on the markets in 2011 generated by my trading system on SPY.... lets hope the markets know that I got an Up signal on the S&P 500 (ETF: SPY) and cooperates.. I am long biased now but only very modestly invested in my portfolio, mostly cash. Will look to go long on individual stocks as I get entry signals.

SPY sets off Potential Buy Signal 12/22/11

It’s been a long wait for my system to trigger a buy signal on the S&P500 (ETF:SPY). Only had one this year and it was short lived. Well, I have another on 12/22 close of business. The expert commentary is Buy if SPY exceeds 125.39, which is the day’s high.

I am not one to predict too much long term. All I tell myself to do is follow the signals from the systems that I have created. Still, I smell a little long movement in the air and during the last week after the first huge 300 points DJ30 up day, I put in an order to close my PBR put positions at a profit and also TLT at a profit. I was long on TLT which rises when the markets falls. I was also holding put positions on PBR which made me money as PBR fell. But that could be changing, and it is time to reel in the profit it generated, before it turns into a loss! I think we will see some upside here

Why? Well, when I look at the chart on SPY, it is nudging the top of a resistance trend line. And my ICE and other short term indicators are point up. See chart below. It has been a long grind sideways this year within the narrowing triangle shown by the two trend lines in blue. If SPY breaks out of the trend line, there is likely to be a short term push for further movement in the same direction as traders would see their stops hit. Along those lines, I also sold of part of my SPY put options that provides protection against my long position in my 401K. Maybe this is the Santa rally we were hoping for, but volume is pretty muted. Still, if it breakout, volume can come back quickly as well as a surge, and I don’t want my contrary positions turning into a loss and holding back a rise in my portfolio holdings.

TLT Rising, PBR Falling 12/18/11

Last week I got stopped out of my GLD position. Kind of glad that I had a stop, although it still gapped down and pinched me for a loss. Since then GLD shows a down signal.

Long trade:

The TLT trade on the other hand looks good. TLT is iShares Barclay’s 20 year Treasury Bond fund. It is an ETF.  I remember the conversation with a friend regarding bond funds and his concern as to what would happen to bond funds when interest rates rose. The technicals have been quite strong for TLT and that is my guide. The last buy signal on TLT came on 11/2/11. There was also another short term minor buy signal on 11/30/11. That was my entry point. I think it is getting a little rich and I may bail soon. Still, there is no exit signal on TLT.

Short or Down trade:

I am also using short term put options to trade PBR which has a down signal. It is a fast swing trading system based on end-of-day, and I look to make money up or down. My last entry was as shown with an ellipse drawn around the down signal on 12/8. By buying put options, I can make money on the trade as long as PBR goes down. PBR has dropped and I notice also a breakdown of the support line drawn touching the previous bottoms. PBR is Petroleo Brasileiro. Brazil’s oil boom could be seeing its first bust.

No Change 12/10/11

No change from last week. My systems are pointing up with the exception of my ICE system on SPY. Both of my regular systems are saying Up for Dow Jones 30 (ETF: DIA) and for the S&P 500 (ETF: SPY). My 401K monthly system is partially long biased. Summary – I have long positions that I am hedged on. Meaning I make money if the market goes up but modestly. If it goes down, I lose money but modestly. The markets are hoping for good news from Europe and wants to go up. But the underlying fundamentals are severe and holding it back.

I am also long in GLD (Gold ETF) and TLT (Long term Treasury bond fund) and entered a small put position on PBR (Oil) – all actions based on my technicals of course and not fundamentals.

401K- No Change from last month 12/3/11

My monthly analysis of my two 401K accounts showed no change is required on my selections. The system is split between equity and bond funds as it is in a transitional state.  Until I get a clear signal to go long 100%, I will choose to stay where I am, which is at about 40% long equity funds. On top of that I am partially hedged with put options on my long equity positions, as this market is fickle and could drop in a hurry.

Last week felt good as my long positions all recovered back nicely. Still, Europe’s problems are long term. Last week we all learned that there was an inter-bank liquidity problem and they agreed to do swaps for the US dollar. Let me see… Europe’s currency is in shaky grounds, and may collapse, and the US Fed decides to swap our US dollars for the Euro?? Makes good sense doesn’t it, if you are a contrarian and in the business of bailing people out. Who will bail us out??? Or are we too big to fail?

I am attaching as examples, a couple of charts on funds I am holding in my 401K. One is an equity fund; the Artisan Mid-Cap Value and the other is the Fidelity Govt Income Fund.

Follow the Yellow Brick Road 11/30/11

Develop a good process/system.

Verify and validate the process.

Then follow the process.

For it will lead to good results over the long haul.

This is the mantra I must remember.

Being human, my first reaction to the DJ30 +485 point up day today was to be euphoric about the money made today. Instead, I wish I could be more Zen like about this when making money. I have to remind myself that what I should be happy about is that I am able to execute my systems to a “T” and what I control is my ability to follow the process, despite fear of losses. I will certainly have losses at times but following my systems, I will gain more while losing less.

Control and manage the Process. And let the Process deliver positive Results.

Focus on what I can control. Let my execution be flawless…

I am still long biased based on the partial entry signal in my 401K system last month. I have been hedged against the loss and that limited my losses in the last two weeks; but it was still painful. I sold part of my hedge after I felt we had gone down too deep; but with the rise will add some more back.  

My next monthly 401K analysis can be done during this weekend to see if there are any changes. My market signals are still down on DIA and SPY.

Buying into a Falling Knife 11/27/11

It is tempting to buy dips. Even when those dips are in the context of a bearish drop. This is Dollar Cost Averaging and it goes against the grain of what I would do. Why? Because losses can get larger and larger as the stock or fund drops. Months later or perhaps years later it may rise and get you out of trouble. In the case of some stocks, that might never happen. Some people have that patience and consider that long term investing.

Why not invest and go long when the market tells you people are buying and the fund is going up instead? Is that so hard to do if you use good technicals? I don’t think so.

Case in point is the India Fund IIF. I recall my friends buying into IIF when it was in the 20s and had a bearish signal. The response at the time was it had dropped 15-20% over 3-4 weeks and it seemed like a good time to buy since no one can tell when there is a bottom. No. I think it is better to buy when there is a technical Buy signal supporting the decision. Sometimes those buy signals can be short lived in which case it is better to get out on a sell or exit signal. IIF is now at 14.85. It has been dropping continuously for the last few weeks. Time to buy? Sure for contrarian investors. It might be a good oversold period and a bounce is likely but that is too risky for me. I work too hard to grow my money. I would rather buy when I get a Buy signal. A contrarian I am not. And if I did buy now, I would do it with options to keep my risks limited.

A Down Signal on DIA 11/23/11

The Dow Jones 30 fired off a down signal after the close today. Not good. The chart structure resembles another period of time back in 5/23/08 eerily. It is identical to the down signal on 5/23/08 after which the market dropped and DIA went from 126 to 80 over a few months. I don’t think the market will repeat itself. That would make it too easy, too simple. Nothing about the market’s moves is simple. But the global fundamentals are looking more ominous than the collapse of the housing and real estate markets. Our borrowing along with the borrowing in Europe is setting the stage for a bigger collapse. The top hedge fund soothsayer says we will see it by end of 2012. So what do I do? Jump for shelter?

I think the trading down band is stretched and I have no choice but to wait for a small bounce to start taking the down moves. At this rate my 401K system will kick me out of equity funds by the first week of next month. I will patiently wait the 30 days Fidelity wants me to wait. I hate that about Fidelity. It is that holier than thou behavior. I will never get an independent Fidelity account. All right. I am stuck with them on my 401K but in case they wanted to know how I really feel….

My SPY puts have gained value and will reduce the losses from my partial long positions from my 401K system, triggered early this month. The only thing that saved me was my ICE system on SPY that still told me exit on long. I know it is quirky but I trust it because of that. The markets are quirky also. Those nice simple systems don’t cut it on the major indexes. I wish I had taken some of the down signals that came along on individual stocks earlier this week and last week and wish I had purchased put options. Perhaps I can take it on the small bounce that I expect to see soon.

The only saving grace would be if the US consumer saved the day by purchasing their way out of this mess. A friend of mine asked me the other day, what are we good at in the US? My first thought was “consumption”. Yes, I think we can do a massive Thanksgiving buy that shows the world and the Corporations that feed us that we the US consumers are not done. If that happens we can get another whipsaw and the markets move back up. The longer the market goes down, the less likely we would say is the chance of us just having a higher low and the whole market moving up. I think there is a decent chance that this market gets ugly; but what good is such a prediction? Zero. Better to say I don’t know and that I will trust my chart signals.

Below is a chart on DIA showing the down signal now and another DIA chart showing the down signal in 5/22/08. Quite a resemblance…mulling that over.  Got to protect my capital first.

Current state of affairs - 11/19/11

I am now partially invested long in my 401K based on my monthly system, probably to the tune of 35% of my 401K portfolio. All my investments in R/IRAs are cash so this does not represent 35% of my total portfolio, much less. Due to the Exit long signal on my SPY chart, I am hedged on even this exposure with put options on SPY. During last week the markets dropped 3% and while my 401K funds dropped in value, my put options increased in value and kept my losses contained. I would normally remove the hedge once I see long signals on SPY. Meanwhile the chart on DIA still shows long, although the indicators are certainly showing a weakening and wilting of the index.

Last week I also placed stops on my long position on GLD and AMD to protect the modest profits I had in each. I was stopped out on both and was glad to lock in some profits as both have turned negative to my point of entry. I hate giving up gains on positions and have to cash out with a loss. Stops do have its usefulness at times and this was one fo them.

I see emerging markets and my IIF India fund charts all showing down signals. I don’t like that as those are the regions I hope to see lead with gains and right now they are leading with losses. At this time the bond funds like TLT are holding up as well as the US Dollar, UUP. The focus is on Europe and we are waiting to see if they can extract themselves from the contagion they are in. Can the leaders lead themselves out of trouble or will the countries financially self-destruct from getting goodies that they cannot give up… and within a couple of years, the US will have to face up to its own debt situation…

The markets are ripe for a rinsing but that is just my brain thinking. Much better to stop that and follow the signals.

Book Review on Covered Calls: “Show me the Money” – Ron Groenke 11/19/11

I just finished reading the book “Show me the Money” by Ron Groenke. It is about placing covered calls and naked puts for a monthly cash income.  I give the author a rating of “A” for the book. It is an easy read despite his including tables and charts on trades that might scare off some readers. I think it reads like a simple story book with a happy ending – showing you how you can make 25% return per year or more on your investments. Sounds too good to be true? Read the book. His website is:  http://www.rongroenke.com/index.php

What are covered calls? A covered call is when you buy the stock and sell call options against it, collecting the call premium. By doing covered calls on a portfolio of stocks that are either going sideways or moving up, it is possible to generate an average of 25% returns on your portfolio. Ron also shows how one can sell naked puts that are out-of-money (OTM) to rack up additional premium; but only do it in stocks you intend to buy for covered calls. If the stock crosses the strike price at expiration, then you land up owning the stock or the stock gets “put” to you so to speak. Ron would immediately turn around and do a covered call on the stock that he purchased at a discount, as he collected premiums on the put options sold.

The obvious weakness to this method is that there is no downside protection other than the offset the call premiums provide. If the market changes and is in a freefall, there would be significant losses. And I dislike losses. Ron points out this risk; but still presents the method as an almost sure thing. That is only true if the stocks are going sideways or going up. If we can combine Covered calls with market timing, it can be a powerful tool and one can truly generate significant money of your portfolio, making it in fact  a money tree.

In order to follow this technique, it would be wise to learn about options first. I learned options through Optionetics. That gave me a good grounding – but I must say it was rather expensive classes. Still, it gave me an added tool I wanted to use for protecting my portfolio, and just reading books was a hard way to learn options.

Ron also offers software that you can lease at about $220/year for the whole package that enables you to select the right stocks to do covered calls on, and time it, and find the best options to sell against these stocks. There is a free walk through software demo that is not too bad. Like any software, it would take some getting used to. Overall, it would be possible to generate $120K income against a portfolio of $360K.

My next steps will be to read the book over again. There are many useful nuggets of information. I am probably more comfortable selecting stocks using TC2007 software from Worden Bros from the S&P500, using some of the fundamental criteria that Ron mentioned. Then I would generate technicals off Metastock to give me Buy and Sell signals that are relatively slow. I would like to use this method on five stocks that have good fundamentals and have a buy signal against them. Run the covered calls on a portion of my portfolio and see how it does. No hurry to jump in immediately. I will do my homework over the next month and start in 2012. Using covered calls to generate income of your portfolio such as Rollover IRA accounts is certainly a good idea but it is best to have a plan and then trade the plan. Still need to know when to enter, when to hold it and when to fold it…

DIA Up and the Money tree 11/13/11

Attaching a chart on DIA. This is an ETF on the Dow Jones 30 stock. The signal is up on this since 10/11/11, more than a month ago. Meanwhile my more elaborate system on SPY still shows an exit on long, which holds me back a little. And my 1/month 401K system has had me dipping my foot back into stock funds like Vanguard Explorer Admiral and Artisan Mid-Cap value. I did buy some SPY put options in one of my R/IRA accounts as protection on my 401K long positions and will leave them on till I get a positive up signal on SPY.

Other than that, I have been thinking about a money tree. I went to the local chapter AAII meeting this weekend and picked up a book for reading. It is called “Show me the Money”, Covered Calls & naked Puts for a monthly cash income by Ronald Groenke. The money tree method so to speak. Plant a tree at the back that grows dollar bills that you can keep taking, as long as your underlying stock doesn’t get decimated..

I have rarely practiced using covered calls as I consider them risky with no downside protection. Yet I have met at least a couple of people who have practiced this strategy quite successfully. I think it might be worth considering when combined with tactical asset allocation (market timing) based on slow signals that don’t get you in and out frequently.

The author starts of with an example where he shows a 21.44% return per year over 28 months. Buy the stock and sell the call options and collect premium. This method certainly has downside risk but I will keep my opinions bottled and take a look at what the author has to say. It will take me a little while to digest the strategies he promotes and then I can combine it with some of my own ideas. What is wrong with buying a chunk of high grade stocks like WMT, PFE and KO and selling options on it over and over again as additional income? I think there are nuances I will want to add and do the what if scenarios so that I am prepared with the proper reaction if the stock goes down. But even if one did this in a mindless manner through downturns, would we not come out ahead in the long term? Capital preservation is still important to me so I probably won’t participate when we get major downturns. Still, this might be a good method for sideways and up markets. I like a slow upward moving equity curve on my portfolio and this might add to it. More on this later.

401K transitional times 11/6/11

It is that time of the month when I take a look at my 401K choices and run my Metastock software through its monthly algorithm and decide whether to keep the same choices or make changes. This month I see that the results are mixed; suggesting a transition taking place.

I have two 401K plans to look through. One is the current company and the other belongs to a previous company. Both are with Fidelity. In the first one it is a tussle between Bond funds and Vanguard Explorer Admiral and Artisan Mid-Cap Value. The other is between Fidelity Govt Income and a Mid-cap fund and Spartan 500. That means I will turn my cash funds into equity based on about 40% of my 401K. I am going less than 50% as my slower weekly technical charts on each of the equity funds are still showing down signals. The only up signals are still from Fidelity Govt income and bond funds. Although I see that the daily chart on Fidelity Govt Income has turned in a down signal.

Therein lays the problem with technical analysis. If you look hard enough, you will always find a reason to do nothing – and with all the analysis, stay frozen - analysis paralysis. When the signals are all tuned together, it is usually too late. It is best to weigh the trading systems but have a trading plan to follow consistently without muddying the waters with additional analysis. There is plenty of uncertainty out there but I feel it is appropriate for me to dip my feet into the 401K equity funds now.

This is a change from previously being in money market, cash and Fidelity Govt Income funds only and no equity funds. I am also modestly into GLD (gold ETF) in my R/IRA fund based on my last week’s post.

Gold - AU 10/29/11

Gold - A precious yellow metallic element. Atomic number 79. Specific gravity 19.3 at 20 degrees C.

Friday I got a buy signal on GLD. Usually I like to see a pullback before I get in but the better method might be to get in partially and then add to my position when there is a pullback.

The simplest way to own gold is to buy into the Exchange Traded Fund GLD. It is not as nice as actually having gold certainly, but it is more efficient to buy and sell it just like a stock. I love the look of gold; whether it is the 22 Kt jewelry that my wife owns (and is safely in the bank vault) or the gold 1 oz coin that she has in a necklace (that is also in the bank vault). We don’t own that much of gold, but the investing public certainly is trading GLD in larger and larger numbers. I was not surprised to find that the volume of the stock Coca cola (KO) traded every day is around 12,500,000 and is half that of the volume traded in GLD, which is at 23,500,000.

My current chart on GLD is attached below. No guarantees that this will be a winning trade. But as part of my alternate investment portion of my portfolio, I have decided to keep gold as a certain percentage of it but using tactical asset management (timing systems). That means when I get long signals, I will buy gold and sell it when I get a sell signal. In the long haul, I will make a decent return on GLD but I have to keep in mind that any one signal can turn out to be a loss.

Waiting for my long entry 10/23/11

The market has been on a fast rise and my systems have flashed some long signals recently. The DJ30 symbolized by the ETF, DIA has now broken through its 200 day exp mov avg. That is a positive sign. I expect SPY to do the same.  The tough part for me is to be patient and wait for the pullback. Even tougher part is deciding how much pullback is enough and when to enter long. I want to go long when the trend is up but buy on a dip. In my 401K it is simpler as I will simply react to my 1/month analysis. I suspect I will see some long entries but that is TBD next week. No one said this personal portfolio management business is easy when you are a conservative manager and don’t like losses. Still, I should not complain.

CREE has not participated in the markets improved behavior and is still in a down trend. Not good. AMD is also looking very weak and has no sign of life. ORCL looks better. The solar companies have got annihilated. Look at FSLR and TAN and how bad they look. Those would have been terrible for covered calls. It is a mixed bag in the conglomerates that I track. TXT is showing a little life but volume on the up side is fading. JCI is holding up and so is TYC.. HRS is still weak after its fall from 53 to 37.  IR must be reacting to its last fundamental news – probably less than optimistic. In the energy area, it is again a mixed bag. AES, BP and SU Suncor energy are moving up but the coal companies are hurting. PCX and ANR are way down. Materials companies have taken a beating as well and some are showing signs of wanting to get back up. DOW has a buy signal but SCCO copper is still down and FOE is still reeling from its dive down. RGLD has come down from its pedestal. X has moved down but with a divergence is looking like it wants to go up. In the currency sector, I see buy signals on FXA, FXE and FXY. UUP the US dollar is long but has been swooning of late as the US markets have climbed. One sector that has weathered the storm well are the non-cyclical; CL, CLX and HNZ. I like ketchup. Perhaps I should look to do some covered calls with these. In my transportation watch, I see F moving on up and FEDEX is also acting perky. The Utilities are also holding up well while paying nice dividends. DUK is certainly on a tear.

Summarizing my look at my stocks in various sectors, the non-cyclical and utilities look strong. Transportation is showing some early strength. The rest are all split and you have to find your spots. Think I will wait for the pullback.

Is it Time to Buy? 10/16/11?

The Dow Jones 30 stocks represented by the Exchange Traded Fund DIA fired off a buy signal last week. On the basis of the buy signal the answer is yes, it is time to buy; but I would prefer to wait for a pullback. I think it is inevitable, given the fast rise we have seen in the stock market in the last two weeks. I see that DIA is now hovering right at its 200 day exp moving average. That is looked upon as a resistance line and I am thinking that DIA will pullback, gather some strength and then climb again. Still, it is a lot easier not to second guess these signals and just follow them.

My 401K funds analysis is due next month, so I do not intend to jump in and violate my 401K fund management rules. If we keep up the momentum, then my 401 K monthly analysis will also pick up the up signal and tell me to get back in to rising equity funds. I can wait.

I am regretful that I missed picking up the buy signal that was on SNDK a while back. I saw it but did not act upon the information. Why? Because I am still somewhat plagued by a hesitation to enter stocks when the market majors still have a down signal. That is the super conservative nature I have. Yet it is logical that before the major ETFs perk up, we will see faster action from technology areas like SNDK.

I took a quick look at CREE and it still has a down signal although it has recovered from 24 to 29. It may be another stock to watch, although the long downward plunge since January is foreboding.

The 50 day ema (red line) on DIA is below the 200 day ema (black line). It will take sometime before this becomes another major up move which has to have the 50 day ema above the 200 day ema. If it wants to do its slow gyrations and collapse and take us to deeper depths, as the gloom and doom scenarios suggest, then we will get a down signal in due time and that might be quite a good spot to take on some put positions on DIA and make a little money on the down side…

For now, there is an Up signal and I will look for a dip to try to put on some long positions.

Growling Bear or Pooh Bear? 10/11/11

“It is far better to be wishing you were in the market when you are out than wishing you were out when you were in”

With the market taking off like a rocket over the several days, I was wondering about my post about the growling bear! In fact the bear appears to have been fed some German honey and is sitting back contented like Pooh bear from Winnie the Pooh. The bulls have charged forward albeit on rather low volume today.  

It is far better to have a system and stick to it in a disciplined manner, as long as the system is sound and solid in its foundations, than trade based on recency. I believe in the systems I have and when the signals give a change, I will change. I want to be a flexible reed. I can sway in the direction of the wind without breaking. Living in South Georgia, I have seen too many rigid pine trees break in a harsh winter storm.

Yes, I saw the reversal signal early last week

Yes, I feel bad I did not place some long positions on the S&P to pick up some of the gains from the reversal

No, I could not have expected the gains to have been so much so quick. My technicals are still weak and it is better not to fight the technicals.

But when I get a change in the charts through my trading systems, I will change my posture. For now I remain wishing I was in over the last few days; but glad I have been out over the last couple of months.

401K Monthly Analysis 10/9/11

Ran my monthly analysis to see which mutual funds I should be in for my (2) 401Ks. Results are same as last month. The only two funds that popped up green were Fidelity Government Income Fund and PIMCO Real Retn Admin fund. No change. I remain in my allocation of cash, Fidelity Government Income and PIMCO Real Retn Admin, depending on each 401K choice.

The market is again at a crucial juncture. After the bounce last week, it is drawing in breath before trying to break through the previous high on 9/27. If it succeeds in doing that, then I would expect a pullback that would accomplish a higher low and another move up. Will that happen or will the market get run over by the bears who will use the bounce to take the market down another leg, deeper than the last one? No one really knows.  The pundits will only guess. Half of them will be right and half wrong! The technicals still say down and my monthly system told me I needed to remain defensive in my 401K fund choices. That is all that matters.

The Bear is growling 9/30/11

Let me point out that my chart on SPY gave an exit signal on long and my 401K monthly system has had me in cash, bond funds and Fidelity Government Income funds for a while now and this has kept me out of recent troubles. I hear the bear growling. When I look at stock charts I am amazed at some of the drops I see. IR has dropped from a peak of 51 to 31. Solar technology has been decimated. The ETF TAN has gone from a 2011 peak of 9 to 3.4. HRS after failing to rise above its previous high did a double top at 52 and is now sitting at 35.Remember my blog on HRS where I said that I would buy HRS only if it crossed its previous high and broke out?  JCI did the same and was turned down and double topped at 43 and is now at 27. And I think there is another leg down coming. Energy has been heading down as the dollar has been strengthening and ANR dropped from 68 to 18.  The pristine DJ30 stocks have held up well under the circumstances but even they have been feeling the heat. Look at CAT which dropped from its 116 peak to 77 this year. And the financial sector has been hit with Europe’s woes and the inability to shed itself of the mortgage foreclosure problems in the US. Look at the gold standard in financials in the US, Goldman Sachs GS, dropping from 175 to 95. And we don't need to talk of BAC or C.

My sense is that many individual stocks have dropped much worse than the large index funds and while the market reports the big indexes like the Dow Jones 30, many individual portfolios have been hurt badly already. The broad indexes have been in a trading range for the last few months and been bouncing off a support. We are very close to that support again and my gut tells me that support will eventually fail to hold. The global fundamentals are just too weak and any solutions in Europe and US are all temporary. We have to face pain ahead; but not in my portfolio if I can avoid it.

I was looking at a scan I do in TC2007 which says “Climbers with Volume”. This scan idea came from “Lady Climber” who was knighted by the Worden Bros in TC quite a few years back. You have to know the TC and Worden Bros system that used to knight letter contributors to know what I am saying but that system is also unfortunately gone... Lady Climber funded her kid’s education by buying these stocks that were Climbers and she showed us the scan she used to pick those stocks. Here is what my version of that scan shows. There were only 13 (unlucky 13) stocks that showed up on the scan today. 10 of them were bear funds! The remaining 3 were stocks like Goodrich GR which was recently purchased at a high price and is now unlikely to move at all. In the currency markets UUP – the US dollar has been showing some upward trajectory.

I have run for the hills. There is a chance that support will hold and we will see a surge back up. If that happens, I will certainly look to jump on that bandwagon. Meanwhile we are still in one of those bear flag sideways movements and the eventual next leg will be…. no one really knows but quite possibly down. Why risk my capital while the bear growls? I will take some small bear positions if there is a breakdown. In any case, I am glad I am sitting out for now. I don’t have to get mauled by the bear, regardless of what some of those Wall street brains want me to think.

EXIT Long on SPY 9/22/11

Well well well… that was a short lived long signal on SPY. Today we got an exit on long signal. See chart below. I had mentioned in my last post that I was going to buy on dips but with the exit signal, scratch that plan. It was wise to look for a dip to go long and not jump in after 5 up days. I was thinking of taking on some long positions but I think I’ll wait. The real question is are we retesting previous lows and looking to recover and go long or are we just beginning a long downturn? What I think does not matter. The market will do what it will do. A Greek default would pull the rug under this support; and a resolution of the Greek debt would give the market a nice boost.

For now, I will go with the down signal and sit on the side lines, relatively flat performance so far for the year.

SPY Buy signal 9/16/11

SPY exceeded the buy stop value of 121.47 and the long signal was triggered. See my last post and also chart below. Buy at your own risk.

It is interesting that the buy signal came after over 6 months of waiting after receiving the exit on long on SPY back in 2/23/11. Does that mean the signal is strong? No. It means nothing more than we have an up signal and nothing is guaranteed. That is the very nature of trading. It does mean for me that I will now be looking for a pullback after 5 up days to go long. The chart on SPY also shows the prices approaching the 50 day moving average – the red line. That could provide some resistance. I had long signals on several of the stocks that I track earlier in the week; but stayed on the side line as the direction on SPY was still down or exit on long. Now I feel more enthused to head in the direction of the tide according to my technicals.

Stronger stocks like AMZN, AAPL, AZO, PCP have already started climbing and approaching their highs. These stocks did not take much of a beating on the downturn over the last few months. I still see fundamentals as weak – consumer confidence, GDP, political climate, and Western world debt which weighs down on growth. On the other hand this is a pre-election year, interest rates are low, and several big corporations are flush with cash and making solid profits. As usual the future is grey and cloudy.

They say the market likes to climb a wall of worries.  We will see. 

SPY Wakes Up 91511

We have a possible buy opportunity signal on SPY. The chart would read “If today’s high for SPY is exceeded tomorrow, take a long position on SPY”. Buy Stop at 121.47. After 4 consecutive Up days now, I have also seen some buy signals pop up on AMD, SNDK, and AAPL etc earlier this week. I chose to ignore them because the overall market (SPY) was pointed down. Yet the thrust upwards was quite nice and each of the up signals would have resulted in positive trades. Perhaps the Up signal early in the week on the Nasdaq Q’s was a good indicator of the strengthening in the technology sector.

September can be a bearish month. Europe’s troubles are not over. The US has plenty of debt. Is it worth getting excited on the up side? Best thing to do is simply follow the signals and let the charts provide the direction.

For now we have possible buy opportunity on SPY. Once SPY is long, I would look to take long positions on a dip.

What kind of Recovery is this? 9/10/11

The Recession ended 26 months ago. What kind of Recovery is this? No. This is not meant to be a political statement. My blog is all about investing and although I remain a technical investor, the fundamentals are the backdrop to what creates the technicals.

Recently I attended another excellent presentation. This time by John M Simms, Ph.D., CFA and Chief Investment Officer for a company in North Carolina... John had made a similar presentation last year and had suggested buying GLD, Gold and more gold. Since then GLD is up 50%.

”Too much debt. Price to be paid. Run for the hills”. That just about summarizes his sentiments. We are already in the beginnings of the double dip recession as GDP growth is <2% last quarter. Each time it dropped to below 2% we have had recessions that followed. Reducing unemployment from the current 9.1% to 7% will require a job growth of 208,250 per month for the next 3 years. That is unlikely. We have a long slog ahead. Consumer confidence is dropping but it can drop steeper. Higher debt means slower growth. Is the US same as Japan? Yes and no. The Japanese have been great savers and own most of their debt. We don’t.

John makes excellent points with his charts and data to show that US growth has been replaced with US Government transfer payments as we have got more and more indebted.

He uses Tobin’s Q and other charts to show that profit margins are at historical highs and profit projections are being based out of these highs, and are likely to disappoint in the future. Feds will probably have a QE3 that will be called something else. The Feds can “goose” the financial system but after QE1 and QE2, the Feds have a real exit problem. If the Fed cannot control the release of reserves, we are likely to have a real inflation problem, although John feels we are likely to have deflation or low inflation first before high inflation.

Is Gold in a bubble? John did a quick test of who owned GLD in the group and how much. Seeing the low numbers, he added, you don’t have a bubble till everyone owns GLD. John expects GLD to get up to much higher numbers based on the failure of Europe and the debt laden US. He did not hesitate to use numbers as high as $4000 - $5000 per ounce. That is a lot higher than the current $1800 per ounce. He sees the US dollar as the likely choice versus the Euro, just as US treasuries is a safer haven than equities. Europe banks are likely to continue to go down as they are weighed down by Greek debt. Then there is Spain, Italy, Portugal and Ireland. Did you know that pricing of credit default swaps show that it costs more to insure France against default than Chile or Columbia? And it is not because of Columbian coffee.

After listening to all the gloom and doom from John, I must say that I am glad my technicals are in line with what he was saying. I will take a closer look at opportunities to buy GLD on dips as well as pick up some inverse funds on bounces. Watch out. There is trouble ahead.

Position Status 9/5/11

My current position is cash, money market, PIMCO Global Bond funds and Fidelity Government Income funds. I don’t see any buy signals on equities. My monthly 401K funds analysis showed for my first 401K that the only fund with a green to invest in is Fidelity Government Income fund, and I am already in it. In my other 401K, three funds are green; PIMCO Real Retn Admin, PIMCO Global Bond fund and Fidelity Government Income fund and I am in two of the three, so no change is required in my 401K choices for the next month.

I had seen opportunities to bet on the downside last week after the bounce. Unfortunately my buy to open put option orders were all limit orders and the market opened with a gap down past my limit prices. I will have to pass on the down trades now as I do not want to chase it.

-         Lesson learned is that I should have been buying put positions slowly as the bounce was taking place before the market turned down.

It is Monday night. Labor Day weekend is over. Markets were closed in the US. Europe has taken the US flat jobs report really hard. Europe banks are all down 5-9% today. All the big names were hit hard. Tomorrow will be interesting with the huge gap down on futures. I think any bounce will probably be an opportunity for traders to take the down position. Still, traders will be watching to see the market reaction in the morning.  

Attached chart on SPY begs the question whether the previous support will hold. It is interesting how the market looks like it is playing out a repeat of June 2010. I think global fundamentals are actually a lot weaker than last year.

Do not buy after multiple days of Higher Highs 9/4/11

In my last blog I pointed out my resisting buying CREE after multiple days of rises as the stock is still in a downtrend. Since then CREE dropped about 8% and my hesitation looks justified. Still these opinions are based on averages and not a specific example. So I thought I would post an old article that had caught my eye about whether you would gain by buying a stock that had just made several days of higher highs. The answer is no. It is better to buy a stock that is in an uptrend on a dip. Here is the article...Keep in mind it is simply pointing out short term results over a week's time frame and not long term. The main point I want to make here is not to chase a stock that just made several days of higher highs. It is far better to buy a stock that has been in an uptrend that has just had several days of lower lows. And for me, I prefer to have the technicals pull these out and help me establish an exit criteria after I am in the trade, in case the trade goes wrong.
I am still cautious trying to catch a falling knife - so I prefer to make sure my system says a stock is in an uptrend before I look to buy it as it is falling. Contrarian traders do well buying after weakness; but that also takes a strong stomach in a major downtrend as weak can get weaker in a hurry.. be careful.

Higher Highs/ Lower Lows?                                                                 12/24/06

TradingMarkets Research article

“Higher Highs
We looked at stocks that made at least three consecutive days of higher highs, all the way to stocks that made at least seven consecutive days of higher highs. The results revealed a number of interesting findings, some of which are highlighted here:
- In all but one case, the average return of stocks that made "multiple days of higher highs" underperformed the benchmark.  
- In most cases the average returns of stocks that made "multiple days of higher highs" were negative, 1 day, 2 days and 1 week later.
- The results on average showed even greater weakness when we looked at stocks that made at least five consecutive days of higher highs.

In other words, on average, stocks that make "multiple days of higher highs" should not be bought.

"Lower Lows"
We looked at stocks that made at least three consecutive days of lower lows, all the way to stocks that made at least seven consecutive days of lower lows. Here's what we found:
- The average returns of stocks that made "multiple days of lower lows" were positive 1 day, 2 days and 1 week later.
- In every single case the average returns of stocks that made "multiple days of lower lows", outperfperformed the benchmark.
- The results were even stronger when we looked at stocks that had made 5 consecutive days of lower lows.
That means traders should look to build strategies around stocks that make at least five consecutive days of lower lows.
As you can see, on average, stocks that make at least five consecutive days of higher highs show a negative return over the next week (-0.20%). By comparison, stocks that make at least five consecutive days of lower lows show a positive return (+0.76%).
Once again, our research shows that both news and emotions lead investors to do the opposite of what they should be doing. They are buying when stocks make multiple higher highs and selling when they make multiple lower lows. In both cases, on average, this is will lead to negative returns. Much like my previous article on "Gaps and Laps", we found even greater opportunities by adding simple conditions, like stocks trading above or below the 200-day moving average, or combining multiple higher highs/lower lows with PowerRatings, etc.
Our research showed time and again, across almost every possible parameter, that the notion multiple higher highs are bullish, and multiple lower lows are bearish is incorrect. The statistics clearly show that, on average, it has been better to be a buyer of multiple lower lows, rather than multiple higher highs.
So, rephrasing the question asked at the beginning of this article, "Is it better to be a seller of stocks that have been strong and have made multiple days of higher highs? And, is it better to be a buyer of stocks that have been weak and have made multiple days of lower lows?" The answer (to both) is a resounding "yes".
Ashton Dorkins, Editor-in-Chief
* Our research looked at 7,050,517 trades since Jan 1, 1995. We applied a price and liquidity filter that required all stocks be priced above $5 and have a 100-day moving average of volume greater than 250,000 shares.

Resisting the Temptation on CREE 8/29/11

When you are out of the market and sitting on cash, money market and some bond funds, and the market puts in nice strong days back to back, you feel left behind. There is a temptation to jump in. But I have to resist that kind of temptation.

I was looking at CREE and in my TC2007 software; the indicators are looking primed for an up move. Double bottom. Nice pull back. But my basic system on Metastock still says down. The market overall is still saying down. Is it wise to jump in? Sure if I want to gamble with some lower odds. But I don’t want to do that. I will be patient and wait for at least CREE to signal up, and then wait patiently for the pullback to stick my toes in the water. Why not have the odds in my favor? After all that is what smart trading is all about. Stacking the odds in your favor, looking at which way the tide is flowing and swimming with the tide. There are tides and then there are waves. Best to catch the wave in the direction of the tide.

Taking Profits 8/23/11

After the success of the Libyan rebels in entering Tripoli over the weekend, I felt the market had the right excuse to climb and get out of the oversold levels it was in. I felt uncomfortable sitting on my down put option positions that were all showing profit. I was traveling on business and besides, I don’t look at the numbers during the day as I am a strictly end-of-day trader on my portfolio. The markets and futures were suggesting a gap up for 8/23 and rather than risk missing the sell trade on a limit order, I took the approach of market orders on my puts. I placed market open close orders on 8/22 night for the next morning. I am glad I did as the market went up from there.

Since I just returned home, I thought I would fire off a blog post tonight mentioning closing my down positions.  I am now only in cash, bond and money market funds. Admittedly the technicals all signal down positions on equities but short term stochastics has bottomed out along with the slower stochastics. That is not a high odds winning place for down positions.

I will sit out for a while and look to take down positions again on a further bounce.

Taking the Downside

After switching out of equities in my 401K a couple of weeks back and closing my hedges, my thoughts were that I should expect a bounce as the market was way oversold. Still, I did not wait to time the bounce to exit my equity positions. I operate my 401K on a 1/month analysis basis and when it told me to move into cash, Fidelity Government Income fund and PIMCO Global Bond fund, I did it right away. But the thought was that when the market bounced I would take on downside positions with put options on the stocks I follow, thereby limiting my exposure.

So how did all this play out last week? SPY went from 118.12 to 112.64 during the week. That is a little less than a 5% drop. Fortunately the downside positions I took during the week gave me a positive week on my portfolio.

I started by looking at SPY using my Cheetah system that gives me major and minor signals. It triggered the expected minor down signal on 8/12/11 and since this system can give me signals a little early, I waited a day or two. I added put position on SPY. Notice the Fibonacci lines on SPY that I drew from the previous high to the low and how SPY went almost exactly to the 38.2% Fib line and turned around. Interesting… I was thinking it had a chance to go to a higher Fib level than it did. My mind tells me that it is a sign of further weakness, which gave me a little more drive to take the down position. My minor down signals occur on weakness and is not trend following. In fact it is trend leading, and sometimes can catch me on the wrong side. Usually I wait for the primary and the minor signals to be in the same direction before I take the position as I did this time.

Next I saw a down signal pop up on CAT on 8/15. Again I took the down position on that. Added a few more down positions on some other stocks I track that had similar down signals pop up. Still, I felt the possibility of the market climbing to the higher Fib level and I did not want to be caught jumping in early with a strong down position. That was of course what cost me opportunity loss as I would have made a heftier profit last week if I had gone in down full throttle.

Where will it go next? I did not see a capitulation Friday. There is more downward action likely. There is the possibility that we could see a nice double bottom and the market rips to the upside. Now that would be a little tough on all my downside positions, so I have to be willing to jump ship on the down positions any day next week. In my mind I suspect that will happen towards the later part of the week if it does. But if I rack up a decent gain in the first part of the week, I will take a profit and bank it.

I am about flat for the year, which is not too bad considering the market is down over 5%. Moreover the recent 15% drop in the last few weeks has been quite harmless to our portfolio mainly because of the hedges I had following my technicals.

Beginnings and Endings

This weekend I was deeply grieved to hear the passing away of a classmate of mine from India. He was a gentle soul and was well remembered by all of our classmates for who he was and his talent with playing the flute. He had been battling with prostate cancer for a long time and finally succumbed to it. He leaves behind very warm memories of the friendships from our school and college days that seem just like yesterday in our minds. I know this will be a very difficult time for his family; his wife and his daughter, whom he leaves behind.

With those kinds of thoughts swirling in my head, I was hard pressed to think about what I feel like writing about this week. And I thought maybe I should touch on new beginnings. I was talking with a good friend’s son this weekend on the subject of managing 401Ks. He has been working for about 4-5 years now. I felt there are at least two paths to follow to becoming self-reliant in investing, and maybe a dash of a third.

The first is learning basic portfolio management, and the importance of keeping a diverse selection of investments to manage volatility and keep steady growth. Rebalance once a year and not too often. The best book on the subject is the recent publication called “The Ivy Portfolio” by Faber and Richardson. It goes through how the top two endowment funds have amassed a huge wealth by losing very little and getting solid steady gains year after year. Preventing a large loss coupled with steady gains is the path I follow. I would be thrilled if I could duplicate anything close to their performance! The book takes you though how you could set up a portfolio along their lines, balance once a year and then through tactical asset allocation, improve the rewards and reduce the drawdowns.

The second path is one of technical analysis. When investing in a stock, commodity or mutual fund, how can one use technicals from the data to figure out when to exit an investment during bad times and when to enter before it makes moves upwards? The best book I have found on that subject is “Technical Analysis from A-Z” by Steve Achelis. I know I have mentioned this book before in one of my earlier blogs. It was one of the first books that started me off on my journey to learn how to be self-reliant in investing. Once I learned some of the basic tools of technical analysis, I complimented my learning with Metastock software. I still use Metastock for trading systems and charts analysis on a regular basis.

The third is learning Position Sizing. How much of a portfolio should I have in a single investment? How much loss should I tolerate from a single trade? This third method is more applicable to those who wish to trade individual stocks and may spill over to portfolio management as well. In my mind it is how you can survive in the trading business long term, long enough to show profits. Improper position sizing on small trading accounts will cause fatal failures and account blow ups. It will leave a distaste for trading that can rarely be overcome later on.

Nothing is definite in life or investing. We all know that we have to go one day. What we would like to do is provide a small amount of security for our families, for ourselves and maybe share our good fortune with others if we wish to. Money is not an end in itself. But if we can enjoy the journey, then that itself is a positive way to live our lives.

Switch is made I

The market was very volatile today. VIX jumped 10 points. The Dow dropped over 600 points. My SPY puts certainly made some money! It feels good to follow the technicals and execute - over 600 points down and I hardly feel any negative effects. Now I did miss taking some of the down positions I should have.. they went right by me and are beyond my grasp. I will have to wait for a pop to get back in.  My GLD position has been quite positive and I think I will place a stop loss on it or just close it out soon.  This market is starting to look like it is now heading to a capitulation this week. Capitulation is when it goes to an extreme and then turns right around. One big reversal day and the traders will switch sides and go long, at least for a few days.. till the buying dies out and fresh selling feeds the downward frenzy again.

I cannot remember a drop coming this fast and this big from where it started..  The US market has caught a cold and global markets are all affected. GLD, Silver, cash and some bond funds are the only havens open. I am glad I am now mostly out and sitting with a small down bias plus GLD. But I don’t want to hang on to GLD for too long as we all know what happens when this ship turns. Most currencies are taking a hit– except the Swiss Franc (FXF exchange traded fund). Time to take a deep breath and be glad that I am not part of the circus.

Switch is made

The market has certainly taken a hard turn to the downside. After dropping 11% in 3 weeks, people are going to get a rude awakening when they get around to seeing their retirement funds and 401Ks if they were heavily in stock funds. The US AAA downgrade could not have come at a worse time. The way the GOP, TEA part folks went at it vs. the Democrats, it was clear that everything was measured carefully for political and ideological gains and the minority appeared to rule. Where is the voice of the majority? It was mostly trying to avoid a missed debt payment and in order to do the right thing accepted a poor plan for debt reduction. It seemed like with all the political bickering and wrangling, we deserved the slap that S&P gave us. The same S&P that gave high ratings to those worthless mortgage backed securities a few years back. Guess they are getting better now. And it sure looked like we were unable to come up with a decent plan except for the poor compromise agreed to in the last minute.

I am really glad that I was hedged fully on the long positions I had in my 401K, which was about 25% of my portfolio. After I saw how much the 401K stock funds had gone down, it was also a surprise to see how much my SPY put options had gone up. Still I won’t lie. The net position was a “tolerable”loss. I hate losses. I also feel like kicking myself for missing out on the down play on ANR. The signal came sometime last week and I was traveling on business, and that is my excuses. Excuses don’t make money. When those signals come, I have to act regardless of how tired I am when I look at the info.

My monthly analysis on my 401K done this weekend says to make the switch to bond funds, Fidelity Government Income fund and cash. It points to pulling out of all stock funds. Who knows what awaits us on Monday after the rating downgrade. The best we can hope for is a mild day. If the Asian markets and Australia takes it on the chin and the US starts with a huge gap down, it is quite possible that many traders will fade the day and the markets could slowly recover. I will place the exchanges over the weekend as I am traveling to one of our plants during the day.

If the market opens with a huge gap down, then I may very well sell my put options on SPY that are in-the-money and profitable and trade them for the same number at-the-money at market prices. I will have to place that trade before I go to work as I will not be watching any of this during the day. By placing this trade, I will be pulling out some profits on the hedges and taking some money off the table. At some point, the market is likely to bounce as shorts cover and I do not want to give up my profits. We are quite oversold right now and could get a sharp bounce. Or we could continue to stay oversold a little longer and go down sharply. No one knows for sure. But the picture for me is to switch back completely to cash and bonds till next month’s analysis on my 401K. That means I close out most all of my long stock funds that was about 20-25% of my portfolio. The other thing I cannot predict is how long this will all last.

The Market and the Debt Debate

The market has been going down for the last five days and VIX has jumped from 18 to 25. VIX is the fear index. 25 is not much fear – real fear has driven the VIX into the 50s and higher in the past. So what are we to make of the market? Do we pull out?

Well, let me start by looking at the SPY chart. Still same signal as back in 2/23/11, which was an Exit on Long. Since tops take a while to form, I would call that an early warning signal. Doesn’t mean a top is necessarily forming. Certainly has been a pause for the markets after the straight run up from last September to February. I put on hedges on my portfolio since then. Yes – the hedges have cost me some profit as the markets have been going sideways, but I can live with that. Better to have the protection and still follow my game plan. I hedge with SPY put options but I recently read about placing hedges with call options on the VIX. Not a bad idea for sure, as the VIX goes up when the market goes down and call options would gain value as the VIX increased. Right now I am partially long with hedges in place and have a small long position on GLD, rest cash.

The smart people we have sent to Washington to represent us can’t seem to agree on anything. I don’t understand why the politicians can’t compromise to do both – raise taxes on the rich, close loopholes, take away the tax breaks for oil companies who make billions every quarter, but also reduce expenses like getting out of wars, cutting off waste and fraud, putting limits on Medicare spending per person, and also reducing the size of some of those Government departments as any business would have to do. As a family we are expected to balance our budget, and so should the Government. But after living fat for so long on credit cards given to us by the Asians and others, it will probably sink us into another recession if we take all the candy and guns (wars) away. What will the big war machine companies do when the demand for weapons and ammunition shrink? So let us do it slowly. As a family, we would be looking at both revenue generation as well as cost cutting. I suspect that is what we need to do. Just cost cutting will not be enough. So why can’t our politicians get that? This is not a Republican or Democrat message – just an independent point of view. And while they sit there trying to compromise, there remains a sense of uneasiness in the markets. And unease means fear. Europe is in a mess with excessive spending also and they too cause fear. But what drives up stocks is revenue and earnings growth in companies, GDP is still positive and the manufacturing index is greater than 50. All in all, we should do better for another several months. Eventually, our excessive spending will eat us or a new QE3 will keep shrinking our dollar’s worth and push the markets up again.  I suspect end of 2012 will mark some big changes and I will need to be cautious from now on as it is impossible to precisely predict macro events.

Back to the charts. I am seeing buy signals on some stocks. I mean a dip on a longward bound stock that I would consider worth buying. I think I will start putting my toe in the water and pick up a few more long positions. I also see where TLT just came in with a long signal. TLT is a bond fund.. As fear increases, bond funds get more popular. Think I’ll wait for a pullback on that one. Stay cautious. SPY signals are still Exit on Long.