Thursday, January 29, 2009

NFLX update: Resistance becomes Support

As I write, this AM's activity has pressed the Dow down a percent and a third. Netflix is up four percent.

Netflix Price resistance has been broken and the stock value increases on momentum.

The rest of that story
That broken resistance line still lies there indelibly recorded in history. The line will serve as a powerful influence, but, this time as support. Should Price decide to fall, that line in the sand should serve to hold a barrier that will be difficult to penetrate.

Wednesday, January 28, 2009

Chart Analysis

Lets start this post by looking at a days worth of market activity on a stock I own: NFLX.




There is a lot of stuff going on in this chart. So much that I had to write it down.

The first candle indicates a very strong open, followed by a very volatile pull-back. Then, buyers went to work and created a powerful rally. The next segment, that relatively flat hour and a half, deserves considerable dissection.

First, that segment can be referred to as "consolidation" which is a continuation pattern (the preceding rally is expected to continue). It's like taking a break to catch its breath after such a strenuous run. This pattern is an indication that the rally is pausing but not ending.

Even deeper analysis of that segment of time shows a left and right bump (the shoulders) and a centered, taller peak referred to as the head. Voila! Its a "head and shoulders" pattern.

You can Google "head and shoulders" if you like, it is well known among seasoned chartists. Better might be to see this Chart School page.

Since head and shoulders is a bearish indicator, we should expect a pull-back, and, yes, in fact it did. If you measure the pattern height and project it below the pattern you will have estimated the depth of the pull-back. Fun isn't it!

After the H&S completes, the morning rally does continue but seems to be limited. Price builds but can't seem to pass an invisible line in the sand. That's called resistance. Resistance is an impediment to further rally attempts.

When resistance is repeatedly tested, it will eventually fail. In this instance, the tests are becoming more frequent. That said and understood, one could see with confidence that the stock is poised for a powerful rally. I'm in! Are you?

Market-Fu selling

The market has changed a lot in the preceding post-market, pre-market, and three trading hours. The $VIX is down another four percent but more importantly, the S&P is up almost two and a half percent.

Since the market is up, my stocks must be up. In fact, my Google investment paid off well... it is up five and a half percent! Which brings up the next topic of Market Tao. When to sell.

The conundrum
I was very happy that my stock was up considerably, and wanted to lock in some of that profit thus ensuring several days worth of lunch money. On the other hand, I didn't want to exit the position. The way that I analyse its charts, more up-side potential exists. Another consideration is that I would be devastated by losing the profit made, and devastated if the stock went up more without me.

The Market Fu solution is two-fold. First I sell off some of the position to keep profits, and pay commissions. Second, I make a mental note to buy more shares when Price pulls back to a less extended value.

Its a simple solution and hopefully will serve me (you?) well.

Update
Google did continue to rise. I sold the remaining shares at six percent profit. Yay! That is a significant lesson now internalized in my personal Market Tao.

Tuesday, January 27, 2009

Today's market wrap up

The S&P made what is commonly referred to as a "inside day." Virtually all of the trades placed today were priced within the highs and lows of yesterdays activity. This might be a good thing for us right now but I am not really sure.

There is something called a Volatility Index that measures.... well.... market volatility. Its symbol is $VIX. Many like to think of it as a index of fear. Since that number has fallen about a percent over today's market activity, traders must be a percent less fearful. Less fear and more stability are good things.

Since fear is down a little, the overall market was able to make a little bit of gain today. That's a good thing! On the other hand, the market has not been able to regain the strength it had the day before the new President was elected. Since few traders have confidence in his ability to create beneficial change, fear is still at a pretty lofty level.

The market made three highs and two lows today, the third low is currently being formed. In 20/20 hindsight, I wish I had traded each of those peaks; a Market-Fu Master would have. Instead of ending the day with a single small gain on the books, the theoretical Market-Fu Master would have five nice gains in his wallet and a small (similar to mine) gain on the books. If those five gains were about two percent each, he would have ten percent more cash to invest tomorrow. Consider the power in this!

The market is a wonderful place for those who understand Market Tao.

Back to my reality:
My Google investment is still up a percent and my RTP is even. I am hopeful for more from each of them for different reasons. They are both testing daily high resistance points and RTP is forming a nice "saucer" pattern on the daily chart.
RTP is experiencing more (another) resistance at the 20 period Moving Average. Since it has been consolidating for two weeks, I hope it is about to explode.

Wow! that sounds pretty technical!
In fact, it is. Nothing I have said above refers to stock fundamentals. I am confident that in this market, the fundamentals of these stocks (and many others) are pretty good since Price is improving.

I learned about technical analysis from reading books, personal experimentation, and watching many hours of the videos posted on the web. Most of the free trading videos that offer instruction in Moving Averages, Support, Resistance, and such, are consolidated into one aptly named website: Free Trading Videos.com. That site is important enough to me to add their link in this blogs sidebar.

Why stocks instead of other investments

To fully document my path, I must back up a little. It took a long while to conclude that stock trading is right for me. The facts are also that stocks might not be right for you. Search yourself grasshopper, find the truth from within.

I found out that my checking account pays no interest at all. Zero is definitely insufficient for meeting my investment goals. Next comes the savings account. A little interest is paid, great liquidity, and loss avoidance are presented so savings is a key element of my strategy.

Certificates of Deposit (CD's) are a tradition in my family but on analysis, liquidity is poor and the amount of interest paid is still very low. Often CD interest payouts are less than cost of living increases. The capitol gain looks nice on paper however taxes and the general economy knock this investment vehicle right out of my list.

Bonds are interesting to me. However, I have found that again, payout is generally low. Some bonds do have interesting rates but only at increased risk of loss. Since I don't understand the risks, for now, I'll stay away. Further, the laws of compound interest are limited by bond maturity dates.

This leaves things that can hurt if you drop them on your toe: art, guns, coins, metals, autos, and bottles of Jack Daniels. Too me, these things are at risk of damage, theft, consumption, and market variations; Things that I can not control. I'll pass. Likewise, real estate. In my little mind, my house is more a liability than an asset. My real estate investment is a necessity, so I have taken steps to protect it: I have insurance, savings, and a territorial dog. Additionally, I bought an inexpensive house and paid the mortgage off early. This in my mind makes for a safe investment.

I popped up a spreadsheet one fine day and began by populating some fields with numbers. Numbers like: what I have available for investment, how much more I plan to contribute each year, how many years I'll let my money work for me, and finally, how much I want at the conclusion. Then I experimented with different values of "rate of return" until I found a match. It seems that very few investment vehicles have the capacity to make the numbers balance. (No! Neither the lottery or the gambling houses are investment vehicles.)

As I write today, I have watched my Google investment vary between up a percent and down a percent. Think of that! Two percent in a single day! Sometimes more! Here is something that I have some control over, (in and out of the position on demand) and it could make a considerable amount of my yearly needs in a single day! The stock market is awesome! I am committed to travel this path. I shall become a stock trading master; a master of Market-Fu.

Volume and Price Tao

While I have not yet mastered the Tao of Price and Volume, I do see some relationships. This relationship is an important step in mastering Market-Fu.

Price moves can sometimes be lackadaisical. There is no sense of purpose; Price seems to be blowing in the wind or falling under its own weight. Price can be in the car, engine running, the light is green, but no sense of urgency to go anywhere. I usually loose money in these times. Price will eventually sink to the level of my protective stop and Bam! I'm out. Then for no real reason, it floats to a higher level, without me. I am stuck with another loss and feeling bad that I missed an opportunity. I could almost feel lunch money between the folds of my tattered wallet but profits eluded me.

Volume is what I think of as a conviction indicator. When a lot of people are loading up on a stock, the volume goes up. when there are more buyers than sellers, shares become more precious and price rises. When price rises, I am closer to having enough money to buy lunch.

Now here is the beautiful thing: When sidelined traders see Price and Volume increases, they become interested. They may watch for a while and when convinced, they jump on board. The more more shares that they buy, the more volume increases. Think snowball effect here; With more buyers, the shares become more precious. Now, my lunch money is guaranteed. The thing is that lunch might be delayed. I am not interested in selling because I wouldn't want to prematurely end my winning streak.

Since nobody either wants to buy more shares, or sell current positions, Volume declines.

Eventually, I do get hungry enough that I have to cash out and make other purchases with my profits. When I do, others begin to see Volume increases and re-consider their positions. They might want to lock in profits as well. Volume begins to increase as more and more shares are sold. More sellers than buyers results in falling Prices.

At this point, we probably haven't mastered the topic but the discussion goes a long way towards understanding Market Tao.

Market Tao before Market Fu

Tao can not be totally defined, however, "the way" or "the path" is frequently used. This suits the purposes of helping us wrap our arms around an important concept: Market Tao. Things that are alive all have their unique Tao. Since market price is nothing but reaction to a dizzying combination of man-made actions, it seems to have a Tao of its own. To say it another way, Market Tao is an extension of Human Tao.

Kung Fu has been defined as "the pursuit of physical and mental perfection." Hmm... Perfection is something that would be good to strive towards. I'll do that. The physical aspect has already been nearly mastered since I am fully capable of clicking the "Buy" and "Sell" buttons nearly any time the market is open. The mental thing is my problem. Here's the proof: both stocks I invested in this AM are currently below my entry price. Methinks that to gain perfection, I would have to understand the way that stocks are. Thus my quest for Market Tao begins.

Let us begin the journey:
1) Stock price has the potential to go up and down. That's called risk and reward.
2) When there are more exuberant sellers than buyers, the price can fall. The opposite is also true.
3) Stock price does go up and down. That's why people trade.
4) People place trades for more reasons than I can know or understand. The big picture can be read like a book by those who have learned to read charts.
5) Stocks may be traded any time the market is open and sometimes when it's not.
6) Some stocks are traded more than others. This is indicated in stock volume.
7) Stock volume changes a lot. Sometimes, volume can be half or double (or more) the average.
8) Increasing stock volume indicates accumulation or distribution
Well... a good start eh?

Monday, January 26, 2009

Power ETF's

My day-trading friends and I love and respect the triple leveraged ETF's. Their ability to make respectable gains on modest investments, and ability to loose principle quickly are fantastic - borderlineing on outrageous.

In broad market terms, the financial sector can be measured by observing the Financial Select Sector SPDR, market symbol: XLF. This SPDR moves a dollar for every dollar that the average financial stock moved. There is an ETF that moves two dollars for one dollar move of the XLF. My favorite is FAS which moves three (count them three) dollars for every one.

With that ETF, we can, for the same amount of time, energy, and money, reap tripple the rewards. The pesimist would say that it enables us to loose money three times as fast. They would be right.

Now for the rest of the story and to please the pesimist:
When the market takes a downturn, the nimble trader can sell his bullish position and enter a bearish one... the FAZ. This ETF is the opposite of the FAS, it gains three dollars when the sector average looses one.

With this power duo, in a volitile market, in a volitile sector, how could a nimble and observant trader fail?

Market Chop

As I write, the clock is nearing today's market conclusion. I have placed and exited four trades, one was profitable.

A recap of the S&P indicates a fantastic out-of-the-box run, followed by a lazy gravitational pull back to the 20 period Moving Average. Next comes an hour and a half lunch break resulting in six, 15 minute candles of going nowhere on low volume. Following that is a decline that was steeper than the morning incline. After an hour of hot selling, the bears gave up and allowed some renewed value buying. That mini-rally had the feel of a grade-school prank: "Go ahead and touch it -- I dare you." Well, of course I did and of course my final trade of the day resulted in a small loss.

On the four day chart, we see four low peaks with the fifth high still being defined. The market seems to be stuck in a range.

As I back out into larger time frames, on the 60 minute chart I can see that we have been range-bound for most of two weeks. Moving even further back to the daily chart, we see that today was pancake flat and that the market hasn't gone anywhere for two months.

So much for the buy-and-hold guys I guess. They have been without profit for the duration of this period. Over the last two months, I would have preferred risk avoidance by having my investment protected in the bank or mattress.

My day-trading pro friends love this type of market. They can see turns about to happen. They can get in and out fast enough to profit from the quick panic driven rallys and quicker sell-offs. Those guys don't have their money stuffed into the mattress, they keep it available to capitalize on all of the market moves. They are masters of nimbly going long, selling, and then going short several times each day. As indicated in their massive profits, this market is exceptional for them.

Me? I just keep loosing a little more money each day. Oops. The buy and hold guys who are even rite now seem to be doing better.