The Mad Scientist

It is in my nature to attempt to understand things at a deep level. I am the type to embrace new knowledge whether I agree or not. For those who follow me you may find it difficult at times to keep up with some of my postings as I throw something out that may be new to you. Don’t fret, just keep asking questions as I usually try to answer all that are sent my way.

One common question category seems to be in my use of a wide variety of indicators against a wide range of stocks (cheap to very expensive). It is true that I tend to play in a large sandbox – I will trade thin stocks from time to time – and feel comfortable with positions on the likes of PCLN as well. And everything in between.

I believe that it is imperative to arm yourself with as much perspective as possible – know what your “enemy” knows. This is why I venture into evaluating various indicators constantly, my Mad Scientist work. Want to know why APKT is so weak since the summer? See if this helps:

Don’t just work hard, work hard at working smarter. Find the indicators that work for your style, your approach, your Risk Management, etc.

Getting a Conviction

From dictionary.com :

 

 

 

 

 

 

 

 

One of the crucial elements that one must possess before executing a stock trade is conviction – a firm or fixed belief in the trade. This conviction may be in direction, it may be in a specific price target, or could even be that the stock price will remain in a range. These are just some examples, you may have others that you are thinking of.

I do want to stress here that the idea of having conviction in your trade should not be confused with just being stubborn or more interested in being right. So how do you tell the difference, manage your conviction in a trade?

I have a current example that I can share with an ongoing short position that I hold in NIHD (NII Holdings). Here is a current 5 minute chart showing the one indicator that I use to confirm my conviction in the trade:

I am short this stock from last week from the 22.50 level and have covered 1/3 of the position on the first move under 21.50 level. The Gap Up day has me assessing the trade but I do not see anything that changes my view of the trade. The Accumulation/Distribution indicator continues to drift down so I hold steady with the position.

I have elected to put a trail stop at the HOD (high of day) for today and will let the balance of the position ride with that decision.

 

 

 

 

 

 

 

PnF – the High Pole Warning

In keeping with my habits of utilizing a variety of chart styles, I thought I would go over a unique alert within a Point and Figure (PnF) chart called the High Pole Warning.

First, a little on what a High Pole Warning actually means:

 The chart example I will use for today is with FDO (Family Dollar):

 

Updated portion: Now let’s jump to the present to see what the PnF chart looks like:

 The stock had a small reversal back up to test the 59 level but failed once again with another 3-box reversal. In addition, It suffered a Double Bottom Breakdown on January 6, 2012 and currently has a Bearish PO (Price Objective) of 48.

Commodity Channel Index

One of the indicators that I scan with utilizes the CCI – Commodity Channel Index. I have included a few charts below from the results of my scan (with a setting of under -150):

Here we have the Daily chart on IWM showing the CCI indicator has been down with the Titanic lately.

However, previous readings this low have provided a very nice buy entry in the past - so worth noting.

Now on to a few other examples.

 

 

The two examples above are WFC and QCOM. Again, previous readings of CCI under -150 have resulted in nice buying opportunities in the past (although I am not a big fan of WFC here).

Buy Low, Sell high.

Heavyweight Fight

Let’s get right to a graphic:

The above is an updated chart showing the correlation (or lack thereof) of TLT (iShares Barclay 20+ Year Treasury Bond Fund) versus the XLF (SPDRs Select Sector Financial ETF). This is a pair that I have been monitoring for a while – waiting for an opportunity to put on a mean reversion trade between the two as they are very much repelled from each other here.

You will notice that the two have touched twice in the past year (Dec 2010 & Aug 2011) and the expectation is that they will do so again in the future. It seems that the wide gap here presents a nice opportunity for a LT position to play for a touch in the future.

TLT is currently at +24.45

XLF is currently at -18.31

A nice gap to capture indeed.

Who stands to lose

David Sterman over at Street Authority writes this:

The key questions are: How big is the exposure? And how will profits in 2012 fare if Europe gets mired in a deep slump?

To help in that process, I’ve drawn up a list of American companies that count on Europe for a big chunk of sales and profits. This group, for example, gets more than 50% of annual sales from Europe.

There are many more companies with a heavy degree of European exposure. These firms, for example, derive between 40% and 50% of sales from Europe, and it’s unclear whether they will even make any money on their European operations in 2012.

Review & Failed Trades

I have spent some time this morning reviewing my trades for November, looking for any patterns that exist in the trades that failed and those that worked. I am sure that the results of my review are similar to yours ; Breakout trades just fizzled for example. The market just seemingly not in the mood for that type of trade.

I have a lot of good questions come my way regarding the notion of “failed trades” so I wanted to expand on this some for those that don’t know my perspective on this. For me, a “failed trade” is not just about a trade that loses money – a “failed trade” is one where your preparation or execution is where you fail.

Say what?

That’s right. My perspective is that if you have solid preparation and execute your trade according to your rules – like for example you are stopped out for a loss – I don’t view that as a “failed trade”. So be it. If you minimized your loss on the trade by sticking to your PLAN then I contend that the trade worked – it was just not profitable for you. On to the next trade, stick to the PLAN.

So give yourself a break on these trades that don’t work — because they don’t all work.