S&P 500 vs U$D

s&P 500 vs U$DIf you take into account the recent weakness in the Dollar, S&P 500 is actually flat for the last 6 months. I have mentioned before that for the FED to be able to sell enough treasuries, they have to scare the money out of the stock market into the bond market by igniting deflationary concerns. If that happens, we should see the Dollar higher and S&P 500 lower in the following year or two. So far, the FED have been choosing the other alternative – printing, which will ultimatelly lead to higher prices, initial commodities boom, followed by retail slump. I am not sure which one will be less evil for the peope – an inflation and assets run ala Island or a long-term deflation ala Japan. I would choose the latter, but that’s me.

 
pe ratio

You can see how the current plunge in earnings has affected the current P/E ratio of S&P 500. I am not a believer in P/E as an equity selection tool, but by any means the chart clearly shows that stocks are not cheap based on current earnings. Certainly the market is a discounting mechanism that always look 6 months ahead and this is not taken into account in the chart.

Chris Perruna's market timing model

Chris Perruna posted on his blog his simple approach to measure market strength. He measures the difference between 52 week new highs and 52 week new lows for NYSE and NASDAQ. He is not paying attention on extreme readings, but rather focuses on major turning points in the differential – the change from negative to positive reading and vice verse. Chris says that we need a differential of at least +100/200 to confirm a genuine uptrend. Currently, we are far from that.

Trader X take on some important trading matters

I recently found Trader X outstanding blog, where trading is explained in very simple terms. For me simple has always meant ingenious, so I decided to summarize some of Trader X view on trading here. He is a day trader and has shorter horizon than I do, but successful trading principles are the same for all time frames: trade with the trend, cut your losses short, let your winners run, practice sound risk management ( proper position sizing and risk/reward; if you risk a $1 in order to make a $1, you won’t get too far in this business)

On Timeframes:

I will repeat what I said earlier – a chart is a chart is a chart. A quality set-up will appear on all timeframes. But, you have to realize that trading on a 5-minute chart is different than trading on a 30-minute chart, even if you are looking for the exact same set-up.

5-minute charts are fast and unforgiving. If you have been trading for years and are consistently making profits on a larger timeframe, maybe then you want to look at moving to something quicker. But if you are trying to perfect your trading, and you are break-even or losing more money than you make, you need to stick with the higher timeframes. A 30-minute chart gives you time to do some solid analysis (is it really a good set-up?). It gives you time to think. It gives you time to take in and analyze the price action and the chart as a whole. And, it gives you time to manage open positions and protect profits and capital. (the guy has switched to 10 min charts as of 2009)

On momentum:

I also swing trade a few set-ups. I analyze weekly charts of stocks that have doubled over the past 15, 30, and 60-days. When you are looking for stocks that are poised to “explode”, they have usually already doubled in value

On Narrow range:

I search for patterns that include bars narrowing in range – particularly after a wide-range bar(s). The more bars narrowing in range, the more I take notice (NR3 = narrowest range of the last three bars, NR5…five bars, NR7…seven bars). Narrowing range bars indicate consolidation and often lead to a big move when price breaks out of the narrowing range.

On Equity Selection:

I normally trade set-ups on 30 and 15-minute charts. In general, I look for stocks that are moving strongly (up or down), pause (or pullback to key areas), and set-up with narrow range or inside bars. I also look for stocks that are moving strongly in one direction and reverse at an area of support, or reverse and move back through key areas that will trigger a trade for me.

On Risk management:

I risk the same dollar amount on every trade, and adjust my position size based on the distance from my entry to my stop. This approach makes the most sense for me, as I always know my targets and stops when I enter a trade. So, I take the distance from my entry to my stop, and divide that into the dollar amount I risk on every trade – that determines the amount of shares I trade.

On preparation:

“…the job of a trader is to wade through all of the set-ups presented to him every day and discard the bad and mediocre ones”.

On Focus

If you are not having the success you think you should be having, make a resolution right now to spend the next six weeks focusing on one chart pattern. Learn it, live it, trade it. Print off a few examples, and hang them above your computer. DO NOT make a trade unless the set-up you are looking at is at least 90% similar to the examples you printed.I talk to numerous people through email every week who are struggling to be successful at trading. And, I find two common traits in most of them:

1.) They trade too much – most of the people struggling make multiple trades daily, some as many as 10+ round trips.
2.) They have a lack of focus.

I will start with #2. I have discussed this in the past – most people jump from indicator to indicator, timeframe to timeframe, method to method. They will use something for a few days, hit a bump, and move on to something different all together. One day the holy grail is a XX period moving average, the next day it is MACD or an oscillator. One day it is a 30-minute chart, the next day it is a 5-minute chart. One day it is buying the break of the first inside bar, the next day it is a pullback from the high.

I call this “chasing success”. The bottom line is the person does not spend enough time on any one method to really understand and execute it properly. They bounce around, and before they know it a lot of time has passed and they are still struggling.

If you pick something and stick to it, you get good at it. Once you get good at it – once you perfect it, THEN you can add something else to your arsenal.

There are plenty of set-ups I have highlighted in the blog that have a 70%+ success rate. Do you want an idea? Look at 30-minute charts that break the opening range high, then pullback and consolidate with a textbook hammer at a key moving average. You may ask, “well how many of those are there a week?” My answer is a pretty high number – you just have to focus and find them. But, say you can only find 2-3 per week. Would you rather have 2-3 great trades and a positive, money making week? Or 30+ trades and a negative, losing week?

Regardless of what set-up you choose, focus on it and study 1,000’s of charts. Analyze the details – does it work better when the tail of the hammer also touches the opening range (OR) high or the Fibonacci extension? What produces better results – a slow, 3-5 bar pullback or a violent 1-2 bar correction? Does it matter if the bar preceding your hammer is narrow-range or wide-range? What about the hammer being green (closing positive) vs. being red (closing negative)? Learn your set-up inside and out!

A final though on #1 – why do you want to make 20-30 (or more!) trades a week when you are losing money? Stop trading so much! And a way to “force” yourself to do that is to FOCUS on one thing. Pick a timeframe. Pick a moving average. Pick a set-up. And wait for it to happen. What do you do while you wait? Study charts!!! And if a day passes and you do not make a trade, so be it. Look at it as a positive – you did not lose any money!

And one last thing. Help Trader X Good Carma project. Do it for yourself. This is an excellent opportunity for you to make a difference in someone’s life. By changing the future of one person, you are actually changing the future of the world.

Great performers are made, not born?

David Brook from NYT has an excellent article on how ingenuity is probably achieved in any field.

The key factor separating geniuses from the merely accomplished is not a divine spark. It’s not I.Q., a generally bad predictor of success, even in realms like chess. Instead, it’s deliberate practice. Top performers spend more hours (many more hours) rigorously practicing their craft.

Public discussion is smitten by genetics and what we’re “hard-wired” to do. And it’s true that genes place a leash on our capacities. But the brain is also phenomenally plastic. We construct ourselves through behavior. As Coyle observes, it’s not who you are, it’s what you do.