Catharsis

Down 1% at 11.22 am as the early falls met some bargain hunting. US futures are not bouncing though as reaction to the post market downgrade to AA+ is awaited.

Cathartic events in both the markets and my trading always offer insight if I'm willing to take it on board. I'm very aware that the rot set in for me a couple of months back when I became unsettled with my trading and lost discipline with both entries and exits. The best thing I could have done was take time off to spend time thinking about what I really want from my trading. I didn't and paid the price but I have come up with a solution now and it certainly feels right and seems to make sense.

The idea is not new for me or anyone else but I want to apply energy and focus to it. The plan is to do fewer, bigger trades. That is, I only want to do high conviction trades. Investing legend, Philip A Fisher, said that you should "put all your eggs in one basket...and watch the basket!" He didn't mean it completely literally, but almost. In a large investment portfolio, he might have held 6 stocks at any one time and not many more.

In my terms, I don't want the situation where I have 8 or 10 positions, I just want 2 or 3. Stopping out is hard enough as it is without multiplying it 3 or 4 times especially when the extra trades are often sub-optimal. I didn't necessarily expect to do any trades today because I was expecting a bounce but not necessarily a market bottom, but the fall was big enough that I've put on a couple of trades. They're not necessarily the best I could have chosen – in hindsight – but have gone ok.

The first is a long in AGO at 360. This is a stock which is well liked in the market and had a 30 minute chart which indicated a short term completion. I'm out of half at 372 and running the rest with a tight trailing stop.

The second trade is a relative laggard and one that I had to think about more than the AGO trade. What swung the deal is that it has a very close stop just below what I think could be a swing low at 354 and the stock is in reasonably good shape. It's last year's darling, rather than this, but recent broker opinion is tentatively positive. Here's the 30 minute chart.

12.05 The more I look at BLY, the more I think that this is NOT the sort of trade I want to be doing. It's one of the few growth stocks that hasn't had a strong bounce from the open. There's obviously a big seller and it's an arm wrestle with the bargain hunters. I'm hoping for the bargain hunters to win but there's no real sign of that as yet. If the seller backs off, the stock could race but that's a big if.

12.22 Out of both, BLY for 354 (v 357) and the balance of the AGO at 368. Not a bad start although the BLY was a misjudgement.

1.19 The Asx 200 gave back most of the early recovery. It's now down 76 versus 30ish when I sold out of my longs. The overnight US futures have dropped back further and Chinese markets are very weak, 4% lower or more. There's the possibility a fractionally higher intraday low has been made on the index with a second tradeable bounce to come but it's almost in the too hard basket. I'm drawn to gold stocks because of another 2% leap in the underlying and continued weakening in the AUD but I don't want to hold any positions overnight and the stocks I'm looking at are firm but pulling back from early strength.

2.05 I thought about RSG and SBM but plumped for NCM since it's a big dollar stock and if it's going to move this afternoon, it will. Long a few thousand at 3923 with hopes of a push up to 3960 or so. I like the daily chart, an a-b-c correction may be complete but if the response to the downgrade is not so negative then gold may reverse sharply overnight. Here's the NCM 30 minute chart and then the daily.

The daily for NCM, with gold at 1699.

2.24 The index is down 101 at 4004 now with the best opportunities having been on the short side.

2.57 The Kospi is down 5% and Chinese markets remain lower by 4%. S&P futures are 30 points or about 2.5% lower which is worse than this morning's levels. It's making it hard for the market here to bounce even though a drop below 4000 was quickly rejected. Down 92 at 4013.

3.44 The spot gold price is up to USD 1710 per ounce but it hasn't helped the gold sector too much, perhaps it has helped to limit falls. NCM is hovering around 3920. The Asx 200 is back below 4000 and stocks like AGO, which was briefly in the black this morning, are well down. AGO is 7% off and FMG is down 3% having been up 3% in mid morning.

3.50 Out of NCM at 3915.

4.15 Have a look at the Asx 200 daily, below. Falling like a stone and although the temptation is to buy, I could have done the same thing on Friday evening.

I have no positions except some well out of the money calls which I've marked to zero. When the market does have a bounce, it could easily go 300 plus points in a couple of days so, like today, I'll be trying to buy a stock which is going to beat that performance. Most likely, it would be a 4th wave recovery with another chunky swing down to follow. The weekly chart for the index shows overlap from the June 2009 swing high at 4079 which means that there's now a reasonable possibility that the move might finally end at around 3750.