Friday, July 29, 2011

End game

The end game is approaching and because a lot may happen over the weekend, the Aussie market has to account for a range of possibilities. The Asx 200 is down by 4 and has touched 4454 but is unlikely to fail today, in fact, a squeeze up seems more likely as a good outcome also needs to be built into the analysis.

At least fear wasn't gripping markets last night, with the indices generally lower but calm. My feeling is that a collapse might be a one or two day wonder but I don't want to see it given that I'm still holding longs.

OK, it's 11.21 am and even as I write, the market has just wobbled again to hit 4452. Not sure if there's any news.

AGO reported yesterday and the key point that the market is focussing on is cost control. AGO did well and the stock looks to have held above the recent breakout in the 390s. I've bought some at 407 for a move to 440 with a stop at about 390.

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Anyway, here's the Asx 200 chart. Right on the button. Looks ominous but if it bounces, the picture changes to a bullish looking reverse head and shoulders.

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The DJIA held above the breakout level but only just.

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12.29 There goes the neighbourhood...the index cracked the 4445 low and has fallen another 10 points in the blink of an eye.

12.41 The US House of Reps won't vote on Boehner's plan tonight and US S&P futures have dropped 9 or 10 points, precipitating our failure, I suppose. It's an indication that the Republicans are divided although the Democrats were going to kill the bill in the Senate anyway. Since the Republicans are split, it has to be a bipartisan agreement and I guess, it always had to be. Ultimately, an agreement has to be reached even if the deadline is passed but with every passing day, the prospect of a US downgrade to AA comes closer to reality. Rome is burning and Congress fiddling?

The prospect of a reversal rally is also an outside possibility as there's no serious selling after the chart break. Also, how does this affect us? We're trading under the assumption that the US market falls apart and takes us with it and that's a reasonable guess but, as FnArena pointed out this morning, US 10 year yields are falling so there's no exit and if there was, does the money flow to the stock market as it did after QE2 ended or does it just flee to cash because of the fear of the US economy seizing up? What about emerging markets and by extension, Australia. Do they become safe havens?

The best bet seems to be to get out and wait for the dust to clear but I also feel as if the horse has bolted and I may as well sit with what I've got. So many clichés, so little idea.

1.56 US futures have recovered a few points and the market has settled at a loss of 35-40 points. The Asx 200 is down about 4% this week compared to 3.5% for the DJIA with a day to go and futures lower so roughly in line. I think we should be discounting their fall – it's not us and we could be a beneficiary of unintended consequences – but the CPI print doesn't help.

Veteran economist Bill Evans was just on TV making some really strong points about how the local economy is slowing and the CPI is going to fall. I hope he's right, it's almost beyond belief that 0.3% of the CPI number is explained by increases in retail prices when shops are empty despite permanent discounts and the only thing that's growing is internet shopping at even greater discounts and overseas travel.

Evans said that 2% of the workforce is in mining and 15% in retail which puts into perspective the argument about all the mining projects in the pipeline. The market knows that the broader economy is weak but fears that the RBA is blinded by its modelling. If we can escape a rate rise next week we might be able to avoid the RBA plunging a knife into the barely beating heart of the non mining economy.

3.24 Opening calls for Europe are for falls of 1% or more so the incipient rally is nipped in the bud. I sold out half of the AGO at 406, the stock had been as low as 400 and I figure I might get a better entry on Monday if the world hasn't ended.

3.52 Last Friday, the US indices had a mixed day with the Nasdaq up, Dow down and S&P 500 flat but we fell 70 odd points on Monday because we responded to political news from Sunday in the US. The reverse can easily happen this weekend and the weak leads we are seeing may be meaningless even if they translate into losses overnight. I can't help feeling that sentiment is extreme.... but then, I've been long and wrong over the last few days. I also know that I do my worst when I capitulate after missing the best sell signals, so it's grit my teeth and wait.

4.12 No relief on the match out and a loss of 39 points on the index with the lowest weekly close since last August at 4425. It'll be a nice weekend for the survivalists, tend those vegies and clean those bunkers.

The loss in my account was moderate but the last 3 trading days have taken me from a better than average month to a small gain which doesn't hit budget. Oh well, the last few months have had very little to do with stock specific moves and everything to do with global macro issues so it hasn't been the easiest trading conditions.

Thursday, July 28, 2011

Conflicting objectives

I was getting that sinking feeling yesterday – along with the market – and once again found myself frozen and unable to stop out of things, let alone take advantage of opportunities on the short side. The Asx 200 had started to accelerate down from a lower high on the 60 minute chart. The index is now within range of the recent lows around 4450. It's at 4479 to be precise which is a loss of 58.4 points. I expect that low to hold but it looks like it's going to be a close run thing.

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It's a decent possibility that the DJIA is having a 4th wave retracement before pushing on to a new high. The pullback has held above the breakout level of 12,217 from June 21st, although there's only about 80 points breathing space before any overlap so it's also a close run thing. I flicked on CNBC after about 20 minutes of the US trading day, the market was down about 75 points and the sangfroid had vanished as fear of the consequences of a political stalemate was gripping the markets. When I turned the radio on this morning, I expected a drop of about 200 points in the Dow and it came in at 199.

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It's also a decent chance that the concern turns into panic and the old head and shoulders scenario starts to pan out.

My main question today is "why am I finding it so hard to act on what I can see unfolding in the market, especially when it runs counter to my positions?" That has frustrated me for some time and I've been trying to work on ways to resolve it, but I've had a fresh thought about the issue which is kind of interesting.

My motivation to trade all the moves that I can stems from being an options market maker for a decade or so at the start of my career. It's possible to make excellent returns with low risks (although the set up costs are very high now) and the crux of the matter is to always be seeking balance. If you get long or short as a market maker, you might ride it for a little while, even a day or three if you're experienced, but you're always looking to square up. The same goes for your volatility exposure, expiry risk, time decay etc etc. Whereas, if I'm looking to trade a simple swing, it's generally going to have a 3 or 5 wave shape about it which presupposes a few days where the trade goes backwards. It's rarely viable to chase these little moves and yet I'm often trying to do it or fearing the move is over and getting out prematurely while the best probability is that there'll be continuation.

There's an obvious conflict here and it may be the reason why I'm continually battling with this issue. It also raises another question: which is it going to be; intraday or short/medium term trading? Quite frankly, I've been looking to do medium term trading for years and it is time to take that seriously. The more trades you do and decisions you have to make, the more stress and time is involved. It could be worthwhile if the money is much better but it hasn't worked out like that for me, probably because I don't really want it, it's just habit. If I wanted to aggressively trade short term, I'd still be a market maker.

2.48 The market has outperformed on the downside with a 1.6% fall, slightly worse than Japanese markets and a fair bit weaker than Chinese markets which are down around 1%. The index is ever closer to the key support and another bad night in the US might do the trick. In the meantime, I'm sitting tight. I can see that the CPI figure has been a big negative and while there may be doubts about the flood impacts, the currency markets aren't concerned and the dollar strength is bound to start feeding into analyst models. However, heading into reporting season, the market is already priced for flat earnings and no growth and the US will negotiate some sort of debt ceiling agreement so things may look a lot better next week.

4.10 Today was option expiry day so there's plenty of volume on the match although no significant move. The Asx 200 has closed at 4465, down 73 with selling across all sectors. US futures are slightly up but all depends on the talks.

Wednesday, July 27, 2011

Separation

I'm trying to see what the market is doing rather than what I want to see happen; most traders want to do that but quite often it's our models that we're seeing. There's just too much information to process so the solution is to build a model or have rules of thumb. It's generally a pretty good approach but you need to be a fox rather than a hedgehog, that is, you need to understand that it's just a model and be quite happy to temporarily switch to another way of seeing the market.

The game started to change once we entered the new financial year when stocks that were in tenacious downtrends began to have sharper rallies. It looks like we've entered the next phase of this cycle because traders and investors seem to be positioning themselves ahead of earnings season and the dogs are barking.

One of those barking dogs is Aristocrat Leisure, a gaming machine maker. I thought this was a no brainer the other day but like one of Pavlov's dogs, I'd been conditioned not to buy it. I thought I was right when the minor break failed but it was a sign of things to come and the stock has pushed again and this time it has escaped the peloton. I presume that there are nervous shorts ahead of the result or perhaps a change in sentiment. I paid 245 for a few just to see what happened. The stock has kept going and reached 251 before dropping a little. With any luck, it will drop into the low 240s and I can buy some more.

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It's 11.14 am and the market is waiting for the CPI number at 11.30, with an early sell off pared back to a loss of just 6 points.

TOL is another one which looks cherry ripe to have a good bounce. I'm pretty much limit long but I'd be prepared to risk some option premium. The markets are wide though so I might need to wait for a natural seller of options.

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11.39 The CPI was higher than expected so another rate rise is back on the cards, not good for my bullish scenario and the Asx 200 has sold off about 12 more points which is cautious for the moment but it could easily gather steam.

11.52 The market is not tanking and has recovered a point or two to be lower by 15. The pundit who was wheeled onto CNBC was looking for 1.1%, well above consensus of 0.7% and the actual rise of 0.9%. I wonder how surprising the number really was and since the previous flood affected figure was 1.6%, it's possible that the impact from that event is still working its way through the system.

12.11 Scanning through some news alerts, it seems that the number was above most estimates but analysts remain of the view that a near term rate rise is an outside chance and there was one comment to the effect that the flood impact continues to be felt. Down 22 and the dam hasn't broken yet but I've got my finger on the trigger with a couple of longs and particularly FMG which sold off disappointingly yesterday and has broken that low today.

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I'm happy enough with my long August calls in FMG, it's just the stock against puts where I'm concerned. The puts expire tomorrow and I would have been looking to sell out by then anyway.

1.01 Hanging in there, the Asx 200 is down 16. An economist pointed out that the biggest impact was from bananas and fuel although he also noted that cherry picking (or banana plucking) the data is always possible and not necessarily wise. Fuel prices have had me scratching my head for months because even if you use Brent prices, the cost of fuel in AUD terms must be lower unless refining costs have rocketed. The shares of refiner Caltex are not strong so the margins can't be fantastic. The prices at the pump are almost as high as when crude was trading at USD 150 per barrel and the AUD was trading at around 70 cents to the USD. All I can think is that customers grew accustomed to a price of around A$1.40 per litre at that time and the margins for the petrol stations have grown. Either way, we're due our periodic round of public anger and futile government enquiries which should mean that petrol prices do not cause concern in the near future, barring a big jump in the oil price.

2.40 BSL has had a nasty sell off today, down 6% at 123.5. There's a definite possibility of a pennant correction ahead of a drive to a new low. I don't have much stock left fortunately, although the Aug 130 calls are down to 5. I'm prepared to ride it out with the calls and the stock cut is at about 118.

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3.11 I'm watching the early stories for European trading and steel maker Arcelor Mittal is going to make more money than market forecasts so you take your pick; sell off like we have today on US steel stock weakness or rally on European strength. I'd suggest that they're both irrelevant to us as I assume they are focussed on their own domestic markets. It doesn't hide the fact that BSL is very jittery right now.

I sold out half of my FMG long at 657. The rest is covered by July 650 puts and since the stock is at 653, my downside is limited.

3.19 According to FnArena, ANZ economists suggest that there's a fair way to go in this tightening cycle which may explain the market sliding away as the afternoon goes by. Off by 27 points.

4.14 Damn those bananas! A reversal of fortune for the 4th consecutive day (up, down, up, down) although the losses were a bit lighter than the previous numbers. For the Asx 200, the wash up was a loss of 36 points. BSL was my worst performer, closing at 122, and I added to the losses with some premature buying of more stock at 124. I'm not thrilled to have got it wrong but the stop is pretty close on the rest. Otherwise, I was a net seller again but did buy a few more ALL at 241.

We ran our own race today on CPI news with the rest of Asia mixed and US futures flat.

Tuesday, July 26, 2011

Game theory

A pundit on TV was saying that the talk will be tough all the way to the last minute, classic game theory. Obama was just speaking and was slightly conciliatory but the House speaker Boehner is definitely talking tough. Mind you, that sort of thing is usually playing to the constituency, behind closed doors things are probably quite different.

US reaction last night was measured and European indices were flat so it was a definite overreaction for us yesterday. Our market is falling from an early 40 point gain on Boehner's reply which is overly bearish once more and, I think, shows a misunderstanding of the political process.

Best news for me is FMG which has been as high as 674 and is just drifting back with the market to be at 667 so the July 675 calls might still come good.

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I've sold some FMG at 671 along with BSL at 131 (bought more Aug 130 calls at 6 yesterday), QAN at 189.5 and LYC at 214.

IPL is also firmer and a confusing chart is clarifying so that a decent push through those two recent highs just above 400 could be imminent.

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Yesterday, I saw most of Friday's decent gains evaporate and today has seen a recovery despite the modest points rise. Usually, I get pretty uptight when the market is whipsawing like this but I was pretty confident in the market and it occurs to me that I'm getting some more perspective. Maybe it's writing this blog because although it is often just a straightforward trading diary as before, I'm really trying to test my motivations all the time even if it doesn't always come across in print.

1.51 The market is up 50 points after the wobble following Boehner's response to Obama's speech. US futures have turned positive and Asian markets have moved from flat to firmly higher. I have a book that's pretty long apart from a few NCM puts and a deep in the money CPU put spread that expires on Thursday. I got out of the balance of NCM July puts yesterday at 21 which is a minor gain but I've added more of the August 3750s at 20. The stock is holding up after some early selling but if the risk stocks keep rallying I expect a pullback to 3850-3900. If it's quick enough, I should be able to sell these puts for about 40.

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Another stock which is having a wild ride is LNC; flirting with stops yesterday and charging back to just below the critical 300 level today. I still have the 20k that I bought at 291 on Friday.

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4.16 It was a cautious end to the day with the market trimming the gains to 43 points. FMG slipped back to 663 and LNC to 293 but the rest closed well. I sold bits and pieces through the day and have reduced my exposure.

Monday, July 25, 2011

Stories

We're shaped by the stories we tell about the world and ourselves, they provide a shorthand that allows us to react to events as they unfold and it's only in hindsight that we reassess how accurate or useful they were. Last week I was trying to think of an animal symbol that might help me to be more responsive in my trading and I thought of a few but I found more value in the exercise I did on Thursday, which was to think of bullish scenarios. It has made me realise how much I'm driven by the story I've created for the market. Once, I had imagined those potentials, it was so much easier to buy when faced with a buy signal. That said, I'm now concerned that I've become attached to this narrative and forgotten about the overwhelming debt problems and political impasse. Still, at least if I have a couple of scenarios to consider, I can more easily switch when a turn is apparent rather than get that stuck feeling and watch helplessly.

Today is a day for that second scenario with US debt talks having broken down and US futures quite weak as a result. It seems that I'm not the only one who has switched to the bullish tack because although the Asx 200 is down 38 points, there seems to be a fair bit of resilience.

FMG is holding quite well with talk that the exit of long term holders will lead to an increase in index weighting come September, while LYC is up a few cents. NCM has rallied with a recovery in the gold price to $1600 so I'm glad I sold the July 4050 puts but still have the July 4000 puts which are down from 40 to 25. I've played around with my existing position and have bought AWE at 138 as the stock is sold off on a downgrade of some NZ oil reserves. The stock is running on shale oil and gas possibilities in West Australia so the NZ news is not a game changer. It's just a punt though, no chart signal or anything. There should be good support at 130 so my stop would be a tad below that.

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12.48 Watching the financial stations this morning, everyone is appalled although not necessarily surprised at the US brinksmanship on the raising of the debt ceiling. When you're the richest country in the world you can afford to ignore the rest of the world but when you owe everyone big time, it may not be the smartest thing. It won't be an issue this time, once everything is resolved, but people have long memories and if there's any sense that the Euro can become the reserve currency further down the road or perhaps, a basket of Swiss franc, a reborn Deutsche mark, Chinese Yuan, Aussie dollar etc etc, the borrowing costs for the US are going to be a fair bit higher for years to come regardless of the current crisis.

The mood here is souring and this leg up has tipped back to support on a 60 minute view, with the loss now 50 points. I'm still confident that the turning point has been reached and expect the daily lows at around 4450 to hold – another 100 points below current levels. The Australian reporting season starts this week and with few profit warnings ahead of the results, outside the retail sector, the commentary will be downbeat (in this country of understatement) but the results should be solid.

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My only long position that's immediately concerning is LNC which has reversed again, to 285. It's below Friday's low and just above the last swing low.

3.07 US overnight futures off by 1%, major Asian markets lower by about 0.8% (mainland China trading down 2% but on domestic issues), European opening indicators showing a potential for somewhere between 0.5 to 0.8% falls....so the Aussie market tumbling by 1.5% seems overdone. The intraday might need to push a few points lower to complete but I'm assuming there'll be a last half hour rally and have bought a couple of stocks on the back foot. AWE is the only one that hasn't really worked but I jumped at the bait rather than waiting and it has kept sliding to be on the day's low at 133.

Also, the US deadline is August 2nd so presumably we're going to have to wait until moments before the relevant hour for the smiling politicians to present their solution. That's another 6 or 7 trading days for us.

4.12 The market did make a low at around 10 past 3 but there was no rally to speak of and the match out saw a late drop to almost reach that earlier bottom.

My take is that today's trading is an overreaction but the Asx 200 chart could easily do what it did a couple of weeks ago and have a second big drop. The reason I'm not getting out of my long positions is that the rejection of the minor new low last week was significant and should turn out to be a turning point. It doesn't mean we can't get close to it again, even if it holds...there's the rub.

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Friday, July 22, 2011

Mountain to climb

I'm pretty tired after staying up to watch the most exciting stage of this year's Tour de France and feeling as foggy as one of those Alpine peaks. One thing I do remember is a comment a couple of days ago, about a young Norwegian rider called Boasson Hagen, to the effect that he doesn't take losses to heart and just gets on with it the next day. Laboured trading analogy alert, I know, but I have noticed that after a big losing day I quite often follow it up with more smaller losses. It means that I haven't really accepted the loss, or even the change in market direction, and in hindsight the initial bad day doesn't look like such a big deal, the problem was the failure to take my medicine and move on. The best thing about this week is that I had a medium sized down day on Wednesday because I was fighting the obvious market turn but I have at least embraced the change and today is a nice recovery for me with the market up 43 points and most things moving, even the short in NCM is performing.

I was concerned that the first leg of the bounce was over but it isn't. What was wrong with my analysis? Not necessarily wrong...there wasn't a sell signal on the 60 minute chart that I highlighted on the close, just the threat of one. 2 times out of 3 there would be another leg down but fortunately, today has seen an extension/expansion of the move and increased the possibility of a short term lift above the recent peak at 4657.

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Another day, another couple of buys. The first is in Boral. Wednesday's rally took it through resistance and the break of yesterday's pullback has given me an entry at 428 on a potential higher low. I'm using a tight stop below yesterday's low.

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The second is in Linc energy. I usually don't need much excuse to buy this one but I've been pretty sceptical lately; the move back below 300 after a long build up to the breakout was not encouraging and then I, sort of, smelled a rat. The company just announced that a US oil acquisition had fallen through over title irregularities and maybe that was the rat. Since then, the stock is shaping up more positively so I've bought 10k at 290 with the idea of buying another 10k if it can push on.

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12.20 Although I missed the bottom in PDN, immediately after the quarterly report, I was right to cut the position. I can't quite put my finger on why I lost patience, I was questioning myself but ultimately it was a feel thing, the selling seemed lacklustre. It has rallied sharply to 262 on a short squeeze, I'd guess. Could I have traded the reversal? I was interested yesterday but missed the jump and since there are plenty of other buy signals around, I let it go.

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FMG is up at 660 but hasn't set the world on fire. I think there's a large holder selling down slowly based on substantial shareholder notices but the selling gets soaked up. I was looking for something more explosive though and spent a tad over a thousand bucks on 300 (30 in the old contract size) July 675 calls which expire next Thursday afternoon. What I want is a move similar to the one in AGO, which is similarly favoured by analysts. Here's the FMG daily followed by that of AGO.

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AGO

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1.58 BSL is kicking on today and since I only bought 30k and sold 5k at 128 this morning, I decided to buy Aug 130 calls at 7. The first rally broke resistance and unless this turns out to be a pennant correction, this leg up can easily get to 145, 150.

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NCM is heading lower again. I sold out a couple of the July 4050 puts at 62 when it was consolidating since it's expiry next week and a little consolidation would wipe these out. And I've just sold the rest at 76, leaving some July 4000 puts. Here's the 60 minute chart.

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3.32 I bought more LNC at 292 which was the break of Thursday's high. The stock is up to 298 and, I suppose, a break of 300 would be back into bullish territory again. PDN is up to 268, 6%.

ALL looks like a no brainer but it has been poison for so long, that I can't bring myself to touch it. Also, I'm long more than enough.

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4.13 That was a nice end to the week. The market finished up 1% at 4603 and all the positions went well. Let's hope for more "risk on" next week.

Thursday, July 21, 2011

Setting limits

I've been thinking about how much intraday trading I can do and whether I can make it an additional earnings stream without affecting my other business. I know it can be done, I just don't know whether I can do it. After concentrating on it for a week or two, my feeling is that although I enjoy the extra activity at first, after a few days I get tired and my overall business does suffer. Whether a decision is on an intraday or an overnight position, it requires about the same amount of mental energy. If anything, an intraday trade seems more tiring because you more often have to cut soon after entering the trade.

The intraday trades that do seem to work are the ones where I'm putting the position on for an overnight move and it just happens quickly. Serendipity rather than any brilliant plan.

In terms of adding a second income stream to my regular trading, I haven't given up on a simple premium writing strategy in the bigger dollar stocks. And I mean really simple, all I want to do is write puts on stocks that I think are near support, where I'm fairly comfortable to be a holder if support fails. If I become a holder, I then write calls. I've had one stab at this and pulled out because I made it too complicated by trying to leg into ratio spreads and also because I was fiddling around too much with my core business at the same time and got distracted.

I think I can make this premium selling strategy work because it's passive, ie, I don't have to make too many time and energy consuming decisions and it's simple. The hard part is going to be leaving the decisions alone.

The action today is quite positive, a rise of 22 points at 11.23 am, as there is a Reuters story about Merkel and Sarkozy having agreed to a scheme on Greek debt. This is despite a US market which trod water as it waited to see if the US debt ceiling agreement would be reached. As regards my longs, there's just a minor uptick on balance and I'm not putting on any new positions as yet. Banks are strong performers as a reduction in funding costs would be a big boost.

The DJIA looks like this on the daily scale.

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If the rally was to push on to a high above the last swing, it could still fall short or match the May high and keep that head and shoulders look about it. Or else...if I can just get the bearish scenarios out of my head, what if there are clean resolutions in Europe and the US, sputtering world growth kicks back into gear and inflation calms down in China? Another bullish scenario would see a minor rate cut which also would probably take the edge off the AUD. The upshot could be a move to 5000. Here's a weekly chart of the Asx 200.

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12.42 The Chinese economy is now thought to be contracting after the HSBC PMI number came in below 50. The market slipped about 15 points on the news and is just up 6. Is this a precursor to an easing of rate pressure in China or a harbinger of stagflation? It's impossible to tell whether it means that the authorities are slowing down the economy in an orderly fashion or they've overdone it...for now, the market doesn't like the number.

1.49 Over a week ago, I bought a few puts in NCM on the off chance that there was a new high in place. Instead, the stock kept racing along with the gold price. Today looks like a more serious reversal day after a good quarterly with spot gold having stalled at $1600 and a resolution to the European and US debt crises, however temporary, a good reason for this to underperform. I've bought some July 4050 puts at 36 and some July 4000 puts at 16; not a big dollar expenditure and with a week to go to expiry, I'm looking for a quick pullback to 3900-3950. Here's the daily.

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I was chopped out of an IPL long but still like the stock. This time I've bought some Aug 400 calls at 10. I think the chart is making a head and shoulders low but it's taking time to turn around and buying the calls allows me to weather choppy trade more easily. Once again, it's a small dollar expenditure but I think that a change in sentiment can push the stock back into the 430-450 range.

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3.33 A slightly poor day for me with the market up 9 but the strength in the banks with resources softer on the Chinese PMI. NCM keeps sliding so there's some encouragement there.

4.11 NCM recovered on the close but still had a reversal day. The rest of my positions were mixed, a bit weaker, and the index finished up 6 points. I'm positioned for a temporary resolution of problems, a fall in safe haven gold and a short term bottom having been made in the Australian market.

I think I may take a hit in the morning. The Asx 200 might have completed it's first leg up. First the daily. Today's action is a bit like the interim high on June 22nd before a double bottom.

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The 60 minute chart has 5 waves up too.

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Wednesday, July 20, 2011

Glue on my shoes

It's not a proper word but "stuckness" is how I'm thinking about it. I could feel the inertia but couldn't bring myself to buy as the market turned around super slowly over 3 days. It reminds me of that scene in the first Austen Powers movie where the henchman is crushed by a very, very slow moving steamroller.

What's the solution, apart from laughing at myself? To quote Sgt Schultz from Hogan's Heroes, "I know nothing!" What I mean, is that I would do well to yield to the market and just respond. I've been trying to think of imagery too. The popular image is of the sea and waves, which is a good choice visually and also from the traditional use of water as representing emotion and the sea representing the collective mood. But in some cases, this image is too amorphous for me. I'm looking for something more alive, maybe not a frightened rabbit, I suppose the popular herd image could do it.

The reason I want an image is that I think it would allow me to step away from plans and systems and take account of the flightiness of markets. Just when you think one outcome is a certainty, the market will turn tail and head in the other direction and rather than fighting the move, thinking of an animal and its movement might allow me to simply accept it.

Anyway, we're just about to open after a super strong overnight lead with the kicker of political deals being brokered in Europe and the US...maybe.

11.17 77 minutes into the trading day and the market has gapped up and stayed there. Up 71 points with the banks all bouncing 2% and the big miners getting close to that. While I can still see topping formations in major world indices, I think all bets are off on the short side in the short term. Here's the XJO.

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I'm doing something which I really wanted to do yesterday and, of course, it was a much better buying day. Anyway, I'm clearing the decks so I'm out of the last BHP puts at 40, PDN at 244, OSH at 680, the last of the CBA spread at about 75 and TOL at 470.

I've also turned FMG into a bullish position, buying stock at 652 against July 650 and 625 puts. This has had a long pennant correction, I think, and a break could be quite explosive. Or rather, it has broken and after some consolidation, I expect it to surge. I've also bought some Aug 650 calls at 26 and some July 675 calls at 3.5 for a cheap kicker if it does go hard.

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12.03 I've been pretty sceptical about LYC lately but it has actually outperformed the market during a period of weakness and given that it should normally swing more sharply in both directions – high beta – that's very good. A weekly chart, below, shows that over 3 months the pullback has so far held above the peak of the big 2010 move (mostly) and the potential for a higher low is there.

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I've bought at 195.5. The 60 minute chart shows a break, albeit with a gap, and so far it has declined the opportunity to fill the gap.

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OST is another fresh long at 190.5. The recent recovery broke through resistance before pulling back while the retracement, by contrast, has held above support.

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1.27 Ouch! Just got back from a vey quick lunch. PDN has issued its quarterly and been sold down sharply, last at 232.

2.18 Bought and sold some PDN to scrape back a few hundred bucks.

Today is just buy signal after buy signal (in my terms!) and since we're coming off a low base with that compressed spring look about the Asx 200 chart, I figure there could be a couple more good up days and I'm taking the signals. So now also long BSL and QAN.

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QAN.

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A note of caution is the underperformance in China with worries about reporting season offered as a reason. It has kept the gains in the Aussie market to a touch under 70 points on a day when I thought we could rise 100.

4.12 The market closed up 82 points. It was quite a good finish because European opening indicators are muted with a headline saying that Merkel was talking down a Greek debt compromise. There wasn't much change in my new positions, the market had already gapped up so that was to be expected.

Tuesday, July 19, 2011

Stuck in the mud

The market is only down 11 points after 50 minutes as the US indices fell about 0.8% but recovered a good piece of the losses and IBM is trading up post market on a good result. The local index has stretched the low by a few points but wasn't willing to sell off, like yesterday, and the possibility of a reversal day is growing. This is something I was thinking about last night but I haven't been able to act on it. I really don't know why, maybe it's because I still have short positions on and that's skewing things.

Here's the XJO chart, down just 5 now..5 minutes later.

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11.49 The provisional peak was at 4481, up 9, but with a muted start in China the index has eased to be down 3 which is quite healthy really.

I'm reshorting TOL as it edges back up. My stop is at about 478 but I'd be concerned if it rallied through a recent swing low at 466 from last Tuesday. Just short a few at 455 and then 459. It's 461 now.

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Actually, I did manage to take something off the table early on, selling 25 BHP July 4300 puts at 105 leaving just 25 left.

1.58 More of the same with the market wavering between small gains and small losses. I've cracked and bought back a few PDN at 238. I was worried about the stock bouncing back to the top of the range like most of my other shorts but I needn't have bothered, it's going nowhere intraday and still looks shabby on the daily.

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2.58 Well, a day of lost opportunities as I couldn't bring myself to buy. The index chart continues to look quite positive in the very short term having just about broken yesterday's high and only being a few points short of Friday's peak. However, if it stalls here, it could tail off sharply in the last hour so I may as well just watch it now. The XJO 60 minute chart is below.

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IPL hasn't done anything much since I shorted it at 385 the other day, looking for another leg down. I've jobbed around and cut the last of the short at 384.

4 pm The IBM result and subsequent lift in US futures hasn't made European banks any more solvent so the last hour did see an intraday failure (as European opening indicators are for a dead cat bounce) and a drop back into the red by a few points.

I lost patience in IPL at the wrong time and the stock has traded to 380. However CBA tipped over again. I sold out 25 lots of the put spread because it ends up being a binary equation around the 4900 strike and I wanted to take something off the table. My exit price of 106 for the 150 spread looked pretty good until the late slump in CBA.

4.12 It was quite a good day in the end but while I haven't bothered to write about every intraday trade, I managed to make a minor loss on the intraday stuff by just punting rather than waiting for a signal. I don't know why I do it, anxious, overeager..? I don't want to force myself to trade in a flowing way but I'm not sure what other way there is to get my mind to go with the action. I'm wondering if some sort of visualisation might work or it that's papering over the cracks and the better approach is to work out what unconscious motivation is trying to fight the market. I'll probably try both!

Monday, July 18, 2011

Projection

Psychological projection or projection bias is a psychological defense mechanism where a person subconsciously denies his or her own attributes, thoughts, and emotions, which are then ascribed to the outside world, usually to other people. Thus, projection involves imagining or projecting the belief that others originate those feelings.[1]

From Wikipedia.

Although it doesn't quite match the definition above, my idea is that in trading terms it's the assumption that the market is going to do what you think it should, what your analysis suggests is the most likely outcome. If you're using Elliott wave analysis, which I do in a loose way, then you are literally projecting an outcome. The trick is to treat that outcome as a hypothesis and be prepared to challenge it. It seems to me that treating the possible outcome that you've plonked your money on as just that, a possible outcome, is quite difficult. Human nature will tend to make you blind to evidence to the contrary.

For example, about half an hour ago I thought, there's no way the market is going to break major chart support today and I bought a couple of things which I've scrambled out of again because the market did just make a new low, albeit by a point. The market is recovering and it was a reasonable hypothesis, but I didn't wait for any signals on, say, a 10 minute chart.

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Overall, the US indices are surprisingly robust despite setting up in a head and shoulders pattern like the German and UK markets. The Aussie market is unconvinced and with US overnight futures down, the index is fairly weak. It suits me overall and I've just played around with my positions. Selling another 25 July 4300 puts in BHP at 93 as the stock has slipped further but time decay is starting to eat away rapidly at the premium. I bought back the CGF short at 472 with the idea of reshorting on a rally while OSH is surprisingly strong. I bought some early at 654 and have sold out again at 667.

12.28 One stock that has been behaving itself today is PDN. So far I've been able to stick to my plan which is to give the stock the chance to fall to a new low unless evidence suggests otherwise. There have been 3 days of mild consolidation and that may now be over.

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2.20 The index has been oscillating around breakeven with a mild skew to the downside. At present, the Asx 200 is at 4471, a loss of nearly 3 points. It's a reasonable response given that we overshot on the downside last week but the overnight futures are weak as are most index charts.

I have a new overnight long in QAN where I bought a few at 184.5 early in the day. I almost immediately regretted the buy but the stock has not, at least, reversed hard. My logic is that listed travel agency, Flight Centre, has just upgraded and is performing well. One of the few strong parts of the economy is overseas travel as Aussies are rushing to take advantage of the strong local currency after years when it seemed chronically undervalued. QAN has been fighting all sorts of operational headwinds but it's back at support and underlying demand is going to be there for as long as the currency is strong.

My initial premise was that the stock had bounced off a higher low last Thursday and traded above that peak this morning. My stop was close also. However, that's all very well but the first rally didn't break previous lows acting as resistance and there was no follow through buying this morning so I now think that it's probably going to drop to a new low first. I'm in two minds as to whether I should wait for my stop at 179 or just bail at around 182, 182.5. I bought 20k where I might have bought 40k if I was really confident so it wouldn't be too much of a wrench to take the hit.

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4.13 The market looked ready to rally for most of the afternoon but couldn't manage to close in the black. The Asx 200 chart could plausibly rally hard; there's a fractional new low with no follow through at major support after a week of heavy selling. Nevertheless, there has not even been a break of the previous day's low so it would be a big call to reverse my book.

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I also sold my QAN at 182.5, will try again when I'm clearer.

Friday, July 15, 2011

Battle fatigue

Battling fatigue more like it. I've had enough after another full on week. It's been an arm wrestle with positives from China, negatives from Europe and mixed signals from the US. The overriding factor might have been local negatives with the carbon tax progressing and retailing continuing to suffer which highlights the caution gripping the Australian consumer.

The DJIA has had a few consecutive weak closes and might be due a straight out tumble. Here's the 60 minute.

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The sell off has little enthusiasm which is fair enough, the index is near support but I'm holding my short positions for now. I have a couple of new trades, both shorts. They may turn out to be day trades but I'm putting them on as overnight positions.

The first is in CGF. Their annuity business has been successful and driven strong share price performance but margins are under pressure. The stock ground up then slipped and I'm selling into the retracement with a stop at 500. Short at 481.

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The other one is IPL where I'm short at 485. I'm essentially bullish this but after a mild recovery from the sell off that stopped me out, the stock seems set for another leg down.

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11.52 Out of the last of the July 5050 puts in CBA at 188. The stock is close to my back of an envelope target of 4850 and seems to be finding intraday support. Still long the 5050 to 4900 put spread.

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12.16 I've been wanting to look at trading motivations as much as specific trades but I'm too busy this week to make much progress with that. I'm trying to at least analyse my emotions about the day and recognise which trades are impulsive/compulsive, which are rational and where I can use my instincts to help me out.

Today I feel tired and flustered despite having most trades go well. I had to miss a couple of hours in the middle of the trading day on Wednesday and Thursday and today I had a late start and have also had a couple of different visitors to my workplace. I like to work my way into the rhythm of the market and I haven't had the opportunity since Tuesday.

FMG has issued a quarterly report which has disappointed the market slightly. I bought more of the July 650 puts at 14.5 before the update and flicked them out at 20. I'm long the original 650 puts and some 625 puts, bought in late June, which are a fair way underwater but recovering a little.

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1.18 I forgot about LYC watch. It actually had a sell signal this morning and I got short a few at 193. China's latest rare earths quotas are not as restrictive as feared. Stock is trading at 191.

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3.36 The day has been almost a carbon copy of yesterday; a mid afternoon slump and a fairly prompt recovery. The index is down 21 having skated close to the 4450 low on the Asx 200 with an intraday bottom at 4454.

I'm short everything and not super comfortable so I bought some of the CGF back at 476, IPL at 383, the LYC at 190 and 191, some OSH at 654, the last of the TOL at 452 and I sold out another 25 BHP July 4300 puts at 92 leaving a balance of 75.

BHP has broken support and is lower on a combination of overnight weakness and another US shale gas acquisition. I can see further weakness ahead, my concern was more to do with the market being oversold on the day with the potential for a squeeze into the weekend.

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If there is to be US market weakness overnight, that would probably be enough for the market to fall through support. Our market is not strong and there has been more relative underperformance this week.

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4.16 The lunge for the breakeven line was beaten back by some late selling. We finished off 17 points.

I'm pretty happy with the week, I've run most things to the target or only taken part profit. I was finding it exhausting by the end though, just letting things be.