Perfectionism

I'm always looking for the perfect trade and yet, I've often had too many positions so I clearly haven't been discriminating enough. What is the perfect trade for me? Is it to catch momentum and get a great move – say, 5 or 10% – in a few days and then get out? This might be something like AWE. (Chart is in yesterday's post). Or is it to get a nice low risk entry allowing time to accumulate a good size position and then have the trend resume? Hopefully, like PNA, which I've bought this morning at 343.7 average. (Stop is at 332).

I think it's the style of trade taken in AWE or BRU.

The pitfalls are that you don't get filled, as in BRU, above. I was keen to buy the day before but in this case, the downside was too large with the previous low at 110. I suppose I could have gone with a very tight stop using the low from last week of 123.

You can also catch a false break and generally it can get too intense and dependent on momentum rather than driven by a broader trend view. For example, PNA is in a decent trend, it has just pulled back from a fast move to a broad area of support, the rally took it clearly through longer term resistance and there is no extended topping out pattern. My stop would be triggered on a break of the first leg of the move which is just a few percent away from the entry while the target to the upside would be 380-400 which is roughly 11 to 15% giving a decent risk/reward ratio.

There's even been an element of instant gratification to the trade with a reversal from the early weakness that I bought into and the stock now back up at 351.

The other two positions are problematic. IAU is grinding up and if I wasn't still bullish about the market overall, I'd get out. There's a chance that it can transform but it would need to accelerate while the day of reckoning is at hand if it drifts back into the mid 120s.

IPL is worse. It is stuck in a range and me with it. It's still making higher lows despite yesterday's softness and it could have a more dramatic leg up. Nevertheless, the trade has been a trap. With the momentum in the resource stocks, there would have been plenty of better places to take a position.

The Asx 200 is up 11 or 12 points after a flat morning, taking heart from a better opening in China. It looks ok to me, not flash but tending to consolidate in a tight range after little jumps. It's the sort of chart you get in a short covering rally.

I've been thinking about using options in the XJO (or Asx 200) but I had a strong opinion in early January and could have benefitted then but will now wait for a better opportunity.

4.14 The index drifted off to close down 10 points at 4263. It could have been some profit taking with the Asx 200 about 5% higher for the month.

IAU slipped to close lower but IPL rallied to 321, while BRU and PNA were firm. I'd pretty much decided to sell out of IAU but wasn't aggressive enough. I may get another chance first thing.

Hiatus

I took the last few days off and visited friends up the coast. The outcome was ok with my positions benefitting from some minor market strength. The Asx 200 is not leaping out of the blocks though, constrained by a rising currency and continued caution.

Chinese markets come back online after the holiday week and we still await the latest Greek debt deal so the action today is muted. I'm quite bullish and my favoured scenario is for a run up through 4450 resistance to about 4600 but the lack of take off in the recent rally is pouring cold water on my thesis.

I have long positions in AWE, IAU and IPL. AWE is going very well although a quarterly report tomorrow would trigger profit taking if it wasn't good enough.

IAU is reflecting the top 200 with a grudging rally and doesn't seem to be getting any boost from the gold rally.

IPL is the worst performer, struggling to go anywhere.

4.11 I sold out of AWE at 154. It was a good trade because it was in reasonable size and there was a relatively quick move from the 137.5 entry level. I'm not clear on how long I want to hold positions. Ideally, I want to hold them for longer but the doji bar after a quick move is a warning and the quarterly report could provide a profit taking excuse. The main thing was my gut feeling. I've been comfortable with the position for 5 trading days but today I felt uneasy and was looking for reasons to sell.

Here's the daily after the finish of trade.

I bought BRU at 128.5 in mid afternoon. I only got about half of the stock I wanted as it took off. It's a thinly traded junior resource stock so even the reduced position size I'd planned was tricky. I got just under 18,000 shares and my stop is at 122. It finished at 133 and I'm hoping for a rapid move above the recent high.

IAU and IPL both pulled back 1.9% as the resource sector was mostly weaker in a mildly soft overall market.

Awe inspiring

It's a tacky pun, but AWE continues to do well. At 12.45 pm, it's up another 3.5 at 149 after touching 152.5 in early trade. Yesterday morning saw an announcement of an Indonesian oil acquisition which the market is impressed with and signs are that the new management team is finding favour.

I'm getting my head around the implications of trading larger size with fewer positions and trying to work out what time frame would work. For example, with AWE, do I hold through a congestion/retracement and look for the next leg up? Probably, but it depends on how big the spike is. If it kept going for another couple of days I'd probably just take profits.

The prospect of trying to find trades with big payoffs has got me thinking about options again. Macquarie bank stands out on a weekly chart and with $30 a strong possibility and the stock trading at 2520, a 2 or 3 month out of the money call option would stack up.

Here's the weekly. For the moment, I'm just thinking it through but would be interested on a pullback. It's a bit stretched on the daily.

It's another play on a market rally and the idea is that this would be an outperformer if the market took off.

Outperforming

I've been out of the office for much of the day but having a nicely contrasting time of it compared to Friday. AWE is up 8 at 146, IAU up 5 at 129 and IPL up 5 at 325 while the Asx 200 has slipped in a quiet market with mainland China closed for much of the week.

I've got a couple of ideas simmering at the moment but no time to discuss today, more tomorrow.

Underperforming

The Asx 200 is up 12 but struggling to get a move on with the index up less than 1% since last Friday's close while Asian and European markets have been up 3 or 4% over that period. It disguises the outperformance of the resource stocks though and the overall tone seems pretty good. The XJO could stall here within the range of the last swing but it seems unlikely in context.

Intrepid has had a minor pullback and IPL is pretty flat so it has been a dull day for me. I've been thinking about buying AWE for a while. The stock had a big run between late September and mid November. There was a double top after the first retracement but the action since then has been very positive because the next retracement leg was very shallow despite carnage in the small resource sector at the time. The price is below those two highs but is popping out of a congestion. I'm using 123 as a stop because I plan to buy more than usual and don't want to get stopped out on choppy action.

I've just paid 137.5. The first leg has been pretty strong and something similar might take the stock to 180. The weekly, below, shows a prior range between around 150-180.

4.21 All over for another week with the attempt to sell the market down having failed. The final result was a rise of 25 points to 4240. Next week could see capitulation from the shorts.

About time

I've been doing some more thinking about a concentrated approach. Essentially, I've been making 40-50% return for the last 2 or 3 years as the market has been chopping around and it seems to me that I could have done a lot better being more discriminating. Typically, if I'm particularly bullish, I might have 8 or 9 long positions and that ends up limiting any outperformance and making it difficult to get out if I'm wrong. It obviously smooths things; if I plump for 2 positions and neither of them perform then I might have been right on the general direction but wrong overall. However, over time I notice that I'm reasonably good at picking outperformers and I often ask myself which is the best of the x number of positions I hold. It usually turns out to be in the best 2 or 3 out of the 8 or 9 which implies that I should cut the chaff and increase the risk in the rest.

Right now I'm in two positions but they're yet to perform. However, they're the laggards I put on after I got squeezed out of FMG and LNC which have been excellent and I'm reasonably confident that they will soon have their day in the sun. Here's a weekly for IAU. It shows the possibility that the recent low of 108 in late December may well be a swing low. The last 2 weekly swings in the recent up move were 33 and 55 cents and the downtrend was also broken, so a decent move could be expected. The stock is up 4.5 to 123 and getting close to breaking out of a recent daily trading range.

 

I'm also planning to trade the XJO options contract. I usually have a view on the Asx 200 and this options market is cheap and liquid to trade. The contract is cash settled, there are no dividends to worry about and nor can it go bankrupt or be taken over.

4.10 IAU caught up in the afternoon and traded as high as 126.5 as it went through near term resistance at 124.5. It held most of the gains to close at 126.

The Asx 200 has shed early gains of 40 points to finish down by 3 points despite rises in Japan and China of around 1%.

Catch up

The tone has changed so that early weakness is now being shaken off and the index is up 6 at 4221 as we approach 3 pm. FMG is the big winner in my list with a push to 500. Unfortunately, I got out the other day but it's interesting that the rallies are now more than 3 day wonders. IAU has had a consolidation day and is yet to really break out but larger copper/gold plays like PNA and OZL are doing well.

IPL looks ready to go and I've beefed up the position with some more stock at 319. Looking for more concentrated bets rather than diffusing my energy.

I'm suffering with a cold so that's it for today.

Thrown a dummy

I wish I hadn't stopped out of those positions now with the market back up 59 points at 2.21 pm. Yesterday, I'd looked at the intraday charts of the European indices which had a big drop and a retracement on Friday so I'd assumed that was in response to the downgrades. If I'd checked more carefully I'd have seen that the S&P made the announcements after market. Regardless, my thoughts were correct, that the news would be treated as unimportant and our reaction yesterday was misjudged.

I still have long positions in IAU and IPL and they're going ok.

I've just had lunch with a friend who comes from a global macro trading background. He had a great year in 2011, making 350% on his money and it was all the more impressive because he was trading on his personal account and not for a company. Strategically, I've been feeling that I overtrade and don't put enough money on the trades that I really like. His approach is to wait for the trades to line up and then to risk a fair bit on each but with the prospect of large risk/reward ratios. His risk appetite is larger than mine but this sort of trading is still something that I want to move towards although I'd do it in my own style. Funnily enough, my friend's main issue is that he gets bored waiting for the right trades to come along and that's not something I'm worried about anymore, being 10 years older and happier with a quiet life.

In that respect, I'm comfortable to just have two positions and I've added to the size in IAU with more stock at 118. I've got a stop at 112 and I think it could easily make 140 so it stacks up. Intrepid is a copper/gold junior with a very large resource base to mine and with both metals charting well, it's a nice play on them.

Usual perspective

The index is down 1% at 2.14 pm in a mildly panicky response to the S&P ratings downgrades which were largely shrugged off by European and US bourses. Even more participants have returned to the Australian market so it's quite possible that the house traders are back in force and they love to short the market. We've recovered 13 points from the low and while I don't expect a reversal, I find it hard to get bearish. The charts look reasonably supportive despite a failure to get through 4200 convincingly and the European crisis is nearer the end than the beginning. Chinese data tomorrow is expected to show a slowing economy which would mean job done for the authorities and further gradual monetary loosening to come.

Here's the Asx 200 daily chart. The possibility exists that we've seen one of those failure to launch type bear market retracements over the last couple of weeks but I doubt it because they are more likely to appear in the midst of a downtrend such as the one in August last year. While it was a sizeable retracement, the second leg up couldn't get far above the first leg high. Anyway, there are a succession of higher lows in terms of the bigger and the smaller swings and I'm still looking for another test of 4400.

I'm just sitting on my positions. Linc had a mad run up on Friday afternoon, touching 143 before closing at 133. I'm long at 121 and might have missed my chance to sell out on a short squeeze. The company received a please explain request from the stock exchange and have mentioned the possibility of a cornerstone investor but no firm deal. The stock is back at 129 and looks soft on the 60 minute chart.

The daily is above and the 60 minute chart below.

3.37 I've decided to stop messing about now that activity is picking up and I've sold out of the balance of BLD at 382 and FMG at 462 on trailing stops while I let LNC go at 129.5. I still have IAU, IPL and TOL but the latter is also on the block after making a one week low with a 13 cent fall to 428. I'm just looking for a better moment to get out. It's disappointing and, as I posted earlier, I'm not particularly bearish but it's a stop/start market and the thing to do is to stay nimble and I get a move I can ride.

4.12 The index closed down 49 points at 4147 and I sold the TOL at 428. I'm happy to have cleared the decks after just sitting on positions for a few weeks which went nowhere overall. The US is closed tonight.

4202 again

It's 10.45 am with the Asx 200 up 15 at 4196 having peaked soon after the open at 4202.8 which is half a point above the two recent highs. More people are starting to believe that the worst might have been seen in Europe, the US and China and that's reflected in further rises in resource stocks from beaten down levels in many cases. I'll be out of the office for much of the day but I think there's a good chance that we'll kick higher. The positives are successful European bond auctions overnight, the negatives are disappointing US economic data and their reporting season hitting full swing with expectations not high.

I've bought LNC at 121 because I'm going to be out and because it was a clear 1-2-3 breakout after a very big downtrend. I've been itching to buy some here but it seemed heavily offered. Perhaps a big seller has finished and the insiders are leaping in because the stock is 126.5 now.

If it's just a dead cat sort of rally then it might stall below 140 but if the stock is going to turn around over the next few months, this leg should get into the 140-160 range.

IPL is still under pressure and I'm hoping there's a similar situation to LNC with a big seller close to completion. It's down 2 at 313 with POT down a touch overnight but when POT has been running as much as 5% the response here has been for small rises. It would seem unlikely for the stock, which is operating well, to underperform for too long now that the tide has turned and there's decent support above 300 so I'll hang in for longer.

Following the script

Since the index couldn't get through that short term double top at 4202 yesterday, extremely flat leads meant there was unlikely to be another push today especially with the market awaiting a plethora of figures. At 2.30 pm, the index is down 0.4% which is what one would have expected after a couple of decent up days.

The first figures were Chinese inflation data; the CPI was a jot over, the PPI a touch under and the make up was reasonable with most of the strength coming from fruit and vegetable price rises which tend to be volatile. The HSI briefly fell then recovered and now has eased down a few points but the Asx 200 took the opportunity to sell off from the flat line. I don't expect much more will happen today with European bond auctions and potential rate cuts in the offing.

No new trades but one of the pre-Christmas longs is showing promise. I bought IPL at 311 on the basis of support just above 300, above the October lows and after a slow, choppy pullback typical of a correction coming to an end. I was, and still am, looking for a move back into the 340-360 range and there were two false starts with today the third attempt. US listed rough equivalent, Potash, is up 15% since mid December and the talk is that mining services is the place to be but IPL, which supplies explosives to the mining industry along with fertiliser to farmers, has ignored the zeitgeist. Anyway, I didn't cut which was a touch sloppy but the market action over that period seemed almost entirely meaningless. Trading is at 317 and a rise into the low 320s might get the bulls going.

The book is up overall and I sold out half of the BLD long at 393 (v 363) on a rough sort of target. The stock is benefitting from a recovery in stocks exposed to the US housing sector. I've been assuming that sort of theme would develop but it has taken a while. I'll try to do better than usual with my balance and run the position until appropriate rather than selling out due to vertigo.

4.10 There was a drop of 7 to 4181 by the close with all eyes on Europe.

Follow through

Big gains in Europe were followed by reasonable ones in the States with resource stocks a standout. Despite flat Asian markets and yesterday's gains, the Asx 200 has continued higher with the rise standing at 1% at 2.43 pm. My positions are all long and have performed quite well with FMG up 10 at 467.

I bought some TOL towards yesterday's close at 440. I was looking for a confirmed buy signal with a break above 448 and a run up towards 480. My stop is at 428. The stock has obliged, trading at 446 with an intraday high of 449.

The Asx 200 index can also generate a breakout with a push through 4202, but so far there's a double top with the market trading at 4192.

A weak Euro is no longer a certainty to take resource prices lower and this decoupling is promising for the Aussie market. Gold is continuing to bounce back strongly and the correction looks like a textbook a-b-c retracement.

I've bought some IAU at 121. It's now trading at 118.5 so I should have waited for the close. However, it's an interesting chart with a reasonable rally in early December despite the weakness in gold. That push took it through resistance at 140. It fell back in the late December, small resource bloodbath but is showing signs of life. My stop is at 111 and it's a good little mover so 150-160 is possible if it can get going.

4.10 The index gave up some of the gains but closed well enough at 4188, a gain of 35. IAU finished at 119.5.

Catalysts

The Asx 200 is up 1% at 2.49 pm as catalysts for a rally have emerged. One of them is private equity trying to buy Pacific Brands for around $600 m. It will have to be a starting point because the stock has gapped up to 65 from a close of 56 so that the market is now valuing the company at just under 600 mill. I hold shares in my super fund and I'm certainly not a seller at this level. Despite a 30% cut in predicted profits, the P/E ratio is around 6 and the dividend yield pretty healthy. Most strategists are looking for the trough to be seen this year so results are expected to improve.

Forgetting about the specifics of PBG, the message is that the market has sold certain stocks to excessively cheap valuations.

Another catalyst is a turnaround in Chinese markets with the Shanghai index up 5% over a couple of days and the HSI looking to break up out of a pennant.

A third circuit breaker is the US reporting season with optimistic talk from Alcoa management helping AWC to rally along with much of the resources sector.

3.08 I bought some BLD at 363 just before Christmas and almost stopped out yesterday. The stock has had a dramatic bounce (as it did last week) but I'm hoping that there'll be some follow though this time. I'm targetting something around 400.

Fortescue broke below 440 around Christmas but there was little selling pressure and a low was made above the extremes of early and mid October. It looks like the move down from the 534 high was a choppy b wave and we could be in for another push towards 520, 540. Long at 452 with the stock trading at 455. I decided to buy before the close in this instance since the overall market was well supported and my stop reasonably close at 438.

4.12 The market held on to the gains, finishing up 47 at 4152, with FMG closing at 457.

Happy New Year

Today is Monday in the second full week in January, typically the day when workplaces around Australia start to fill up again although the kids are still off school and a lot of folk will be taking holidays in the next few weeks. I was hoping for some more activity but volumes remain light and I'm twiddling my thumbs as well as getting rid of a few long positions which haven't performed after the market retraced some solid gains from last week.

The new year hasn't changed the prevailing mood of pessimism and the market seems ripe for a rally on a technical basis. The first signs were a couple of very strong days last week which have since retraced, though not completely. A higher low would be quite bullish and the market could start to follow US and European indices. It's by no means certain, of course, and the weaker Asian indices are providing the template at the moment.

Here's the Asx 200 daily chart which shows that the market has done little of note since an unusually quiet holiday season began in mid December.

However, what interests me is the slow retracement of the 350 point bounce from late November/early December and then the breaking of that downtrend last week after a higher low. It implies another leg up which might once again test the breakdown levels just below 4500 from the middle of last year.

There's no catalyst as yet although extreme pessimism could be one along with divergence from the better performing world markets. For example, look at the move in the S&P 500 since mid December.

It's a similar story for the FTSE.