HOW VHC MADE ME FEEL LIKE I WAS LOCKED IN A ROOM WITH A PERSON FROM CHINA, ZIMBABWE AND MEXICO

With every trade I make in the markets, I have a scenario plotted in my mind of what a stock that I am long or short should do. For short-term trades, I typically initiate positions around areas where I know what to expect under most circumstances. I bring this up because a stock that I was short since Friday (VHC) managed to take the route I least expected today. That caused me to push the ejection button and parachute out as I became unsure of what to expect next. Whenever my road map in the markets becomes clouded, I have learned to turn the car around and wait until the roadmap is clear before driving another mile, risking getting lost and never being heard from again. With VHC I had the following ideas: 1. Following the strong close on Friday I was expecting either a sharp gap up or perhaps a somewhat substantial down open. Instead, it opened up slightly down and just drifted around for the first hour of the day. Coming into the day, I knew that this type of action in the first hour of trading was the worst case scenario, as it opened the door to dull sideways trading. Dull sideways trading in a heavily shorted stock that has been dissecting the shorts is nearly always a bad thing for new shorts. I fell into the new shorts camp. One strike against me. 2. I knew that 40 would be an area that would create a substantial amount of stops to go off for momentum players and shorts who had enough of the pain. Stocks are attracted to nice sounding round numbers just as they are to important technical levels. When VHC broke 40 today it may as well have broke 38.72. It acted as if the number meant absolutely nothing. Just kept drifting around the 40 level. No hysteria amongst shorts and no momentum players really playing along. Two strikes against me. 3. My thinking then became that the short sellers have been rinsed from the picture for the most part, when they see that there isn't much trading activity above 40, sellers will come in bunches and drive the stock price down. The stock traded below 40 again as the day wore on. This was the sellers chance to seize momentum as VHC failed to cross a significant round number with any conviction. Take it the other way. Close the stock at 38. What did it do? Just drifted around 39.50 for most of the day. It ended up closing the day at 39.88. This was strike three. Three things happened today that...

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5 DISCIPLINARY MEASURES THAT WILL MAKE YOU THE KING KONG OF TRADING OR INVESTING

Nothing has changed. I came into this week thinking that the general market averages were in an extended consolidation phase within a healthy bull market. And I think I will be exiting this week feeling the same way. I get shocked at the number of people I see attempting to overthink the financial market on the daily basis. It's turns into such an ego game for some people. They get in the way of themselves. It's like the tennis player who attempts to think about the positioning of his feet, the rotation of his shoulders and the stiffness of his wrist while he's hitting a forehand. The mind gets in the way of innate ability. It's much the same in speculation. If you think too much, you die. It's so easy to mentally masturbate with all of the information that is at our fingertips nowadays. You can find one million different ways to slice and dice any piece of information. I feel terrible for anybody attempting to learn about trading or investing in this environment. While the abundance of information makes things easier in some respects. That same abundance of information can prove extremely detrimental. You can find varying opinions on every single method available for speculation. Unless you have a mentor to literally hold your hand as you walk down the house of informational horrors that the internet can become, the task of getting to that point where you are self-sufficient and confident can't be an easy road. I'm glad I came up during the time that you had to order ValueLine (came in the mail) for information on stocks and I got my real time quotes from a Quotrek with a 2 foot metal antenna that received radio signals. There are a few methods you can use to improve your trading or investment results right away. I would advocate the following disciplinary measures: 1. Know what you are going to do tomorrow tonight. This means that you should be doing extensive homework at night for the following day. No trade or investment should come as a surprise the next day. You should have all scenarios planned for the day ahead. 2. Becoming impatient, fearful or going against your discipline means you are done for the day. If you have positions that are hurting you cut them down to the point where they no longer hurt. Being in an impatient, fearful or undisciplined state opens the door to your EDS. And when your EDS is opened you have one foot in the grave already. If you feel any of these during the trading day, have the discipline to...

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3 THINGS YOU MUST MASTER BEFORE YOU CAN MAKE YOUR FIRST $25 MILLION TRADING THE MARKETS

1994 I was fresh out of high school. I met with a friend who showed me option chains on different stocks. He showed me that if I put $500 into a call on a stock, it could potentially turn into $2000. He went on and on. I ate it all up. The next day I went to a local bookstore and bought my first book on trading. I would go through the newspaper and find call or put contracts that I thought were reasonably priced based on absolutely no analysis or criteria. One of the first I bought was a call option on Bally's Hotel. I believe the symbol was BLY. And I think the strike price was 7.5. I was successful on the trade as a result of pure luck. I recall walking down the stairs of my parent's house some $500 richer, thinking how brilliant I was for discovering such a simple way of making money. Over the years, I derived a sense of importance from trading. I remember in 1997, I would be trading the Yen at 10pm during a BOJ intervention in the currency markets. It was me versus the BOJ. It was exciting. I was a player. At least I thought I was. Wall Street was my favorite movie. I watched the Paul Tudor Jones documentary over 100 times. He was my idol. The video is available for viewing here. It's a classic documentary. I haven't watched it in years. If you have never seen it, do yourself a favor and spend the hour watching. What I didn't realize at the time was that the fantasy, perception and image I created for myself as a trader was more important than making money. I was more enamored with the act than the results that were produced as a result of the act. I would come up with a successful system of trading and within months completely flip it on its head because the excitement was beginning to fade. After I left the trading desk of Bank of America in 1998, I started making an effort to push back against my Marilyn Monroe complex. The results were astounding. I had triple digit up years in both 1998 and 1999. I didn't have a down year until 2004. The drawdowns I have experienced in the past have all been a direct result of abandoning my ability to make money in the markets for an image of myself that didn't actually exist. It was my way of making the markets exciting and keeping the fantasy alive. I never wanted the markets to turn into just another business. I...

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COMING CLEAN: I MADE A BOO-BOO TODAY
Apr27

COMING CLEAN: I MADE A BOO-BOO TODAY

It has been a long time since I made a trading boo-boo. A boo-boo - for clarification - is not when you lose money on a trade like I did with NFLX on Tuesday morning. That's just trading. A trading boo-boo is when you veer off of the road map for a particular trade. Case in point: VHC The trade started out wonderfully. My read on the trading pattern was spot on and my entry was a good one. The weakness was obvious from the moment I put on the trade. I didn't have an ounce of pain on this trade. Not one moment of doubt. It went my way from the very beginning and didn't stop into the close of Tuesday's trading session. In my mind, I said that once it broke 23 I would get out in anticipation of a bounce off the trend line at the bottom of its range. This morning VHC broke through 23. I didn't cover. All of traders who inhabit VHC (there are a lot of them) decided that they would begin buying/covering shorts right on the uptrend line that marks support. I still don't know why I didn't cover. I just didn't. Call it my blond moment of 2011. Even though my head is shaved and I'm a male. Today I was a blond. As the stock began rising and I was sitting there playing with my make believe blond hair, I started accessing my EDS. If you haven't read about my theory on EDS and how it influences trader/investor behavior, the link is here. I have learned over a 17 year career that started at the age of 19 trading for myself, clients and on a trading desk at a major bank that once the door to my EDS is opened I HAVE to exit the trade. I become indecisive and must move on to the next one. Start fresh. I know I have made progress since this is the first time it has happened in 2011. If you are new to the markets, it happens weekly, if not daily. Those with a few years experience should be able to keep it down to a few times a month at the most. If you have been doing this longer than 10 years and you haven't mastered your inner-trader to the point where you keep it down to once every few months, then you need to find a method that keeps the door to EDS...

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FOLLOWING A ROUGH QUARTER, I’M ASKING MYSELF THESE 6 QUESTIONS

I just sent members our monthly performance numbers for the investment names within the portfolio. To put it bluntly, March sucked for us. It capped off a somewhat frustrating quarter where we became all too familiar with the dynamics of a sideways trading range. 3 out of 4 of the names within our portfolio are mired in a sideways range. All of the 3 closed the month at the bottom of their respective sideways range. This creates an odor in the performance numbers that is only remedied through a steady diet of positive gains in the weeks and months ahead. I think it's important when suffering through down months - and especially down quarters - to examine one's thesis and judge whether it continues to hold valid. If you invest based on fundamentals, you must  look at the individual stocks within the portfolio and ask some questions. Here are the questions I am asking myself tonight: 1. Do the fundamentals that drew me into the stocks I invested in still hold true? 2. Does the catalyst that caused me to take a position in the stock still have validity? 3. Have the names within the portfolio become more correlated to the general markets than in the months or quarters prior? 4. Have the investments in the portfolio become popular amongst investors, causing the potential for unnecessary volatility in the investment? 5. Are technical warning signs beginning to pop up? 6. Are there macro-economic developments beginning to take shape that may interfere with the potential for the investment? If I can give a confident no answer to a majority of these questions, then I'll keep the portfolio allocated as is. It's important that you, as an investor or trader, constantly reexamine your thesis or system of trading. It should become an especially urgent matter during drawdowns. You must constantly look at yourself and be willing to admit that I could be wrong here. You must then be willing to make the necessary adjustments to right the ship. Be pro-active in all facets of your investment or trading life. Don't become complacent or think you have any single component of your investment or trading methodology down. It is during times of cocksure arrogance that the market will devour nuts and leave you in a state of complete and utter impotence. Keep it alive and stay...

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THE SINGLE BEST INDICATOR OF BULLISH SENTIMENT
Mar30

THE SINGLE BEST INDICATOR OF BULLISH SENTIMENT

The sentiment geeks are always switching between different indicators of bullish and bearish sentiment in an effort to gauge whether the market is close to a top or a bottom. If it's not the AAII survey, it's Market Vane or Investor's Intelligence. Maybe it's the COT numbers that tickle the fancy of some traders? The VIX is a fan favorite, as well. The list goes on and on. I have traded with and attempted to profit from every single one of these indicators over nearly two decades of speculation in the financial markets. The single best indicator of bullish sentiment time and time again has been individual stocks themselves. I described how to use individual stocks to gauge market sentiment in my "Phase 4" article published in February. With all the squabbling amongst the bulls and the bears about whether we are about to make new highs in the market averages or plunge to multi-month lows over the next few weeks, I thought now would be a good time to measure what "Phase 4 investors" are up to. Let's take a look at 3 companies and 1 ETF: (click on the charts below to enlarge) CIEN and PXQ are giving us early signals that speculative money is coming back into the market. FNSR and JDSU moving up substantially over then next few days will be the final bell sounding on this short-term bull cycle, within what I believe will be a sideways trading range for the next few months. You want sentiment indicators? I just gave you four of the best. Keep your eye on...

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A SLOW MARCH TOWARDS DOOM FOR RIMM
Mar26

A SLOW MARCH TOWARDS DOOM FOR RIMM

There are a million different ways to lose money in the financial markets. What catches most market participant's off-guard is the counter-intuitive nature of trading and investing. It's an issue that is best summed up by Jefferson Airplane in the song White Rabbit: When logic and proportion Have fallen sloppy dead And the White Knight is talking backwards And the Red Queen's "off with her head!" Remember what the dormouse said; "Keep YOUR HEAD" In order to "keep your head", you must realize when situations are obvious to a majority of market participants, it will slow down the pricing mechanism for whatever financial instrument is in question. The most recent case in point of this phenomenon comes in the form of RIMM. The maker of the popular, but increasingly outdated Blackberry line of cell phones is becoming painfully irrelevant, as the market for wireless devices is moving towards an application driven format. RIMM has been slow to react to the lightening pace with which the evolution of technology takes place. This has cost RIMM about $60 billion in market cap over the past two and a half years. More importantly, it may have cost them the opportunity of ever recovering the customers who have switched to either an Iphone or an Android device. The rule of today's technology marketplace simply states that once you are obsolete, you are obsolete. Unless you have the alien mind of Steve Jobs, you will be hard-pressed to find an avenue with which to recover. The best thing that RIMM has going for it is the fact that most everyone in the financial markets realizes that their back is pinned against the wall. A funny thing happens when a majority of investors begin seeing a situation as obvious. It creates a support dynamic for the stock price. It actually slows the descent of the stock price, as short-term money becomes involved and long-term interest in the stock slowly wanes. Below is a monthly chart of RIMM going back to 2007. You can clearly see that it has been the creation of an application driven model for wireless technology that has been the downfall of RIMM. Yes, the grand sell-off of 2008 played a part in the decline. However, the lack of recovery for the stock, while many similar names are making multi-year highs is very telling. (click on chart below to enlarge) It is most fortunate for RIMM that the markets thrive on punishing those who attempt to profit from obvious situations, regardless if their opinions ultimately end up being correct. It is this reason that will create a cushion of time that will...

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WHAT MY MURDER OF A BIRD CAN TEACH YOU ABOUT TRADING
Mar21

WHAT MY MURDER OF A BIRD CAN TEACH YOU ABOUT TRADING

Most drivers will encounter birds throughout the day as they are driving. Birds have this uncanny ability of dodging traffic. They accelerate at the exact right time. They manage to stop in the exact correct places. Their decisions are crisp. They know the exact trajectory and speed with which to take off in order to avoid becoming a hood ornament. I'm driving down a city street in Los Angeles today. Not going extraordinarily fast. A little over the speed limit, perhaps.  I spot a gentle, peaceful yellow bird hopping around the street. It seemed to be hurriedly attempting to nibble at what it considered to be lunch. The bird that I encountered today must have been new to the traffic scene. It suffered from a moment of indecisiveness. It was so clear to me as I was watching. I saw the bird become cognizant of the fact that I was   coming at him at around 40 mph. At that moment, the risk of satisfying his hunger with whatever it was he was after in the street became too great. I was within maybe 20-25 feet of him at the time. He begins his attempt to dodge me by hopping to the left. I thought that it was a great move, as the left side of the road was clear and he could have just flown off back to his bird family, high atop a tree, in a better part of town. But then out of nowhere, he changes his mind completely and darts off to the right, about 3 or 4 feet off the ground. A small thud is heard as the bird gets polished by the right front end of my vehicle. I cringe and then become sad for some period of time. I immediately thought to myself, going right wouldn't have been a bad decision for the bird if he had committed to the decision from the beginning. It was going left for that split second that threw off his timing. Going left wasn't a bad decision either. It was clear of traffic. If he would have simply stuck to his decision to go left, his day may have turned out differently. My car didn't kill that bird, indecisiveness did. His bird brothers and sisters are dodging cars like mine all day. Their decisions are crisp and calculated. This bird, however, suffered from a split second of straddling the fence. It threw off his ability to time the escape correctly, costing him his life. Or her, it could have been a girl bird, I suppose. The point is that the whenever you enter a trade, you have...

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A NEW WAY OF LOOKING AT MARKET CORRECTIONS
Mar17

A NEW WAY OF LOOKING AT MARKET CORRECTIONS

Looks like we're in the process of completing our first leg down of this correction phase. I'll be going over a bunch of charts this coming weekend. For tonight, however, I want our focus to be on one. The chart we're looking at tonight is the QQQQ. Correction phases are tricky affairs. It makes sense that they would be. They (correction phases) are essentially rinses. It is an attempt to rinse the weak hands from the market so that the proper balance is observed in order for the averages to resume their uptrend with maximum strength and dexterity. The best way to visualize a rinse is to imagine investors in a bull market as a pile of shit on the sidewalk. I hope I didn't lose you...just stick with me here and you'll see where I'm going. Ok. Investor's are a pile of shit sitting on a sidewalk. The rinse that takes place is basically a very high pressure hose pointed right at the shit (investors). Initially, the weakest investors (surface shit) get carried away by the pressure of the water coming from the hose. What remains then is the more firmly ingrained shit. As the pressure from the hose becomes more concentrated, even the most firmly ingrained shit doesn't have the strength to hold on and is carried away with all the rest. What remains at that point are only pieces of shit that are embedded so deeply in the cracks of the sidewalk that they cannot be rinsed away. Once there is nothing left to rinse, the pressure stops and those who manage to embed themselves deep within the cracks of the sidewalk, get to walk away with the pleasure of participating in the next leg up for the market What the market has done to date is to rinse away the surface shit, mostly in the form of phase 4 investors. It has also managed to get into the more deeply embedded shit, which is a good thing. This simply means that we are completing the rinsing process at a lot faster pace than expected. The unfortunate part, however, is that the rinse is not over. There are more pieces of shit out there that need to be dealt with. This simply means that we will more than likely encounter a period of choppiness over the next couple of months before any sustainable uptrend takes place. Choppy movements can become extremely discouraging extremely fast. They frustrate traders and take up the levels of fear without the markets really going anywhere. They also create technical patterns that become extremely difficult to interpret, causing even further confusion, as...

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LET’S GET LAZY

I haven't been updated "The Gun" lately for a very simple reason.....trading opportunities are few and far between. The long setups I had been watching over the past couple weeks have broken down given what we have experienced in the market recently. And short setups? Well, they are susceptible to days like today where the squeeze is applied with painful precision. That leaves me with nothing to do. Having nothing to do is something that we, as humans, associate with laziness or complacency. Basically, when we have nothing to do we feel that it's because we haven't been working hard enough. This is a good line of thinking if you're a postal worker, as there is always new mail to sort. It's a good line of thinking if you're a paper pusher, as there is always new paper to push. And it's a great line of thinking if you're a sales guy, you can always search for new leads. If you're a trader or investor, however, it's financial suicide. Yet another example as to how the financial markets run contradictory to every emotion, whether learned or innate. It's an aliens game that a bunch of humans are trying to play. A group of midgets playing in the NBA. A gang of nuns trying to feud with the bloods and crips. The markets are one of the few places where you are penalized for working hard. You begin pushing trades and creating scenarios that don't exist, instead of allowing trades and investments to come to you. Being anxious to find trades in order to stay busy just isn't good business in this arena. Have some patience. The opportunities will come. In the meantime, if you feel the need to work hard...go to the gym, go do some volunteer work or run a lap around the block. You'll feel better about yourself and your portfolio will thank you, as...

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