Trade review: GTIV, MNI

I think I'm getting a little bit mentally screwed up after the series of losing trades in past two weeks. This week I made two trades and made the same mistake on both, raising my stops too early. I really don't want to see any additional loosers, so I tend to raise my stops way before there is even time to do so, which of course is a sign of bad mental state.

The first stock that I closed this week was GTIV. I bought it from absolutely perfect Squat pattern. For a description of all patterns please see Terminology page. Buy point was 6.35, but I got in a little bit late at 6.64, which was the first big mistake. The second was setting initial stop below buy point, but not below of the day of the breakout. The stock then rallied on low volume and I did not take advantage of that breakout above 7, where I should've take some profits, locking in my stop loss risk. Stock then reversed, fell below 7 and I got scared it could go into negative during this low volume pre holiday trading. So I raised my stop and got stopped out on two occasions with just a minor profit.


Looking at a stock at this time it is still acting very well. It is testing its buy point, which is a normal behavior and it is still poised to go up to 8, where I would look to sell. So the biggest mistake behing the GTIV trade was late entry, consequentially illogical stop and a poor position after the pullback, which, taking my bad series in account, made me to raise stops without any need to do so. I also should've locked in some above 7, taking in at least my stop loss risk out, which would allow me to leave my initial stop where it is without any fear of loosing.

Next is MNI with a Launch pattern. The main problem with all these Launches is that they are very hard to buy at exactly the right time. Buy point usually is not clear, because consolidation often happens way below recent high. So I bought it on a breakout above 2.25, a little late entry again at 2.31, but not that late. It was still a good buy and stokc rallied almost immediately. And then again, the exactly same mistake as with GTIV. Stock rallied a little bit and I started to raise my stop in fear of price turning around into a loosing trade. So I naturally got shaken out on first decent pullback, while the stock is still looking just fine and poised to somewhere between 2.75 and 3, where I would look to take profits.

While making just a couple of these trade reviews my bad habits soon started to strike into my eyes. I always seem to be making the same mistakes, which is buying late as I wait for price and volume confirmation of a breakout, consequentally setting illogical stop and then raising stop without any particular reason to do so as price pulls back. I'll make a short review of all these lessons in a separate post as I think they're worthy of taking a closer look.

Trade Review: DXD, FSLR, DEXO

A bad week for me. I closed three trades, all of them negative.

The first trade was DXD long, which is a double inverse DJIA ETF. After market broke down from bearish flag I anticipated SPX would come down to at least 1175, where I would look to cover. But market reversed the next day, so I had to take a loss on this one. Meanwhile I opened some long trades and I expected shorting a market would be a good hedge if indices go down.


Here is how the actual trade took place:


My next trade was FSLR. This stock made a pattern that I call a "Bounce". A Bounce is basically short term bottoming pattern. After some sort of a shakeout stock bounces off lows, creates a very brief consolidation area and then breaks out, rallying for 1 to 3 days on a short squeeze.
I bought abreakout above 33.30 resistance area and thought FSLR will easily reach previus gap down resistance at 37.


And stock is actually still poised to go there. But as seen from the intraday chart below (for intraday charts I have to use my trading platform) I got shaken out on a wild swing down as I raised my stop. Now, there's not really that much more I could say about this trade as a bad luck. My entry was a little bit late and my stop was probably too tight but the stock simply collapsed after it touched 36 mark. I definitely should've bought earlier, but I would still get shaken out on that ugly drop. So the lessons from this one are don't chase breakouts and have a buffer for stop loss. Which I did have, but not enough.


The last trade is DEXO, which is an intraday copy of FSLR. But DEXO was a really bad trade. I'll explain why.

I have a pattern which I call a "Launch". Every once in a while I find a stock in a solid downtrend, suddenly shooting up from the ground, like a rocket ship from the launch pad. Often Launch pattern develops in several stages. As seen from the daily chart below, DEXO was in its fourth consolidation phase from its absolute low in October and stock was alreaady up 500% since then. I've been watchnig this stock during this last consolidation and firmly believed it can make another move up. But this was flawed thinking. Fourth stage bases are way too obvious to everyone. Also, DEXO experienced a significant climax top on November 29, when price gapped up and was falling all day long on huge volume. The third problem is that this is clearly a pumped up stock. There are many traders shorting it on every rally. So, all in all, I made plenty of mistakes with this one.


An intraday chart revealy pretty much the same picture as FSLR. I bought the breakout above intraday resistance and immediately price crashed, hitting my stop.



And finally, the biggest mistake I made the last week was trading momentum stocks into the holidays. Experience tells that days before holidays tend to be dull low volume days. Of course, market may day drift higher all the way to the year end, but we cannot expect any serious momentum develop. If I find any good setups to trade I'll probably have to use wider stops than I used to.

Trade Review: NTSP, UUP

I decided I'll start making weekly reviews of my trades. Analyzing market indices is whole lot of fun, but the real-life action is going on in stocks, so I guess these reviews will be a much more interesting read. Also, I believe making detailed reviews of all my trades, winning and losing will help me observe and overcome my weaknesses and become a better trader. So, I'll make an effort to be as critical to my trades possible, even on the risk of making a complete idiot out of myself.

First of all a little introductory word about my trading strategy. I'm basically a momentum-swing trader, meaning that I trade stocks which I expect to move quickly, in a matter of no more than five days, into a wanted direction. Some of my trades are day trades and some last for several weeks, but most of trades will be closed in less then a week. I mostly trade on the long side, but will do occasional shorts if conditions tend to be favourable to bears (as they are now). Stocks are my number one trading instruments, but will do occasional trades in commodities, especially gold and silver, and currencies, such as US dollar.

In general I trade six bullish patterns which I've analyzed and found them to be the most consistent ones for quick swing trades. They are not chart patterns in a sense that most traders understand patterns (i.e. cup with handle, triangle, double bottom, channel, etc.), but are more like contextual patterns. This means that they describe a context, or a cycle/stage/phase, the stock is currently in. A stock can be in solid uptrend, basing, bottoming, etc. I've even made up some stupid names for them. I call basic batterns Bounce, Squat, Resurrection, Launch, Breakthru and Runaway. Some of these patterns can also have continuation patterns, a second stage buy points, which have been named also. I won't bother explaining the mechanics of each pattern in this post, but will rather explain every pattern in a real-life example of a trade, when it occurs. OK, enough talking, let's do some trading!

The first trade I closed this week was NTSP. This was actually a pretty unfortunate one as I got stopped out with a loss, only to see the stock rally from that point on. But, frankly, I made several mistakes in this trade. NTSP was a Resurrection pattern in its basic form. A Resurrection is a bottoming pattern. As the name implies, the stock is somehow being resurrected after being beaten down. After a several mont long downtrend, stock starts to make a bottoming base. When these patterns break out, they can produce some very nice gains in a very short amount of time.

So, after being pushed down for several months, NTSP started to bottom in August 2011 and built a nice ascending triangle in the next four months, with a very, very clear buy point at $6.50. This is a picture perfect resurrection pattern. The basic definition is that stock must consolidate for at least two months, provide a clear buy point, should not rally too much from the lows and, ideally, shouldn't have any upside resistance anywhere near. Everything lined up for NTSP to go up to 8 and probably even higher.

Now, the main problem is that I found stock on December 1, only after it has already broken out od the pattern. It was too extended to buy back then. I also didn't buy pullback to the buy point the next day, since I don't trust stocks that pullback immediatelly after the break out. Stock than built a very tight flag pattern with a clear buy point at 7. It even produced a little shakout right before it broke out. I bought this breakout and got shaken out the very next day as stock gapped down a little bit and fell below muy stop loss at 6.97. What happens next is seen from the chart.


So, what were mistakes I made in trading NTSP. There were many. First of all, buy point from Resurrection pattern was 6.5 dollars. Period. I should've located the stock earlier and buy that breakout. Secondly, my stop was flawed. A safe stop should've been put below the day of the breakout at around 6.75. I bought too late at 7.20 and was forced to put a stop right beneath 7. Which is not bad for a breakout from Resurrection pattern. But what I bought was not this pattern. It was a second stage short term base and these tend to produce a little bit more wiggling as the breakout point is not that well determined. Third, in a hurry to buy I actually miscalculated my position size. According to my money management rules I shouldn't have bought no more than 500 shares, but it looks like I mistyped some number in my money management calculator and got 700 shares. And the fourth mistake. Market was pretty shaky lately. My position in NTSP was way too big for these kind of market environment when indices threatened to produce a sell signal. I don't regret buying the stock at all. I would make the same if I had the same opportunity. But simply, I should've bought less shares earlier with a less stringent stop. That's it. Learn from mistakes.

The second trade was UUP, which is a US dollar ETF. Now I don't generally trade currencies, but this time I decided to make an exception. I'll explain why. US dollar bottomed in May 2011 and started a real rally in September. Such long term bottoms don't top just like that. Dollar is still in a long term downtrend, but the action seen in past few months suggests some sort of relief rally is under way. The first rally produced a very deep pullback, scaring most weak holders to sell I guess, and then made an extremely right translated cycle. Right translated simply means the time between the start of the rally is much longer than the time from top to the next bottom. The ratio in this case is 20 to 4. Right translated cycles make higher highs in most cases, so I bought a confirmed swing low.

Dollar is a very slow mover, so my position was almost 3 times my normal position. I sold everything five days later on a gap into new highs. Why? Just because dollar is in a long term downtrend, because gaps to new highs are often signals of double tops, which is still a probability, and because I had a pretty nice profit with a strong three day rally, which I did not want to waste. So, this was a very well timed trade from buying and selling standpoint in my opinion. The only mistake I made is that I traded a currency, which is not my specialty. But, as I said, stock market was getting weak and I wanted to have some sort of a hedge in case I screw up long stock trades. Which paid off perfectly this time as I was still able to close the week positive in spite of a loss on NTSP.


So, that's it for this week. I hope I'll have more trades to report next week, hopefully all of them with a profit:)

Bearish Intermediate Term

Let's start today with the stock market. Well, it has been a chopfest for sure. Trading in these conditions has become extremely difficult. There are still plenty of high quality setups both long and short, only that most of these setups fail soon after the breakout/breakdown. What bothers me the most at the moment is an unusually huge Friday's volume on all indices. Intraday scan reveals that this volume was genererated in the first minute of Friday's trading day. Prices jumped on huge volume, but collapsed soon afterwards. Big volume is almost never a good thing, especially near recent tops. I think there is a pretty high chance that market makes another dip to test the November lows at 1160 on SPX, then rally into the year end and collapse again in January 2012 in earnest. This scenario seems quite logical. Breakdown from this minor bear flag would force many retail traders to sell. Smarts will be able to accumulate at previous support to ignite a strong Christmass rally. This rally would convince retails that new bull is under way, thus smarts will be able to sell accumulated shares, supposedly on breakout above MA200. A once tested support at 1160 will not become tested again, so prices should just slice through these levels like a hot knife through butter. Sure, just a speculation, but a pretty sensible one. I might short something on a break from this bearish flag.

Now to gold. Way back in September 24 I posted some trendlines for gold. I think now is the perfect time to review my long term strategy as very important event happened. Gold violated black ascending trendline that has been valid from the early beginning of this cyclical bull in 2009. So, for almost three years gold price obeyed this trendline on every major dip. This trendline is now broken! I think gold did manage to close marginally above it, but daily action suggests there was no real buying at the line or below it. I think we can reasonably expect another dip down. There are basically two options. Gold may bottom at the green line in January or at the pink line in March. Let me explain why I think gold will bottom at the pink line (or below it).

Let's forget about trendlines for a moment and just observe cycles on gold. On the below chart I have marked all the intermediate weekly cycles since January 2009. Green arrows mark bottoms of each cycle and the number below it denotes the weekly length of each cycle. If we make a quick averaging we can conclude that average cycle should last between 20 and 25 weeks. Now, the last cycle that bottomed in September was extremely short, lasting only 13 weeks. History of cycles says that extremely short cycles are often followed by longer ones. History also teaches us that bear cycles tend to be about 25% shorter than bull cycles on average. So, when we sum up all these numbers we realize that cca 24 week cycle that bottoms in March is more probable than cca 16 week cycle that bottoms in January. A very short 13 week cycle should be followed by a longer one and 24 weeks is appropriate length.

OK, let's wrap this up. The bottom line is that I believe January 2012 will be a massacre month for both stocks and gold. Stock market has been topping since February 2011 and will have to convert this into some sort of a dramatic fall sooner or later. If stocks go down, gold won't be able to keep high grounds as cash will be a safe haven for most investors. The same thing happened in 2008 when gold corrected 30% together with stocks. If a plunge of similar magnitude happens we can also expect that all technical levels will get broken in panic selling. But I'm getting way ahead. We'll talk about this when those times come.

Stocks Also On Sell Mode

I think I've seen enough. Stock market indices printed 3 or 4 distribution days in two weeks, which should be more than enough to turn the trend back down. Today selling continues below MA50, which is my signal that bear market may be back again. Sure, we may and probably will get some sort of a relief rally on low volume into the year and, but I strongly doubt indices will be able to get anywhere near previous highs. Whatever bounce we may get it should probably be the best shorting opportunity of this entire bear market. We'll get back to this when time is right.

Gold Breaking To The Downside

This is just a brief update on gold market signal. Yellow metal is now officially in SELL mode as it broke to the downside from a four-month symmetrical triangle. The breakdown was so powerful it violated trendline, MA150 and previous swing low all in one session, albeit not on a closing basis. But I believe yesterday's sell off and today's follow through (not seen on the chart) is enough evidence to confirm my thesis that gold shall see much lower prices in the next couple of months. The currect short term cycle should bottom sometime in the next two weeks and rally out of this bottom will tell, how weak gold actually is. So I'll refrain from drawing support lines until I get a taste of the upcoming bounce. For now, my short term target on gold is around 1620, where this cycle should bottom.

Gold Weakening

How things change. About a week ago I've talking about gold possibly setting up for the breakout to the upside. I know many traders like to buy "in the face of an upcoming breakout", just in case price gaps up at the open, leaving latecomers behind. The problem with this strategy is that one presumes a breakout as inevitable. In other words, you become bullish on stock before you even get a bullish sign, which of course is a breakout itself. My experience shows this is a poor strategy. I made this mistake several times and almost always regretted it. But not this time.

In light of this short aside, gold seems to be negating our bullish outlook from the week ago, as it is now on the verge of breaking down. Now again, I'm not saying it will, but last couple of day's action suggests there is more weakness coming for the precious metals. Several ascending trendlines could be drawn. If our interpretation on the chart below is correct, a break below the triangle bound would be a red flag for gold. The final confirmation of failed short term cycle and thus possible continuation of correction would be a close below the last support (green line). We'll get back to this later.


Stocks are not behaving any better than gold. The two-day coil-consolidation right below MA200 broke to the downside on a sell-off distribution day, which is negative, of course. On the other hand, Friday produced a pretty strong reversal, suggesting Thursday was just some panic selling on bad news. We'll have to wait a little bit more for a consolidation and a breakout or a wedging rally, followed by another sell-off. With a little bit subjective view, I suppose price could easily meander between MA50 and MA200 until the end of the year. Definitely not an environment for a momentum trader. Additionaly, there is still no buy signal more than two weeks into the rally, which is sign of caution by itself. I still believe stock market will continue its bear market trend soon.

Gold Has To Decide

I'll start today with gold. Yesterday it sold off, which almost made to post something about gold probably breaking to the downside. But today it is rallying hard back up. I have absolutely no clue on earth what's the next move for precious metals. Luckily we have a pretty decent pattern to watch. The triangle is getting squeezed to the apex and gold will have to make a choice soon.


Today's news driven market is very unfavourable for anyone trying to grab a share of a trend. Not seen on the daily chart below, but intraday charts are ful of wild swings in both directions, causing breakouts and pullbacks to fail, only to reverse later in the day and fail the very next day again. In such environment it is best to stick to the larger perspective and trade longer term swings. There is nothing on charts that would change my mind about stock market being in a cyclical bear. I still expect the current rally will top some time in December and roll over down to at least October lows. The problem is that now we have resistance at previous top but also support at previous lows and MA50. So this chopfest may continue for quite some time, trigerring several false alarms in both directions. I think we should not a expect a textbook technical top. However, I would love to see a failed breakout above MA200, because this would give us a very reliable stop for short positions. All markets still neutral.

Cards Shuffled Again

I must admit the last week's rally in stocks surprised me. I fully expected any bounce will be just a short term short covering rally, but for now the last five days look more like the beginning of a new short term cycle that should move above October high.

First of all, the swing at the bottom was extremely powerful. Second, after a day of mild consolidation, market just slashed through the MA50 on huge volume, closing at the high of the day. This is the basic definition of a follow through day, that often starts a new uptrend. And third, market was able to keep the high levels for the rest of the week, confirming the follow through day.

However, my scepticism still prevents me from announcing a buy signal. A really huge volume on indices is usually not a good sign. Often such too-good-to-be-true-looking FTDs will fail two to five days later. And we are officially still in a bear market. I just don't think that bullish sentiment has been cleared enough to pave the way for new bull market. So, for now stock market will stay in neutral mode. Things should get clearer by the end of the next week. If MA50 stays and maybe even MA200 gets conquered I will start to believe that the bear is at least temporarily over. And I mean temporarily. The biggest problem right now is the leadership. There are virtually no constructive bases in big cap leaders seen at the moment, which means that chances for a sustainable, many month rally, are low. Indexes are being pushed up by oversold stocks, which is usually not a good sign.


Moving forward to gold. I guess we now have a confirmation that many investors see the same picture as we do. Yesterday gold tagged the descending trendline perfectly, sold off a little bit, but stayed mostly neutral for the rest of the day. I suppose this is a bullish sign. A partial retrace-consolidation just below the trendline would set gold, silver and mining stocks for a powerful breakout. I'm starting to lean to the bullish side. The fact that gold is probing resistance levels and not selling off probably means the sellers have been exhausted. If price breaks above yesterday's high, I will definitely buy a stake in precious metals and proclaim a buy signal.