End Of Accumulation Phase

I would like to continue a stock market discussion from the previous week. Stock market is in a runaway move in my opinion. Once again I've prepared three charts from previous runaway moves and marked three distinct phases on each of them. I won't explain each separately. The point is that runaway moves typically start with a long accumulation phase. The slope of this phase is very steep and there are almost no down days. It continues with the distribution phase, when market starts to behave choppier. Momentum is mildly positive and money flow hardly ever gets into overbought readings. This phase is typically shorter from the first, but there have been exceptions. However, there are virtually no exceptions to the final, climax top phase. This is almost always a quick, steep 1 to 3 day breakout that marks the end of the bull market. See charts below for examples.



Let's now extrapolate these findings to the current market. I guess a pretty large distribution day on Thursday could mark the end of accumulation phase. There was no follow through to the downside on Friday, so more downside could take place next week. One thing that still bugs me is that I've completely lost my cycle count. We are on week 9 of the 9-week cycle and thus already overdue. Although I wish for further upside I'd also like to see a quick drop out of the green wedge that would mark the cycle low. Another thing that concerns me is the extreme slope. I speculate that market could now go into distribution phase, followed by climax phase. But this is just this. Speculation. Such an extended move into resistance could very well top right here. We'll have to wait at least another week and see. If indexes dropy in a slow, controlled fashion, there is a high chance of the orange channel to take place. If on the other hand sell off days start to pile in, chances are better for a final top in a week or two.

Another Climax Run?

The market action has frustrated me for the last two weeks. My analysis of cycles suggested an imminent deeper corrections that has not happened (yet). I believe in times when market seems to oppose logic it is best to try to find a past analogy just to see what can be expected in the near term future. By the way, I've decided to rename my cycles for more clarity. I will name them according to the average length of the cycle. Thus, the 18-day cycle means this is the cycle with an average length of 18 days. For 5-month cycle, average length is 5 months and so on.

So, let's start with the facts that we certainly know. Stock market has been stubbornly griding higher for three weeks without any minor sign of exhaustion. Momentum and money flow indicators go from overbought to more overbought. What can we conclude from this?

The first chart below is from February to May 2010. As we can see conditions back then were pretty similar to today's. The second 18-day cycle out of 5-month cycle bottom was accumulation period when both indicators stayed overbought for a long time. The next cycle was choppier as retails started to chase the rally and smarts selling to them. It all finished with a final blow-off top.

Next chart is from September to November 2010. A similar story. The first 18-day cycle after significant bottom was accumulation period, followed by two more choppier cycles with shallow corrections.

Another example is start of 2011. This one was a little bit different. The accumulation period was not so obvious and it stretched into two 18-day cycles. The rest of the story is pretty much the same. Several shallow corrections all being bought until the final climax run.

Now, let's make some general observations before moving to current conditions. First, notice the obvious separation from accumulation to distribution period. Accumulation period exhibits a very well defined uptrend with almost no pullbacks and all indicators staying in overbougth range for several weeks. During distribution period price action tends to become choppier, momentum line starts to wiggle and MFI barely moves above 80 as every rally is being sold.

Regardless of the cycle count it looks like we have just witnessed accumulation period. Every indicator I look (price/volume, stochastics and MFI) display these properties. Timing wise I am not so sure that 18-day cycle low is already behind us. We are on day 21, which is very late, but the constantly overbought MFI suggests we may still see that 2-3 day pullback before continuation of the uptrend.

Cyclicaly speaking we are in the timing band for a 9-week cycle low and in the timing band for a 18-day cycle low. A 3% drop should probably be enough to satisfy these conditions. On the other hand, the 9-week cycle may easily extend up to 12 weeks, so another 18-day cycle until the 9-week bottom is not out of question. Also, mind that we are officially still in a bear market. The long term 5-month cycle is not so far away and it is simply hard to believe that we may see another month or so of higher prices. But who knows?

I basically see two possibilites right now. The lenght of this rally and money flow suggest a very strong accumulation that should spurt another powerful push higher. On the other hand the parabolic look of this final week may also mean that we may just witness a couple more days of climax run, followed by a plunge. Although I like to make long term projections my trading decisions are (or at least should be) made based on short term market action. Right now markets are way overbought and even if this rally turns out to be a climax run I have no intention to buy anything until I see at least a 2% correction that would release overbought conditions, confirm my initial view that accumulation period is coming to an end and print a clear cycle low, whether it be just 18-day or 9-week cycle. So, currently I'm in a waiting mode until some high pribability setups present.

Stock Market's Surprise

Stock market has caught me totally unaware. I certainly did not expect such an extended move to the upside. From technical perspective it seems unrational, but I have to proclaim that one day drop down to the previous consolidation area as a 17 day half-daily cycle low. I could also say that we are on day 19 of an extremely extended cycle, but it is usually better to stick to the normal timing bands and day 17 is much more normal than day 23 or more. So, what can we expect with this new cycle count in place? From the half-daily cycle perspective, the cycle is still young and could rally for two more weeks before bottoming. But the daily cycle is 35 days old and already in stage for a bottom. I simply don't believe we may see much more further upside. Not to mention indicators that have resisted overbought levels since the start of this daily cycle. Furthermore, big volume up days late in the cycle often tend to mark tops. We'll just have to wait for a decline to happen and then see how much of further upside we can expect. As it looks now, decline should be quick and shallow, soon followed by by a higher high.


Let's see how gold is doing. Right now, gold is a laggard. It is making higher highs, but volume and momentum suggest another half-daily cycle decline is imminent. If it bottoms above previous low, I might consider a minor position for a short term trade as volume properties still suggest another higher high.

I usually don't talk about gold miners, but there is a high probability shorting setup developing. Miners mostly follow gold in cycle count but are also affected by stock market. They are the weakest issue of all three. While gold and stocks are making higher highs, miners are way below. There is strong divergence in both momentum and volume and day to day candlestick analysis also exhibits selling into every strength. Any rally up to 54 mark would provide a very high risk/reward ratio short setup. It may happen during current or the next half-daily cycle.

Weekly Perspective

I'll make a brief post about my intermediate term projections for stocks and gold. I've made some analysis of past charts and realized that the following months will probably bring us more downside for both issues.

Below is the weekly SPX chart. I've also plotted stochastics and MFI, my new indicators that I use. First thing to notice is the different behavior of both indicators in a healthy bull market in not so healthy bull market. In bull market MFI has a strong upside bias and higher highs and higher lows in index are confirmed by both momentum and volume. Observe that in the past year MFI has been unable to climb into overbought territory. What's more, we are seeing divergence right now, which suggests this cycle might be very close to a top.


We saw a very similar picture in 2008. Suddenly divergences in momentum and volume started to appear and MFI got a negative bias. It wasn't until the first cycle out of final bear market low when MFI went up to 100. Also, pay attention to extremely strong divergence in MFI just before the bottom, even during the strong downside momentum.


2000 to 2003 bear market was not much different. A bear market bottom was indicated by divergence in MFI, followed by an explosive move, that took MFI to 100, which was the first time since the bull market top.


It should be clear by now what I'm pointing too. First, I don't believe we have seen the final bottom. Not by a long shot. Bear market rallies can extend just enough to convince everyone that new bull is just around the corner. Luckily, we can use some volume studies to confirm how much buying was really going on during the rally. As current MFI readings suggest, this rally is fake and should reverse soon. Maybe starting this week.

Second, at the final bear market bottom I expect to see a divergence in MFI. After the final shakeout MFI should get up to 100 in no more than four weeks, which would be our final confirmation. Until I see these signs, I'll be very, very sceptical of buying at the long side.

Let's make the same analysis for gold. We have just witnessed the first weekly cycle in three years that was unable to push MFI above 80. What's more, selling volume seems to be increasing, which is seen from the downtrend on MFI. Plain and simple, I don't believe we have seen the bottom of this correction yet. I expect a strong move to the downside that will push MFI down to zero (and fix it there for some time), followed by a rally and hopefully a double bottom with MFI divergence. Previous cycle was very short (13 weeks), so this cycle could maybe extend up to 25 or 30, thus having enough time to complete the abovementioned scenario. Furthermore, if all this happens close to the pink line, this would be the final clue of another bull cycle starting.

Trade Review: ALXN, CBLI, HGSI, VPHM, NSR

I made plenty of trades this week. Probably a bit too many. My losing streak made me to become even more careful with my trades. I decided I will start taking smaller positions, not risking more than $100 on any trade, preferrably even less. And second, I'll start monitoring markets even closer as there are obviously only brief moments of momentum when swing trading has risk reward ratio high enough. Consequently, I was loaded in five positions when I realized that markets may be ready for a correction. I got scared of further losses and sold them all on January 9. Markets eventually rallied, but most of my stocks basically went nowhere or fall after I sold them, so I was at least able to finish one week positive after several negative weeks.

I'm not going to spend any time on discussing every single trade this week as all charts are well annotated. Probably the lesson from the past several trades should be that I should strictly focus on the best longer term patterns as these seem to have the highest breakout probability in this market. Also, simply taking profits in 5 to 10% range may not be a bad idea as most breakouts simply fail soon after they make some initial progress.

ALXN: +7%/+$250



CBLI: +7.1%/+$96


HGSI: +5.8%/+$68


VPHM: -1.7%/-$24


NSR: -1%/-$28

Conditions Improving

Stock market did not provide a decline into the half-daily cycle low as I suspected last week. Instead it stubbornly flirts with the 1300 mark on SPX in an extended half daily cycle. What's more, yesterday SPX made a new weely cyle high, which makes it for at least 16 week top. What this means for the remaining of this bear market remains to be seen as the decline into the next weekly low develops.

Anyway, the current haly-daily cycle is on day 16 and daily cycle on day 32. Both cycles are due for a decline in the next 5 to 8 trading days. I started to incorporate some indicators into my tarding arsenal. I've been studying several over past month or so and found stochastic(5) to be the most reliable momentum oscilator and Money Flow Index MFI(5) as the most reliable accumulation/distribution indicator. Both are just screaming for a decline. In fact, I haven't seen MFI so strongly overbought since the last bull market. A correction is due, but both indicators show strength in the market. Decline might materialize only as a 2-3 day swift drop and then quickly reach new highs. The next weekly low is still at least a month away, so there is plenty of time for another new highs attempt. However, I definitely don't want to buy anything right now. Stock market will correct very soon and shake out many week hands who are buying these "breakouts".


Now on to gold. I use the exact same indicators. Gold also exhibits strength. The half-daily cycle, that usually takes 7 to 9 days, bottomed surprisingly in just six days and and gold is now flirting with 1675 resistance. It wont be breached in the first attempt, I'm almost sure about that. I expect gold will decline in the daily low sometimes in early February within the next two half-daily cycles and everything suggests it should make a significant higher high. I plan to buy the next daily low for a short term trade if MFI bottoms above 20, which would mean a lack of distribuion. However, the next daily low after this should also be a weekly low, which means that gold will probably come down to retest the 1525 area. The next weekly low should also provide the best long term buying opportunity of this bull cycle for another couple of years.

Cycles Theory

My recent trade reviews took me a lot of time, so I haven't been able to make a decent post about the stock market and gold. I think it's time to look at where we are at the moment. I started to implement a cycle theory into my trading, so I'll devote this post to short term cycles in stocks and gold.

On SPX chart below I've marked the daily cycle lows (blue arrow) since the last weekly cycle low (black arrow) and half-daily cycle lows (green arrow) from the last daily cycle low. The usual timing band for the shortest cycle I follow, which is what I call a half-daily cycle, is around 15 days. The current HD cycle is 13 days old and should find a bottom sometimes this week. The current daily cylcle (D) is 29 days old and should find a bottom within its normal timing band between 35 and 45 days. The weekly cycle (W) is 13 weeks old and still has plenty of time to develop as W cycles tend to last from 20 to 25 weeks on average.

My expectation for this week is that stock market will make a swift two to three day drop. How deep will it go is impossible to predict. I guess somewhere between 1225 and 1250 would be a nice level for a bottom. The bottom of the next HD cycle will also coincide with the bottom of the next D cycle, which means that the correction will be deeper. I expect the next HD cycle will top in no more than 6 days and it will not go above highs of the current HD cycle. I also expect the next D cycle will bottom above the bottom of the previous daily cycle as we now have two consecutive HD cycles with higher highs, so there is plenty of support below.

Now, the most important question is whether current weekly cycle has already topped on week 4 at about 1290 level. I think it has. Reasons why I think so are following. First, we are in a bear market. In bear markets weekly cycles tend to top in the first 8 weeks. A later than 15 week top seems almost impossible to me. Second, volume properties simply don't suggest any major accumulation. D and HD corrections are deep, which is not typical for weekly cycles that want to reach new highs. We'll talk about this when current cycle develops a little further.

And now to gold. The biggest question is of course whether gold has already formed long term bottom. I think not. The main reasons are two. First, gold W cycles usually last between 15 and 20 weeks. Previous cycle was 13 weeks long and if current W cycle already bottomed, it should be 13 weeks long also. Two very short cycles in a row are unlikely. Second, the rally out of W cycle should be furious. The current HD cycle we are seeing right now is on low volume and it looks like it already topped on day five, which is also not positive. I think we will see at least two more D cycles before this W cycle finally bottoms. I expect this will happen sometimes in late February or early March.

I know these are pretty bold predictions. I'm actually not too concerned with long term weekly cycles. Daily and half-daily cycles are useful for timing trades. I'm looking to go short both stocks and gold as soon as we get a confirmation that both still have weekly cycle lows to print.

Trade Review: SCSS, AMRS

Another disappointing week. I closed two trades and both of them negative. The first one is SCSS, which broke out from a nine week basing Breakthru pattern. There's not much I could say about this trade as the picture says it all. I bought a breakout above clearly defined buy point. Price made an intraday reversal, shook me out the next day and then rallied. A very painfull experience. One thing I learned from this one is that I really, really, REALLY have to set my stops a little wider. I did put it below the day of the breakout as I simply couldn't believe that such a strong breakout could reverse. But it did. A stop should've been set at least below the previous day low.

The next trade is even more confusing. AMRS made something that I call a Bottom pattern. As seen from the chart, the neckline (buy point) was clear, stock was obviously under accumulation and so I had to buy that breakout. It closed well for the first day and I expected at least some follow through up to 13 level. But the stock then simply collapsed. There is virtually nothing I could reproach to myself with this one. Except for one thing, which I'll explain in a minute.

These two losing trades from seemingly well defined patterns and well executed buys forced me to rethink my strategy a little bit. I mean, if good patterns with good buy points and well set stops don't work, what will work then?? I found my answer in the current market environment. Please see the chart below. I've plotted Nasdaq chart with a Dow Jones index line in the background. It is clear that market is obviously being dragged up by only a handful of large cap stocks included in Dow Jones. When Dow leads this is not a time for momentum trades. I mainly trade small cap stocks that experience some momentum, but there is just not any momentum in this market.

And the second mistake is something I've already made in the past. I tried to buy breakouts on a big gap up day on indexes. My experience tells me that gap ups in a short term uptrend usually mean a short term top as many traders sell into these gaps. But still, I was ready to forget this experience and buy. It cost me, but the lesson was here.

I've also come to a conclusion that something is missing in my market direction/timing system. It is the obvious fact that market moves in cycles. I constantly look for confirmations of trend reversals before buying and this strategy constantly forces me to chase the market. The first task for the new year is so to determine some sort of cyclical timing tool both for stocks and gold. If I have time later in the day I'll try to explain why I think everything is now set for the decline in the stock market. Which makes me a little bit nervous as I still hold a handful of positions. Any strength on Monday will be sold.

2011 Lessons

Year 2011 completed my second year of actively trading the US stock market. I have no other choice but to admit that I am disapointed with my performance. After two years I am about 5% negative. And there is only one thing that makes me still keep a positive view of the future. It is the recent realization that trading stocks is not a game. It may be compared to a sport, a business, a professional hazard in a casino ar at a poker table. But it is definitely not a game. Whoever treats it as a hobby, some late afternoon activity to overcome boredom, will only lose money. I've read many stories about highly successful traders that haven't made a single penny for years and blew up several accounts, before they finally started to make something out of their trading. Trading, as any other activity that needs to be mastered, will take its tuition. There is just no other way. One has to invest a lot of time and money before he can realistically expect any minor success. This is the aspect I've been consciously ignoring for quite some time. I thought trading stocks is as easy as reading a book from some trading wizard, applying his strategy and counting profits. But it goes way beyond that.

That's why I thought it might be a good idea to make a list of lessons I learned in 2011. If one cannot critically look on his own mistakes, he cannot correct them. I've made plenty of mistakes. This will probably be one of the most important posts I'll ever write as I'll try to expose all my trading weaknesses I've observed in the past two years and provide possible solutions on how to improve them. These lessons will lay out the foundations of my trading philosophy for at least another year.

Money management is the most important aspect of trading

From the beginning of my trading "career" about two years ago I have applied one painfully simple rule that has prevented me from getting into real trouble. I was always so afraid of seeing a big loss on my account that I almost automatically sold all my losers fairly quickly. Later on as I read several books about successful traders I got a confirmation that cutting losses is absolutely necessary for a long term success. There is an old proverb on Wall Street: "Cut your losses and winners will take care of themselves." And I thought I'll just have to stick to this one simple rule and let winners fly. Well, the truth is a little bit different.

Sound money management goes much further than just cutting losses. Selling small losers before they turn into big loosers is essential but far from enough. You can cut losses but if you get too aggressive when conditions suggest passiveness and not aggressive enough when there is momentum in the market, you simply won't have any significant profits at the end of the year. Period. And this is exactly what happened to me this year. I was nicely up on several occasions, but gave all my profits away soon after conditions changed. On the other hand, when there were opportunities, I was afraid to step in because of my previous failures. I finally figured out that I need to develop some sort of money management rules, that will serve three purposes:

1. Prevent me from making a big loss.
2. Pull me into the market as conditions improve.
3. Take me out of the market as conditions deteriorate.

Most of my analysis in the last quarter of 2011 has been devoted to development of money management strategy. I took my Market Timing System (MTS), which is basically a buy/neutral/sell signal system based on action of leading market indices, developed a Market Stage System (MSS) to determine the overall market trend and applied several new techniques and money management rules to them and got something that I call a Market Risk System (MRS). Fro details about these systemy please see Terminology page. I bet to say that the best thing I did all year was implementing MRS into my trading strategy in the past month or so. If I hadn't I'd probably be in real trouble by now after a series of loosers that I had due to the extreme volatility in markets. Maybe I'll discuss MRS in detail in some other post after I test it in the market.

I need to develop my own system

I think most beginner traders (me included) believe that all they have to do is find some guy that knows how to do it, who provides a free blog or a paid service, follow his recommendations and make money. Sounds logical, right? I'll try to clearly explain why this is not possible or very, very unlikely at least.

Every methodology has it's drawbacks. Every. There are no exceptions. Most extremely seuccessful traders admit that their percentage of winning trades is no higher than 50-60% on average. So, we can conclusivelly presume that the best paid services will have batting average no higher than 50%. Now, with this "fact" in mind the beginner trader's assumption doesn't look so promising any more, does it? But there is more to this than just winning percentage.

First major problem with following someone else's advice is character clash. Every person is different. We all have our own sense of reason. We, humans, the ego-based creatures, cannot do something that doesn't sound reasonable to us. At least not for very long. We like to make it our way. We like to believe our way is the only right way. Maybe this sounds a little bit too philosophical but it's true. The point is that most traders won't be able to follow someone else's advice without soon starting to incorporate their own rules. Which basically means they will come up with a different strategy. This may not be bad, but it should be clear that eventually every trader should develop his own system that makes sense to his personal view of reason.

Second problem with advice based trading logically follows from the first lesson about money management. You can get the best buy and sell signals on the best stock picks in the world, but you won't make it into a consistently profitable trading unless you follow some sound money management rules. And that's the main problem with all paid services. They may provide high quality stock picks, but the money management principles are on your own. And it is the same with money management as with stock picking. Every trader will have his own reason behind it. They go hand in hand. Stock selection strategy must be supported by money management, designed specifically for that strategy. You cannot simply copy it from some other trader. You can take a template from someone else and follow it for some time, but eventually you will start adding your own personal ideas and finally come up with a completely unique method. The need to develop my own system for buying, selling and money management has become crystal clear to me this year.

Profits won't take care of themselves, you have to take them

Human beings are greedy bastards. I'm human being, so I am greedy. When I have nothing, I want something. When I have something, I want more. When I have more, I want even more. You probably know how this progression continues in trading, right? When I have even more, I want even even more, and so on. Right? Well, wrong! In trading the progression goes on like this: when I have more and I want even more, I get back to something. Then I want more back again. As I want more back again, I go back to nothing. As I have nothing, I want at least something back. In the end I have to give away. That's how it goes.

I couldn't get rid of this bug in my head for two years. But after a serious reconsideration of my past trades I finally accepted that I absolutely must turn that "I want more" into "I'll take something off" and "I want even more" into "I have enough". Selling stocks at the right time is ten times more important that buying them at the right time. Selling is one critical aspect of good money management strategy and cannot be left to chance. I could not take profits and watch the stock make another 20% from where I sold it. It was heartbreaking. I was so afraid of leaving money on the table that I just could not sell when I knew I'd had to. And this mentality cost me a lot of money. In short: YOU HAVE TO TAKE PROFITS! Yes, you will always leave some on the table. Always! But this is a simple fact of trading that every trader has to accept otherwise he has no chance of winning this game.

Buying breakouts into new highs is not the only viable strategy

The first book on trading I read was William O'Neil's How To Make Money In Stocks. This is probably one of the top 3 bestselling books on trading of all times. Many traders worship it like a Bible. And there is no question it is of extremely high quality. It's been my personal trading guide for almost two years also. I highly recommend it. What O'Neil essentially promotes is buying breakouts to new highs from at least six week long tight bases. I consider this as a sound strategy and I've tried to trade these kind of setups for quite some time.

However, there are some very obvious limitations to this strategy. Obvious in hindsight, of course. I haven't been able to see them for a long time, due to my firm believe in Mr O'Neil. The first one is that too often the best stocks with the most momentum and thus short term potential simply don't make constructive, buyable, several week long bases. This is is especially true in later stages of a bull market when everything is kind of sloppy and choppy. This has been my observation in the last year. During the whole year of 2011 I've been able to find maybe 15 to 20 stocks that would be potential buy candidates according to O'Neal rules. Most of them failed soon after the breakout as smart money sold into increased deman. Opportunities for long base breakouts just weren't there.

Secondly, as I said, breakouts to new highs tend to become more risky as the bull market comes to later stages. O'Neal promotes capitalizing on stocks mostly when the new bull market develops from the bear market and holding them for several months. This would basically mean sitting on cash through every bear market, until new bull market develops. In case you miss it, well, wait for another correction again. Holding time for this strategy is way too long for me. I like to be a little more active. Besides, buying the wrong stocks can ruin your year as you sit with names going nowhere. All in all, I started to believe this may not be the best approach for me.

The point is that buying breakouts to new highs only works in very specific market environment on very specific kind of stocks. I was a believer in O'Neil for a long time until I finally realised stocks can be traded in other ways also. This realisation forced me to sit down to charts again and make some analysis what else could be traded beside breakouts to new highs. Eventually I've discovered several patterns that looked promising and also uited my character better.

The basic tenet behind all my patterns is their short term potential. I really don't have patience to hold stocks for three months, watching them drift slowly higher day by day. I like to be involved on a daily basis. Momentum is thus critically important. And momentum is in small stocks. I don't enforce any limitations regarding price, but most stocks that pop up on my screen are priced between 3 and 20 dollars. And best of all, the six patterns I've identified are all contextually different, meaning that they develop in different market environments. For a thorough description of patterns that I trade, please see Terminology document under Contextual Patterns.

Other

So, I think these four lessons were the biggest eye openers for me in the past year. But there were many other important lessons, that I will just briefly mention:

• A system for determining market direction - for a long time I tried to approach the general market analysis in discretionary was, meaning I had no mechanical rules to determnie market direction. This year I finally developed a more mechanical system that prevents me from inducing my personal bias into market signals.
• Don't chase - another problem that I could not get rid of. Chasing stocks can be translated into "getting into poor position immediately after breakout". I was often more afraid of missing an excellent opportunity than afraid of taking a loss with a bad stop, which was costly. If you miss the breakout, leave it!
• Don't buy before breakout - anticipating a breakout in fear of missing it or a gap up maybe sounds rational, but from my experience this is a recipe for disaster. Many breakouts simply never happen and many make that final shakeout that kicks you off right before stock really launches. Plain and simple, always wait for a breakout!,
  
• Set stops wide enough - my obsession with taking only very small losses has brought me to extremism in setting stop losses. In most cases I set them way to tight, not aloving highly volatile stocks to breath in their normal rhythm. Yes, stops need to be tight, but not too tight. ,
  
• Take small positions - greed and belief into a great setup can easily make you to take irrationaly big positions. This may work sometimes, but in the long run, it will make more damage than money. Simply, don't do this. Have the upper position size limit.
• Set targets - another mental trick that market plays upon inexpirienced traders. I never wanted to set targets for open trades. My excuse behind this was that I want to let my profits run, so I must not sell to soon. Well, the question here is, when will you sell then? Never? When it turns back down? I realized that setting targets is a virtue that is better be mastered if I want to succeed. This is the area I still have to work on.
  
• Analyse past trades - I'm a pretty lazy guy and I never really felt like analysing all my past trades. I never thought I could learn much from them. Well, I totally switched this view after doing just a couple of such analyses. I learned more from them than from any book I read. That's why I started to make detailed reviews of all my trades, good and bad, on this blog.
• Use buy stops - another weakness of my character. I buy breakouts. What it's very hard for me to do is to buy immediatelly the price trades above my trigger price. I simply wanted to see a "confirmation" first. I wanted it to trade just a little bit higher. I wanted to see some increase in volume, and only then I will place an order. Well, the painful truth is that this is just not the right approach for trading breakouts. By the time I get my confirmation, I'm already late. I'm chasing. I cannot set a safe stop. I will have to get used to placing buy stops. Some of my buys will fail, no question, but I believe buying the right stocks at the right time and setting a safe stop will more than pay-off for those faulty buys.
  

2011 Wrap Up

I thought I could make a short post at the year end to discuss 2011 action in gold and stocks a little bit and to present my expectation for the first quarter or so of 2012.

There is one interesting observation I made while analyzing chart of SPX. It closed the year almost exactly at the price where it opened one year ago. The gain in stocks last year was a flat zero. I think the recent development in broad economics has brought us to the stage when buy and hold approach style of investing into stocks will fail miserably. Every rally in US stocks in last two years has been driven by some political factor, like printing more money to support investment of banks. The main property of such rallies is their lack of longevity. If there is no new technology which would start new wave of hiring and money making from production, there is simply no way we can expect any of these rallies develop into a bull market, like one we witnessed in late 90's.

Thus I still fully expect the year of 2011 was just one giant topping process before a 2012 bear market. I have no clue on earth how long and how deep will it take to bottom, but the first half of 2012 should have a strong downside bias. I don't expect anything near to a 2008 plunge, but correction should still be quite dramatic, taking at least 40% off from current levels.


Gold has clearly completed it's cyclical bull market that lasted from 2008. The easy money times in gold are over for some time and anyone buying "every dip" will probably get completely discouraged until this cyclical bear finally bottoms.

I've been drawing the green and pink trendlines for months now. I expect gold will end its correction on one of those lines, although I am about 90% convinced it will go below the green line. People tend to think that gold is a safe haven when stocks go down, but the massive liquidation event of stocks and gold in 2008 prooves that this is simply not true. If stock market really goes haywire, it will almost certainly take commodities down also. So, I expect gold will bottom in March or April 2012 as stocks complete their second stage bear market correction. In 2008 bear market gold bottomed six months before stocks and it should be the same this time also. As stocks will probably work their way into the third bear phase, gold should consolidate during this period, setting the stage for another cyclical bull market, that should take price of an ounce of gold up to 5000s area. I base this projection on development of past cycles. But then again, this is a bull market. The final stages of all bull markets tend to dwarf even the most optimistic predictions. So, no one should be too surprised if we see gold trading above 10000 three years from now.


My long term strategy for 2012 is simple. First of all I want to preserve my capital in face of weak markets. I have no intention to trade heavily into any direction in any instrument. The real money will be made when stocks and gold bottom and start their next cyclical bull run. It will surely take a lot of patience, but it should pay off heavily. I would also like to say a word about shorting. Everyone knows stocks are in a bear market. Everyone is talking about shorting indices or individual stocks is a way to go strategy in the next couple of months. But from my experience shorting is an extremely difficult task. Permabears consistently get dissapointed for that rare instances when everything lines up for them. I do plan to take some positions in inverse stock market indices ETFs, but they will be small, and everything will have to look just perfect for a bearish setup.