How You’ll Know When A Tradable Bottom Is In Place

Posted by Brian Lund in Trading and tagged with , , , ,

The talk for weeks now has been about this market and how oversold it is.  Everybody is looking for a bottom.  Let me rephrase that…everybody is looking for a tradable bottom. One has yet to arrive.

Will it come tomorrow?  Next week?  A month from now?  I don’t know Babs, but I do know this; it’s the wrong question to be asking anyway.  It’s not “when” will the bottom come that you should be asking yourself, but “how will I know it?” when it does come.

The short answer is “you won’t,” at least not with any quantifiable tool or indicator.  This is one of those times in trading when you can take your MACD’s, and oscillators, and overbought/oversold indicators and put them in a box with your bell bottom pants and Members Only jacket, because that is how out of touch and useless they will be.

The reason for this is because price action is not normative during the bottoming process, and thus (temporarily) changes the mechanics of a market, which skews most indicators. Oversold indicators can stay oversold for a long, long time.  Price can extend a long way away from moving averages.  Double bottoms, support levels, and other price regulators become irrelevant.

The only way you can recognize a market bottom when it’s happening in real-time is to feel it.

I know, can you believe that I actually just said that?  Mister “risk/reward ratio” guy.  Sir “quantify your trading” man. Mademoiselle “pretty boy”…wait, strike that last one.

But it’s true.  Take a look at this chart of the $COMPQ from yesterday and the tweets I made regarding finding a bottom.


Neither of those tweets were particularly heroic, nor were they really actionable.  But I did get a number of emails asking me what I was looking at in order to say what I did, when I did.

The best reply I could come up with was, “that was the way the market felt at the time.”  It sounds weak I know, but finding the actual bottom is not a quantifiable process in real-time, which is why it makes it one of the most dangerous times to be trading.

Feel is something that can’t be taught, it has to be learned, and not everybody learns it the same way.  It’s intangible.  It’s ethereal.  It’s The Jimi Hendrix Experience.  It’s taking a jazz drummer who plays behind the beat, combining that with a rock guitarist who plays ahead of the beat, and throwing in a first time bass player who plays right on the beat, and having it come out sounding like magic.

So in that context, I can tell you a few subjective things that I have found over the years that tell me when a bottom is near:

  • The streams and media will go from “we’re near a bottom” to “we will never find a bottom.”
  • Certain perma-bulls will go bearish, and certain perma-bears will crow that they are shorter than they have ever been.
  • Morning drive time DJ’s will spend the first 15 minutes of each show talking about the market.
  • Rumors of forced liquidations, margin calls, and heavy redemptions in big hedge funds will start circulating.
  • Lawmakers will start grandstanding, acting as if anything they can do will stop the market decline.
  • You will see a ton of “oh my God, look at (insert well-loved stock here)” tweets.  Think $AAPL.

There are also two relatively more objective things I look for when determining the actual real-time market bottom.

It’s almost impossible to hit a bottom without a massive price/volume spike down on a 5-min chart.  Some call this a “flush” but I like to call it a “puke” because people are literally “puking” out their positions, causing this market action.  Watch for it.

But the real nail in coffin for me is price action that makes all my charts “jump.”  Meaning that long red bar in the hard right hand bottom that moves so fast it re-scales all your charts simultaneously.  They literally seem to be “jumping” towards the bottom of your monitors. It’s hard to articulate, but it’s kinda in the vein of what Supreme Court Justice Potter Stewart said to describe his threshold test for pornography, “you’ll know it when you see it.”

If you keep these factors in mind and spend enough hours looking at the markets, anybody should be able to develop their own “feel” and have a reasonable chance of being able to tell when a tradable bottom is in place.

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What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).

 

The 7 Deadly Sins Of Trading

Posted by Brian Lund in General Ramblings and tagged with , , ,

Trading is wrought with all sorts of trading sins, any one of which can lead you down the path to making a suicide trade.  And although there are probably hundreds that I could come up with, these seven are perhaps the deadliest ones to avoid and help make my post title sound more liturgical.

Playing Earnings –  Holding into earnings is just begging to be hit over the head with a black swan.  Not unlike playing Russian roulette, even if you have the odds on your side, in the event that things go against you, the effects can be so devastating that your account may not be able to recover.

There are complex ways to play earnings with options that can limit your downside, or help protect the profit of an existing open position, but for the average trader it is just best to be flat or have a very small position going into an earnings call.

Pulling Stops - Every 5% loss starts with a 1% loss.  So does every 10%, 25%, 50% and 100% loss.  Just don’t do it.

Trading Tips – I have probably been give more than fifty “sure thing” tips since I began trading.  The thing about tips is that they always sound like they have rock solid provenance, yet the vast majority of them are a bust.  Don’t be fooled by the story or the storyteller, who may actually believe the info they are telling you.

Once I got a tip on Home Base, which a friend assured me was going to be bought out by Lowes.  His “source” actually saw the deal memo on the desk of the CEO’s secretary. They eventually went BK.

Another tip I once got was that Platinum Software was going to get bought out.  This tip came from the cousin of Platinum’s CEO, and it turned out to be true, they did get bought out.  Unfortunately it was a “takeunder” where the target company gets offered less per share than it is actually trading for.

Stay away from trading off of tips.  Remember that line in Wall Street where Gekko asks Bud Fox, “What are you, 12th man on the deal team?”  By the time you hear about a tip, Bud Fox (pre “I bagged the elephant Marv”) will look like an insider compared to you.

Technical Rationalization –  This is a sin that those who use technical analysis are often guilty of.  To better explain it, let me channel the spirit of my dinner guest from last Friday night.

“It’s not so bad.  It’s not so bad.  It’s not so bad.  It’s not so bad.  It’s not so bad.  Hey, why is that bclund guy ripping open my abdomen and pouring drawn butter all over me?”

In trading terms it work like this…

“My stock failed a breakout, but it’s still in the upper end of the range.  It’s still holding the 5ema.  The 9ema.  The 20ema.  It’s still holding the trendline.  Still above a support level.  It’s below the bottom of the Bollinger Band.  Still above the 100sma.  The 200sma.  Still trades on an exchange.”

You can always find a technical reason to hold a losing stock if you want, which is why it is critical to use price action and money management techniques in tandem with technical analysis.  Don’t allow yourself to rationalize away your account equity bit by bit or you will end up in worse, and less delicious shape than my lobster friend.

Chasing – Very rarely does chasing in any aspect of life pay off.  You chase fashion and you look like a Project Runway reject.  You chased that girl around in college and now you’re married to her, so that didn’t work out too well (note to self, remember to duck when entering the house tonight).  It’s no different when trading.

Here is the thing about chasing; there is almost no way that you can chase a stock and still be able to use good risk/reward ratios on the trade.

By definition, if you are chasing a stock it means it is breaking out (or down) through a congestion zone,  a S/R level, or a pattern, all of which you key off of to set your risk ratio. The farther you have to chase a stock past those inflection points, the larger your risk factor becomes.  Even worse is the psychological aspect of chasing.

When chasing you often feel you are “missing out” on a move, which puts you not in a mental position of power and control, but of weakness and helplessness.  That is not a good mindset with which to enter and manage a trade.

Avoiding Decisions – A very good trader I know once told me that whenever he began cleaning his office, he knew he was in trouble in a position.  It was a defense mechanism and his way of avoiding having to make a decision about an open trade.

“I’ll just give this position some more room,” he would say, and then organize his desk, empty his wastebasket, and neaten up his bookshelf for 30 minutes or so, hoping that when he came back to his screen his position had righted itself.  More often than not, it didn’t.

I have heard of successful traders who put on trades and then turned off their computers or even left their offices until near the close of the markets, the most famous being Ed Seykota from the ‘Market Wizards” book.  But these traders had stops and often target orders live and in place before they “checked out.”

They were avoiding the markets in order to “take themselves out of the trade” and let it work, not to avoid dealing with a position that was going against them.

Bottom Picking - The problem with bottom picking is that it can work for a while.  Even if you don’t pick the exact bottom of a stock or the market, you can sometimes get in close enough to the bottom and then make some good money when the rebound comes.  This gives you a false sense of security that you know what you are doing and deceives you into thinking you have a sound methodology, even though you really have no methodology at all.

It always works until it doesn’t; and not unlike trying to play earnings, the losses when it doesn’t work are so devastating that they can end your trading career.

When the markets are imploding, the key is to wait until you think they have hit bottom, and then wait a little bit more.  When you think it’s getting bloody, wait for more blood.  When you think the financial structure of the markets is about to collapse, kick back and have a beer for a while.  But most traders don’t have the patience for this, nor to they have the discipline to take small initial positions, saving enough dry powder to add when the first “bottom” fails.

Hey, I said “seven deadly sins” but I am a giver, so here is a “bonus” sin.

Blaming - There has always been somewhat of a “blame game” in trading, but in recent years it seems to have reached epic proportions.  Brokers, market makers, HFT, algos, analysts, The Fed, Bush, Obama, Greece, hedge funds, the list is endless of who I see getting the blame for people losing money in the markets.

If you blame anybody but yourself for your losses you are destined to blow your account up and get washed out as a trader; it’s as simple as that.

Got some more deadly sins?  I would love to hear about them so send them to me at bclundblog@gmail.com.

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What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).

Why California Is Broken And Can It Be Fixed

Posted by Brian Lund in California and tagged with , ,

In case you didn’t know it, California is in trouble, big trouble.  Current Gov. Jerry Brown is projecting a $16 billion dollar shortfall in his budget; and that factors in a tax hike that has yet to be approved by voters.  California has an annual GDP of $1.8 trillion, which would make it the world’s ninth largest economy, and if it goes down, the ripple effects would be tremendous.

Victor David Hanson, California farmer, professor, and Senior Fellow at Stanford University’s Hoover Institution has written extensively on “normative” measures that the Democratically controlled State Assembly could do to fix California.  Now he writes in National Review Online about some “out-of-the-box” ideas they should implement as well.

1. Slap a user tax on the some $10–15 billion that is estimated to leave the state in remittances to foreign countries, or at least through executive action make foreign cash remittances grounds for disqualification from state public assistance.

2. Cancel high speed-rail asap.

3. Open up immediately the estimated now off-limits 35 billion barrels of oil off the central California coast, the vast majority of which can be safely and cleanly exploited by on-shore horizontal drilling.

4. Cap the amount one can receive from a California public pension, or multiple pensions at $100,000.

5. Eliminate three-quarters of the thousands of public California board members, who stymie commerce and are mostly costly and unproductive term-limited insider politicians.

6. Mandate one official language for state publications and office business.

7. Cut by 75 percent the number of administrators at the UC and CSU systems (their numbers from 1993 have grown by 212 percent), and pay them at the commensurate twelve-month faculty rate.

8. Clamp down on the vast underground and untaxed cash economy that has exploded to the point that one can buy tax-free almost anything needed, from a new lawn mower to a four-course meal, at roadside emporia and canteens. 

9. Deport the 20,000 plus illegal-alien felons now in California state prisons to their countries of origin.

10 Have George Clooney do another $40,000 per head Hollywood fundraiser, but with Sacramento, not Barack Obama, as the beneficiary.

However, the chances that the State Assembly actually takes any of these suggestions is doubtful.  They are focusing on more important things like banning foie gras right now.

Nero.  Rome.  Burn.  Ring a bell.

“Can California Be Fixed?” via National Review Online

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Why The Real Super-Traders Are Yet To Come

Posted by Brian Lund in Guest Post and tagged with , ,

Today’s guest post is from Jessica Peletier.   Jess is a private trader, blogger, writer and Twitter Fiend.  She trades intraday FX and equities using simple technical analysis.  You can follow her blog at www.roguetraderette.com.

One of the biggest draw-backs about living in a tiny beach shack is the lack of any form of office.

My trading lair literally consists of me in an armchair, with my lap-top on my lap (I know – how novel!) and my TV doubling as my second trading screen.

It’s a little unconventional but it works perfectly well – perfectly well, that is, until my kids get sick.  Like today.

Today, I have 2 kids sitting on the couch looking at me mournfully while I watch my charts set up.

They’re waiting to watch a movie which obviously in kid-world is a God-given right when you’re sick.  Sadly, they’re in for disappointment.

So instead of getting cross and telling them to nick off – I would never do that to sick kids, they might sneeze on me in cold-hearted revenge – I’m explaining what’s happening on my chart.  I’m asking them if it’s going up, or going down, and whether they’d buy it or sell it.

My sick kids are 4 and 8, and I reckon they can pick a trend better than the average adult.

And I’m not the only one nurturing child prodigies – another Aussie trader has a two year old that tells him his chart is ‘broken’, which invariably means the trend has changed.  Personally I think he might have bred the next stock-picking octopus equivalent, but who am I to judge?  ;)


                                     I’m long sick kids, and short TV screens.

Fast Forward 15 Years

As a kid I never saw my parents doing anything to do with money.  They never discussed their investments – although that’s probably because they didn’t have any – and never really discussed how they ran the family budget until we were adults.

Things are different these days.  We tend to be more open about money with our kids, not so much the exact figures necesarily, but what we do with what we have.  This includes what we give, what we save, why we save and even things like insurance and of course our investments.

My kids already know things that I had no idea about when I was in my 20′s, like investment property and share charts, and I can’t help thinking that if they have this kind of exposure now, by the time they’re adults they could easily have their 10,000 hours – ala Malcolm Gladwell’s ‘Outliers’ – done and dusted.

At the very least they’ll have learned a whole new level of financial literacy that not many of us could have hoped for growing up.  My daughter, at eight, already understands that a big red candle is beautiful because you can make money on the downside.

All I knew at eight was that my pocket monet could buy me 10 caramel cobblers on a Saturday morning.

The internet has been revolutionary for ‘normal’ investors like me, people who don’t work professionally in the industry but run a trading business from home.  We have access now to instant prices, where all our parents would have had is yesterdays prices in the newspaper.

We have real-time charting, where our parents would have had to chart any prices by hand – and let’s face it, that takes some commitment.  There’s no way people who hand-charted were doing it for laughs and as such they were few and far between – I would suggest almost non-existant in non-professional circles.

                                    ”Just getting the stock prices, darling!”

But our kids are the ones who’ll be killing it, investment wise – they’ll have access to the things we now take of granted, but they’ll be able to use them without the huge learning-curve we faced once we were adults.

Our kids are going to reach adult-hood entirely proficient, with the steepest part of the learning curve well behind them because they are growing up surrounded by charts.

They are being taught the things we could only learn as adults while they’re still children. And if we can nurture the same passion we have for trading in our kids, I believe in the next 10 years we’ll be seeing a whole new generation of traders like the world has never seen.

You can follow Jessica here on StockTwits and Twitter.

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What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).

“Drat! I Suppose The Market Has Already Discounted This, Too.”

Posted by Brian Lund in General Ramblings and tagged with , ,

Some of my favorite old school Wall Street comics from “The Golden Age Of Trash” by Lee Lorenz.

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What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).

The Best Trader You’ve Never Heard Of Closes Up Shop

Posted by Brian Lund in Trading and tagged with , , ,

Unless you happened to read my blog post about my encounter with John Arnold, the name might not ring a bell with you.  However he may be the best natural gas trader ever.

Arnold, fresh out of college, started his career with Enron, and in 2001, at the age of 26, was said to have made the energy behemoth three quarters of a billion dollar with his trading of natural gas.  One year later Enron collapsed.

Friends of mine who knew him back then said he was an unassuming kid, whose assistant would have to remind him when it was time to buy new clothes.  But when it came to trading, he was said to know exactly how much nat gas was in the ground at any given delivery facility at any time.


While Enron bigwigs like Ken Lay, Jeff Skilling, and Andy Fastow were tried and convicted of criminal charges related to Enron’s trading, Arnold slid out clean as a whistle, and into his own hedge fund, Centaurus Capital.

In the years since forming Centaurus, Arnold had many triple digit return years, including 2005 when he returned 150% to his investors, mostly from crushing Brian Hunter and Amaranth Advisors when he took the other side of their bullish nat gas trade.

His “retirement” follows on the heals of the continued drop in nat gas prices as well as other well known hedge fund managers like George Soros closing up shop.

In 2009 Arnold is believed to have personally made $900 million and Forbes has him listed with a net worth of $3 billion.

Not a bad decade of trading.

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What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).

Catching Up With The “Market Wizards”

Posted by Brian Lund in Market WIzards and tagged with , , ,

In his two classic books ‘Market Wizards” and “The New Market Wizards,” Jack Schwager interviewed some the greatest traders of our time.  These were followed up with his “Godfather 3″ type of book “Stock Market Wizards,” notable mostly for the interview with Steve Cohen.  Here is what some of the “Market Wizards” are up to lately.

Jim Rodgers believes that agriculture is the “next big thing” for the next 20 years. (via The Economic Times)

Bruce Kovner just dropped $500,000 into a pro-Romeny super PAC.  He is not alone as the super-rich choose their candidates. (via CBS News)

Paul Tudor Jones and Steve Cohen are making serious efforts to help military veterans. (via Bloomberg Businessweek)

Steve Cohen put $77 million into $SCSS but it’s not going to well…yet. (via MSN Money)

Mark Cook may be a “book three” Market Wizard, but he is still a Market Wizard.  Here is a video interview with him. (via YouTube)

Blair Hull is critical of high frequency trading rules.  (via The Wall Street Journal)

Alphonse Fletcher Jr.’s flagship hedge fund has been ordered liquidated.  Hey, he was “book three” too.  (via The Times-Picayune)

Steve Cohen lost out on the Dodgers, but the rumor is that he might be considering a baseball team just south of them.  (via Los Angeles Times)

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What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).

Jet Break Up

Posted by Brian Lund in Let's Talk Music

How the band Jet didn’t become huge stars after their 2003 album “Get Born” is beyond me. I thought they signaled the return of guitar oriented rock and roll.  Now they are no more. Check them out in their prime.

Jet Break Up After 11 years And 6 Million Albums Sold.

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What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).

Week In Review: Best Of The StockTwits Blog Network

Posted by Brian Lund in Best Of The StockTwits Blog Network and tagged with , ,

Let’s be honest, you could pretty much throw a dart any day of the week at the StockTwits Blog Network, and end up hitting a post that is better than 99% of the other stuff out there that passes as financial blogging.  So to say these are “The Best of….” is a little disingenuous; let’s just say these are some of the posts from the last week that caught my attention and I think will interest you.

The Armo Trader has been on a short, no doubt scholastically based break.  But now he is back and wastes no time jumping in the deep end of the pool with “Is The Treasury’s Surplus In April A Good Sign For The Economy?”

One of my favorite stories coming out of the 2008 market carnage was Aubrey McClendon, the CEO of $CHK puking out the last of his shares right at the bottom.  Hey, I just don’t like guys with chick names okay?  Anyway, The Stock Sage shows how history once again repeats itself in “CEO/Chairman Margin Call: The Ultimate Capitulation?”

Last week one of our venerable learning institutions was invaded by a rag-tag group of StockTwits upstarts.  The Reformed Broker was one of those upstarts, and here is what he had to say to potential future Presidents, Supreme Court Justices, and Unabomers.  “Back to School: My Presentation at Harvard.”

If you rely on your friendly neighborhood realtor to tell you what the housing data is signalling, I have some uncollateralized Tanzanian bonds selling a 2x par that you might be interested in.  Let The Basis Point tell you instead.  “What’s The Flood Of Monthly Housing Data Actually Telling Us?”

50 the hard way?  Not for Points and Figures.  “On Turning 50.”

The big news this week was that I was more profitable in trading last quarter than $JPM, beating them by a little over $2 billion dollars.  The story of their failure gets the Kid Dynamite’s World treatment in “So You Wanna Talk About JPM’s Trading Loss and The London Whale?”

Mark Twain once said, “there are lies, damned lies, and social finance.”  Dr. Phil Pearlman explains in “The False Truths of Social Finance.”

Veteran trader Peter L. Brandt tells us how a standard charting style is now irrelevant.  “Why high/low/close bar charts have become worthless.”

If only we could be more HFT and algorithmic trading in the options markets.  “Where Has the Liquidity Gone,” by Investing with Options.

I love the graphic FaithMightFX has in “Exit The Euro.”  It clearly and simply illustrates where Europe is in the deleveraging process, and it also uses the phrase “desynchronised and heterogeneous,” which also happens to be the name of one of my favorite New Romantic bands from the 80′s.

Dynamic Hedge never fails to impress me with his ability to crunch data into easily relatable concepts.  “Historical Analogs: the Bernanke Pattern.”

Everyone knows Silver does the Tango.  Platinum has been known to do The Twist.  And Palladium just likes to Slam Dance.  Now “Gold is Doing the Limbo,” or so says Dragonfly Capital.

Need a “quick-and-dirty” valuation tool?  Crossing Wall Street has it in “World’s Simplest Stock Valuation Measure.”

Hammer.  Inverted Hammer.  Shooting Star.  Obama.  Romney.  All these terms are associated with reversals.  1nvestor show how to use reversals in trading.  “The TR (Trend Reversal) signal.”

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What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).