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  • Google Trade Setting Up

    The stock market is a tricky game. I often compare it to chess because there are many nuances involved and you are playing it against other people. Many people talk about the ominous "they" and often times these people are just making an excuse for a losing trade. You need to think about "they" being the losing traders and how are you going to beat them. Yourself being a winning trader. What's this have to do with a Google trade, you ask? It's a prerequisite for understanding the trade.

    Earlier today, I posted a quick series of tweets on how you have to combine multiple signals to make a good thesis. Many traders will take only one item (Sentiment, support level, breakout/breakdown) and decide to make a trade based off of it. These trades, more often than not, turn out to be losers because they are easy. Don't get me wrong, a trade doesn't need to be complicated to win, it just needs to be a bit more subtle.

    Here's tweets today on that rant:

    (click to enlarge)

    Now let's get to the Google trade. Below is a chart of Google and then I'll explain what exactly I'm looking for and why.

    (click to enlarge)

    I haven't really looked at the stream or sentiment tonight as I'm out of town for meetings/vacation. However, I'd be willing to bet there are a lot of people calling to buy Google based on a hammer candle. However, that is the obvious trade and has a high probability of turning into a losing trade. Notice also that while the hammer formed near support it's not really at support.

    So really, the only thing this trade has is a hammer candle. Sentiment? It's certainly not overly bearish for Google, Support? Close, but not quite. Breaking out? Ha! For these reasons, I'll pass on buying based on a hammer candle (though I really do like hammer candles). I'm not saying that trade won't work, I'm just saying that the probability of success isn't high enough for us to take the trade. They do have oversold stochastic with the hammer, and I'll admit, it is a very nice looking hammer.

    The trade that I am looking for is buying the stops of everyone who buys this hammer. And here's how it should set up:

    • Google will confirm a breakout over the hammer candle high.
    • Sentiment will get very bullish (likely see a lot of that tomorrow) And if I were at the office, I think Google to the long side tomorrow will be very profitable.
    • Momentum will quickly be lost and Google will either trade sideways or start trading lower on Monday.
    • Over the course of 1-4 trading days after breaking down from the lost momentum, Google will breakdown below the low of the hammer (847).
    • Sentiment will start turning extremely bearish because everyone that was long will start tweeting the usual bearish tweets about how terrible a stock is and why they are glad to be short (ha!).
    • Price will be right at support 840-844 (50 day moving average, channel support).
    • Oversold reading will still be there.
    • Who knows, maybe there'll be another hammer candle (though probably not as pretty and obvious).

    So basically, I'll be looking for those stars to align for me to get long Google again. And I'd take a 4% position to start with as the risk isn't easily defined from that position. If I were going to play today's hammer candle, I would have taken an 8-10% position because the risk is very defined (stop below 847). But that's why we will likely see below 847, it's an easy stop to run. Think fractals. Though that's a whole other post.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GOOG over the next 72 hours.

    Additional disclosure: No real need for a disclaimer as I've pretty much posted exactly what my plans are and what I'm looking for. However, I obviously reserve the right not to initiate a long trade or to change my plan based on any price action I see. I will not necessarily update this post when and if that happens, you are on your own for your investment decisions and I merely post this for entertainment/food for thought.

    Tags: GOOG
    Jun 07 2:04 AM | Link | 1 Comment
  • VHC Trade Review And Other Ramblings

    This isn't a trade idea in the sense that I want to give everyone an idea of a potential trade to make. It is, however, a trade idea in the sense that these are the sorts of trades that more often than not, prove to be successful.

    Many people will tell you to avoid trying to catch "falling knives." Its an industry wide term. However, in my career, I have found that knife catching has a high probability of ending in a profitable trade.

    Where most people go wrong is they dedicate too much capital too early. They see a stock dropping and think, "That's a falling knife, I'll catch it." However, falling knives generally fall far longer than you think because it is powered by all the traders trying to catch it too early. In catching knives, especially on the daily time frame, I will not dedicate more than 2% of the capital to a position, and most of the time it remains at 1%. This means that even if I make 100% on the trade, my account value will only go up 1%.

    So on a $100,000 portfolio. If you make 100% on the knife catch, your portfolio only moves to $101,000. This is where beginning traders go wrong. They think, "Well that hardly seems worth it. If I stick in 10% of the portfolio, I can make more than that. If I stick in 25% I can make much more than that." So they get heavy into a trade and even if the trade would have worked out, they are forced to close out because guess what? They can also lose much more than 1%.

    Now, my strategy isn't for everyone. I have seen traders put a lot of leverage to work. That just isn't me. I trade not only my money, but other's as well. For some PMs this drives them to increase risk because at the end of the day, it's not their money. For me, though, I care more about my client's funds and my good name, than I do about my personal money. I am not a huge risk taker. I prefer to eek out 6-8% a year and give my investors more consistent gains than to be a hot shot who gives them the occasional 30% year, but blows up a few years later.

    I will be getting to the quick VHC review, but I want to finish the point about position sizing, because that is one of the keys to successful trading, in my opinion. My investors are happy with 6-8% a year. Some people complain, "Well the S&P was up 13% in 2012 and you were only up 12%. I should just stick all my funds into the S&P 500 index funds and get better return." But that's not what they pay me for. They pay me for consistency. I have had investors pull out for this reason, but then they stick their money in an index fund at the top and lose a bunch on the way down. It's easy for warren buffet to say, the index will outperform mutual funds after fees. And while that's likely true, it isn't true that the individual investor will perform better putting their money in the index fund than they would in a mutual fund.

    So while I tell my investors that we just seek to deliver 4% more than the rate of inflation--making us a better alternative to CDs and other investments. We have in our history proven to return better than that (won't post numbers due to performance reporting compliance, just trying to make a point).

    That's why I don't put more than 1%-2% into a trade like VHC. Even though it has a high probability of success, in the times that it does fail, the losses are huge.

    The Trade:

    I first posted about VHC to stocktwits on March 25 from what I can see in my post history. I do seem to recall mentioning it prior to breaking below $20, but I could be mistaken. It was after it had dropped below an important level and I made this tweet:

    "Amazing how prescient levels are on a binary event stock. You wouldn't think so, but check $VHC."
    - http://stocktwits.com/message/12717388

    This chart was attached:

    (click to enlarge)

    After examining the chart, and seeing that the first knife catch failed, I determined the next level of support (where I would try to catch the knife), along with the exact scenario that would need to play out for me to enter. A level is not just enough for a knife catch to work. There are also other factors that increase the probability.

    See:

    (click to enlarge)

    On March 25, 2013, when VHC was still trading at over 19. I posted that I would need to see VHC trade to my entry level (17.5) on a day when it reached there it was down more than 6%. This increases the chances of a rubberband trade vs. just continuing lower.

    A few days later, on April 1, my scenario played out. In the morning VHC dropped more than 6% to 17.50 and I was able to enter a limit order when it was around 17.46 for 17.50. My entire order was filled.

    (click to enlarge)

    I chose to include more than just my tweets because I wanted to give an idea of the sentiment on that day. Most of the people on the stream were either just pointing out that VHC was tanking again or that they were glad to be short. Negative sentiment on an already stretched name is another necessity for trying to catch a knife. If too many people are trying to play the knife catching game, then all the knife catchers will likely get cut.

    Here is what VHC looked like that day:

    (click to enlarge)

    This was the third break down. I could write a whole post on why I like to trade the third breakdowns. Or even breakdowns from key levels that everyone is watching. These are often called 2b reversals and it essentially just shakes out the bottom catchers before forming a bottom.

    A little more than a month later, I sold the position for about 31.5% gains. My initial target was 22.5, but it flew past that today, so posted an exit at 23.

    It took about 30 minutes for the order to fill, but it eventually did. I even got a tweet from someone telling me that they would continue to hold VHC.

    (click to enlarge)

    Again, I posted more than just my tweet just to give a small sample on the sentiment switch between the day I entered and today when I exited. Today it's on short squeeze screens, you see buyers and people talking about how it could fill a gap at 26 and 30.

    And the chart certainly looks like it could continue to go higher like they say. However, I made my 31%, and I happen to believe that when charts look like they have a lot of room to run, it's time to exit into the people who are actually buying that they have a lot of room to run. It's an odd concept and hard to explain exactly. Its not the warren buffetism "Buy when others are afraid and be afraid when others are greedy." It's slightly different than that. Perhaps that's a post for another day though. Here's a chart of VHC that I snapped just a bit after I sold:

    (click to enlarge)

    It certainly looks like it could continue to 27.5, but that seems greedy to me and that wasn't the trade. The trade was just a snap back from a falling knife. If I can make 30% in a little over a month on a trade, I'll take it and run. I'll leave it to the "buy on strength" crowed with their stops and risk management to see if it will continue. My game is over, I'll pass the ball onto them.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Sold VHC today (discussed in the post). Author takes no responsibility for reader's actions. Author is making no recommendations one way or another in the blog. And the post is meant for educational and entertainment purposes only.

    Tags: VHC
    May 13 2:08 PM | Link | Comment!
  • AAPL's Decline And Intelectual Honesty

    Apple, Inc. (NASDAQ:AAPL) is in correction. Everyone knows that. It's like the anti-bubble; Even the taxi driver knows not to own AAPL and if shorting stocks were easy, your grandmother would be short AAPL.

    It seems to be the popular pastime to blame Tim Cook for this decline in stock price (See: "Tim Cook: The (Negative) $250,000,000 Man" for one example.) Pundits and individuals everywhere seem to want to blame Tim Cook for the decline in AAPL's shareprice. In part, I think people know it's not really Tim's fault, they are just upset over his silence on the matter (which is a problem, don't get me wrong). Where were these people on the way up though? Mr. Cook seems to have a thankless job. The stock roars from $400 to $700, analysts everywhere were calling for the shareprice to reach $1000, all while Tim Cook was captain of the ship (NYSE:CEO).

    Tim Cook became CEO on August 24, 2011. Steve Jobs died October 5, 2011. The insane ascent did not begin until January 2012. See the chart below for visualization. Tim Cook's inauguration as CEO marked with the green arrow, Steve Job's death marked with red.

    (click to enlarge)

    My first point is this: If you're going to blame the man for the decline, blame him for the ascent as well. The stock price is back near where he took over. Just as an aside: people were calling for an AAPL top where those arrows are. I even had an island top marked on my chart back then.

    So what then are we to blame for this correction crash in AAPL's shareprice? My answer: Basic market fundamentals, the laws of supply and demand, or if you prefer, the market gods.

    The stock market works like every other market, on the laws of supply and demand. If everyone wants to own AAPL and few want to sell their shares, the price will go up. If everyone wants to sell AAPL and few want to buy, the price goes down. This is the reason that both technical and fundamental analysis work in the market. They are both ways of measuring the supply and demand in the market, just from two different perspectives. The fundamental analyst looks at the company's current numbers and future growth prospects and determines that the price of said company is cheap. The unstated conclusion is that if the price is cheap, more people will want to own the company as those future growth prospects are realized. A technical analyst looks at the shorter term situation and looks at the raw data of buyers and sellers of that company's stock. Using methods to analyze the supply and demand, they decide whether the demand is overtaking the supply or whether the supply is overwhelming the demand.

    But what happens when everyone owns something? What happens when funds have 8% of their portfolio in a single company just because it needs to keep up with the indexes? Eventually, if everyone owns something, there is no one left to buy and the price will decline until more buyers step up. These are basic market fundamentals and these are the reason for both AAPL's ascent to $700 and the decline down to $390.

    They say a picture is worth a thousand words. So I'm posting two.

    (click to enlarge)The Stages of a Bubble.

    (click to enlarge)

    That's great, Haki, but what does it mean?

    I could go into detail explaining the above chart of AAPL. I could explain how the price action matches the labels, how that Hammer on the monthly chart in November was a nasty bull trap, but I won't. I will simply state that I believe that we are just entering the capitulation phase of a speculator bubble. AAPL is down over 40% from the top at $700 and in the last week it is down 10%. It has me feeling like capitulating and I got the majority of my position at 412.5 or so.

    I'm not going to say how you should play this stock because who knows what the future holds or how it will play out. What I am going to say is that I believe the above scenario is likely. I believe we are in capitulation and I believe we still have despair to endure. How low will the price go during this? $350, $300, $250? It's anybodies guess really. What is important is that how you play this company must match your style and you must know what you are in for.

    I buy and sell positions based both on the technicals and the fundamentals. I have a stomach of steel. Sometimes I endure a position going down 50% before it rises 50% from the place I bought it (see HPQ, I got in at 17, it went down to $11 or so, then up to $24). I am prepared, then, for AAPL to decline to $300 during the despair phase because I believe I am in at a good valuation. Don't get me wrong, I'll likely hedge against the earnings event on Tuesday just because I can see that being a catalyst for despair or true capitulation. However, I believe that AAPL will eventually return to the mean, and so, I bought when I could into the fear. Did I buy the bottom, highly doubtful. Did I buy AAPL at a good value and a decent technical level?

    I believe so.

    Disclosure: I am long AAPL, HPQ.

    Additional disclosure: I am a trader, I am long and short many names not discussed in the article and have many timelines for investment horizons. I may buy or sell AAPL or AAPL derivatives at any point in the future including within 72 hours. Always consult your financial advisor before making any investment decisions. Consult your dietitian concerning any stomach cramps or indigestion. And brush your teeth before going to sleep. And whatever you do, don't sue the author. He accepts no responsibility for your actions and makes no recommendations on investment, divestment, or any sort of vestment concerning any stock or derivative mentioned in the article. Please invest responsibly and don't drink and drive.

    Tags: AAPL
    Apr 21 10:24 AM | Link | Comment!
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