A Glimmer of Hope?

Yesterday we had a fairly decent snap back rally in stocks. It came out that apparently bank CEO's and executives were buying their own common stock. This is bullish in that it is likely the CEO's would not buy 11 million dollars(in one case) of common stock if it was going to get wiped out and go to zero. I would assume they know something we don't, however it hasn't been the case so far as they have apparently been oblivious to all the write downs as well. Regardless, this is a fairly positive sign and was taken as a positive by the market.

In addition to insider buying, we had Apple release it's earnings and blow them away. They blew away earnings in arguably the hardest quarter ever to sell high priced products. This shows that people are still buying high end electronics if the quality is good and that the consumer is not totally dead. I would like to be long Apple on a pullback for the longer term portfolio, the only question mark now is Steve Jobs which really shouldn't impact the stock but does so I have to be cautious. I will start to look at the financial statements and do some analysis on cash flows and make a determination.

We have a couple more important earnings releases in MSFT and GOOG. MSFT disappointed and announced job layoffs. GOOG reports after the bell. My guess on Google is that they beat expectations simply because if people are staying at home more due to the economy, they are likely on their computers more giving them more revenue in ads and search. Just my hunch, they are hard to gauge without statistics.

We also had jobless claims and housing come out today both worse than expected. I would argue that new housing permits going down is a positive since we need to get rid of excess supply to have a chance of housing prices stabilizing and improving. Jobless claims higher than expected is definitely not a good thing and will be one of the key metrics moving forward. However, we have to look at the market reaction after another initial sell off the market has recovered a lot of the losses as of this writing. The more bad news that comes out and gets discounted and the more we hold the better is the case for a bullish bias. We are currently in deeply oversold levels so I would think a rally is coming at least back up to the 860 level in the S&P 500 would be my guess. If we get good news out of the Obama camp and some positives in earnings this could be the catalyst.

I currently have no positions, I only have a 1% gain overall for this month however that is compared to a nearly 8.5% decline in the S&P 500 so I am still having decent outperformance relative to the major averages as of late. My only position is long the Euro which is somewhat a long stock play. If stocks do rebound we will likely see the Euro move up, oil move up, dollar move down. Treasury yields have also made a higher low and exceeded their prior high which I would think is also bullish for stocks as people get out of the safety of treasuries. TBT could be one way to play this trend.

In general, we can't have a sustained rally without financials participating. The banks that have held up better and made smart aquisitions will likely be the leaders coming out of this. U.S. Bank still has positive earnings to report, although the street didn't like the results they have avoided the massive write downs of others and will likely be a great company to own going forward. Wells Fargo and JP Morgan also made some smart moves and could be good plays.

So far 800 has held on the S&P in the face of nasty news, combined with the oversold level in stocks it supports a short term rally however I don't want to get too aggressive, patience has been working very well as of late so I am going to wait for confirmation before making any moves. At some point the market has to start discounting a recovery but I don't think we are quite there yet, possibly around March I think we could see signs of improvement, but again I'll wait and see.

New Year, New Ideas

So as the new year rolls in I am trying to learn new things that I find interesting and that could help me become more profitable. I have still maintained my relative out performance as of late, in the past 3 trading sessions I have been +4%, 0, +1.5%, the thing that is annoying is that on the flat day, I would have outperformed by 1% had I not taken a losing day trade on the futures. But I can't be that upset, i limited my loss at 1% and it could have gone in my favor and given me even better performance.

I had the privilege of speaking with Eric Utley who is a day trader and one of the two guys who runs Trading Addicts along with Jeff Kohler. I always enjoy hearing about real world experience, even if it is just to hear that they too take losses and make mistakes. He seems to wait around A LOT for a trade but said that he has a win % of 70%. I would wait around all day too waiting for those types of entries, I just wish I knew exactly what he is looking for that is such a high probability to him. If I knew I was taking a trade with 70% probability I could easily be mentally prepared for a loss knowing it was a minority of the time.

So I ran into a friend who is also into trading and he told me about an automated trading program for forex. I have always had an interest in these programs but it seems like unless you are at a hedge fund like Renaissance Technologies your program likely doesn't work. So far this program I paid 139 for doesn't work at all, luckily I am only using it on a demo account so it isn't real money being lost but I did lose 139 in paying for it. Supposedly there is a 60 day money back guarantee so I'll just go that route.

But besides that it seems like you should be able to automate trading which could be very handy if you work a regular job and at the same time had a program making you money. I am on a forum that is dedicated to these programs and most the things I see I laugh at. They have so many indicators and lines all over the place which I don't use. All I use are support and resistance lines, VWAP and sometimes pivot levels. It seems like if you have a profit and loss system that has a positive expectancy and a fairly simple order entry you could make some money. Of course much smarter people than myself have likely thought that too. Apparently the winner of a programming competition that turned 10k into 130k in 3 months has phd's in math and physics and his programming is based on Neural Networks so I am fairly disadvantaged. However as I have watched these programs run on the demo accont most of their entries are down right stupid and are at places where I definitely would not have manually taken a trade.

My idea would be to use a simple system that detects a trend change intraday based on say a 1m or 5m trend then compare it to the 30m trend and only go in the way of the 30m trend. Or just do a system based on a daily chart and trade the changing trends. The other more complicated system that I have an idea for would be to detect flag formations on various time frames and then take a trade once it breaks one direction or the other. You can see this happen on charts decently often, if you could determine with decent accuracy a flag and a break and use a stop loss of less than your profit you could possibly have a long term profitable system.

For example, say it is forex, and you have a flag that is about 50 pips in height, generally this is a continuation pattern and a break signals a resumption of trend for at least the height of the flag. Lets say I think it generally continues for 2x the height of the flag and once it breaks the flag it should not re enter the pattern, so I give it a stop loss of say 10 pips and my target is 100 pips. That means I could be wrong and get stopped out 90% of the time and still make money. Of course if I got stopped out 90% of the time I'd want to see if I was getting a lot of false signals or if my stop loss was too tight, but the point is theorteically in the long run it should make money. If you were able to be correct and reach profit 30% of the time you would make 230 pips of profit every 10 trades, depending on lot size and frequency that could be a lot of money.

We'll see if I can program these ideas into reality because it seems like people much smarter than myself can't do it but I will learn a great deal in the process and who knows maybe I'll come up with something. ;-)