This is the heart and soul of the web site. Here we have literally tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. You can also click on any category icon to see posts tagged with that particular category.
This post deals with your business plan, your mission statement and your statement of personal belief. The nuts and bolts of building your trading business.
Many lump trading plan and business plan together. It is my opinion that they are different. Parts of your business plan will be incorporated into you trading plans. Your business plan is the overall framework of how you plan to run your business. Your trading plan would be a specific trade or trade setup and how that trade is entered, managed and exited. Trading plans will be dealt with in another post.
Here are some things that can and should be addressed in your business plan:
1. When will you trade? Of perhaps more importance, when will you not trade? Some suggestions: do not trade when your tired, going through emotional stress, under the influence of alcohol or drugs for example. I also have rules such as after three losing days in a row, take the next day off. After a huge day (I have a metric for that), take the next day off, etc.
2. What will you trade? There is a lot to be said for becoming expert in ONE trading instrument. For example, I know a trader who ONLY day trades INTC (Intel). He has for years and makes a very good living doing that with a $100,000 account. Something to think about for you stock de jour day traders. Every single stock has at least one guy that just trades that stock. You want to go up against that?
3. What kind of equipment will you use? How will you maintain contact with your broker in an emergency? Power failure, etc.
4. How much trading capital will you risk in a single position? How much in a pure directional play? How much within the same sector/market. etc? At what point in draw down will you suspend trading?
5. What methodology, if any, will you seek to use to trade?
6. Are you going to trade as an individual or as an entity (LLC, corporation, etc)?
7. Schedule your time for trading activities away from actual trading (study, chart analysis, etc). In other words, get some kind of schedule or rhythm.
8. what kind of time frame are you going to trade in? Day trader means NO overnight positions in day trades! Big error in day trading is to carry over positions to the next day. IF your trading by plan, you will never allow that to happen. It is essential that you match your time frame to your lifestyle. Do NOT change your lifestyle to accommodate a trading time frame! That seems logical but some decide to become day traders and up and just quit their day job. NOT a great idea unless you have already become a consistent trader. By that I mean, consistently extracting capital from markets regardless of time frame traded!
This is by no means an exhaustive list but just some ideas to get you started.
Before attempting to understand markets, you must understand yourself! This is your personal goals and mission. You must have a guiding purpose to your life! Most people do nothave any kind of purpose to their lives and wander through life aimlessly, blown around every time the wind changes. IF this describes you, your chances of being successful at trading will be severely limited by your lack of a defining mission in your life.
Mission statements are not fun for most people and most traders will not evaluate their lives in conjunction with their trading! Here is the typical response…well, my mission is to make a lot of money. That does not get it at all as that is not a mission! It is also not a strong motivator! If it were, why are wealthy people such a minority? Your mission as a trader is totally and completely impacted by your mission in life. Determining your life mission is one of the most powerful and important things that you can ever do.
How else can you define what is important to you, interact with other people and obtain self satisfaction as you go through life? How much you can live your life fully and with joy is determined by your mission in life! Here is what you must define: 1) What are your guiding principles and what do you value? Answer those two questions and you will have more knowledge about yourself than perhaps you ever have before. This is some of the hard work required to become a successful trader. The work few will undertake and maybe now you begin to see why most fail at trading?.
Statement Of Personal Belief
Certain key beliefs which have absolutely nothing to do with markets will determine your success in the markets. These are beliefs about yourself. What do you believe your capable of doing? Is trading and/or success important to you? How worthy of success do you believe yourself to be? A weak personal belief system can undermine and even kill your ability to trade even a great trading system or methodology. You must believe in what you are doing and be doing something that you believe in. Nothing short of that will suffice. This is where the rubber meets the road. Where your mission in life meets trading.
Statement of personal beliefs, by their very nature, are very personal. I will share with you mine. It was written many years ago and is as true today, for me, as the day it was written.
"I believe I possess all of the abilities innately (inside of me) to become a top trader. I believe I have the ability to learn from myself and from others the knowledge and skills to the excellent trader that I am. What I do as a trader is honorable as I supply liquidity to markets. Without people, such as myself, markets would not exist. My ability as a trader helps me, my family as well as my country and humanity as a whole."
I hope this has been of some help in your journey as a trader. Remember: remarkable traders do remarkable things. Separate yourself from the crowd. You deserve what you earn through hard work.
What we have below is a handful of stocks that are showing signs of,
or already in the process of, breaking down as the smart money
appears to be leaving them in a subtle manner. As I thumbed through
the different charts I noticed stocks trading at its peak and finally
showing some vulnerability, and on the other extreme I saw a few stocks
that had been in a channel near or at its lows, before finally
breaking down below those previous lows.
I don't know what it is lately, but many of the screens that I run
tend to have a lot of representation from the insurance industry. All of
them are primarily shorting-screens, with the exception of the screen
showing stocks trading at huge discounts (but in a way that just further
shows how hated this industry is to begin with, by how cheap they are
relative to their book value). Other industries popping up in clumps is
business services and health related stocks.
Living alone the past week and a half has taught me that I am not much of a bachelor. I’ve been told that I’m not the best person to be alone with, which is probably why I like having a roommate – mom, grandma or the colonel… whoever, I don’t like being alone by myself.
To curb my loneliness, I asked local street dweller Stun Gun Jones to move in for a bit. He agreed to stay until the Colonel gets back on the condition that I don’t cramp his lifestyle by making him use the bathroom and shower.
Last night I was showing him some charts with long term Elliott Wave counts, and he started that drunken laugh/cackling people hear from him all day on the street. He stated that the following EW count was just as possible as the count with EWI's P3 panning out, and warned me not to place big bets on very speculative EWT outlooks or be too firm with my beliefs on how things will play out long term.
After hacking up some phlegm and Irish Rose, Stun Gun said that there are a few safer ways to use EWT, one way is to only try to catch 3rd waves. A third wave is the most powerful or “glorious” of all waves, and a third wave can be a 3 or C – both are third waves. Wait for an impulsive first wave to appear, it could be a 1 or an (A), wait for 2 or (B) to appear. Enter the trade anywhere from 38-61% retracement of the first wave, set stops right below the first wave. Exit can be tricky, look for divergences or whatever to exit the 3rd wave (which is either a 3 or a C, who cares!)
I have to go empty Stun Gun’s pee-jar, another prerequisite of him moving in. One other thing he told me though was that lots of folks are looking for Aug 5th-6th as an important cycle or turn date, we are also very close to the 50% retracement area from the April 26th high to July 1st low. Seems like a good place for a bearish turnaround. His advice helped me out in early July, so I’ll be taking a close look the next couple of days.
Just a quick two chart post to cheer Tim up while he's in mourning for the bear case this year.
As I've said before, I'm expecting to see a new high at least on SPX in the coming months, but I'm not feeling bullish over the next few days, though many or most seem to have written August off on the bear side. There are a number of reasons why I think we could make a significant interim top here. EURUSD looks close to an interim top, and may have made it already, GBPUSD as well. USD looks overdue for a bounce and may already have turned. Oil hit my upside target this morning and SPX is right underneath a key resistance level that may well hold for a while longer, even if it is just to make the alternate IHS that I was posting about two days ago.
One of my indicators has also just given a topping signal and that is the $GOLD:$SILVER ratio on the daily chart. Here it is with the SPX in green as the background:
The $GOLD:$SILVER ratio has a strong support trendline that is almost a year old now. I've put in a red (sell) vertical line wherever that support trendline has been hit and you can see that it has identified most of the major interim tops in that time, often a few days early, but when it is early, the market doesn't move up much afterwards, and falls significantly after the top is made. There have been no false positives.
On the identifying bottoms side (blue vertical trendlines) it has been pretty good at that too. Even when it broke up from the rising channel for a little while, it called a significant interim low just before it broke up, and another when the resistance level above was hit.
Now that support trendline will break sooner or later, as all trendlines do, but this is a strong signal that we are likely to turn down in the very near future, and while resistance at 1130 may be broken, it isn't likely to be broken by much before the next interim top is in. My only caveat for that would be that the action over the last few months has the worrying look of an H&S pattern, and that if that support trendline broke, then we might see a major break up on SPX.
My second chart is an annotated version of the Dow H&S chart Tim posted tonight, and my comment here would be that if we were now making the top of the RS, then that would be a perfectly valid H&S pattern indicating to 7900, just with a downsloping neckline:
As I said, I'm strongly favoring the intermediate term bull side now, but my point is that while the bear case is badly wounded, and would be further wounded by a break of the June highs, it isn't dead quite yet.
We begin this month's review looking at rail traffic. Rail traffic in general continues to improve over 2009 levels. Because there are some seasonal issues going on around this time, I don't want to over-hype the small draw down that we are seeing here. Seasonally adjusted we are only down around 1.3% in total tonnage from last month. Having said that, every report I read is simply talking up how great the shipping tonnage rates are. In an attempt to examine this, we can simply note that tonnage compared to 2009 is about 20% greater yet it is still around 10% lower than 2008. In addition, we need to keep in mind that the best years on record for intermodal rail shipping were 2006 and 2007 so it is a bit more sobering to think that we are recovering, but not near peak levels.
GDP adjustments really reinforce this as last weeks revisions to GDP showed that growth in GDP was slowing well before 2008.
RECESSION INDICATORS ON RAILS – Motor Vehicle rail cargo and waste and scrap metal materials shipping is tailing down in recent months. The autos shipping and sales data is absolutely seasonal so I don't want to highlight that much given that it may mean nothing, however the drop in scrap metal and waste movement is something to keep an eye on as these are inputs into the manufacturing process. Later we'll look at scrap metal pricing.
THE WEAKEST SHIPPING TONNAGE – KSU
As I mentioned last month KSU and KSU Mexico continue their slide in tonnage. I put this up because we need to continue watching these rails and their cargo shipping. Specifically for them, they are encountering a crossover from levels from last year in this quarter and this may be a concerning development to monitor. Last month I mentioned CNI and showed their chart as the best performer. I also suggested passing on their stock simply to wait for a retest below support. That didn't work out well as the stock is now trading almost $6.00 or 11% higher.
I wanted to include some data related to jobs. Below is the information for the Monster.com Employment Index. This data shows a summary of online recruiting efforts and job availability. This data highlights information from June, but I will begin updating it monthly in my chart form. In that time period, Monster suggests that in 13 of the 20 major employment areas in the country, there were additional listings on job boards and company websites. The biggest gains were made in hospitality and food services industries. Examining the most recent unemployment report confirms these trends are continuing as well.
ECRI / WEEKLY LEADING INDICATORS and ECRI GROWTH RATES – http://www.businesscycle.com/resources/ ECRI continues to release data showing that the weekly leading indicators are falling. Last week's -10.7% growth rate provides ammo to those that are arguing that we are headed for slow down, if not another recession. Again, the slowing data here is in contradiction to the ever-ramping stock market.
Housing drops and consumers reducing their purchases is driving the drop in growth rates.
MOODY'S / MIT COMMERCIAL PRICE INDEX– http://web.mit.edu/cre/research/credl/rca.html
The most recent Moody's / MIT Commercial Price Index Data shows that commercial real estate prices in the index increased 3.6% for the month of May. Again, this data is lagging here, and isn't showing that pricing has leveled off yet.
Equity market gains and other financial market rebounds have fueled the recovery in the Bloomberg Financial Conditions Index. A level above 0 would indicate that the recession is over, numbers below show a contraction. We have not pushed through zero yet, but a significant equity market explosion higher in August could at least give us a second attempt at moving into an expansionary number.
SCRAP METAL - GOOD TIME AL'S FAVORITE INDICATOR– Alan Greenspan often said that he watched the price of scrap metal to determine the health of the economy. Below is a scrap metal chart for the last two years. Just like every 2 year chart it shows the same shape moving up and to the right, but it is interesting to point out that this index bottomed out in January of 2009. This would have been a good indicator to use to portend the market's recovery in 2009. We see that we've endured a drop in scrap pricing in late June and July, only to see a move up in the last week or so.
The USD's dramatic decline seems to have washed away all fear of European collapse or should I say the lack of fear of the European collapse has begun to wash away the value of the dollar! Those stress tests sure did the trick didn't they? The decline of the dollar has certainly also ushered in a revival of the stock markets. Funny, we are now hearing that folks are concerned about the downward direction of the dollar. The truth is simply this in my opinion. We will have little upward momentum in the markets without a destruction of the value of the dollar. Having said that, Alan Greenspan this weekend put into words what the FED is really thinking. Greenspan simply stated that the market is the economy! So, we must be on alert that since the "Economy is the Market" we are being reminded that asset values are the only concern of the Fed and the only hope to return things back to the good old days. Understanding this means we remind ourselves that they seek a return to inflation, easy money and credit, and if it takes it, a decline in the purchasing power of the dollar. Here me loud and clear. There may be ups and downs in the value of the dollar, but if the FED has anything to do with it, there will be an ultimate walking down of the value of the currency. This is the only way to survive and extend with the looming debt issues we have.
The BDI has made a significant drop since May and June and is attempting a bottom here. As commodity demand increases we should see a move higher in the cost of spot shipping, however the drop in the BDI is a reflection of the over supply of ships that stand ready to carry freight. Still, if you are an owner of those ships that don't have long term contracts at a fixed price, you are probably hurting very badly at these rates.
I like the simple chart provided by the guys at Growthstock Advantage. Based on their indicator that examines the number of stocks trading above their 40 day moving average, the market is NOT overbought yet. As stocks get extended it is sometimes helpful to fade the happiness when everyone loves the market. Typically you might consider scaling out of positions or shorting at that time. At this point the indicator is NEUTRAL.
COPPOCK TURN INDICATOR –
I showed this chart last month and it is simply a 14 month moving average of the Dow. When the average turns and heads south like it did last month at the end of July, it is an indicator that the market may be headed the other direction. The COPPOCK is one of those indicators that confirms a move rather than one that is predictive. Having said that, even with July's monstrous performance, the COPPOCK is suggesting that we are still going to go lower and therefore it is BEARISH.
US Libor continues to improve and so do all other denominated Libor measures. I made a comment right after the European financial stress test result release that I'd be watching these levels to get a confirmation that the banks actually were believing what was being served up. Because we are seeing a drop in these rates we can confirm that stress is abating. So while the contraction in rates is only a few basis points since last week, it is a 10% reduction in 1 week funding rates, which is significant.
St. Louis Fed President Bullard Throws Down the Gauntlet As the flood of disappointing news rolls in about a slowing economy, St. Louis Fed President James Bullard moved from his centrist position to one of outright advocacy for the spawning of the Son of Stimulus just like we've been warning for at least a month. Bullard's discussion warned of the specter of a Japanese style deflation, exactly what they want to avoid at all costs. Bullard's comments make it all the more likely that the Fed will actually move to invoke more stimulus in the form of buying treasuries, buying more agency backed mortgages, and maintaining a near zero rate (no hikes).
Bullard's comments probably are part of an orchestrated effort to convey the Fed's future policy. We cannot forget that no matter how ineffective Fed policies have been thus far in creating a real recovery in the economy, this is really about creating a rebound in market or as Big Al would say, "It's all about the asset values". Check back to the post we made last year regarding Bernanke's 2002 deflation speech. There is no ambiguity there. He is positively stating that the Fed can and must win against the deflation enemy. Despite the fact that jobs have not returned and the housing market is still floundering, we will see a new round of QE that looks to further juice the market. I would guess that this will have a smaller effect in terms of the magnitude of a move on the market and the impact will have less of a lasting effect in terms of time than last time, but if we get a formal confirmation from the Fed that they will provide liquidity, we will see a move up.
This further highlights the notion that we will probably see mortgage interest rates at 3% or 3.5% in 2011. Isn't it funny how despite their efforts we continue to spiral the way of Japan. Want to get an idea for what it might look like right now? You can buy a Japanese 10 Year note and receive 1% on your money! Hello deflation! PUBLIC ENEMY # 1 – DEFLATION
I'll remind you the futility of the game that the Fed is playing – FDR’s Secretary of the Treasury, Henry Morgenthau came to in 1939 after initially being a proponent in massive fiscal stimulus to cure the depression and employment. His comments are provided below:
"We have tried spending money…We are spending more than we have ever spent before and it does not work. I say after eight years of this administration, we have just as much unemployment as when we started… And an enormous debt to boot!”
30 DAY TRADING OUTLOOK-
Ok, so the Fed is beating the drum that they will do anything to stop deflation and they will continue to buy treasuries, what is the play for the month? It is exactly the same strategy that I outlined on July 3rd in the Mid Year Review. We should continue to invest in emerging market issues focused in countries like Brazil, China, India, Indonesia, Malaysia, Chile, and Taiwan.
All of these etfs have broken out, and even the S&P 500 extended its gains over the 1120 level I highlighted last week in "What I'm Watching Now". While macro indicators confirm that a slow down from recents peaks in in the works, we cannot deny that there are areas which are showing improvement. In addition and probably more importantly in the short run impact of a committed Fed. Bullard essentially has thrown down the gauntlet and stated that the Fed will use all of its ammo to fight deflation. Once again, the Fed playbook is opened and I suggest you read our post on deflation to remind yourself of the commitment to defeat that enemy at any cost. The hawkish tones of Bullard emphasize what is at stake and the intensity of the desire to prevail.
While I've been bearish on gold lately expecting a pullback to the $1040 area, I am tempering this because of the expected Fed devaluation. CPI data will probably come in lower, yet this will only fuel the Fed's aggressive response.