4/20 Notes

...A few comments on yesterday's market action:
...The bulls are still not out of the woods, and yesterday's action was not as strong as it appears on the surface. NYSE volume still exceeded Nasdaq volume. That is still a sign that is normally associated with weaker markets, as it reflects that there is still little genuine buying enthusiasm out there.
...NYSE 18 new highs vs 67 new lows; Nasdaq 29 new highs vs 116 new lows. I have found that keeping an eye on the new highs vs new lows ratios is a handy barometer for judging the overall health of the markets at a particular point in time.
...Even with all four major indexes, the Dow (DJI), S&P 500 (SPX), Nasdaq (IXIC), and Nasdaq 100 (NDX) being up this week, they are all still trading below their 50 day and 200 day exponential moving averages (EMA). The volumes on this week's rebound do not match the volumes on last week's selloff. And none of the indexes, even after two rebound days, are back to where they were at the open Friday. Moreover, NDX is about ready to complete a dead cross, where the 50 day EMA crosses down through the 200 day EMA.
...The bulls clearly have a lot of work to do. After hours (AH) action last night was strong, and with favorable media pumping, a gap up and strong open is likely. After that is anyone's guess. But at the minimum, the 200 day EMAs need to be recaptured soon.
...It will also be difficult for the markets to rally strongly for long without the tech stocks help. INTC reported good news and was up strong in AH. They may provide the rocket fuel the bulls are looking for. Strong tech stocks would also help the Nasdaq volume to move back up ahead of NYSE volume, as the tech stocks are primarily in the Nasdaq.
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...I'm still holding long term positions in XTO, SU, CRT and VLO in the long term port, so that made for a nice day yesterday finally. It has been rough going. I almost added a short term trade in XTO yesterday, but held off for two reasons. First, they report earnings today, and I don't like to hold trades going into earnings. Since I never seem to know which way the stock will react to their earning's announcements, I try to take that uncertainty out of the equation. Second, the XOI oil index as a whole is not out of the woods yet, in my opinion, so I am regarding yesterday's favorable price action as a counter trend bounce in the short term. Although I am firmly in the long term bull camp regarding energy companies, in the short term, the top is in and has been verified. I won't be bullish again from a trading standpoint until XOI can take out 850 at the least.
...I only have two short term trading positions open at the moment, and one is AAPL. AAPL is a perfect example of why I don't like to hold stocks through earnings announcements. They beat expectations by over 40%, their sales were up 70%, earnings up 500%. But when the earnings were announced, the shares were trashed. AAPL announced on the 13th. They opened that session at 42.95, but closed at 41.04. They have traded as low as $34.00 since, and closed yesterday at 37.09. And that is why I don't like to be holding short term trades when earnings are announced.
...AAPL's $34.00 low on April 18th appears to have set a new short term low. The chart also shows strong support at $35.00. So I like this trade as long as the overall market cooperates and doesn't tank. I am looking for the market to continue a rebound short term, but then tank again. I am one of the bears who believes that what we have seen since October 2002 is a cyclical bull market within the context of a longer term secular bear market. The excesses have not been wrung out of the system, and there is still more pain ahead. As Mr. Volcker pointed out in his article 'Economy on Thin Ice', link given in a previous daily commentary, even governments have a hard time prospering long term when they spend $1.06 for every $1.00 of revenue. But as a short term trader, I try to trade my system, not my opinions.
...WMT is a stock that I follow regularly, and that is one ugly chart.
http://www.forbes.com/investmentnewsletters/2005/04/12/cz_mr_0412chartroom_inl.html?boxes=author
The above link is to an article on Forbes online. It shows a Wal-Mart chart and in the article Arch Crawford, a well know technical analyst, gives his outlook for WMT. In short, he says that since its highs in 1999, WMT has formed a symmetrical triangle. It has now broken down out of the triangle, which is bearish. He has set $39-40 as a short term price target for the shares, with a possible break all the way down to $25-27. The stock would need to rebound to $55, or better yet $58, to void that negative outlook, in Crawford's opinion. WMT closed yesterday at $47.60.
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...I still intend to post model portfolios and more notes on my personal trades, I have found that keeping a journal helps my performance. It is also helpful to print out charts of all trades, so that I can go back at a future time and review exactly what I was looking at when entering and exiting trades. I also hope that perhaps people reading this log can avoid some of the mistakes I have made over the years, and still make too often. Sometimes I think I have made every mistake than could possibly be made. But I have survived, and that is no small accomplishment in this game.
...Regarding my continuing education in the school of trading hard knocks, I was given another rap on the knuckles a couple of days ago by Mr. Market because I didn't follow my system. I allowed my emotions, not my stop, take me out of a trade. I saw my position going against me and got out, even though the stock was nowhere near my stop. Almost immediately, the stock reversed and charged higher. I took a $100 loss. A day later I would have been up over $600 on the trade. And I would have been if I had stuck to my guns and followed my system. There is very little difference between winning and losing in this business.
...Over the years, I have found that my emotions are the weak link in my system. I allowed myself to be knocked out of the trade because I have been going through a slump, and did not have the confidence or courage to stay with my system. That is frustrating. And that is the mistake that recurs more frequently than any other in my trading.
...For some reason, that reminds me of a comment in the book Pit Bull, where the author laments that when you are going good, you don't listen to anyone, but when you are going bad, you want to know if the shoeshine boy has heard anything.
...Happy trading, all.
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