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Range bound 2 month

Posted on 4/29/2013

Can the market convincingly break the two month range this week. The first attempt was a failure. But market bounced back from the pullback quickly.

The underlying breadth continues to deteriorate as lower and lower number of stocks continue to lead the advance.

The larger cap stocks continue to lead the action. But in last one week the small caps are showing some improvement in breadth.

This is not a market very conducive for breakout buying as many are failing.

In sector trends homebuilders look attractive, they are making new high after brief pullback and also have earnings growth to support further advance.


Which stock will move big today

Posted on 4/26/2013

Fresh news creates fresh moves

Stocks release news post and pre market. Analyst upgrades tend to happen in the morning. In earnings season lot of news is released post and pre market.

Such news often leads to one day move on day of news. Sometime if the news is significant it can lead to multi week or multi month rally.

For day traders and short term swing traders news catalyst can offer a range of opportunities.

Such stocks with fresh news are called stocks in play or story stocks.

News that can affect price:

  • Earnings
  • upgrades/downgrades
  • govt policy change
  • FDA decision
  • Natural disaster
  • Political instability
  • Insider buys
  • CEO/CFO change
  • New product launch
  • New order

There are many free sources of news. If you want to catch intraday moves you need to build process loop for tracking news ...

At first you will feel every news is important , but soon you will figure out what is consequential news and what should be ignored... This kind of skill building requires months of regular practice....

There are several sources of news. Some like briefings.com are paid and some are free. Some paid sources like Bloomberg are ultra fast.

Make this a habit

Posted on 4/24/2013



First thing in the morning spend few minutes developing Situational Awareness. Write it down. Make it a habit. It takes six weeks for a habit to become part of you.

Look at questions on market like :

Where are we in longer term multi year trend.

Where are we in current bull or bearish phase (at start or near top)

What is driving this move

What is the predominant theme (growth, turnaround, value, junk)

What are the breadth trends telling us...

What is the likely 5 day scenario from here

How should I position myself accordingly.

How aggressive should I be in chasing breakout.

Should I wait for a short setup to develop...

Should I tighten stop...

Should I go in capital protection mode...

These kind of Situational Awareness you need to develop as part of your trading skills development.

Only way to do it is to do it daily. First few days you might be bad at it, but if you persist and do it for 6 weeks or more, it will become part of you. Instinctively you will do it first thing in the morning.

if you really want to improve your SA skill, put it in public domain for others to critic....

Situational Awareness (SA) is a US Air Force term coined during Vietnam war. It means pilot should always be proactively aware of their surroundings and other planes in their vicinity and accordingly adjust their flight paths.

What should you do today to improve your trading

Posted on 4/23/2013


Run your process loop...

Process loops are series of well defined steps based on a setup.

If you want to trade earnings, run earnings process loop.

If you want to buy pullback run pullback process loop...

If you want to trade options , run options process loop..

If you want to trade ETF run etf process loop...

If you want to day trade , run day trading process loop...

Unless you have set process loop you will flirt from method to method and setup to setup.

Process loops develop procedural memory...

The benefit of running process loop will be apparent after 4 to six months...

Doing same thing again and again and again develops expertise...

Throughout the day or after close run your process loop.

Depending on your setup idea and timeframe of trading process loop will vary...

Running same process loop for extended period of time will make you an expert on a setup...

Stick to few setup and do the same shit everyday till you become expert on that setup...

Situational Awareness

Posted on 4/18/2013


Situational Awareness (SA) is a US Air Force term coined during Vietnam war. It means pilot should always be proactively aware of their surroundings and other planes in their vicinity and accordingly adjust their flight paths.

SA is similarly useful in market. It allows us to reduce or increase our exposure depending on market conditions.

Market were rallying for some months on low breadth compared to historical breadth trends.

They were increasingly finding it difficult to make big moves.

Breakouts were failing on several stocks.

Large caps or the generals were leading while small caps were laggards.

In last 3 days we have seen big distribution days. A 900 plus day on breadth to negative side . This was followed by another big down day yesterday. That kind of breadth figures show big speculators selling.

At this stage we have not had a meaningful correction and breadth has not reached extreme. Historically at this juncture there tends to a weak bounce of 3 to 5 days, that ultimately fails and more downside follows.

That kind of action sets up lot of stocks for shorts as they also rally on weak volume after having first down leg. Then that bounce failure becomes good short setup.

In the meanwhile stocks that have held up well also start to correct.

One of the things to keep in mind is Fed action has distorted some of these patterns and the market has bounced back without reaching breadth extremes.

Is this the start of big bear market, unlikely. But it is most likely start of a 5 to 10% correction in the overall market. The small cap might have bigger correction.

Change in character

Posted on 4/17/2013
In last few months there has been a constant buying pressure on any weakness. The buying has not been strong enough to get big move going . The small caps have struggled for a month or so.

The big selling on Monday was followed by  another round of aggressive dip buying on Tuesday. Today however the dip buyer could not muster much of a rally.

Individual stocks continue to breakdown. Breakdown in sector has been happening for weeks, however money kept rotating in smaller and smaller number of stocks. Now the last 3 days of action has resulted in more breakdowns.

Every time the market has been down in last few years the Fed has aggressively responded by changing the policy. Expect same thing this time. That puts the floor on depth of correction. Good corrections are good for the health of the market as they create new leadership and create constructive buy points. However constant Fed action has changed the character of the market.





Eager pullback buyers

This market has had a bid underneath it for some time. Every pullback gets bought aggressively. We saw that yesterday where buyers wasted no time in falling over each other to buy the dip.

However the big drop on Monday may have changed the dynamics of such move. Small caps had one of the biggest down day supported by breadth on Monday. That kind of damage is difficult to heal. It will require lot of aggressive buying.

As of now this puts the market back in wider range. 

Hunt in the morning for Stocks in Play

Posted on 4/15/2013

Many stocks release news in the morning. Brokers upgrade/downgrade stocks. If you want to day trade or swing trade such moves spend at least 2 hours in the morning hunting for stocks in play.

Look at stocks up pre market find catalyst. Look if it is a good setup. Look for related sector stocks.

Short term big moves in stocks often have a news catalyst. If you are looking for short term swings or day trade then systematic analysis of daily news offers you daily candidates roaster.

Stocks release news after hours and before market open. This kind of news can move the stock immediately and in some cases start a multi month or multi year rally.

News that tends to move stocks big often is of following kinds:


  • earnings surprise to either side
  • earnings guidance
  • brokerage upgrades/downgrades
  • CEO/ CFO change
  • insider buying
  • new product/service launch
  • analyst conference
  • new drug approval
  • govt policy change
  • SEC action
  • IBD front page story
  • IBD New America highlight
  • Seeking Alpha mentions (which can be sometime pump and dump)

If you want to catch good day trade moves focus on these everyday. Become an expert in reading and analyzing news. Everyday at end of the day look at stock that went up big for the day and look at what kind of news precipitated that move. If you do it for 6 month plus you will understand what news moves the market and what news to ignore.

There are many paid sources of news like Bloomberg, Briefings, Fly on the Wall and several others that give you news as it happens. Many free sources like Marketwatch, Seeking Alpha , Benzinga and many others are free.

A good news paired with good setup can often lead to explosive moves. If a stock already is setting up well and news comes in it is best setup.

Spend early morning hours pre open looking at price moving news. Compile a watch list and then focus on those stocks during the day.

Carpe diem !



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Situational Awareness

Posted on 4/12/2013


Situational Awareness or SA is an aviation term. Pilots are trained to maintain SA all the time to ensure flight safety.

SA concept was developed in Vietnam war to overcome the problem of large number of plane crashes and incidence of own planes shooting each other or colliding.

SA involves being aware of your environment and adjusting strategies accordingly.

In the market the concept of SA can be used to adjust our trading, position size, risk exposure, profit target, and kinds of setups traded based on market conditions.

Currently the market is in multi month bull move that started in September. The few dips so far has been bought.

One distinct character of the market move has been low magnitude moves compared to past bull moves. Stocks breakout but they do not make very big moves.

Smaller stocks and technology stocks have lagged and not been major participant in move. Large cap stocks have lead the advance.

Breadth based trends have not worked as good as they work in most market circumstances. Excessively positive breadth corrects by market going sideways or having rotational pullbacks.

Every market has a dominant theme . The bull market from 1990 to 2000 was about technology stocks. The 2003 to 2007 market was about emerging markets and energy/commodities. Several hundred stocks doubled, tripled or went up 500% during that period based on their earnings/sales growth.

The predominant theme in this market for last 4 year has been Fed action. Every rally has started with aggressive Fed move and it has ended with either pause in Fed policy or on finding that in spite of Fed action the stocks earnings are not growing.

Currently we are in earnings season, that tends to lead to day to day action being dominated by earnings releases.

Overall from SA terms look for smaller magnitude moves.

A good rebound

Posted on 4/11/2013


A rebound in the index after job report induced gap down, at first was tentative, accelerated yesterday. This sets the market for another high in near term. As of now the lagging index is small cap and Dow Jones is leading.

The underlying setups are of many extended stocks with minor pullbacks. A fresh set of stock should breakout in coming days/week to broaden the rally.

Some of the stocks setting up for possible b/o in next few days are:

dgi

omi

bgfv

rock

angi

ppc

meru

cbk

How to look for sales acceleration

Posted on 4/09/2013
During the earnings season the focus is obviously on earnings. But really good and explosive opportunities can be found by focusing on young unknown companies that have gigantic sales acceleration.

A small company that starts growing sales rapidly will have rapid price increase even if the earnings are not great. This happens in case of new categories. For example if you have a company that has done say sales of 38 million last year and then this year it starts big sales acceleration and grows sales to 213 million and next year it becomes a 568 million company, what do you think will happen to the stock price.

These kind of extreme sales growth happen in new companies that come out with new product or service and that catches the public fancy. For example the figures I showed in paragraph above were for NTRI during the period of 2003 to 2005.  And as you can see in chart below during that period stock went up dramatically.


Similarly from 2003 to 2008 MNST grew from sales of 110 million to a billion dollar company. And as you can see in chart below during that period its stock price had explosive move.


When a company becomes a billion dollar plus company starting from small sales base you will find it will have dramatic share price appreciation.

The earnings season provides an opportunity to find such growth stories right at ground floor level, when they just start out to grow dramatically. Look for companies that start growing sales dramatically from small base. If a company grows sales to 100 million in quarter from a base below 20 million same quarter last year and if this is its first or second such big quarter then that is the stock to focus on.

I am always looking for companies likely to become a billion dollar company in 1 or 3 years from today. Only a handful of companies grow that dramatically in most years, but they are likely to be the explosive winners in market. In some market circumstances you will see lot many companies grow like this. This tends to happen in secular bullish trends like during the emerging market build up or during internet buildup era.

This kind of growth is also possible in consumer product or services. If a hot product or service catches on then it can quickly grow due to explosive consumer demand . For example CROX grew from 10 million sales to 800 million sales in 3 years or so once its product took off. The share price correspondingly multiplied many fold.

During the earnings season look for such sales outliers. They can make explosive moves. Especially if you have small account and want to grow it dramatically look for extreme sales/earnings growth situations. That gives you tremendous leverage.

If you have small account and looking to grow it dramatically make it your mission to find every such dramatic growth story. If you can just catch 3 to 5 such growth stories in next 3 years you will have big account.


How to profit from earnings surprises

Posted on 4/08/2013
This week is the official start of a new earnings season. Alcoa will kick off the season. Over next 6 weeks bulk of the companies will declare their earnings.

Earnings drives stock prices. Especially if there is surprisingly good or surprisingly bad earnings. After such big surprise stocks go up not for a day but sometimes for months or year or more. This phenomenon is well known and is called PEAD. 

PEADS stands for Post Earnings Announcement Drift. PEAD is a well known and heavily researched market anomaly. PEAD stocks show tendency to drift up or down for next 60 days.

Such earnings surprises can result in big move as a result entire industry and ecosystem has developed to predict earnings. Analyst try and estimate earnings. Trends in analyst earnings estimates itself leads to many stocks rallying or dropping in anticipation of earnings. Inspite of best efforts of analyst earnings surprises happen every season.

Especially for small cap stocks earnings surprises are common. These stocks most often are neglected and have no analyst coverage or little coverage. When they come out with blowout earnings, it can result in explosive rallies. Small caps also tend to have more volatile earnings. For a company with small earnings or sales base a small improvement can lead to big surprise.

The earnings season offers speculators opportunities on both long and short side. Look for big earnings surprises on small stocks. Especially if the stock has not been rallying in to earnings and has been trading quietly for months pre earnings, it can make explosive move on earnings.

If you want to find potential market leaders and future growth stars play close attention to earnings season. A unknown company that suddenly starts growing rapidly comes to notice during such season.

There are several free sources of earnings. The key is to look for the earnings outliers. At times an earnings surprise can lead to 100 to 500% plus move in next few months, so stay focused during this season of opportunities.  

Resolution

Posted on 4/04/2013

The breadth divergence that was building up for few months is now resolving. Three back to back negative days have driven resulted in most market leaders having sharp pullbacks.

Any short term bounce here is unlikely to lead to new high on small caps. It will take time and level for market to setup again on bullish side for broad based rally.

The large caps still look ok but we will see how long they hold up.....

Small cap under pressure

Posted on 4/02/2013
12 days of gains on small cap stock index were wiped out yesterday. The market showed split personality with the larger stocks holding up well but the small caps experienced selling. Small caps are the stocks capable of making explosive moves. They have had trouble making new high for last 2 weeks and were first to turn.

The key question is will there be follow through selling. The individual setups on many stocks look extended and there are signs of breakout failures and reversals after new high.

At this stage risk of correction in small caps is increasing and that is something to keep an eye on. 

Earnings season arriving

Posted on 4/01/2013
The market has been grinding higher for few months, now we are approaching earnings season. The earnings season always leads to some surprises.

When companies announce earnings some have huge surprises either to upside or downside. Such surprises can lead to start of  big moves if that earnings is not priced in to market. This is called PEAD or Post Earnings Surprise Drift.

Earnings surprises are more pronounced on smaller stocks. Many of these stocks are not actively followed by analysts and the only time they come to limelight are during earnings season. This is how new leaders in market arise. Often unheard of companies and market segments become star of an earnings season.

Tracking earnings can help you find some big moves.