Category: Stock Market

Continuation from yesterday……(Why You Should Know Exactly Where You Are)

Identify The Cyclical Composition Within Your Time Frame:

Attempt to identify exactly where you are in the above mentioned cycle. Bottom, bull, top or bear. Typically, the longer the time frame you are working with the easier it is to identify exactly what part of the cycle is working in the market at the time. If you are working with short term cycles, simply understand that multiple short-term cycles will complete themselves within the confines of longer cycles. For example, one long-term completed cycle on the Dow would be a bull/bear market of 2002-2009. Yet, it was within the confines is this larger cycle that multiple short-term bull/bear moves developed at the same time. In fact, a day trader might see as many as 4-5 small daily cycles develop on a daily chart.

Identify Where In The Cycle You Are (bull or bear).       

Based on the time frames you working with, determine exactly where in the cycle you are. For instance, if you are working with weekly and monthly charts, identify if the weekly/monthly cycle is in a bull or bear market or distributing/consolidating.

Apply Other Time Frames For Confirmation:

Consider other time frames before deciding where in the cycle you are.  For instance, if you are trading based on daily charts it would be helpful to consider what weekly and monthly charts are indicating. While the market might be in a 5 day bull run or a bounce, weekly and monthly charts might suggest you are in the midst of a bear market.

Doing all of the above should give a fairly good indication of where in the cycle you are coming in. Allowing you to take an appropriate trading position in the process.

For example, today’s (September 16th, 2014) market environment presents us with a perfect analysis opportunity for the Dow Jones.  Here is the sample analysis to show you how to determine exactly where in the cycle we are and what positions or entry points are optimal.

1. Desired Trading Time Frames:

Monthly and weekly.

2. Cyclical Composition Within The Market On All Time Frames:

• Long-Term: Today’s bull market started in March of 2009. The long-term term trend remains bullish for the time being. All markets are near all time highs.
• Intermediate-Term: Monthly charts remain positive for the time being.
• Short-Term: Weekly charts remain slightly positive. Although signs of possible distribution and downtrend shift are present.

Warning Signs:

• Most long-term bull market cycles do not last longer than 5 years. Current bull market has been in existence since March of 2009 or 5.5 years. Suggesting that the market might be topping.
• Monthly charts show a possible period of distribution that started in January of 2014. In other words, the market has shifted from a fast moving bull market into a flat market. Suggesting distribution.

To Be Continued Tomorrow……….

Buy Low, Sell High, Go Short & Cover Google

Continuation From Friday……(The Circle Of Profits)

Rule #4: Know Exactly Where You Are At All Times.

By default, you should know exactly where you are at all times. Although it may not be as easy as you might imagine, particularly, if you are new to the whole process.

More or less, the composition of all stock moves can be divided into four distinct parts.

1. Bottom formation (accumulation or trauma).
2. Bull market.
3. Top formation (distribution or blow off).
4. Bear market.

Now, the composition above gets fairly complicated once we begin to add multiple time frames and structural patterns to the underlying moves.

For instance, the overall stock market might be in a 10 year bull market, yet it is about to suffer though a massive 50% correction. Or we might be in a 17 year secular bear market, yet the overall stock market might be ready to stage a massive multi-year rally. Just as it did from both 2002 and 2009 bottoms.  Further complicating the matter are the different size cycles developing in the market at any one time.  Ranging in duration from hourly to decade long. In fact, it is their eventual combination (long and short cycles) that causes the final stock market composite we see on a daily chart.

Is there a way to tell exactly where we are in the overall composition?

Yes, there is. Unfortunately, such a method cannot be described in any reasonable manner, let alone in this short book.  It can only come through years of experience and a tremendous amount of work.   Particularly, when the above analysis is applied to individual stocks.  Not to tout my market timing service, but you might want to take a look at the subscriber section of my website if this type of an analysis is of interest to you.

For the purposes of this book, we can apply the following tools or shortcuts.

Know What Time Frames You Are Working With and/or Trading:

If you are day trader, chances are, you are trading based on weekly, daily, hourly and minute charts. If you are more interested in catching larger moves, as I am, it is highly probable that you are trading based on both long-term and short-term charts. Whatever your situation might be, the first step is to define, without a shadow of a doubt, what it is that you are trading.

In other words, if you are day trading based on your daily charts, stick to that.  If you are trading based on weekly or monthly moves, continue on with that approach. Do not move between various time frames until and unless the move is permanent.  Why? It is highly probable that constant shifting between different time frames will lead to multiple errors and substantial losses.

To Be Continued Tomorrow…….

Why You Should Know Exactly Where You Are  Google

Continuation from yesterday…..Buy Low, Sell High, Go Short & Cover Investment Strategy Rules)

• Always keep detailed technical charts, long-term and short-term, for all of your stocks and the overall market. These charts will tell you when stock prices are about to break down.
• Liquidate your long positions and go short as soon as the daily, weekly or monthly trends change from bull to bear. Typically, the exact points of exit will be based on your overall trading strategy and risk profile.
• Go short at the same time and price.

These strict rules allow us to accomplish a number of things. First, they force us to be vigilant as we continue to scan for possible market, industry or stock specific corrections.  Minimizing our risk profile in the process. Second, the rules above force us to sell our long positions at the onset of corrections.  Preventing unnecessary and at times massive losses. Finally, these rules give us the ability to profit on the downside should a significant move down develop fully.

Rule #3: Cover Your Short Positions & Go Long When Technical and Timing Indicators Confirm (Trading) 

The rules found here are the exact opposites of Rule #2.

• Always be ready to cover your short positions and go long if technical indicators associated with the underlying securities suggest that stock prices are about to break out. No matter how bleak the underlying fundamentals are at the time.
• Always be ready to cover your short positions and go long at bear market or correction bottoms. No matter what you believe will happen to the overall economy in the meantime.
• Always be ready to cover your short positions and go long when the underlying stock prices have experienced massive drops and could now be considered oversold or selling well below their intrinsic value. This rule applies to all market conditions. Bull and bear.
• Always keep detailed technical charts, long-term and short-term, for all of your stocks and the overall market. These charts will tell you when stock prices are about to break out.
• Cover your short positions and go long as soon as daily, weekly or monthly trends change from bear to bull. Typically, the exact exit points will be based on your overall trading strategy and risk profile.
• Go long at the same time and price.

As you can very well imagine the rules above will complete the transaction and bring us back full circle. First, the rules above will help us with identifying market or stock specific bottoms. Giving us the ability to come in and assume long positions at giveaway prices. Second, these same rules will help us find stocks that are about to surge much higher and in many cases at X multiple to the market.  Giving us a fighting chance to walk away with massive gains. Finally, the rules above force us to change course at exactly the right price and time. Removing all of the emotional aspects associated with investing out of the picture.

Here is another way to look at the proposed Rules #1-3. They create a full circle of sorts. A circle that allows you to take an initial position at or near the bottom and ride what should be a massive rally all the way up into its eventual overvaluation bubble. Only to exist and go short as the stock price begins to collapse. In other words, this setup allows you to profit on both sides of the move.  All while maximizing your returns and minimizing risk in the process.  The best part is; your initial entry point on this cycle can be at any point. For as long as you understand exactly where on this proverbial circle you are coming in.

To Be Continued On Monday…..

The Circle Of Profits Google

Continuation from yesterday…...(Costs Associated With Short Selling)

Finally, before we can answer which of the investment strategies above is the best one, we have to consider an important issue.  We must first define what goals most investors have. Unfortunately, the investment industry has done quite a job cutting and dicing what should be a simple classification into a million different pieces. Anything from divorced housewives on fixed alimony income to 95 year olds with advanced derivative strategies.

Luckily for us, human nature and greed never go out of style. If given a chance, 99% of all investors, no matter the age or risk profile would want the exact same thing.

• A massive capital gain.
• In the shortest possible period of time.
• While taking on very little, if any, risk.

The real question becomes, which of the strategies above can get us to the above mentioned points the closest?

As you can probably imagine, none of them. Every one of the strategies above has their own shortcomings that would jeopardize the objectives above. For instance, most value investments take a few years to play out.  Blowing our “short time frame” requirement completely out of the water. Investing in growth companies is inherently more risky and trading or overtrading rarely leads to large capital gains.

So, what is the ultimate solution?

As always, the answer lies somewhere in between. If we are to bring the strategies above together, we might just be able to achieve our ultimate objective. By taking the best parts and disregarding the worst, we might be able to stitch together a strategy will satisfy all of our high return and low risk profile requirements.  Let’s see if we can get it done.

Value Investing:  (Minimizing Risk)

• Let’s Take: Undervalued and out of favor companies. Cheap stocks that for one reason or another selling well below their intrinsic value. Stocks that have collapsed over the last few months or years to the tune of 50-90%.  Stocks of companies that are turning around, but their positive change haven’t been realized by the market.

• Let’s Disregard: Uncertain holding periods and buying stocks with weak technical indicators.

Growth Investing: (Maximizing Returns)

• Let’s Take: Fast growing companies. Stocks that are appreciating at a fast pace. Stocks with strong technical indicators.

• Let’s Disregard: Highly speculative companies. High risks associated with extremely volatile industries and overvalued companies.

Trading: (Perfecting Timing)

• Let’s Take: Clearly defined rules and market timing techniques. The ability to take both sides of the trade….long and short.  The willingness to study trading and make necessary adjustments.  Strict risk management rules.

• Let’s Disregard: Overtrading. Trading without rules or a clearly outlined strategy. Trading on hunches and gut feelings. Laziness.

The next step is to put all of the above selections together.

Won’t we end up with some sort of a Frankenstein monster?

Not at all. A clearly defined investment strategy below is the ultimate outcome.

To Be Continued Tomorrow…..

Which Investment Strategy Is The Best Google