Friday, January 30, 2009

Stocks end January on Down Note

Stocks closed lower on Friday as traders were disappointed over the governments apparent confusion on how to deal with the ongoing banking crisis. The 4th quarter GDP figures came in slightly better than expected, but that was likely due to a build in inventories rather than consumption. Ultimately, the Dow Jones Industrial Average closed nearly 10% below its close at the end of December, making this one of the worst Januarys on record. A weak January tends to indicate that the remainder of the year will be weak, but of course that is not set in stone.

Bottom line is that until we see improvement in the jobs figures and real estate, the economy will be weak, and I can't see the stock market moving very high from here. At best, we are stuck in a between 7,500 and 9,100 on the Dow, and at worst, we begin a new, painful leg down.

One thing worth mentioning is that I am noting more commercial and investment real estate being assigned to the "special assets" division of some of the banks I deal with. This means that the banks are trying to figure out how to deal with an underperforming property, and typically, that means foreclosure. That is somewhat interesting since as of late, the REITs have been among the best performing industry groups when the market manages to move higher.

More to come on the weekend.

Scott Cole
www.bestdaytradingstocks.com
www.kungfutrader.com

Thursday, January 29, 2009

Stocks Give Up All of Yesterday's Gains

U.S. Stocks closed below Wednesday's lows today as traders appear to have rejected the House Democrats' stimulus package. Some weak economic data also contributed to the decline. Overall, it was just a weak day, and all one can do is chalk it up to the Bear Market. Tomorrow's GDP report may not have much affect on the market tomorrow, since earnings reports are already reflecting what happened in the 4th quarter. Next week's employment report will have a much greater impact on the market going forward. The bottom line is that it is still all about jobs and real estate.

Market leaders on the upside today were the precious metals, as money flowed back into gold and silver out of the Euro. The Dollar Index was up on the day, with most of its strength coming against the Euro. It looks like the British Pound is trying hard to stabilize at these levels, but it may need to re-test its recent lows before attempting any move higher from here.

Treasuries weakened considerably again today, as yields rose across the entire curve. I had heard it mentioned on CNBC that this would be a positive sign for the stock market. But, with weak Treasury prices and weak stocks, the best place to be appears to be gold and silver. Since governments and financial institutions can't seem to get their act together, the precious metals appear to be the safest bet for now.

I will say that if interest rates are unable to stabilize soon, the real estate market will be unable to recover. I had a conversation with a client over the weekend. They were desperate to lock in a previously negotiated interest rate for a commercial loan and had a deadline to meet early this week. If they could not meet the deadline, the rates had gone up too much to keep the deal together.

Over the last several weeks, interest rates on 10 Year Treasuries have risen about 70 basis points. Mortgages are tied closely to these rates, but the spreads are currently historically wide. As a result, even though these Treasury yields are quite low, the mortgage rates are nowhere near as low as they would have been a few years ago with these same rates. Investors and home buyers will continue to put off purchases as long as financing remains difficult.

Scott Cole
www.bestdaytradingstocks.com
www.kungfutrader.com

Wednesday, January 28, 2009

Stock Market Rally May Have Legs

Today's rally in the stock market was quite impressive. All the major averages were up over 3%, and they all broke through some initial resistance levels. Volume increased significantly over the last few trading days, and the breadth readings were very strong. Considering that the market was set up perfectly to go lower after some weak rallies, today's price action was quite impressive.

Leading the way in today's rally was the banking sector. President Obama's plan to potentially allow the FDIC to deal with the bad assets in the banks was clearly met with a positive response from traders. REIT's popped up on the list again as top performing industry groups. I am also impressed by the recent performance in Google shares, which broke out to two month highs today.

In other markets, commodities were generally mixed, Treasuries pulled back, and the Yen was clobbered.

Keep an eye out for that GDP report on Friday before the open!

Scott Cole
www.bestdaytradingstocks.com
www.kungfutrader.com

Tuesday, January 27, 2009

Stocks Post Modest Gains in Light Trade

U.S. Stocks posted modest gains today on lighter volume and within a narrow trading range. Most of the major averages are bumping up against one of my moving averages, and they appear to be setting up for a quick move to the downside. A broad range of industry groups posted gains today, but none of the biggest winners today are among the groups that have performed the best in recent weeks. In fact, it looked like some light bottom fishing in some retail and financial stocks today, but their price patterns look ominous.

With all this in mind, daytraders should probably have a bias to the short side for the next couple of days. At the end of the week is the big 4th Quarter GDP report, so if you are short term trader, be very wary of holding a position overnight after Thursday's trading.

Scott Cole
www.bestdaytradingstocks.com
www.kungfutrader.com

Monday, January 26, 2009

Stocks Make Modest Gains on Light Trading

U.S. Stocks closed modestly higher on Monday on light trade. Trading was a bit of a disappointment today since there was some positive economic news on housing and the Leading Economic Indicators. The LEI actually rose in December, while existing home sales were up over 6% in December, and the supply of homes fell dramatically to just over a 9 month supply from over an 11 month supply. Furthermore, it was reported that Pfizer is acquiring Wyeth in a deal among drug makers.

Early in the day, the Dow was up well over 100 points and the S&P 500 was up over 20 points. Unfortunately, these levels could hold. Furthermore, volume contracted, which is not a good sign for an up day. Now, the price charts show an ominous pattern, one that I love for daytrading, and the market direction appears to be pointing downward for Tuesday. Other news could certainly allow the market to move higher, but this is one set up I like to see on the charts for a nice 1 to 3 day directional move.

In other markets, the Dollar was pounded today as the Euro and British Pound made huge gains against the greenback, recouping some of their losses over the last week. The Dollar held steady against the Yen. Treasuries were basically unchanged to slightly lower in price today, resulting in modestly higher yields. Commodity prices were mixed today, with some strength in metals and soft commodities, while energies stalled out.

Scott Cole
www.bestdaytradingstocks.com
www.kungfutrader.com

Sunday, January 25, 2009

Daytrading Tips

Opening Range Breakout
The Opening Range Breakout is one of the most important and utilized trading tools in the daytrader's arsenal. I know of a couple of successful hedge funds that trade a variation on this theme across a diversified portfolio of futures and equity markets with significant long term success. Gary Smith, noted author of "How I Trade For a Living" and what I consider to be the bible of daytrading, "Live the Dream by Profitably Day Trading Stock Index Futures" also utilized a form of the Opening Range Breakout.

The basic premise of the ORB is that when a market breaks out above or below the trading range set within a specified time period after the open of trading, the market will tend to continue in that direction for the rest of the trading day. Statistics have also shown that markets will tend to close within 10% of the day's high or low a statistically significant period of time, usually over 20%. When you combine these two ideas, you have found a trading edge. The hedge funds I noted have actually developed mechanical trading systems to take advantage of this edge.

There are a variety of forms of the ORB. The simplest idea is that the trader will buy a market if it breaks out above the high set in the first N minutes of trading, or sell if the market breaks out below the low set in the first N minutes of trading. Usually, a trader using this methodology will combine it with some sort of directional bias, such as a gap, the underlying trend, or some sort of pattern set up.

Another way to trade the ORB is to wait N minutes after the open, and if the market has traded a certain amount above or below the opening price, a trade will be entered. I have seen a variety of formulas used in this regard. One is to use a percentange of the 10 day Average True Range. For instance, when trading the S&P futures, if after 10 am the market trades at a level of 50% of the Average True Range above the opening price, the trader may enter a long position.

Still another way is to apply some sort of Pivot formula. One pivot formula applied by daytraders is: (High + Low + Close)/3. If the market trades above the pivot price for the day, a long bias is established, and vice versa if the market trades below the pivot price.

These are just a few such Opening Range Breakout strategies. If you can combine these with a proper risk management strategy, you can develop a mechanical trading system that is capable of generating consistent profits.

Scott Cole
www.bestdaytradingstocks.com
www.kungfutrader.com

Wednesday, January 21, 2009

Stocks Rally on IBM Earnings Report

U.S. Stocks were given a lift by IBM today, which reported earnings after the close yesterday that were $.25 above estimates for the 4th quarter. IBM also suggested a rosier outlook for 2009. Stocks were called to open a bit higher on the news, but the initial rally began to fade later in the morning. Ultimately, as the Geithner nomination hearing wore on, traders began to feel a bit better, and the market rallied strongly into the close. Financial stocks lead the way, with big gains in Morgan Stanely, JP Morgan and Goldman Sachs. Banks and REITs were among the best performing industry groups today.

The rally in stocks resulted in higher Treasury yields today across the entire curve, as traders further unwound long positions. 30 Year Treasury Bonds closed at one month low prices resulting in the highest yields in a month, over 3%. The Dollar made small gains today, but eased off its highs against the Euro and the British Pound later in the day. The Yen had made new contract highs in the March contract, but pulled well back off its highs by the close of trading.

Commodity prices were mixed today. Energies managed to make modest gains, while lumber prices continued to sink on the back of a report that homebuilders remain very pessimistic about future prospects.

Although it was a good day for stocks, there is much more work to be done before I will be convinced that this rally has any legs. The market still closed below yesterday's highs, and that is the first level of resistance. The market will then need to burst through the early January highs. As we are in earning season, key earnings reports will drive the market until the next big economic reports next month.

Overall, this was a good day for day traders, as there were a lot of big directional moves. These are the kinds of days day traders live for, and our system for finding and day trading stocks takes full advantage!

Scott Cole
www.bestdaytradingstocks.com
www.kungfutrader.com

Tuesday, January 20, 2009

Stocks Plunge on Obama's Inauguration Day

U.S. stocks followed other markets today, dropping substantially on weak earnings reports coming out of financial companies. An unfortunate start to the Obama presidency, but one clearly out of his control.

A number of statistics were reported on Bloomberg today that clearly point to the underlying problem of this financial mess we are in....it's all about residential real estate. Until the residential real estate market finds stability, these problems will remain. Shoring up the banks with capital from the TARP has proven fruitless. Neil Cavuto reported on FOX that the big banks that have received money from the TARP are worth less now than the money they have received!

And, the fact is, the big banks are not willing to lend on any residential real estate projects. I spoke with a banker today that said his bank wants nothing to do with any residential subdivisions, anywhere. That is probably a sure sign of a bottom in that market. This is the point in time when someone needs to step up and take a risk. As such, I can see that anyone with money to spend at this point in time is looking for opportunities in these markets. Unfortunately, they won't get much financing from the banks.

The mess we are in started with real estate, and will not end until those issues are resolved. Hopefully, the Obama administration will realize that, and some courageous entrepreneurs will begin taking the risks necessary to step into this market.

More to come later.

Scott Cole
www.bestdaytradingstocks.com
www.kungfutrader.com

Saturday, January 17, 2009

Risk Management - The Key to Profitable Trading

After reading and participating in the investing and trading forums on the internet over the years, I have come to the conclusion that the vast majority of beginning and intermediate investors and traders fail to realize the important role that risk management plays in successful trading.

What I have found over the years is that most questions posed by these new investors and traders are focused on stock selection, stock tips, trading system selection, etc. They are all hoping to catch a few big winners just by scouring the internet for some hot tips. Or, they think there may be a hot trading system out there that will make them a millionaire in no time. Or, if they are focused on short-term trading, they are hoping to learn that one trading system that will give them 90% winners, and profits month after month.

As a result, the financial industry is perfectly willing to capitalize on these attitudes with an endless array of trading systems and books that cater to these desires. The brokerage houses want you to open an account so they can sell you the latest and greatest ideas in the stock market, while padding their accounts with your commissions. The discount brokers will sell you on the idea that you can make big profits just by using their trading platforms and using a couple technical indicators.

And, of course, the biggest fraud is put on by professional money managers, who promise consistent profits to unaware investors. We have just realized the biggest fraud of all, with a potential $50 billion Ponzi scheme run by formerly reputable money manager Bernie Madoff.

Due to his long running reputation on Wall Street, all Madoff had to do was tell his investors it was possible to generate consistent monthly profits and annual returns of 12% without ever suffering through a drawdown. All the while, he was simply soliciting new money to pay off the original and oldest investors. There have been plenty of examples like this, but the Madoff scam is clearly the biggest fraud of all time.

The bottom line is, there is no such thing as the Holy Grail of trading! There is no one trading method or system that will generate huge returns for anyone, year after year. History is wrought with hundreds of examples of trading legends who made it big, then crashed and burned.

The best traders go through periods of underperformance, and they accept this, because they know, that in the long run, their trading methods will provide strong returns. However, they don’t expect to make 100% on their money every year, and they don’t expect to make money every day, every week, or even every month. Very few are capable of such returns, and those that are, will not share their strategies with the public!

Professional traders are also not worried about having a trading system that is right 100% of the time. They know that this is impossible. All they are concerned with is finding an EDGE that, over time, will be profitable. On the other hand, most amateur traders are worried about being RIGHT all the time, rather than being profitable. They can’t stand the thought of having a losing trade. Professional traders know that losing trades are part of the game.

One thing all of the best traders DO have in common, however, is that they know how to manage risk! Because they know that the markets can turn on them at any time, they are more focused on managing the risk in their portfolios, rather than on specific entries and exits in their trading models.

Most amateur traders can not seem to get past the idea that the initial trade entry, or stock selection, is the NOT the most important part of any trading model. It is what you do AFTER you enter a trade that is more important. And even more important than knowing when to exit a position is learning how to manage your risk.

One popular concept in the trading world is the idea of minimizing your risk to 1% or 2% of the equity in your account on any given trade. For example, if you have $100,000 in your account, then you would only risk $1,000 or $2,000 on any particular trade. If you want to buy XYZ stock at $20, and you have determined that you will exit the trade if it goes down to $19, then you will trade no more than 2,000 shares.

This is a good start, but is not the end of managing your risk. You can limit your risk to 1% if you like, but if you do not have the discipline to stick to your trading rules, and you take trades that you should not, you will still lose, and lose quickly! That is just one example of not controlling your risk. The following is a list of do’s and don’ts when it comes to managing risk.

1. Do not over trade. This can mean risking too much on any one position, or trading too much, simply for the thrill. With that in mind, once you have developed the entry and exit rules for your system, STICK to them! Don’t take trades that are not signaled just because you feel the need to trade!

2. Don’t trade markets that are highly correlated at the same time, unless you are doing some sort of spread trade by buying one market and shorting the other. Also beware of markets that are inversely correlated. For instance, if the Japanese Yen is going up while the Nikkei index is going down, don’t buy the Yen and short the Nikkei! You are simply doubling your bet!

3. Don’t add to positions when the markets become more volatile! Some trading systems look to capitalize on long term trends and will pyramid positions to achieve greater profits. Only the skilled trader should attempt this, because normally when trends are in place for a while, the volatility tends to increase.

4. If the volatility in your trading position increases dramatically, consider exiting some of your position.

5. Don’t begin hoping that one position will turn into a big winner. You must check your emotions at the door when you enter your trading room. Never marry yourself to a position. If you have a profitable strategy, it is many trades over time that will bring those profits, not one big winner.

6. Absolutely, positively know where you will exit a position BEFORE you enter a new trade!

7. Absolutely, positively know how you will trail your stops on your positions!

8. If you are having a bad trading day, trading week, or trading month, TAKE A BREAK! When have not taken a break for a long time, our trading judgment can become clouded, and we begin to break Rule #1. Once you find yourself breaking that rule, it is time to step away from the trading desk for a while.

9. If you are on a losing streak, and your equity has declined, reduce your risk!

10. Finally, when you do take some profits, take them out of your trading account and diversify your investments! Even though you may have a diversified portfolio traded by your trading system, you still should invest in completely different markets, such as real estate, bonds, art, commodities, or even another business.

If you can learn how to manage risk properly, you will be on your way to becoming a successful trader and investor.

Scott Cole
www.bestdaytradingstocks.com
www.kungfutrader.com

Wednesday, January 14, 2009

Stock decline steepens due to weak economic reports

U.S. stocks experienced sharp losses on Wednesday on the back of weak December retail sales data, which suggests that corporate earnings will continue to be downgraded. The major averages all broke through their December lows, and appear to be on their way back down to the November lows. Since it has been a couple of months since those lows were made, the market could be setting up for a more reasonable attempt at a successful re-test. However, that is if the re-test occurs relatively soon. If it takes time to get down to those lows, there would likely be a dead cat bounce, and then a new leg down would surely unfold. At this point, all we can do is wait and see.

Another result of today's release of weak economic data was a rally in the Treasury markets. Five year notes actually made new highs today, while the 10 year notes and 30 year bonds also rallied nicely.

Surprisingly, the Dollar held its own today in spite of the weak data. Commodities also managed to hold their own as well.

Next week may be the day of reckoning for this market as Obama takes office. No matter what though, it will take an awful lot to get this economy headed in the other direction. A lot of money has been lost by both individuals and corporations, and it will take a long time to restructure. In the meantime, it will be the government that needs to step in and provide new jobs, as the corporations and small businesses scale back.

Scott Cole
www.bestdaytradingstocks.com
www.kungfutrader.com

Tuesday, January 13, 2009

Stocks Modestly Higher in Quiet Trade

U.S. Stocks closed modestly higher Tuesday in a quiet trading day as traders found little reason to push the market very far in either direction. REIT's were the leaders to the upside today, showing 4% plus gains in this industry group.

The Dollar traded higher across the board today, with most strength against the British Pound, due to some weak economic reports in the UK. The Dollar is attracting more capital as traders continue to bet that economic recovery will come to the U.S. more quickly than elsewhere. The Yen, however, has been the strongest currency due to the higher savings rate in Japan.

Commodity prices were mixed today. Crude oil recovered from weak trading overnight, as gasoline and heating oil traded strongly upward today. Traders are betting that the weekly supply statistics will show drawdowns in these products, particularly in heating oil due to the cold weather hitting the Midwest, and set to hit the east later this week.

If you are a daytrader, the odds are that the market should trade a bit to the upside on Wednesday based upon the 3 to 5 day cycle. However, don't be surprised if the recent weakness reasserts itself after a pause today. With that in mind, use tape indicators to support your trading decision no matter which direction you favor.

Scott Cole
www.bestdaytradingstocks.com
www.kungfutrader.com

Monday, January 12, 2009

Stocks, Commodities Slide, Dollar rallies

U.S. stocks continued their early 2009 weakness as prospects for an economic recovery in the first half of the year remain bleak. Traders continued to place bets to the downside as commodities were weak, Treasuries were strong, and the Yen continues to be the strongest currency. It appears as if the markets are setting up for a new leg in the direction of the trends that occurred from September to December.

With this in mind, traders should be very cautious in considering any new long positions in stocks at this point. The market may be due for a slight rally in the next couple of days. After that, watch for a test of the December lows, as it appears that the breakout above the December highs has failed. A break below the December lows will likely result in a new test of the November lows.

In the currency markets, all of the major currencies are within trading ranges against the Dollar. However, a little bit more consolidation should likely be followed by a new breakout to the downside for the Euro, Pound and Swiss Franc. The Yen should test its recent highs against the Dollar, but likely needs more consolidation before a new leg up can begin in earnest.

Commodity markets seem to be renewing their downtrends, lead lower once again by Crude Oil. Not one major commodity posted a worthwhile gain today and many were down sharply.

Scott Cole
www.bestdaytradingstocks.com
www.kungfutrader.com

Wednesday, January 7, 2009

Stocks Plunge on Weak ADP Jobs Report

U.S. Stocks tumbled as the spectre of a deepening recession returned to the economic forefront today, in the form of a weaker than expected ADP jobs report. This report, combined with bearish supply data, also sent the energy markets tumbling, as crude oil tumbled over 10% today. Commodity prices were also weak today, and the Dollar tailed off against the major currencies.

The markets are now worried about the government jobs report due out on Friday. Some economists suggest potential job losses of 750,000 or more for December. However, after today's trading, that figure may already be priced into the market. Any number under 500,000 may actually spark a decent rally.

Yesterday I mentioned that one stock that has the characteristics defined by our Ultimate Stock Trading System broke out to new highs yesterday. We also mentioned that this is a time to be very cautious, and today's market confirmed that. This particular stock sold off significantly today, and would have caused initial stop losses to be triggered.

This brings up an issue with timing when it comes to trading high momentum stocks. We are clearly entrenched in a market that still can be characterized as a bear market. With that in mind, the best time to buy a stock that may try to break out to new highs is AFTER the overall market has pulled back. In the last couple weeks, the market has had an upward bias, and was likely due for a pull back. This will then provide a better opportunity to purchase an Ultimate Stock.

Scott Cole
www.bestdaytradingstocks.com

Tuesday, January 6, 2009

Stocks Stage Modest Rally

U.S. stocks managed solid gains today, lead higher by the Nasdaq as far as the major averages are concerned. In regard to industry groups, the REITS and commodities showed significant strength today.

We also had our first breakout in months in a legitimate Ultimate Stock, but there are no other stocks that have the characteristics required by our Ultimate Stock Trading System at this time. At this time, followers of our system are advised to trade very cautiously, as we still must characterize this existing rally as a bear market rally.

For those traders that are seeking daytrades to the long side, the market is presenting much better opportunities to trade strategies that capitalize on large daily directional moves. Our daytrading system trades an opening range breakout type of strategy. A couple of today's big winners included WBD and WDC.

In other markets, the Dollar continued to make gains against the Euro and Yen, while the Pound seems to be putting in a solid bottom against most currencies. The Aussie$ and Canadian $ also showed more strength today.

Most commodities showed strength today as well. This likely explains the strength in the Canadian$ and Aussie$ today, and in the last month. It is interesting to see commodities and the Dollar rally in tandem, along with the stock market. Although many analysts appearing on CNBC do not see immediate economic recovery, the markets seem to be indicating a recovery appearing earlier in 2009.

Stay tuned!

Scott Cole
www.bestdaytradingstocks.com

Monday, January 5, 2009

Stocks Decline in Dull Trade

U.S. Stocks fell modestly in a slow trading day on Monday, the first "normal" trading day of 2009. Today's trading range in all of the averages was very narrow as volatility continues to contract.

Today's trading activity suggested a hint at a more positive outlook on the economy by some traders. The Dollar rallied sharply against the Euro as Treasury prices plunged. The 10 Year Treasury yield has jumped from a recent low of under 2.1% to the 2.5% level. This has buoyed the Dollar against the Euro and the Yen, which have also weakened against the Canadian $, Aussie $ and the British Pound as of late. The Pound continues to be the weakest currency of the major currencies, but may be putting in a solid bottom at current levels against the Dollar.

The other indicators suggesting a more positive outlook on the economy is in the sector analysis. The strongest industry group today was the resorts and casinos group, up over 10% on the day. Residential construction was also up sharply today, and, in spite of the strength in the Dollar, the energy sector continued to rally. Crude Oil prices approached $50 again today, and held above a recently penetrated downtrend line, dating back to early November. If it is able to penetrate the December 10 high, watch for a rally up to the $60 level.

Ahead this week is the release of the December Employment Report. Any sort of improvement in the data will be very welcome news. After the release of the November report, the market managed to hold its lows and has traded a bit higher since.

The chart below is SQNM, one of today's big movers. This has been a strong stock in the face of the bear market that has gripped the market for over a year. Today, it broke out to a multi-month high on high volume. This is a classic opening range breakout type of trade.

Scott Cole
www.bestdaytradingstocks.com


Saturday, January 3, 2009

Stock Market Off To Good Start For 2009

The stock market enjoyed a nice rally on the first trading of 2009 Friday. The Dow closed above 9000 for the first time since December 8th, and has broken out to a six week high. In fact, all of the major averages closed at new highs since the late November lows. The only negative to Friday's trading was the light volume, which was to be expected. We'll need to see some follow through next week on heavier volume to get more confidence in this rally.

In other markets, Treasury prices sold off sharply on Friday, breaking some minor technical levels. It appears that at the very least, a near term top is in for these markets, as yields have dropped to unattractive levels compared to equities.

Some of the money flowing out of Treasuries also appears to have found its way back into commodities as of late, especially the energies. The February crude oil contract has rallied over $10 in the last week of trading. Precious metals and some agricultural contracts have also managed to rally in the last week. Watch for continued strength in commodities and weakness in Treasuries if the stock market continues to rally.

Scott Cole
www.bestdaytradingstocks.com