Trading the Trend

[Steven Vincent]

Chris Outwater writes:

I did not know your site was brand new! Congratulations. I am certain you will be successful as you seem to care about people and teaching them valuable survival skills. I grew up in LA and moved up here to SB after I sold my first company.

On paper today---I was in and out of FAS with a 9% gain---this is before I spoke with you on the "call-in" about time frames. We are still in the uptrend so tomorrow on a pull back (if there is one), I might get in again (paper) and hold until we approach 950, which might take days, weeks, mos? Couldn't one play the trend as the market oscillates along? Say, it drops to the bottom of the channel, but does not break down below---you go long an ETF and hold for the ride back up to test 950?

Feeling that the uptrend is intact, I bought FAS this morning at $10.20 (small amount of real money)---timing was not perfect, but if the trend stays intact, I should be okay.

[Steven Vincent]

First Chris I want to say that I don't want to be in a position of telling people when to get in or out of the market. It's a challenge to get that right for my own account!

What I do hope to do is share information, experience and thought processes which help you to make your own decisions.

Like we discussed yesterday, a daytrading strategy may not be appropriate for you. First, will you be trading with an account balance over 25k? If not you can't really daytrade anyway due to SEC restrictions. But even if you do, in my opinion it's best to learn to trade well in larger time frames first and then eventually you may be able to trade well in smaller time frames. Regardless of the time frame, the principles remain the same.

Assuming that you agree that daytrading is not the strategy that you want to pursue, then buying the trendline break yesterday was fine but I think you should have held it rather than closed the position if your objective is SPX 950 as you state. Now that you have re-entered, what's your stop loss point? Have you entered a stop loss? One principle I apply is that once a position is profitable on a closing basis I never allow it to become a losing trade. So a breakeven stop loss should be entered.

Also, you should consider whether you should be messing with leveraged ETF's. Make your first goal to trade well, not to make money. Once you become more grounded in your own methodology, then you can risk more with leverage.

[Steven Vincent]

Chris replies:

I read your comment that we might be in a trading range as the 50 and 200 DMA work towards convergence. This begs the question, if you are following the "Livingston" rules, and if we remain in the uptrend channel, then one trade is to sell long positions at resistance around 945 on SP. That is, of course, unless we power right through, which is unlikely, but if so, then you might actually add to your long positions.
However, if you sell at 945-950 resistance, then you wait for the pullback to the lower channel resistance around 880-900 and go long again there, unless we power through to the down side in which case you switch to the bear trend and begin to short, or go with a reverse ETF.
Does the above make sense?

[Steven Vincent]

Yes you could "range trade" but I think the range is likely to be too irregular and too small to be worthwhile. More likely you will get "whipsawed". And will you really stop out of your trade if it goes against you? Have you entered a stop loss on your existing trade?

After consideration I decided I wanted to go with a trade where there is a good possibility of a strong move and an extended trend. I think the precious metals market looks ripe and am particularly interested in silver. So I stopped out of my long equities trade and went long SLV. There is strong support below and today the entire PM market was showing signs of an imminent breakout. Contrast that with the equities markets which are showing signs of being a confusing, churning mess for a while. Which would you rather trade. Nothing says you HAVE to trade a market. You can be OUT or you can look for opportunity elsewhere.

The BullBear said:

Chris replies:

I read your comment that we might be in a trading range as the 50 and 200 DMA work towards convergence. This begs the question, if you are following the "Livingston" rules, and if we remain in the uptrend channel, then one trade is to sell long positions at resistance around 945 on SP. That is, of course, unless we power right through, which is unlikely, but if so, then you might actually add to your long positions.
However, if you sell at 945-950 resistance, then you wait for the pullback to the lower channel resistance around 880-900 and go long again there, unless we power through to the down side in which case you switch to the bear trend and begin to short, or go with a reverse ETF.
Does the above make sense?

[Chris Outwater]

Understood. So, you build a tool box, if you will, of possible ETF's and move in and out as the market indicates to you. Thanks. And I will put in the stop as you recommended.

[Steven Vincent]

Well I think that over time you study sectors and become familiar with them. It gives you alternatives. You should only trade markets that you know. There was a time that all I would trade was precious metals because I was zoned in on that market. I had an understanding of it. Now my understanding of different markets and sectors has expanded and I have more alternatives. Please note in Livermore's book he makes a big point...NO ONE CAN CATCH EVERY MOVE. You SHOULD be out of the market from time to time. Because sometimes the market is not trending and it is just slop. We do seem to still be trending here and it is possible that the trend could continue even above the 200 EMA. Hoewever classically the 200 EMA acts as substantial resistance and there is a good percentage chance of a trend break at that time. However if this move is impulsive enough we could blast through it and then break down below it again.

The chart of the NYSE shows we hit the 200 SMA today and shows a double topping.



Might the market power through this area of technical resistance? Sure. But chances are above average for a period of chop for a while. Tough to trade.

OTOH, I have somewhat broken my own trading rule to stay with a trend until it is broken on a closing basis. We have yet to break trend and I am out on anticipation of some chop or a break. I may regret this as the market powers higher. However I am long another market which should also rise (and I think has a chance to outperform): silver.




Chris Outwater said:

Understood. So, you build a tool box, if you will, of possible ETF's and move in and out as the market indicates to you. Thanks. And I will put in the stop as you recommended.

[Chris Outwater]

I understand you are not making any specific recommendations. I also agree about day trading and day trading is not my intent. I appreciate that you are sharing information and your thought processes that will help me make my own decisions. I enjoy the BullBear site very much and hope to continue the discussion! Thank you.

[Steven Vincent]

Overtrading is a habit almost all traders have...we have trouble sitting on our hands and waiting for opportunity. I have learned this lesson at great cost (and continue to learn it!)

Chris Outwater said:

I understand you are not making any specific recommendations. I also agree about day trading and day trading is not my intent. I appreciate that you are sharing information and your thought processes that will help me make my own decisions. I enjoy the BullBear site very much and hope to continue the discussion! Thank you.

[Chris Outwater]

Agreed. Having spent some time surfing (not the internet) but in the ocean, I can relate to waiting for the right wave. There are lots of waves coming, but you are looking for the right size and shape that will carry you for the best ride. You can waste a lot of time and energy (commissions) taking the wrong waves, and not be in place to catch the right wave when it comes. And the waves are generated thousands of miles away by complex forces that are difficult to understand and predict. I think I could write many paragraphs on the analogies with surfing and on positioning and competing for waves with other surfers---maybe some other time.
I like your mention of silver (above), which plays into your thesis of growing reflation. It also reminds me of an old saying---don't fight the fed---and the fed wants reflation now. I guess my only concern is the rise in 10 yr rates, which is putting the fed in a bit of a pickle.
BTW, how can I/we help you? What I mean is you are starting a new site, which I think will be VERY, VERY successful! I assume the more eyeballs you have the better??? I am already talking up your site (and Reminiscences) with my friends and associates because you make SENSE. Will write more later...

[Steven Vincent]

I like the waves analogy...it works on lots of different levels.

Overtrading is costly not just in commissions but in the costs of stopping out frequently at a loss...and also loss of confidence resulting in not pulling the trigger when the REAL wave/opportunity does present itself.

I think I will be writing a new report soon because the downgrade of British sovereign debt and the rumor that the same is to happen for US debt could be a game changer. Frankly this is a development which I would have looked for in a couple of years, not this soon. How the market reacts to this will tell us much about the character of the market at this time. But e need to wait for the market to tell us what is going on, not try to guess (overtrading).

I would not recommend being long US equities at this time both on a technical and fundamental basis. The situation is too "iffy". We could get one more run back at the highs but if you are long I would get out and stay out. Precious metals are *PROBABLY* a much safer way to play the inflation/reflation trade at this time...both fundamentally and technically. Where stocks could be topping, metals are breaking out after a long basing process.

Thanks for liking the site and offering to help. I haven't had much time to promote it yet so anything you can do to spread the word would be great. Embedable badges are available here: http://tradingstock.ning.com/main/embeddable/list

You could post those around whenever you get a chance.

I'm hoping the show catches on...as far as I know there isn't another after the bell show that you can just call up and rap about the markets...plenty of shows that you can listen to others pontificate but none that are call-in style. Also most shows and sites are guru-centric: "listen to me and do what I say and you will make millions". Not too much out there that is more of a community of people trying to help each other out in the game.

Chris Outwater said:

Agreed. Having spent some time surfing (not the internet) but in the ocean, I can relate to waiting for the right wave. There are lots of waves coming, but you are looking for the right size and shape that will carry you for the best ride. You can waste a lot of time and energy (commissions) taking the wrong waves, and not be in place to catch the right wave when it comes. And the waves are generated thousands of miles away by complex forces that are difficult to understand and predict. I think I could write many paragraphs on the analogies with surfing and on positioning and competing for waves with other surfers---maybe some other time.
I like your mention of silver (above), which plays into your thesis of growing reflation. It also reminds me of an old saying---don't fight the fed---and the fed wants reflation now. I guess my only concern is the rise in 10 yr rates, which is putting the fed in a bit of a pickle.
BTW, how can I/we help you? What I mean is you are starting a new site, which I think will be VERY, VERY successful! I assume the more eyeballs you have the better??? I am already talking up your site (and Reminiscences) with my friends and associates because you make SENSE. Will write more later...

[Chris Outwater]

Yes, and the breadth of the market appears to have gone negative for the first time since the March rally started. A bit dicey, to say the least.
I will spread the word and look forward to the next call-in. And you do have a good point---there is a plethora of sites and shows out there, but they are all ego-based and/or pushing some service or subsrcription. Your group will grow because you offer sound comments and are not trying to sell anything or predict anything. You are discussing the probabilities of a market event happening based on research, experience and hard work. People will come and join because they will perceive the value of these discussions.

[Steven Vincent]

Hopefully eventually I will be able to monetize the site with advertising sales...if it grows and becomes popular.

Chris Outwater said:

Yes, and the breadth of the market appears to have gone negative for the first time since the March rally started. A bit dicey, to say the least.
I will spread the word and look forward to the next call-in. And you do have a good point---there is a plethora of sites and shows out there, but they are all ego-based and/or pushing some service or subsrcription. Your group will grow because you offer sound comments and are not trying to sell anything or predict anything. You are discussing the probabilities of a market event happening based on research, experience and hard work. People will come and join because they will perceive the value of these discussions.

[Chris Outwater]

Yes, I understand the business model. And it should work as the site grows.
I read your commentary last night and without predicting the market, you did damn well at staying a cautious bull even with a lot of negative talk all weekend about US Treasury downgrades. The market this morning showed us that it is not ready to absorb that potential negative outcome at this time. We must go with the prevailing trend.

This is an interesting quote from Market-Ticker.org: "This week we will be treated to the US Government attempting to sell $100 billion in new Treasuries to finance its profligate spending habits.

Bernanke, for his part, is on the cusp of losing control of the long end of the bond curve. If it gets away from him he will have only two choices: pull liquidity and allow the curve to spike higher, repeating almost exactly what happened in the 1930s, or ramp up his "monetization campaign" to meet the issuance, risking an immediate tender of the entire outstanding float, resulting in an even worse outcome - a choice between collapse of the government or an Argentina-style currency implosion followed by that same collapse.

My bet is that is if push comes to shove Bernanke will back off and swallow The Depression that inevitably must follow, because the alternative is that he may literally swing from a lamppost - if not at the hands of angry citizens once the government and rule of law have fallen then from Congress, who, if he goes "all in" ramping up the monetization and loses, will find themselves unable to fund the government's operations." end of quote from Market-Ticker.org.