Day trading or Night trading? :)

Source: Frank & Ernest

Jesse Livermore's Trading Rules

Lesson Number One: Cut your losses quickly.

As soon as a trade is contemplated, a trader must know at what point in time he'll be proven wrong and exit a position. If a trader doesn't know his exit before he takes the entry, he might as well go to the racetrack or casino where at least the odds can be quantified.

Lesson Number Two: Confirm your judgment before going all in.

Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed. Once the stock was traveling in the direction he desired, Livermore would pile on rapidly to maximize the returns.

There are several ways to buy more in a winning position — pyramiding up, buying in thirds at predetermined prices, being 100% in no more than 5% above the initial entry — but the take home is to buy in the direction of your winning trade – never when it goes against you.

Lesson Number Three: Watch leading stocks for the best action.

Livermore knew that trending issues were where the big money would be made, and to fight this reality was a loser's game.

Lesson Number Four: Let profits ride until price action dictates otherwise.

"It never was my thinking that made the big money for me. It always was my sitting."

One method that satisfies the desire for profit and subdues the fear of a losing trade is to take one half of your profit off at a predetermined level, put a stop at breakeven on the rest, and let it play out without micromanaging the position.

Lesson Number Five: Buy all-time new highs.

The psychological merits of buying all-time or 52-week highs are immense and shouldn't be discounted as a part of your overall strategy.

Lesson Number Six: Use pivot points to determine trends.

When going long, traders are continually looking for confirmation by assessing the strength of a move. Higher highs and higher lows are a solid indicator that a current uptrend is merely taking a slight pause, and the odds of higher prices are in their favor. These same pivot points are integral to drawing support and resistance lines to give traders their line in the sand. Taken together, trend lines and pivot points can enlighten a trader to a change in momentum, which may change the character of a trade.

Lesson Number Seven: Control your emotions.

Our goal as traders should be to also make a critical yet honest assessment of the areas we can improve so the bottom line will support our claims of truly being seasoned traders. Adhering to the time-tested rules of Jesse Livermore would be a great start for anyone.

Source: Livermore's Trading Rules

Small Caps Vs Large Caps in US

In the chart above we have the daily S&P500 (top) and the daily inverted S&P500 relative to the US small cap stocks index Russell 2000 Index (bottom). We notice that usually a relative strength of the small cap stocks is supportive for the uptrend of the large caps (blue chips) in the S&P as a sign of more risk taking in the markets. Since we have no divergence of the trends of both charts above, the uptrend in S&P seems to be healthy and poised to continue.

An example of a serious divergence we have in the same charts below but on weekly time frame. The uptrend in the relative strength of the small stocks ended in July 2006 and started trending down while the blue chips in S&P500 continued north in strong uptrend until January 2008. The underperformance of small stocks was an early important warning sign of the later strong reversal of the S&P500.

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Chart of the Day - DAX Index

The German DAX Index registered a breakout to the upside yesterday with a breakaway gap from an ascending triangle or a rectangle. The potential target price area is between around 6900 (computed from breaking out of the rectangle) and 7200 (computed from breaking out of the ascending triangle).

Chart of the Day - CRB Index

CRB Index has just reached a two year high and the trend is poised to continue longer term unless quickly turns down. We have a weekly chart above that indicates a potential target for the bullish run in the 320 - 340 area during the next several months. The trend is supported by the weakening dollar and by the Fed efforts to fight deflation through inducing inflation expectations via commodities.

The CRB Index has the following composition: Crude Oil (23%), Aluminum (6%), Copper (6%), Corn (6%), Gold (6%), Live cattle (6%), Natural Gas (6%), Soy beans (6%)Cocoa (5%), Coffee (5%), Cotton (5%), Heating oil (5%), Sugar (5%), Unleaded Gas (5%), Lean Hogs (1%), Nickel (1%), Orange juice (1%), Silver (1%), Wheat (1%)

Chart of the Day - US 10-year Treasury Note

As noticed in the weekly chart above, the US 10-year Treasury Note is in a strong downtrend triggered by the weekly SMA200 and 34-week time cycle. This technical setup was supported by Fed bond purchases - or the Fed actions were supported by this technical setup:) - to push longer term yields lower in order to underpin economic growth.

Chart of the Day - MSCI Emerging Markets

MSCI Emerging Markets is trending up but an important price and time confluence might be strong resistance to pass.

In the chart below we see the relative performance of S&P500 against MSCI Emerging Markets. The strong downtrend since 2001 was briefly interrupted in 2008 but resumed shortly after showing continued strong emerging markets overperformance.

Bob Farrell’s 10 Market Rules to Remember

Wall Street “gurus” come and go, but in the case of Bob Farrell legendary status was achieved. He spent several decades as chief stock market analyst at Merrill Lynch & Co. and had a front-row seat at the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and October 1987 crash.

Farrell retired in 1992, but his famous “10 Market Rules to Remember” have lived on and are summarized below. The words of wisdom are timeless and are especially appropriate as investors grapple with the difficult juncture at which stock markets find themselves at this stage.

1. Markets tend to return to the mean over time

When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.

2. Excesses in one direction will lead to an excess in the opposite direction

Think of the market baseline as attached to a rubber string. Any action too far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.

3. There are no new eras – excesses are never permanent

Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over the past six years, only to get cut in half. As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it – human nature – is never different.

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways

Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction eventually.

5. The public buys the most at the top and the least at the bottom

That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing. Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors Survey.

6. Fear and greed are stronger than long-term resolve

Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism”, says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

This is why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks.

8. Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend

I would suggest that as of August 2008, we are on our third reflexive rebound – the January rate cuts, the Bear Stearns low in March, and now the Fannie/Freddie rescue lows of July.
We have yet to see the long-drawn-out fundamental portion of the bear market.

9. When all the experts and forecasts agree – something else is going to happen

As Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?” Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

10. Bull markets are more fun than bear markets

Especially if you are long only or mandated to be fully invested. Those with more flexible charters might squeak out a smile or two here and there.

Source: Investment Postcards

Market Wizard Quote of the Day

“Don’t think about what the market’s going to do; you have absolutely no control over that. Think about what you’re going to do if it gets there. In particular, you should spend no time at all thinking about those rosy scenarios in which the market goes your way, since in those situations, there’s nothing more for you to do. Focus instead on those things you want least to happen and on what your response will be".

William Eckhardt

The GOLDen Route Update

Gold followed its bullish route I mentioned one year ago on 17th of October 2009 in a post entitled "GOLDen Fibonacci Uptrend". The post included the chart above with the following price and time targets: "1250 (161.8% Fibonacci projection) then around 1400 (the 200% projection) and 1600 (261.8% Fibonacci projection). We also have the 34-week cycles in April 2010 and November - December 2010 when we may record new highs around the levels above or just inflection areas."

Below we have the updated chart where we notice that the first target (1250) was reached in May 2010 a month later than its cycle time while the second target (1400) is supposed to be reached in November - December 2010 but it's close already today on 8th of October (when registered a high just shy of 1365). In a later post I will discuss more on the potential price and time targets of Gold.

Chart of the Day - S&P500

S&P500 reached a confluence of an upper side channel resistance and a 21-day cycle. With the potential volatility of the NFP news tomorrow we may be able to check if the next short term trend is stil up or turns down.

The most signicant lesson Soros taught Druckenmiller

The most signicant lesson Soros taught him, Druckenmiller suggested, was “that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong. The few times that Soros has ever criticized me was when I was really right on a market and didn’t maximize the opportunity.”

He learned this soon after he began work at Quantum. He had been unenthusiastic about the dollar and he took a large short position against the German mark. The position began to go in his favor, and he was quite pleased with himself. Soros dropped in on him in his ofce and discussed the trade.

“How big a position do you have?” he asked.

“One billion dollars,” Druckenmiller answered.

“You call that a position?” Soros said, a question that has become part of Wall Street folklore.

Soros suggested that Druckenmiller double his position. He did. And, just as Soros had predicted, even more prots poured into Quantum.

“Soros has taught me,” noted Druckenmiller, “that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig. It takes courage to ride a prot with huge leverage. As far as Soros is concerned, when you’re right on something, you can’t own enough.”

Source: SOROS - The Unauthorized Biography, Robert Slater

FX Chart of the Day - EURGBP

The area around 0.8750 seems an obviuos target for now..the strong trend in EURGBP is the reason behind GBPUSD underperformance against EURUSD.

Chart of the Day - ELMA

Graficul saptamanal de mai sus indica potentiale targeturi zonele 0.80 - 0.82 si apoi 0.95 - 1.00 pana in luna decembrie 2010.

Black Swan vs Black Duck

“The trouble with the Recency Effect is that everyone all of a sudden thought they were Nassim Taleb, orinthological experts on the spotting of Black Swans. Every blip on the screen or blurb in the newspaper was fresh evidence of the next hundred years’ storm. Forget being fooled by randomness, people have become obsessed with randomness.

But as we’ve learned, not every aberration is a Black Swan in the making. Sometimes, it’s just an ordinary Black Duck. A negative event or possibility that is processed and dealt with, that doesn’t necessarily lead to contagion, panic and meltdown.”

Source: The Reformed Broker - Sometimes It’s Just a Black Duck