My Secondary Watch List: $NKE $UHS $V $SBUX $CMG $FL $STZ $GOOGL $AMZN

20% Price Swings on $QQQ

Last Monday we witnessed a sheer panic in the market.  One of the major index - $QQQ - that I monitor, had a price swing of 20% that day. The two sectors that have been leading this year (Technology $XLK and Health Care $XLV) also had a similar price swings on Monday. Traders on the floor were letting their emotional instincts of greed, fear, hope and pride get in their way of making sound decisions based on the market data. 

Retail investors were caught completely off guard too and they were quickly liquidating their positions as well. This is what volatility looks like. There was extreme volume in trading that day. The last time we had such a high volume on the $QQQ or the $SPY was on Sept 22nd 2011. Market was in correction at that time too and was trading below the 200 simple moving average (SMA), just as it was last Monday. 

The Market is Predictable

One thing I have learnt from trading the markets is that market is made up of individuals like myself all over the world. Market is predictable because human behavior is predictable. It doesn't matter if you are a part of an institution such a hedge fund, pension fund or a mutual fund. There are individuals like myself that actually execute buy and sell orders. 

We may all use technology and programming algorithms on the computer to aid us in accomplishing our tasks in the market but there is always a human being that actually does this task. 

Lessons From Market History

Currently, most liquid and transparent stock markets of the world such as Australia, Germany, France, Hong Kong, Brazil, Korea, Japan, Mexico, Italy, Spain, Russia, India, Canada - just to name a few - are hovering below their 200 simple day moving average (sma) Our US market is also hovering below the 200 sma. 

Is this a coincidence?  The price of oil has plummeted by 65% since June of 2014 as well as the price of copper, iron ore, gold and silver has been on a downward trajectory. There is a lack of demand for products all over the world. Savings from low price of oil has not resulted in consumers spending that saving. They are instead saving that money or utilizing it to spruce up their homes.

Looking over the historical aspects of the market, I notice that since the lows on Sept 22nd of 2011, $SPY rocketed up by 9% within 4 weeks. A similar thing happened on October 16th of 2014 when the $SPY bounced up by 10% within 4 weeks as well. We have had a very similar rally in the market 4 days last week with a very similar volume on the $SPY. I am fully prepared this week with a primary list of 6 stocks that are poised to lead the market. This list is available to subscribers of my watch list service.

There are other stocks on my secondary watch list as well that I am looking for conservative option strategies, if the market resumes its uptrend this week. Some of those stocks are:

$NKE

$UHS

$V

$SBUX

$CMG

$FL

$STZ

$GOOGL

$AMZN 

As always, I look to the Asian and Australian markets on Sunday night before I go to bed. They set the initial tone for us in the US markets. If the market resumes its uptrend this week than it is best to take only a very small position initially. 

Happy trading!

The $SPY Bloodbath

The $SPY Bloodbath

Watching the market take a nose dive last week was, unfortunately, not a surprise for me.  I raised concerns in a post on July 27th about the lack of demand and then two weeks ago I noticed that $DJX was down -2% year to date.

I was stopped out of a $NKE option debit spread and $FL credit spread option trade this week because the market took a tumble. I placed stop loss orders for all of my trades just in case the market turned against me. 

Most traders I talked to last week were anxious and afraid because of the market performance.  In these times, being in cash make sense.  Switch to virtual trades for a few weeks and let the dust settle!

So far this summer, I've stayed mostly in cash and all of my positions have been small. I used mostly option trades to minimize my exposure to the market which has come in handy during this rough patch. 

Market Outlook Going Forward

My outlook on the market has been cautious ever since July of 2014. Major currencies such as the $FXE, FXA, $FXC, $FXB and $FXY have been dropping while the the US $ ($UUP) has been rising since July of last year. Oil price is also down by 65% ($USO) in the same period. Minerals and metals metals such as $GLD, $SLV and $JJC have also been dropping. Companies that mine the metals, coal and fertilizer components are also on a down trend.  Major mining equipment manufactures like $CAT gave a very poor guidance which signals a lack of global demand.

If you believe the media, you would have thought that this market turmoil was because of one of a litany of items.  Greece, Ukraine, ISIS, Russia, China, quantitative easing, the culprit changes almost daily!  The truth of the matter is it is simply lack of demand world wide.  When consumers aren't buying up products, the companies that produce them have a lower demand for raw materials.  It's really as basic as that!

In the U.S. alone, $M is down 16% over the last 5 weeks. $WMT is down by 30% since the beginning of the year!  School starts today for my granddaughter and  'back to School' season is one of the most profitable seasons for retailers and yet, retailers are hurting?   

Institutional Behavior Is More Important Than Ever

I know that over 70% of the volume in the US market is the result of Institutional (hedge funds, pension plans, mutual funds) investments. They are the drivers of the stock markets performance every day. They were quick to dump technology ($XLK) and healthcare ($XLV) stocks last week. They took profits and used the cash to invest in defensive sectors such as $XLU or high dividend paying stocks such as $MO, $RAI or $LMT. 

Some of the money went into defensive ETF's like $TLT  I also noticed that they have spread some money into thin stocks (trade less than $100 million daily). This is a safe bet for them because they have the weight to control the price of these stocks.  

I intend to track their footsteps over the next week. Also, there will be a sector rotation in the coming days seeing as how most of the names in technology and health care are extended.

As I have said before, this is no time to be heroic. It is best to be in cash and close out your losing positions.  Conserve your capital and never place a trade until you have a well thought out trade plan in place.

Happy trading!

Greed & Pride - How They Cloud Your Vision

Last Week I walked you through a hair raising experience - and showed you how I used my fears to my advantage.  This week I'm going to dig into greed and pride and continue with this month's theme of The 4 Deadly Sins of Trading.

Greed

Let's face it, every retail investor is driven by greed.  The key to success in retail investing is to feed your greed in healthy ways. This means you need to limit your risk and exposure!  One way to do this is to train yourself out of looking at dollar amounts and, instead, focus on the percentages involved on your trade.

For example, if a $1000 position pays you $100 of profit in 8 weeks, you have a choice in how you perceive the success of that trade.  Either you're going to look at it as $100 or you're going to look at it as 10%.  Both are technically accurate but, in my opinion, measuring this trade as a 10% profit is the healthier choice.    

Here is why I want you to look at this trade from the 10% perspective - you just increased your portfolio by 10% in 8 weeks!  If you get into the habit of growing your portfolio at 5% a month over the course of the year - you're going to be pretty happy.  

Your Number of Shares Is Irrelevant! 

Time and again people tell me "oh I like that stock, but it's too expensive for me!"

When I probe them on how much cash they've got available, though, it's always enough to get a few shares of that pricy stock.  I have found that many retail investors cling to the idea that if they can't buy 100 shares of something, they can't take that position.

While there's some merit in that line of thinking, I would personally rather have 1 share of a $700 stock versus 700 shares of a $1 stock.  Remember, expensive stocks are expensive for a reason!  Conversely, cheap stocks are cheap for a reason!  When you look at the price of a stock, you're looking at its perceived value from the markets point of view.

If you're still hesitant to follow that approach, keep in mind that option trades like credit spreads are a great way to get involved with an expensive stock, even if you don't have the funds to actually purchase that stock.  The point is, you should feed your greed by getting involved with stocks that are out competing the general market.  

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Use Pride To Your Advantage

Recently I wrote a post about a trade on $AVGO that went against me.  The biggest take away from that scenario is that I used my pride as a trigger to action.  In that case, the action was a post mortem on the trade that helped me learn why the trade turned out the way it did.

Unfortunately, most day traders and option traders will lose their entire portfolio within 5 years.  There are a number of reasons why this happens.  In some cases, there's a lack of education and understanding of the market.  In some cases, the risks involved weren't clearly understood by the trader.  I think that pride plays a role here too, though.  I have found even in my own circles that traders are hesitant to admit when they are wrong.  Without admitting your shortcomings, it's impossible to fix them.  

Think You Can't Be Wrong on a Trade?

Prove it!  Either the data on a chart proves your hypothesis, or it doesn't.  The worst mistake you can make is to start down the path of; I think, I feel, I hear, I hope etc about a trade.  

Keep in mind that a stock is only good if it's going up.  If you decide to trade a sideways or falling stock because of non-chart related data like, speculation of earnings or a new product launch, be aware of what you're doing.  It's perfectly OK to get involved with stocks for those reasons but don't fool yourself into thinking that it's a good stock.

The bottom line is that you have to be honest with yourself about what you're doing.  Remember, If it's a good stock it doesn't need to "come back" - it's already moving up!

Conclusion

Hopefully this post helps you get you pointed in the right direction when it comes to greed and pride.  Next week I'll finish off the theme by showing you how to balance the personailty of a stock with a few different trade strategies.  

As always, keep me posted with your thoughts on my blog topics and...

Happy Trading!

$DJX Is Down 2% YTD

My Performance Last Week

Last week I was stopped out of 2 option positions. One was a credit spread on $CELG and other one was a debit spread on $SBUX. I took the time this weekend to do a post mortem on these trades.  I selected the right stocks and the right option strategy but the market turned negative within a few days of placing my trades which led to me getting stopped out.

Reviewing the performance of the three major indices that I track ($DJX, $SPY, $QQQ) one thing jumped out. $DJX is down -2% year to date and currently is trading below the 200 daily moving average, which is what institutions prefer to trade off of.  $SPY and $QQQ are hovering over the 50 dma.  These are bad signs in the market! 

Being stopped out of my positions on $SBUX and $CELG was something I had planned for in case the market turned against me. It helped me conserve my trading capital. These stocks are still fundamentally and technically sound.

My Market Outlook

August is typically a bad month for stocks. However, last year at this time, the market took a turn to the positive and shot up 5% in the last two weeks.  I am fearful of the market but I am using it to my advantage by scrutinizing the charts. I just step back when I am fearful and look at what the story the data tells me. Charts reflect the price and volume and the strength of the stock, but they also represent human behavior.  There is always going to be noise and chatter from the media but I prefer to verify what I hear by looking over the charts and doing my own due diligence.

Survival Of The Fittest

For access to my primary watch list and virtual trade plans this week, you need to subscribe to my service, however, here is my secondary watch list

$EA
$MO
$RAI
$LMT
$EBAY
$AMZN
$DHI
$V
$CMG
$EQIX
$STZ

One thing we have seen in the market lately is that we have a 3 digit swings up and down in the indices. I prefer to wait until later in the morning after things have subsided before I place my trades. I don't ever chase the trade either. It is better to wait and just let the price retrace to the target price identified on the plan.

Happy trading!

Using Fear & Hope To Your Advantage

Just a reminder for those of you in the Tampa Bay area - I'll be hosting a live presentation on my methods on September 19th that you're welcome to attend!  I'll be covering my process for selecting stocks and Ron Appel will walk us through some specific options techniques that can be used on the stocks my system produces.

If you would like to attend in person, we'll be hosting it at the East Lake Woodlands Country club from 9:30 AM to 12:00 PM.  We'll also be recording the session and we will make the material available for all attendees so that they can review it as much as they like in the future.  If you're interested, you can sign up for more information below:

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The 4 Deadly Sins of Trading: Fear & Hope

This month I'm breaking down what I consider to be the 4 Deadly Sins of Trading - Fear, Hope, Greed, and Pride.  Last week I gave you a brief overview on the topic and this week I'm going to dig deeper into fear and hope!  Let's jump right into how you can recognize when these emotions are taking over, and how you can turn them to your advantage.

Fear:

Before we talk about trading, I want to take you through an experience I had in the early 80's when I worked for the airlines.  What started as a routine flight into Boston turned into one of the scariest moments of my life!

I was in the back of the plane as the crew supervisor and it was the last flight of the evening so everything was pretty quiet.  If not for the quiet I may not have noticed, but the engines revved to a high RPM and then I felt the plane banking out of the landing pattern.  Just based on experience, I knew that the pilots had aborted the initial attempt and were lining the plane up for another approach.


A few minutes later, the same thing happened and at this point, my fear started to rise.  I glanced out the window and noticed that a massive bank of fog was obscuring the runway lights.  Knowing the dangers of Logan airport I started to worry about a potential water landing.

As an employee of the airline, my training kicked in and my fear moved to the back of my mind.  I was reminded of my responsibility to my crew and the passengers on the plane.  I had to prepare my crew for a possible water landing and make sure that passengers were strapped in safely.  I had to trust that my pilots possessed the know how to see us through this situation and when I accepted that - a sense of calm settled in on me.  I immediately started focusing on the things that I had control over.

I recognized my fear as a result of the abnormal behavior of the aircraft and I relied on my training to get me moving in the right direction.  As a trader, I recognize my fear when the behavior of a stock doesn't line up with my predictions.  So how do I get moving in the right direction? 

• I pull up my trade plan (remind myself of what was I thinking at the time)
• Consult my charts to see if my trade plan is still valid
• If valid, I make sure that my contingencies are properly prepared
• If there's something I've overlooked, I fix it ASAP

Scott O'Neil has a really interesting take on how fear impacts traders.  You can check out his video on it below: 

Hope: 

Plan for the worst...but hope for the best.  You're probably familiar with this phrase because so many people use it.  Unfortunately, the phrase is used so often because so many people ignore the common sense behind it!

In trading, when you choose a stock you're obviously going have hope that it will perform the way you want it to.  However, you can't overlook the realities of the world.  You've got to plan for as many outcomes as possible.  In my case, I like to prepare for every potential outcome on all of my trades.

To keep hope from leading me astray, I like to do a few things before I place my trade:

• I work off of the 8 day EMA because it's the single most important measure of health for any momentum stock.  Now I don't have to rely on hope or guesses - the data is clear.
• I open a separate chart that just focuses on the sector that my stock belongs to.  The sector chart is what I use to give me a heads-up on the intentions of financial institutions.  
• I review charts on the direct competitors and related industries of the stock I'm looking at.  For example, if I'm looking at Nike, I'm going to do a quick check on Adidas and Reebok as well.  I'm also going to spend a few minutes reviewing the health of Footlocker!  

This is the type of pre-trade activity that keeps me from having to rely on hope to hit my goals!

Next week I'll dig into Greed and Pride to show you how to fully recognize their advantages too.

As always, Happy Trading!

$CELG and $UHS - Plus My Targets For Credit Spread Trades

Is Fear Holding You Back?

Lately, every trade I place has turned on me or behaved out of the norm.  Even more frustrating, I've gotten stopped out, only to have the trade go the way I had planned, just a few sessions later! 

Naturally, I started to question my methods but when I talk to other traders, they seem to express the same frustrations. They tell me that they are fearful of placing trades and have just given up on the market for now. Some have even abandoned their process of screening for a proper watch list and setting up a trade plan.

That's a bad idea, though, because it dulls your edge and that will come back to haunt you when the market turns around.  Instead of giving up entirely, it's better to continue as-is but trade on a virtual account that doesn't put your real money at risk.  This is the best way to keep your skills sharp and learn from what's happening!

My Market Outlook

This earnings season has given us a lot of unpleasant surprises. Most of the bullish moves have been from a handful of stocks. Most growth stocks will make a 5% to 10% move, only to retrace to their buy points within just a couple of sessions. Most indices and sector ETF's are trading right around their 50 day simple moving averages (DMA) The $DOW is even worse and trading below the 200 DMA.  As a retail trader who trades very liquid growth stocks, I just don't want to be any where near the 50 DMA and certainly not the 200 DMA. That is a bearish territory for me.

Currently we have a very high distribution count. Last Friday at the close of session, we had all the sectors trading below or hovering around their resistance lines. The only sector that was holding ground was the Consumer Discretionary ($XLP)  Institutions were parking their monies in the tobacco, staples and pharmacy related companies. Most markets in the world are downtrending. Commodities like oil and mining materials along with precious metals are down trending too. This all points to a lack of global demand. It is best to be looking at stocks that are US centric.

What I'm Looking At

There are only 2 stocks that survived my funnel method this week. They are:

$CELG
$UHS

Last year, the month of August gave a return of +5.07% but most of the move occurred during the 2nd half.  I don't want my to fear hold me back from entering the market this week so I have prepared a target list of strong trending growth stocks for some low risk credit spread options. Here is what I'm looking at:

$NKE
$WBA
$FB
$CMG
$SBUX
$EQIX
$EBAY
$REGN
$NFLX
$AMZN

I prefer to wait on Monday until mid morning just to let the dust settle down. Any position I take will be small to start out with. I am mostly in cash right now and keeping my powder dry.

Good luck and Happy Trading!

The 4 Deadly Sins of Trading

Your Instincts Are a Problem

In August, I'm going to talk through what I consider to be the 4 Deadly Sins of Trading - Fear, Hope, Greed, and Pride.  

For the length of my trading career, several of my mentors have stressed to me that I need to remove all emotion from my trading.  So I started coming up with ways that would help me to approach life with an almost Mr. Spok-like attitude.  Unfortunately, I failed because I just wasn't able to tune out all of my emotions.

Scott O'Neil, who I admire greatly, has a pretty awesome series of videos on this topic.  Definitely worth checking out so I'll be embedding them in my posts through this month.  

He's one of the proponents of removing all emotion, which I don't 100% agree with but I still recognize that there is a ton of merit in what's he's saying.  However, I modified things to line up a bit closer with my own personality.  

My Alternative

I realized that there had to be a better way for me to do things.  A way where I could somehow use these potentially harmful emotions to my advantage!  I assumed this would be a risky adventure given that nobody else was talking about it, but I knew I had to pursue this for my own financial well being.

I also knew that my instincts and emotions existed within me for a reason.  It's because there's an evolutionary advantage to them!  Think about it, fear of risk is a useful tool for survival when you live in a dangerous world, full of animals that consider you to be a part of the food chain.  Our greed encouraged us to eat as much as we could in times of plenty which helped us survive through times of need.  Instincts helped keep humans alive and have been passed on to every one of us as a result.  

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The Technique

I decided to start treating my dealings with markets the same way a Cro-Magnon man would deal with a world full of saber tooth tigers.  I began to nurture my instincts to limit their negative impacts in my trades.  

Training myself to recognize when I'm feeling one of these emotions was the first step.  For example, when I recognize that I'm feeling afraid, I force myself to take a deep breath and step back.  I wait a few moments for the fear to subside, and with a calmer state of mind I turn my attention to charts and data!  

Now, some may say that what I'm doing is actually still eliminating my emotions from trading but I think my unique perspective here gels better with my over all approach to living life. Using my emotions as a trigger to action makes me feel more in control of my trading, and that's a must for me.  Incorporating instincts into my process may be one of the smartest things I've ever done!

Wrapping Up

Now that I've gone through a basic introduction to my approach, next week I'll go through the specific dangers of Fear and Hope in trading - and how you can turn both into an asset!

As always, feel free to reach out to me if I can be a resource in your trading education!

Happy Trading!

$DJX - Insights & Emotions

Your Emotions Can Be Useful

July provided a lot of opportunities for retail investors but talking to my readers and others in my circle, you'd be hard pressed to find much market optimism.  I'm not immune to the negative feelings but I try to use them as a trigger towards positive actions and when in doubt, I consult the chart!  I try to keep in mind that charts are there to tell me the story of all the human behavior behind the market. 

So, What's the Story?

• In July 2014, $SPY did -1.35% and this year it did +2.26%. Most of the gains this year occurred in the first two weeks of the month (+4.5%). We had a follow through day on July 17th but the rally fizzled soon after and the market gave back half of those gains! Thus, the popular opinion tells us that July was a bust!

• In July 2015 the $NASDAQ outperformed the $SPY by twice as much. The $QQQ index that I prefer to study was up by $4.56% this month. This was mostly lead by just a few stocks such as $GOOG, $GOOGL and $AMZN. However, it's important to note that it wasn't a broad rally and, most of those gains came as a results of earnings activity.

• The $DJX has been quite a disappointment for July as it was up a mere +0.46%.  The index is still trading below the 200 simple moving average (SMA).  The index is made of stocks that are multinationals and a reflection of our Industrial sector ($XLI), the Materials sector ($XLB) and the Energy sector ($XLE). It is also a reflection of a downturn in the world wide economies and a very strong dollar.

On that note, I've had some interesting conversations lately with Tyson Conrad, who has a background in recruiting electrical engineers for large scale construction projects.  With his work being on the front line of the construction industry, he's uniquely positioned to see how all of this this lackluster $DJX activity affects the industry.  

Interestingly enough, his business is booming because there's a rise in the need for automation and the deployment of cutting edge technology - which is what electrical engineers excel at!  Now, look at which sector is showing the most strength and think through things logically.  When any industry experiences a slow down, you can expect that there will be someone who benefits! 

Who Made My Watch List?

For access to my full watch list with side by side comparisons, you can subscribe to my weekly watch list and trade plan service.

Some of the items on my watch list are extended but don't be surprised if there's still some juice left in them. Now that earnings out of the way, they're a safer bet but as always, I will only take a very small position in them and I refuse to chase them if they pass their buy point.  Instead, I'll wait for them to retrace to the specific buy point enumerated in my trade plan:

$VRX
$CELG
$EW
$UHS

Other Opportunities

Over the past 3 weeks, I've been keeping tabs on the Consumer Discretionary ($XLY) as well as Consumer staples sector ($XLP).  Several stocks in each sector present opportunities for a low risk, short term option trade.  These stocks aren't technically on my watch list yet, but they've definitely appeared on my radar: 

$WBA
$CVS
$RAI
$MO
$DIS
$SBUX
$CMG
$NKE
$FFIV
$EBAY

Be careful this week and as always...Happy trading!