Monday, May 21, 2012


Sports always present great analogies for life for some reason and yesterday was no different. As I watched the last Lakers game I will ever watch as long as Kobe Bryant plays for them, one thing became painfully clear. They are going to be sub par for a very long time going forward now. Once again he single handedly threw away a game in the last two minutes. He not only is not the best closer, I would argue he might on some levels actually be the worst player to have on the floor in the league in the last two minutes unless you are way behind and hoping for some miracle. I watched one possession after another where he waved off the pick and roll leaving the team mate setting the pick standing out of the play and went 1 on 2 throwing up a horrible shot and missing, as his team mates all stood by watching.

This guy is a cancer at this point

Here is the problem. All the rumors are that they will make a trade to build around him. They need to get rid of him. No matter who they bring in, he will do the same stuff at the end of the games, and the results will be the same. I just cannot understand why people are not talking about this, it could not be more obvious? People wonder why the big men disappear at the end of the games? He won't pass them the frickin ball that is why. Why would you build around the person who is causing you to lose in the end?

Here is what we can learn from this

I am in the process of changing how I do my stock trading. I have been for awhile now and have shared some of the things I have been doing here that have not been any good. The key to any strategy is that at it's core it has to have an edge, an advantage in the game. Once you have identified an advantage, you can best determine how to exploit it. In the above case of the Lakers, opponents have a clear edge in close games against the Lakers, because they know what Kobe will do. All they have to do is double team him because they know he will not pass the ball. As a result, they have a very good advantage to work from. As it pertains to the stock market, we have a similar condition in place now. We know there is a historically high correlation among asset groups. As a result we know if the ES is rallying, we don't want to be shorting stocks, we need to be buying them. Of course there are exceptions, there are companies that can and do implode irrespective of the overall market. However, the number of situations like this is decreasing steadily. I cannot tell you how many good looking stock shorts I have had over the last few years that went to hell just because the overall market was so incredibly strong.

The edge is now simply trading individual stocks in the overall direction of the market. You might ask why not just trade the indexes? The answer is you should, but you need to trade both. At times the indexes are completely controlled by the FED and they just go and go and go, giving no pullbacks for entries. They cannot control all the individual stocks, so there are opportunities there as individual stocks pullback while the FED is buying ES futures day after day. The rising tide lifts all the boats, and we have seen that more and more and more. They have alluded in speeches that at some point they would consider buying stocks if need be, but have not done so yet as far as we know. The challenge then becomes, how to best do this?

From my studies I have found a couple of things I will share here. First, do not buy or sell breakouts of highs or lows in individual stocks. There are so many games being played at these points. I have never believed in stop running, but there is something going on now I can't explain. You can watch a stock with a narrow bid ask spread and good volume trading, then place a stop a long ways away, and the market moves right to it for a trade them moves back into that narrow spread again. This has happened to me many times, and should be illegal. When I go to the brokerage firms for help I get shined on every time. You need to pick your spots and enter at the market when your conditions are met. This way the markets cannot game your entries. You may even want to buy or sell on limits. If it comes to exiting and the price moves to where you want to get out and take a loss, wait a few minutes to make sure the stock is not being gamed just to fill one stop. Once it trades multiple times in the zone, you can get out.

The second thing I have found is that there is such a large percentage of gap opens now due to the overnight futures moves, that you have to be very careful about chasing these openings. Generally I want the price to trade through the area I want to enter. Some gaps just take off and never look back, it is not a perfect world. Third, do not have resting stops in place when the market opens. I wait a few minutes to make sure volume is there and only then if I feel I have to have a stop in I place it. In general, I do not use stops anymore for exits with stocks.

The third thing I will share is that I have established a Trading List. This is a list of stocks that have smooth enough bar patterns, so they don't look like a pork belly chart. ETF's in general do not make this list, they are just gap havens for the most part. They require a different trading approach than regular stocks. There are some that are not as prone to gaps and I do trade some of those. There are so many ETF's that feature huge volume yet the majority of the net moves are on gaps, so you really need to handle that differently. I have mentioned that Larry Connors books put forth good strategies for this. They do have one big problem, the losses can be huge on these strategies, which is why I do not use them. They hit at a very high percentage, but when you get a market decline like this you get absolutely smoked.

I scroll through the trading list to look for trades. I do miss some that are good, but at some point you can only look at so many things each day. You can of course setup custom screens to filter for certain setups and I do have many of those. Those are the only thoughts I have on stock trading at the moment. I am still working on a few ideas and how to best implement them. I need a 5 year old now to look at the ideas to make them simpler, any one have one handy?

The only new trade I am looking at today is Cocoa on the short side if it breaks. It does not appear that it will at the moment, but you never know. There also was a Bond buy at the open with the trading system, which based on how extended that market is appears to be lousy. However, systems are systems, so all the trades are the same. Opinions are not programmed into them. For disclosure purposes, I am not in that trade I am just monitoring them as they are spit out. I am not 100% convinced that any system will hold up nowadays, so I want to watch this one for awhile before I commit any money to it.

I know the spacing in the first sentence is messed up but blogger won't let me fix it so it gets posted as it is. Sometimes there are gremlins with this.

Good luck this week

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