Random Rants and Market Ideas by Brandonf

I am very often asked what I think of the market here. Often I have an opinion, other times I do not. My current take is that the market might go higher, but if it doesnt it could go lower. If it does not do either of these things then we would be in for more sideways trade. PROFOUND!

So, seriously what do I think? I dunno that pretty much sums it up. The US markets have been trading in a sideways range for some time. This is a healthy thing for a market to do, nothing moves in a straight line. However, when the market is "home on the range" its not generally one that I will make a big profit in. There are always pockets of strength and weakness giving me a few trades, but there is not a ton right now. What does the sideways market do? Well on my personal account I was up 7% in the first week and a half of Febuary, right now I am up 2% because sideways markets whack me around.

Until we break either lower or higher my sizes will be small, around 25% of what I normally trade. Some names to look at include TRLG, CELG, BBC ( this one I found on John Anthoney's Trading Markets blog..the guy is sharp!, I love the work he does and his philosophy seems to line up very well with my own- looking for under owned, under watched names that once they are disovered by Wall Street have the potential to produce massive gains. I don't know John, but I would love too), GII etc. I am tempted to buy Homebuilders on the next pullback if they put in a higher low.

Brandon
 
Yesterday was a day that looked pretty nice. The S&P500 gained 4.69 points, closing at 1294.12. The Nasdaq Composite gained 20.15 points, it closed at 2307.18 and the Dow gained 35.70 points, it closed at 11097.55. Over the last several years the Midcaps and Smallcaps have been providing the major leadership in the market. The Russell 2000 closed at a new high at 740.63, gaining 4.04 points, the S&P400 (midcaps) gained 1.74 points and closed at 782.39. On an intraday basis the S&P500 traded at a new five year high, while the Russell closed at one. Volume came in at 1.78 billion shares on the Nasdaq and 2.00 billion on the NYSE. This was only slightly higher so I would not call yesterday an accumulation day. Another thing that concerns me is that the market was not able to add gains into the close. There was a huge upthrust in the indexes that started around 10am and moved all the indexes nicely higher. The market then marked time, trading in a sideways fashion the rest of the day. This was perfect action to setup another large move into the close as institutions got involved in the last 40 minutes or so of the day. This didnt happen though, in fact the market started to sell off in the last 30 minutes of the day and actually saw volume pace pick up as it did so. This is obviously not what I would have liked to have seen. For this reason I am still playing it pretty close to the vest on US Equities. Japan is super, India is super, and so is Brazil. Since last August I have had about half of my own funds and about 1/3 of my clients funds invested in these three markets.

As you are scanning the market for buying opportunities I would suggest you look at names trading under 300K shares a day. The best pockets of strength have been in names that do about 30k to 300k shares each day. I know that many people shy away from names that trade under 1 million or 500k shares a day, and it is exactly for this reason that they often offer such great opportunities. When I look at my trading journal I see that about 25% of my trades are in names that average under 120K shares per day but 62% of my profits are found in those. Just under 10% of my trades come in stocks that average 20-50K shares per day, yet these have accounted for nearly 30% of my profits in the last 4 years. Unfortunitly because of the low volume in these shares I am not often able to share them before the fact with you since I do not feel like having the SEC knocking on my door. At any rate, I would suggest you not neglect this area of the market as it can be very profitable, and technical analysis works very well in these names.

Leadership has started to show in retail, we had a nice breakout yesterday. I would focus there for buying opportunities, as well as in small and midcap biotechnology names. Transports of course are never going to have a down day again, it has evidently been decreed by God that they can not. I like the fact that Google has been able to pick itself up by the bootstraps here, it shows the fast money crowd is back in the game. Personally I see no reason to own Google anymore, I had it from the day after the IPO until early Dec. In early December it hit institutional ownership levels and attained a price to earnings ratio that caused me to no longer be interested in the stock for anything more than a trade lasting a few days. However even that would not be in the cards at this point, at least until we get something of a pullback. Should that occur on light volume then maybe we can go out and play with Google for a bit, but I do think there are better names out there. For those of you looking for specific names to keep an eye on here are a few on the buy side. TRLG (which continues to be my favorite long term play, I am currently long) OATS, BEN if it can pick up some volume and move higher and then pullback on light volume..if this breakout continues as it is on low volume it will be a very vulnerable stock so I would stay away. I am interested to see what the homebuilders do here over the next several days. Everyone seems to hate them right now but they are not acting as bad as it would seem they should, TOL is the leading name in that group. On the short side I still like the beamer (IBM) alot even if it has not returned the love back to me in the form of profits. Oil;s also look like they will be vulnerable to further downside. PDC has been one of the very weakest stocks in that group, I would not short it right here as it has gotten rather exdended on the downside- but should it rally on light volume that would provide a nice opportunity. Also notable in the oils are XOM, RIG, SUN. I bought AX on Weds and it continues to provide nice profits, I will now be looking for a light volume pullback in order to increase my size. An example of a light volume stock that could be providing opportunities for those willing to dable in that pond is GIII. It broke out on 800% of its average daily volume on Thursday and since then has traded in the top 1/3 of Thursdays range on lighter volume. Such a pattern is often a prelude to a continued move higher. I will be watching for a break above $16.50 to give me a buying opportunity. I do not currently have any shares of GIII. Should it setup this is one that has a great chart, but so so fundamentals. It might be a great turn around story so I will give it a chance, but it will be a small chance, GIII will get about 10% of what a typical stock will get out of me.
 
Before I take on a new money management client I have a policy of getting to know the person as well as possible. I do this because I have had some bad experiences in the past taking on new clients who did not know me well enough to be investing with me, and I did not know them well enough to make them a significant part of my life, which my money management clients become. Severa months ago I drove down to Naples and played 15 holes of golf with a potential client, it would have been 18 but I am truly as terrible at golf as Tiger Woods is good. This obviously is not the point of the particular thought I’m on, but it’s the background.When I was there I was truly inspired by the power of the human spirit, and by the realization of the incredible opportunity all of us have. I briefly met a man who, at age 17 was involved in a terrible farm accident that left with no right arm. This man grew up as a poor “farm boy” in the Midwest, and despite the physical and economic disadvantage’s, he rose to become the CEO of one of the largest Dow Components. He is also, with only one arm, a decent golfer. I met another man who grew up in poverty on a dairy farm, his wife was an orphan. He started out his life working in a packing house as a laborer. He and his wife decided that they wanted a better life for themselves and their children, and deciding that he started his own business selling provisions. He started this business with only $200 to his name and eventually sold it for over $50million. Both of these men are living breathing testaments to the absolute power of human determination. If you truly want something and believe with all of your heart you can get it, nothing will stop you.


What does this have to do with trading? Nearly everything! It has probably the hardest thing I have ever attempted to do in my life, and most people will fail. The odds are stacked against you from the very first time you place a trade, and the only way you are going to come out ahead is to be more determined than the next guy and outwork them. If you are hardworking, determined and have a bit of common sense though I think you will eventually get it. Im not the worlds smartest guy, I pulled C's and B's in school, but this is all I have ever wanted to do. I was very fortunate early on in that some very successful people could see my determination and they helped me more than I could ever pay them back for.

The next point is one that I know will upset some people. I am told all the time that “All of you damn Americans think you live in the best place in the world!” By the end of my golfing trip I no longer thought I lived in the greatest country on earth, I now know it to be absolutely and without a doubt true. I too grew up very poor. For many years I did not have a father and my mom was on public assistance. I spent a good deal of time angry and very envious of the rich kids born with the silver spoon in their mouths. But, I must confess that the more people I meet who have picked themselves up by the bootstraps and made incredible lives for themselves here despite their circumstances, the more I really believe that each and every one of us, simply by virtue of having been born American’s truly, we have all been born with the silver spoon. Sadly many people spend a great deal of time with their mouths open complaining about their circumstance and wanting a free ride, and then that spoon falls out of their mouth. Very sad, but in the vast majority of cases I really believe they have only themselves to blame. We live in a place that if you are passionate, ethical and determined there is no limit to what can be had.

Brandon
 
The key to success as a trader is to get yourself into a routine. Boring, predictable. The same stuff over and over again. Once all the hype is gone, trading is a job and the only way to be successful is to treat it like a serious business. We are our own bosses, and we have to be the biggest assholes that we have ever been employed by or success will be fleeting if it is seen at all.

Because there is a ton of money on the line, and race, sex or family background will have nothing to do with making it tends to attract the brightest and most motivated people in the world. Great traders are in a word, hungry. All of these people are after the same money you are I are trying to make. So, prep work is key. In the following paragraphs I will show you what I do to prepare for the following day.

Market Analysis
The very first thing I do is look at the most popular cash indexes. (Dow Industrials, Transports, Utilities, SP500, SP400, Russell 2000, Biotech, Semiconductors etc) I also look at some key market statistics such as the VIX, 5 day and 10 day moving average of the TRIN, high and low of day for the TICKs, Volume, Advance vs. Decliners etc. This helps to give me a good idea of where the market sits. I also note any sectors that are producing setups.

Futures

Next I look at the four key futures contracts that I feel are important in moving the market. The CBOT's Dow (/YM) and 30 Year Bond (/US) and the CME's SP500 (/SP) and Nasdaq100 (/ND). I look at daily and longer term intraday timeframes to note key area's of support and resistance. This gives me a good idea of what price levels to be aware of the following day. The market analysis and futures analysis takes about 40 to 60 minutes.

Individual Stocks
I feel that it is very important for a trader to get a good look at the top stocks each and every day. This is true whether you trade stocks or futures for a living. I can not recall how many times I have gotten key insights just by scanning the various components of the SP500, Nasdaq100 and the top 200 volume stocks of the day. I look for classical setups such as pullbacks, breakouts, head and shoulders, flags, double tops and bottoms etc. The 90 or so minutes I spend each night on this has made and saved me more money then I care to count. Next I go back to my sector list. As you will recall I write down the sectors which themselves are producing good setups. What I will now do is go and look at each of the stocks in this group and analyze them for a trade. I look for setups and relative strength. This takes between 10 and 60 minutes depending on how many sectors are setting up.

Setups:
I next look at the various setups and scans that are programmed into tradingscans. I start off looking at the uptrending and downtrending stocks. As when I look at the database in the large indexes I am looking for classical patterns that can key me in to the next big move. All of this takes another 90 to 120 minutes.

When my analysis is done I tend to have a large number of stocks written down on a piece of paper to look at further (sometimes up to 50). I try to get this down to a manageable number (15/20) by looking deeper at these stocks. I will go over the weekly and key intraday timeframes to clue me in as to which ones might be offer the best opportunities. Finally, I look at my list from the prior day and see if there where any large movers on it that did not make it to my final list. When this occurs I will go back and study this chart to see if there is anything I missed would have had me putting this stock on the final list. I always have learned more by my mistakes then triumphs, so don't cheat yourself by avoiding this critical phase of your nightly study. This final sporting takes another 30 to 45 minutes.

All told I spend 4 to 6 hours each night market analysis. This is in line with all the most successful traders I know. Trading is a lot of time and a lot of work. It is something that you must have a passion for in order to continue on. I think it's also important to realize that your real work is done at night. Most traders make the mistake of thinking they work between 9:30AM and 4:00PM. This is like saying a professional football player works for 60 minutes on Sunday. That is ridiculous, the 60 minutes on Sunday is the commutation of years of hard work and practice. Sunday is when he gets to put it all together, let loose and play. If your trading is to be successful, that is how 9:30 to 4:00 has to be.
This covers the technical analysis portion of what I do. I got my start as a daytrader buying breakouts and whatnot, so I am very comfortable with charts. Once all of this technical analysis has gotten me a list of STOCKS I then look at the fundamentals of the COMPANY. This helps to determine if a stock will be kept longer term or shorter term, how much risk I am going to be willing to take on it among other things.
 
Quote from Brandonf:


I try to get this down to a manageable number (15/20) by looking deeper at these stocks.
More...

15 to 20 stocks is still quite a handful.

How do you manage this list during the trading day? Do you use alerts or do you place stop or stop/limit orders at your entry points?
 
The market continues to be pretty spastic, red bar/green bar type action..not the best for my bottom line. However as I scan there are a lot of names on both sides of the marke that stand out as worth watching.

Longs include: nsm, trid, brcm, joyg, cost, akam, utx, bni, form, csco

shorts include ibm, mo, ebay, yhoo, amzn

Brandon
 
Today turned out to be a pretty good day.

I want to have a look at CSCO. My favorite thing in the world when I can buy a swingtrade/positiontrade using a daytrade setup. Why? Because daytrades have small stops (risk) and swingtrades have larger upside potential. By taking a swingtrade but using a daytrade entry you combine those two things. You get to assume the risk of a daytrade and have the upside potential of the bigger picture trade. PERFECT.

If you look at an intraday and daily chart of CSCO you will see what I am talking about. On the 28th CSCO based right under $20 per share. You can see this on the 30 minute chart I have attatched. Once it broke above this resistance level CSCO gave a nice daytrade setup. Because I entered using the daytrade trigger I was also only required to take the risk of that daytrade. I placed my stop under $19.95, risking 5 to 8 cents on the trade. This is apposed to placing it under $19.50 if I was using the daily chart pattern. This allows me to take a much bigger position in the stock so that if I lose money it will be the same in either case, but if I am profitable it will be much more so. The reason for this is because I risk 1/2 of 1% on each of my trades. So as an example if I have $250,00 in my account I will lose $1250 if my stop is hit. By placing the stop under $19.50 per share I would have been able to take about 2100 shares, however by placing it under $19.95 I could take about 14,500 shares. I think you can see the differance in potentail. Now going back to that daily chart, you can see a nice base after the large gap up on Feb 8th. As soon as a stock has a large gap such as CSCO did it goes on my list of stocks to keep watching. I want to see them hold their gap and base, exactly what CSCO did. This base kept running into resistance around $20 a share, so this was the breakout point to be watching. CSCO provides about the closest thing to a perfect example of what I look for. Ideally the daytrade will provide an entry point a couple of cents under the swing/position trade setup. The reason for this is that when the daytrade triggers a tad lower the momentum the daytraders create will often "setup" the break that traders in the larger timeframes are looking for. Then you get a fresh round of momentum as the bigger picture traders enter. This type of action allows you to very quickly move stops up and lock in profits.

Now onto the market, what to say. To me price has always been the undisputed king, everything goes back to price, but VOLUME is without a doubt the QUEEN. All of us know that if the Queen isnt happy the Kings is likely to be grumpy. After the distribution day we had on Tuesday stocks rebounded nicely on Weds, recovering Tuesdays losses and triggering traps. Many of the indexes CLOSED at five year highs. And here in lays what is to me a significant problem. Volume was mixxed at best. It was up about 2% on the Nasdaq but down about 5% on the NYSE. When NEW HIGHS occur on lower volume that is warning sign to you that CNBC Is more interested in the upside than large traders and investors are. New highs on Lower volume are a signifant warning sign and often mark tops. Am I saying to be short just yet? No, In fact I am now long. I have positions on in GLW, CSCO, IWM, BRCM, OATS, NSM and FORM. I am however not entirely comfortable with any of these and am actually already using intraday price points to adjust my stops. This is not par for the course because had we seen good volume on these breakouts I would be willing to give them a good deal of flexibility for the simple reason that technically these are gorgeous looking stocks that have shown superior relative strength and they also have good fundamentals. In short they are the kind of stocks a trader has wet dreams about. I just cant ignore that low volume though, so I have myself in a positon that will allow me to quickly blow out my positions and return to cash, maybe even go down.
 

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I am getting sea sick. Red Bar, Green Bar, Red Bar, Green Bar. She's up..no wait..she is down....no wait, its up..no wait...just..wait, just a minute, maybe..nope,.nevermind!!

Anyway I am back to cash with the exception of my long in NSM. I made some small profits, not much but enough to get myself a hamburger happy meal @ lunch I guess. Currently I am watching HOTT, if it breaks to a new LOD I will be short. Everything is small at this point. Until we actually break the range I am trading with 10% of my account. That is to say I am trading as though my account is only 10% as big as it really is. Why am I doing this? Because this back and forth type of market is very hazarous to my capital and confidence, so I need to go small. But, I also feel its important to be in the market. So, I resolve that by doing it VERY SMALL and insignificantly. I will not be trading with size again until we clearly break this trading range we have been in since the end of December. Once it breaks, and it will, I then want to see how the volume is, and what the pullback looks like. Lets just assume the breakout occurs to the upside. I will be keyed in on volume. If the breakout occurs on light volume I will assume its likley false. After the breakout I want to see what kind of pullback we get. It better be on lighter volume than the breakout. Only should this criteria be met will I start to get back into the market in a major way. Until then Im sitting. I made 17% in January and 3% in Febuary so my returns are fine for the year, my yearly goal for my accounts is 30%. At this point my job is to preserve capital and wait for the best trades in the best market. If that takes awhile and I have to live with being bored for a bit, I can do that .Bored is better than broke and frustrated.

Brandon
 
On Friday US Equities opened up sharply lower as bond yeilds hit new yearly highs and Intel accounced that it cotinues to lose market share and revenues are falling. It certainly looked like dark clouds on the horizan, however after the open the market quickly found its legs and moved higher with semiconductors (including INTC), networking stocks, some retailers and small caps in general showing a lot of strength. I was starting to position myself aggressively for a bottom in the market because the type of action we saw is how they usually form : A piece of bad news, already baked into the cake, is finally released and the market sells off but it quickly recovers and moves higher on good volume. This is the strongest buy signal I can think of. However, all did not go according to plan and the markets started to leak after the bonds closed and that only accelerated into the last half hour or so. We ended up selling off on very heavy volume and equities put in a pretty clear distribution day. This was the third or fourth one in a very short period of time. YACK!

So what to do? I guess we are really back to square one because the market is not breaking out of its range either way. As I said I did start to positon myself pretty aggressively Friday and took a bit of a smack on the news on it, especially in my index positions. Suprisingly many individual shares continue to hold up very well, for example GLW, CSCO, GWR, AMTD, FIX, JDSU. Each of these looks buyable at this point if they pullback on light volume. These are the best looking names on my pulback list. On my breakouts list there are a number of stocks waiting to setup, some of my favorites include MBT, MW, FSL, MSCC, LUV, LQDT, DBRN, and UPN. However, with the current whipsaw market we are in I am going to play any breakout on the light side and look to get the balance of my positions on in the event of a light volume pullback. This obviously somewhat limits my upside potential, however it does a lot more towards protecting the two C's (CAPITAL and CONFIDENCE) which are the two most important things you got.

My personal opinion about what is happening is just that the market is making time before moving higher. Too many people are bullish though right now, so something needs to happen to get them out of the mraket. Nothing is more likely to get folks to give up and walk away than when the market just whips them around. One way or the other this whipsaw will resolve itself, it always does, and most likely when it resolves the following move will be HUGE. In the mean time tread light so you can come back and put up with it again tomorrow :)

On the short side there are also a few names standing out. A couple to look at are BBBY, ANF, DELL. Each of these are among the weaker names in the market. We have two way action out there so I think both sides are playable, but again wtih caution. I am trading at 15% CAPITAL right now, and may go down to 10% if we do not resolve this range in the next few days. As soon as we do move out of the range I will very quickly get my market exposure up.

Brandon
 
When I was in 4th grade my Little League Baseball team went 1-12. In an effort to cheer us up our coach arranged for us to go to the Metrodome in Minneapolis and watch a Twins game to watch the World Champions play. Somehow he also arranged for it that several players would stay after the game to meet us. The Twins lost the game 3 to 4 in the last Inning and I can remember that when we went down to meet them most of the players gave off the impression that they did not want to be there with us. It was rather uncomfortable, and probably would have been a memorably bad experiance except for Kirby Puckett. He came in and lit up the locker and really gave off the impression that he WANTED to be there with us, not that we inconvenianced him and he single handidly made it a great experiance for us. Baseball lost a great Hall of Famer. I know that the last few years have seen Kirby hit hard times, but I will always remember his smile and enthusiasm in hanging out with a bunch of 8 to 10 year olds.

Speaking of sad, how bout the US Equities market! Global equities are, I am afriad, not far behind as it looks like the European Centeral Banks and the BOJ is going to be taking after the Fed and raising rates. I want to be clear about this, if the BOJ starts to raise rates, all bets are off on Japans recovery. Japan's economy depends on the weak Yen, and the gobal carry trade in Yen is measured in the TRILLIONS of dollars. Everyone is leaning in one direction on the Yen. Should the BOJ start to raise rates this carry trade will unwind as it becomes more expensive to barrow yen. This could very well lead to a global crisus a la 1998.

I still don't have a lot to say about direction and picking trades at this point. The market followed through to the downside, so we finally have two days in a row in one direction! Volume also increased, and this of course is on the heels of increased volume on Friday as wel. So, we now have TWO higher volume distribution days in a row. Even more importantly than this is that the right hand side of my notebook is starting to catch up to the left hand side in terms of the number of names. At this point I am still going to tread very light, but I do think that we have found a direction (down) for the short to intermediate term. It will be critical to watch how the market acts when it finally gets some upside. If it rally's up to resistance on light volume that will be the icing on the cake. You will want to be building a list as the market rallies, and that list should include stocks that are clearly seeing downside momentum and do not participate in the markets rally. These are likely to be the best names to play on the short side. Commodity related stocks, Gold and Silver, Oil's etc, led to the downside along with Healthcare, Semi's, Biotechs and Software. These are likely to be nice area's to focus on in your hunt for shortig opportunities. There are still several Small and Mid Cap stocks which are acting extremely well and with the two way trade we are seeing it would not be wise to ignore them. I think you can likely play both sides of the market, however my bias is moving to the short side slowly but surely.
 
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