Trader's Thread 01 (May 08 - Dec 08)

[kennynah]

i have said before that O'Neil's method is NOT applicable in a BEAR trending market... the tool is as good as how knowledgeable the person is in using it.

[winston]

The last couple of follow thro's went no where and quickly met with resistance and failed. Furthermore, if funds don't come back to Asia, stocks won't move much. YZJ and Cosco might be the exception cos' they have lost close to 90% from peak...

The outlook for the shipbuilders Cosco & YSJ are not too good though. There's a lot of cancellation and even when they've projects, they may not be able to collect.

However, stockmarkets do lead the real economy. This time, what would be the lead time ? Is it 3 months or will it be 12 months ? And do we see things improving in the near future ?

And what about the short-sellers ? Have they covered their positions on Cosco & YSJ ?

[Cheng]

San, Gran, MM, Kenny, winston, thanks for all your replies.

I'm still learning though, trying to find my investment philosophy. Some said that the market can be timed, some said cannot, I want to find out on my own. People's mind are wired differently, some can't figure it out at all, maybe some do.

MM: Yes I'm a value investor and believe that the small retail investor should not be buying and holding on a stock forever, I do have my exit strategies. The strategies to manage huge capital like millions of dollars and small capital like a few thousand is very different. That's what I've found out this year. It is more profitable for the value investor to buy on value, with a margin of safety and then sell when it hits your target price or to allocate capital to stocks that can give you better returns over the long run.

[iam802]

Here's how I would read the charts in a Bear market.

Without using Ichimoku, just using 50 day MA or 200 day MA... we will use that to determine the big trend.

If the trend is downtrend, the next thing I would scan is RSI or Stochastics.

In a downtrend, I want to see if the stock is overbought. If it is overbought, I would want to play the short side.

If it is oversold, I may want to take profit.

The reason for this is simple. We are only at the beginning of the credit crunch. Not even in the middle. Are banks going all out to lend to businesses ?

If business are not getting cheap credit, what is the chances of them expanding business easily?

I would say, don't worry about the bottom. Just wait for the trend to change. If the trend change, and it last for 5 years, being late for one month is not going to 'kill' you.

[helios]

The reason for this is simple. We are only at the beginning of the credit crunch. Not even in the middle. Are banks going all out to lend to businesses ?

If business are not getting cheap credit, what is the chances of them expanding business easily?

wáh ...

just saw the ASME made a press statement on credit support from the garmen.

use that as yardstick?

[winston]

Dear Cheng & Kennynah etc.,

I've moved all the discussion on "Margin of Safety", ""Intrinsic Value" etc, into the "Value Investing" thread.

Take care,
Winston

[kennynah]

ok..thanks w....

[millionairemind]

WEDNESDAY, NOVEMBER 19, 2008
GETTING TECHNICAL

The Agony of Retreat
By MICHAEL KAHN | MORE ARTICLES BY AUTHOR

In recent weeks, each quick market rally has been erased by a steady decline. That's a sure sign that the market has a lot of healing to do.

OVER THE PAST MONTH, THE stock market has confounded everyone more than it usually does. From persistently high levels of volatility to an unbelievably wide trading range, conditions are unusual, to say the least.

As exciting as the occasional power rallies are, the slow retreats that follow have been agonizing. And now with this week's action to date, the scales are tipping toward the bear case once again.

Now that we've got some data under our belts since Oct. 10, the day many think the market had its final blow-off decline, we can start to look at its ebb and flow. Specifically, we want to gauge whether demand has come back into the market. Are stocks being bought with any urgency or are they still being sold as actively as they were in the weeks leading up to Oct. 10?

So far, the signals are mixed with this week's action, as mentioned, starting to tip the scales toward the bearish side once again. All the strong rallies we've seen did not last and prices retreated all the way back to their worst levels.

Indeed, over the past five weeks, the market has fallen for two-and-a-half days for every day it has gone up. From a technical standpoint, markets that spend more time falling than rising, even if the net change is zero, are still in rough shape.

For a bullish spin, though a weak one, the market has not made a significantly lower low since Oct. 10. The word "significantly" is important because some major market indexes, including the Nasdaq, have indeed been setting new lows. But the trend, if we can call it that, has been more sideways than decidedly down.

A better, but still weak, bullish angle comes from trading volume, or the amount of money committed to either the bull or bear side each day. All of the higher volume days that have occurred since Oct. 10 have come on days when prices rose.

Theoretically, when prices are going up and volume increases, it means that investors are chasing the market higher. That's a sure sign of demand. Subsequent declines occurred with lower volume, so we can conclude that the desire to sell was not quite as strong as it was before Oct. 10.

While volume on price surges was good, there were many more price declines than surges. The cumulative amount of volume committed to selling was greater than that committed to buying -- and that is not very positive.

Meanwhile, many analysts are talking about a retest of the market lows as a sign that a bottom has been made. With major indexes revisiting their Oct. 10 intraday lows not once but twice, it is tempting to think these retests have already happened. My view is that they have not.

Let's first define what a retest is. Following a major decline, the market rallies as bottom-fishers scoop up perceived bargains. But the rally fails, and prices dip back to the previous lows.

Given that loose definition, I contend we have not seen a true retest because the market has not been able to lift off and stay off its lows for any appreciable amount of time.

At the bottom of the last bear market in October 2002, the Dow Jones Industrial Average dipped to 7200, in round numbers, before rallying to 9000. It stayed above 8200 for nearly three months before falling back to test its low again.

In 1987, the Dow dipped to roughly 1600, before immediately rallying and holding in a zone around 1900 for several weeks before its retest.

It was similar in 1974 at the end of a very brutal bear market. It was even similar in 1998, when the market suffered a sharp correction.

The point is that the market has not been able to escape its worst levels. And that means it has not rallied in a meaningful way yet. Without rallying, it cannot come back down for a retest.

The implications are important. Whether the market rallies and retests, moves sideways in its trading range or falls to new lows, it will be many months before we can even think about the market being ready for its next bull market.

[winston]

Keep Yourself in Trades by Widening Your Stance By Rick Pendergraft

In golf, when you are putting in the wind, you have to widen your stance.

In volatile markets, this rule can be adapted to apply to trading as well. It may seem like strange advice, but in times of extreme volatility, you need to widen your stop-loss points. Most people think you have to do the opposite and tighten them.

Let me explain: When the market is swinging back and forth wildly, movement within a day can knock you out of a position. Then, when the market swings back in the direction you were counting on, you will have been stopped out... and missed the gains you should have had.

It's frustrating when a trade goes against you. But it is even more frustrating when you are in a trade, get stopped out, and then the trade turns around.

Take my advice and loosen up your stops a little. You still need to set stop-loss points, but when the market is volatile, you want your stops to be nearly impossible to reach within normal market activity. What constitutes "normal" activity keeps changing. What seems normal now would have been considered insane just a few months ago.

[winston]

Buy and Hold Revisited -- by Bill Kraft

Around this time last year, I wrote an article in which I warned of the dangers of buy and hold investing. One critical response accused me of "shucking and jiving" and asked for academic publications supporting the value of trading options. The critic went on to write: "Our family has owned Citi-Corp [sic], yes that doggie, since $14 a share..." Back then, Citigroup (C) was trading around $33 a share. Today (Thursday, November 20, 2008) as I write, that "doggie" is trading around $5.35. I hope that fellow hasn't continued to hold. At least, I hope he became aware of the value of options in the form of protective puts that may have saved his bacon.

It seems that each time I address the frailties of buy and hold I get several emails telling me that the buy and hold strategy is the only way to success in the markets. It simply isn't. The Dow and S&P500, are back at 2003 levels and the Nasdaq Composite is about 28% of where it was at the high in 2000. Why would anyone want to hold through drops like those we have recently witnessed? The old refrain of "it'll come back" can be a cruel deceit. A year ago, who would have guessed that there would no longer be a Lehman Brothers or a Bear Stearns or a Washington Mutual? When will those once strong companies come back?

For years, I have advocated that traders and investors have an exit strategy in place before they ever enter a position. I earnestly suggest that something as simple as the break down through a moving average can serve as a way to cut losses. Looking at Citigroup, for example, back when the critic wrote last November, the stock was trading around $50 a share. This past June, it broke down through the 50 day MA around $52.50. That was at least one potential signal to exit. By July, the 50 day MA had crossed below the 200 day MA and the price had fallen to around $46.50. Here was another signal. A support formed around the $45 level in August and September and when the price dropped below the support, there was yet another signal to exit.

Using any of those exit strategies -- a break below the moving average, a moving average cross down, or a break through support would be acceptable exit strategies. However, the buy and hold afficianado would have watched the stock tumble roughly 90% to its current levels. Why hold through these downdrafts? The pain has to be intense and if the stock has dropped just 50% in price, it has to go up 100% just to get back to even.

For those who just don't want to sell their stock no matter what, we addressed the subject of insuring the position by purchasing puts in last weekend's article and that strategy is another by which investors and traders can limit losses.

I do want to mention that my new book, "Smart Investors Money Machine" will be available soon! I will let you know when and where to order it when it becomes available. "Smart Investors Money Machine" is designed to have broader appeal to a wider range of investors than the first book, "Trade Your Way to Wealth". "Smart Investors..." deals with a wide variety of ways to produce regular income and, in addition to discussing strategies such as writing covered calls and buying Real Estate Investment Trusts (REITS), the new book explores bonds, annuities, Master Limited Partnerships, dividend investing, and even reverse mortgages.

I wrote the book to provide guidelines to a wide range of investors from those coming into retirement to growing families and even for new investors. You don't have to be interested in trading options to find value in this book (though it does include information on trading options for income as well). I hope you order the book and find a lot of helpful information that will add streams of income to your lives in these troubled times.