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

[blid2def]

Thank you gran for the great insight, learnt something new.

Was refering to the general s-share market bottoming out and going into a bull market. I still believe that there will be long periods of stagnation but my sentiments may be wrong. Just some of the tell tale signs I've noticed in the charts. Totally not experienced in chart reading, that's why need some of your comments.

Any comments from MM?

Cheng, a follow-up review on the YZJ chart is here, in the Itchy Mushroom thread:

viewtopic.php?p=35253#p35253

Of course, I only post those charts where I get it right. Those that I get wrong, I "tiam tiam" keep away...

[winston]

Selling Short -- by Bill Kraft

I hope everyone had an enjoyable Thanksgiving. I know these can be difficult times but Thanksgiving is a time to reawaken thoughts of those things that are positive in our lives and perhaps change our focus away from the negatives.

In the past couple of weeks, some subscribers have written and asked about shorting stock. The markets are currently dealing with levels of support that go back to 2003 and 2004 and we don't yet know whether we are going to see another downward move or whether the bottom has been hit. In any event, it is good to be aware of ways in which a trader might profit in a down market even if it is too late to do so in the current conditions.

Buy stock low and sell high is a common way investors see the way to profits in the markets but that is only possible when the market is moving up. What can be done to garner profits when the markets are falling as has been the case in recent times? There are a variety of ways to make money in a down market, many of which I detail in my first book, "Trade Your Way to Wealth." One of those ways is to sell short.

Short selling is the same as buy low and sell high except it is done in reverse. First, we sell the stock at a high price and later we buy it at a lower price. The difference, less commissions, is our profit. The first question that usually is asked by investors who are unfamiliar with the strategy is how can I sell something I don't own? The answer is that we borrow the stock from our broker and sell it on the open market. That brings cash into our account. Since we have borrowed the stock, from the beginning, we know that we are going to have to replace it and that means that at some time we will have to buy the stock on the open market to cover the short position. That is known as buying to cover.

An example may be helpful. Suppose we see that the markets are falling and the chip sector is particularly weak. One of the stocks in that sector, XYZ has recently come down after hitting a resistance and is trading at $60 a share. We can see that there is a support around $50 a share so we decide to sell the stock short. First we check to see that the stock is available to borrow from our broker and, if so, we sell it short at $60 a share. Suppose we sell short 100 shares at $60. That means $6,000 will come into our account at settlement. Now the stock goes the way we thought it would and begins to fall in price. It hits the $50 mark and we buy the stock to cover our position. That will cost us $5,000, but the market paid us $6,000 in the first place so we make $1,000 (less commissions for the two transactions) on the downward move.

It is important to realize that selling short can entail very high risk. If we are wrong on the direction, we are still going to have to buy to cover the position at some time. Suppose we sell XYZ short at the same $60 a share and then the company announces some new mega-chip and the stock price takes off and gaps up to $70 a share. Now, we would have to pay $7,000 to buy to cover our 100 share short position and would lose $1,000 plus commissions. Theoretically, the upside is unlimited and the stock could go to $100 or $300 a share so great care must be taken to assure that we have an exit strategy in place before we ever initiate the short sale.

Since we have borrowed someone's stock to sell it short, we should also be aware that they would be entitled to dividends if any are declared and since we have sold their stock, we are responsible for those dividends.

As I mentioned earlier, selling stock short is just one of many ways to profit in a downward move. The trader would be well advised to read and learn other strategies as well so that he can determine what is most suitable for his own situation. In "Trade Your Way to Wealth," for example, I discuss at least 5 distinct strategies, including short sales, that a trader can use to profit in a downward move. In Appendix D, I summarize those along with bullish and neutral strategies to illustrate a number of things such as relative risk, capital required, time frame, whether protection is provided, and the level of monitoring that may be required. Knowledge, as is generally the case, is key to success.

[kennynah]

the accompany risk of short selling cannot be underestimated

It is important to realize that selling short can entail very high risk. If we are wrong on the direction, we are still going to have to buy to cover the position at some time

so, before one goes trying this method, give the risk factor serious consideration. this is especially, when one is using a leveraged tool like CFD to do this.... it was highlighted by many in this forum about the dangers of using CFD... add to the risk of short using CFD... this is potentially a major disaster in the making...please be very very careful....

[kennynah]

The decision to adjust margin requirements for CFD positions, rest solely with the brokerage or CFD house.

Below is a real life example of how a CFD trader can get screwed.... what will happen if you account is insufficient or you have no more investment capital? they will force you to pare down or close off those earlier positions, where the leverage was 5 times...now they offer only 4 times (25% margin) leverage.

Message to clients from a trading house:

Please be informed with effect from 5th December 2008, margining requirements will be changed for the following counters:-

http://www.iimmgg.com/image/c4029bfb252 ... c791ed837a

(above is a sample list of affected counters)


How will this affect you?

Clients with existing positions on these affected counters may wish to top up before 5th December 2008. Should there be a short fall in margin requirements, the usual margin call rules will apply. The short fall amount will be determined by your equity balance and the total maintenance margin required valued at 4th December 2008 market close.

[millionairemind]

WEDNESDAY, DECEMBER 3, 2008
GETTING TECHNICAL

Building the Case for a Rally
By MICHAEL KAHN | MORE ARTICLES BY AUTHOR

While still a risky proposition, the case for a short-term market upswing is starting to build.

IT JUST MAY BE A DECENT HOLIDAY season for the stock market despite the ongoing problems facing the economy. Even though it was just two days ago that the Dow Jones Industrial Average suffered a decline of 680 points, it's fourth-largest point decline in history, it's clear that a number of positives are building.

My favorite analogy is that a market forecaster operates very much like a trial lawyer in court. Aside from any theatrics either may employ, both seek to build a case piece-by-piece until the evidence points towards a conclusion. For investors, that conclusion is buy, sell or hold.

To be sure, we've had several exciting, but quick "short covering" rallies over the past two months. Bears who held short positions decided to take their profits. It incites a stampede of buying. But without a true change in the supply and demand picture, it cannot and does not last for long.

However, over the past two weeks, we have seen three occasions where buying was more than simple covering of short positions. While volume was not impressive, the trading activity that did occur had an element of broad-based intensity that is not seen very often. And since the market was rather washed out already, these instances of surging buying interest suggest that there is a segment of market participants that are just itching to get back in.

I interpret that as demand.

Critics will point out that such interest in the market means that it has not suffered its final capitulation where the last stalwart bulls finally give up, but that is an incorrect assessment. We have seen quite a few days of such "get me out of stocks" selling behavior, most notably the several days of disgorgement leading into the October 10 low and again at the October 27 low.

This pair of conditions -- the washing out of the market and renewed interest --is a positive for the market and we should put it on the bullish side of the ledger. It is not enough to declare it time to buy but again, we are still crafting the case to do so and are not quite done.

Another positive comes from simple chart reading and momentum analysis. Last week, I pointed out that the major market indexes had formed patterns called "falling wedges," a bit of jargon for a declining trend that has lost its downside power (See Getting Technical, A Thanksgiving Deferred?, November 26).

This week, the indexes are threatening to break out to the upside from their respective wedge patterns. For example, the Standard & Poor's 500 tested the top border of it pattern last Friday and despite Monday's monster decline it is once again knocking on the door to that breakout (see Chart 1).

Chart 1
http://online.barrons.com/article/SB122 ... weekday_r1

One of the observations I have made over a 22-year career looking at charts is that strong markets tend to hover near resistance features -- the upper border of the wedge, in this case. Weak markets tend to fall away from resistance quickly after touching it. The latter was the case on Election Day and the index fell hard after touching the upper border of the still-forming pattern.

Momentum readings, such as the MACD (moving average convergence divergence) shown in the chart, have also been climbing from low levels even though prices had been setting lower lows. This divergence between the two tells us that the urgency to sell has abated - another sign of a shift from bear to bull.

Again, neither of these conditions, the firmness of the index within the wedge pattern and the momentum divergence, is a green light to buy, but let's add both to the bullish side of the ledger.

Ian Woodward, market guru at High Growth Stock Investor software, said, "There is no silver bullet," referring to each indicator chart watchers use. "But two lead bullets are better than none and four are better than two," he added. That means that the more different types of indicators we can add to the bullish side, the more likely the market will reward us with a rally.

We can add continued gloomy sentiment of investors and a somewhat calmer volatility index (VIX) to the above to create a decent case for a short-term rally. It's still a risky argument but it is the best one I've seen in many, many months

[kennynah]

imo...the smaller volume can be an impediment to indexes rally....unless the volume picks up...every TA chap will be very weary about the sustainability of the rally...

[winston]

More on Being Careful About to Whom You Listen by Bill Kraft

Last weekend an anonymous subscriber wrote a caution on the blog in which he noted: "Not to be a cinic [sic], rather a realist, please recognize these blogs are solely published to drum up business for their paid advisory trading subscriptions, books, seminars or a variety or of other sales pitches. Although there are often some merits to what they say, they are not written with YOUR best interests, rather the authors [sic] bussiness [sic] interests. Always be careful and cautious over ANY single persons [sic] opinions and questions [sic] their motives."

First, I want to say that of course one of the reasons I write these articles is to encourage sales of our subscription services and of my books. I have never made any pretense otherwise. However, I do agree, in general with the subscriber's message that all of us need to be careful to understand the motive of people who may be offering opinions and advice. One wonders, for example, why the quoted subscriber felt the need to offer his opinion and advice. What ox may he have to gore? We should always look to motive, his as well. Certainly one of my motives is to sell subscriptions and books but that doesn't mean that the information in the articles may not have value to the reader.

The part of his statement with which I do disagree in my own case is the writer's statement that articles are not written with your best interests in mind. The fact is that I do try to write these articles with your interests in mind as well as my own. That is why I write about strategies for various markets (like selling short), money management, business plans, education, and methods by which a trader can reduce risk (like stops and protective puts), all subjects treated in these articles. It seems like those types of articles are to the readers' advantage as well as to mine when folks decide to subscribe, retain me for a coaching session, or buy my book. There is no reason why we both can't get a benefit. In fact, I think things are always better when a situation is win/win rather than when I win, you lose or you win, I lose.

The fellow does make an important point, however. All of us need to be careful when deciding to whom we should listen. I have written on the subject before and I believe it is critically important. As an illustration, a year ago, I was invited to participate in an investment group engaged in lending money. One of the proposed borrowers was a builder in trouble. He had a number of lots but was not offering them as security since they were already pledged elsewhere.

After the builder had made his pitch and was excused, one of our group confidently made two statements, to wit: 1. the housing crisis will be over in a year to a year and a half and 2. none of us should be involved if he can't afford to lose $200,000 (the pro rata amount to be loaned by each member of our group). I immediately knew two things: 1. the fellow didn't know what he was talking about because no one could possibly know when the housing crisis would end -- witness the fact it is now past a year and the crisis continues and 2. I did not want to be involved where the group mentality was that it would be OK to lose $200,000. My idea is to cut losses, not just to know I could afford to lose a specific amount and this deal had no cut loss.

All too many investors listen to the wrong people. I once had a trading teacher who said if you want to make $100,000 a year trading, you should be talking to people who are making $100,000 a year trading, not to Uncle Joe who lost his shirt in the market last year. So many investors listen to the wrong people. They may listen to someone at work or to a tip from a fishing buddy in making their trading decisions. That may be OK if the friend has a valid basis for the information, but often they don't. My suggestion is to make the effort to learn investing and trading so that you have a basis upon which to evaluate Uncle Joe's advice or the tip from the fellow at work.

Indeed, that may require that you be a serious student. You may even want to go to a seminar or buy a book (maybe even mine). Failing to make the effort can entail a much greater cost. Imagine refusing to go to college or going to college but refusing to buy the texts because the college charges tuition or because the textbook publishers are trying to make money selling the books. While their motive may involve profit, it doesn't mean they are out to get you. Cynicism and paranoia are close cousins. Be cynical when evaluating sources, but avoid paranoia.

I know the readers aren't stupid. You know that I would like you to buy my book or subscribe to my service. What is also important for you to know is that if you don't, it is still OK with me. Trading has been good to me. I am happy to give some back even if that is my only reward for writing the articles in the Newsletter. Not everyone is trying to scam you. Of course, as the subscriber suggested some are. Let me suggest that with the use of common sense you can figure out who is and who isn't.

[winston]

More on Being Careful About to Whom You Listen by Bill Kraft

Last weekend an anonymous subscriber wrote a caution on the blog in which he noted: "Not to be a cinic [sic], rather a realist, please recognize these blogs are solely published to drum up business for their paid advisory trading subscriptions, books, seminars or a variety or of other sales pitches. Although there are often some merits to what they say, they are not written with YOUR best interests, rather the authors [sic] bussiness [sic] interests. Always be careful and cautious over ANY single persons [sic] opinions and questions [sic] their motives."

First, I want to say that of course one of the reasons I write these articles is to encourage sales of our subscription services and of my books. I have never made any pretense otherwise. However, I do agree, in general with the subscriber's message that all of us need to be careful to understand the motive of people who may be offering opinions and advice. One wonders, for example, why the quoted subscriber felt the need to offer his opinion and advice. What ox may he have to gore? We should always look to motive, his as well. Certainly one of my motives is to sell subscriptions and books but that doesn't mean that the information in the articles may not have value to the reader.

The part of his statement with which I do disagree in my own case is the writer's statement that articles are not written with your best interests in mind. The fact is that I do try to write these articles with your interests in mind as well as my own. That is why I write about strategies for various markets (like selling short), money management, business plans, education, and methods by which a trader can reduce risk (like stops and protective puts), all subjects treated in these articles. It seems like those types of articles are to the readers' advantage as well as to mine when folks decide to subscribe, retain me for a coaching session, or buy my book. There is no reason why we both can't get a benefit. In fact, I think things are always better when a situation is win/win rather than when I win, you lose or you win, I lose.

The fellow does make an important point, however. All of us need to be careful when deciding to whom we should listen. I have written on the subject before and I believe it is critically important. As an illustration, a year ago, I was invited to participate in an investment group engaged in lending money. One of the proposed borrowers was a builder in trouble. He had a number of lots but was not offering them as security since they were already pledged elsewhere.

After the builder had made his pitch and was excused, one of our group confidently made two statements, to wit: 1. the housing crisis will be over in a year to a year and a half and 2. none of us should be involved if he can't afford to lose $200,000 (the pro rata amount to be loaned by each member of our group). I immediately knew two things: 1. the fellow didn't know what he was talking about because no one could possibly know when the housing crisis would end -- witness the fact it is now past a year and the crisis continues and 2. I did not want to be involved where the group mentality was that it would be OK to lose $200,000. My idea is to cut losses, not just to know I could afford to lose a specific amount and this deal had no cut loss.

All too many investors listen to the wrong people. I once had a trading teacher who said if you want to make $100,000 a year trading, you should be talking to people who are making $100,000 a year trading, not to Uncle Joe who lost his shirt in the market last year. So many investors listen to the wrong people. They may listen to someone at work or to a tip from a fishing buddy in making their trading decisions. That may be OK if the friend has a valid basis for the information, but often they don't. My suggestion is to make the effort to learn investing and trading so that you have a basis upon which to evaluate Uncle Joe's advice or the tip from the fellow at work.

Indeed, that may require that you be a serious student. You may even want to go to a seminar or buy a book (maybe even mine). Failing to make the effort can entail a much greater cost. Imagine refusing to go to college or going to college but refusing to buy the texts because the college charges tuition or because the textbook publishers are trying to make money selling the books. While their motive may involve profit, it doesn't mean they are out to get you. Cynicism and paranoia are close cousins. Be cynical when evaluating sources, but avoid paranoia.

I know the readers aren't stupid. You know that I would like you to buy my book or subscribe to my service. What is also important for you to know is that if you don't, it is still OK with me. Trading has been good to me. I am happy to give some back even if that is my only reward for writing the articles in the Newsletter. Not everyone is trying to scam you. Of course, as the subscriber suggested some are. Let me suggest that with the use of common sense you can figure out who is and who isn't.

[kennynah]

Last weekend an anonymous subscriber wrote a caution on the blog in which he noted: "Not to be a cinic [sic], rather a realist, please recognize these blogs are solely published to drum up business for their paid advisory trading subscriptions, books, seminars or a variety or of other sales pitches. Although there are often some merits to what they say, they are not written with YOUR best interests, rather the authors [sic] bussiness [sic] interests. Always be careful and cautious over ANY single persons [sic] opinions and questions [sic] their motives."

with so many (sic) within a paragraph...i would have quickly skipped the entire blog in the first instance...as i have the entire passage above...

no offense intended to winston, of cos...

[winston]

What Is Panic Buying, and How Can You Protect Yourself From It? By Rick Pendergraft

The huge gains in the market in the week leading up to Thanksgiving reminded me that there is such a thing as panic buying. Mostly, we hear about panic selling - but panic buying is just as dangerous for investors.

What is panic buying? Panic buying occurs when there has been a prolonged down period in the market and everyone is expecting a bounce. Investors dive in headfirst for fear of missing the next rally. Because stocks get overheated in a very short period of time, the sentiment shifts too quickly and short-term traders look at this as an opportunity to take gains or to take smaller losses.

My advice: Don't get caught up in panic buying. The next rally likely won't start with a bang, but more of a whimper. When the selling is exhausted, the market will start a slow methodical climb that could last for months, or even years. Trying to time your entry perfectly is nearly impossible. If you are a long-term investor, there are deals to be had right now, but you don't have to dive in. Wade into the water.