Citi Trends Inc. (CTRN)

This stock is in an uptrend:

Many stocks are continuing to break out and are heading higher so far this week. I think some stocks that I have mentioned before, like look like they have a lot of pent up energy building. Another stock, CAKE, I think has already gone into orbit.

On the other hand, there are still no shorts coming up on my scans. To me, this means that we are in a strong market right now.

MGM Mirage (MGM)

This stock is not in a true uptrend, but as long as it remains above its 50dma, it will garner my attention:

Predictive versus Reactive Technical Analysis

It was Yogi Berra who once said that it is difficult to make predictions, especially about the future. This is especially true with regards to the stock market. This post will show why trying to predict the market can be a frustrating ordeal.

Let's first start with a monthly chart of SPY that goes back to the early 1990's:

As you can see, it appears that a double bottom is now forming with the lows of the previous bear market. To many technical analysts, this would be considered bullish. However, the long-term trend is still down, so to long-term trend followers, the picture is still bearish.

Perhaps a daily chart will help clarify things. Below is a daily chart of SPY, which goes back 1 year:

The blog, The Art of Trading, calls this the world's most famous rising wedge, as it appears that every blogger has noticed it, and has drawn bearish implications from it. Therefore, it is a bearish piece of evidence to traditional technical analysts, but a bullish piece of evidence for contrarian traders with the rationale being that if everyone is expecting the wedge to breakdown, then it probably won't.

The next layer to this puzzle involves a daily chart of the Dow:

The above chart shows the Dow stalling out against the 8000 level, which used to be support, but is now resistance. Surely, this must be a bad sign.

But next is a daily chart of the VIX:

In the chart above, the VIX appears to be breaking down below support. A falling VIX, of course, is bullish for stocks. But perhaps, since everyone has there eye on this breakdown, it is bound to be a false?

Let's have a look at the health of the carry trade by dividing the Australian Dollar by the Japanese Yen:

Currently, the Aussie Dollar is outperforming the Yen, which indicates that investor's appetite for risk is increasing again. Notice how in September and October the opposite was true, as investors shunned high yielding assets, such as the Australian Dollar. So, all in all, this fact must be bullish for stocks. But notice how this ratio bounced off its 200dma resistance level?

The next chart shows the number of stocks, within the S&P 500, that above their 200 day moving average:

The bullish breakout shown above, I think, is conducive to the bulls. But the long term trend, of course, is still down, indicating that the market is still in a long term bear market.

The bottom line is that there is plenty of bullish evidence for the stocks market, as well as plenty of bearish evidence. What this means is that the stock market could go up next week or it could go down.

And this is the mentality that I try to maintain. At any given point in time, the stock market could up or it could go down. But rather than losing sleep trying to outsmart the market, is it not easier to simply buy when the market is rising and short when it is falling. In other words, not predicting what the market will do in the future, but merely reacting to what it actually ends up doing.

Hospira Inc. (HSP)

I did these trades this week:

Sold UGA (crossed below 50dma)
Covered VIV (crossed above 50dma)
Bought BMC (buy stop was hit, stock breaking out)

Here is yet another long candidate:

My portfolio is now heavily long stocks. This is because all of my shorts have died off, and my longs are prospering, so this is the direction my portfolio has gone in. I am NOT heavily long because I feel that the market is going to rise. I do not know what the market will do next week.

I am simply adding stocks to my portfolio, and weeding out the losers. It just so happens that all of the losers are shorts. This tells me the current path of least resistance is up.

Allergan Inc (AGN)

This stock is currently going up:

Hansen Natural Corp. (HANS)

Here's a stock that broke out today. I've actually been holding HANS for weeks, and during this time, the stock (annoyingly) was stuck in a sideways trend. That changed today, with the stock erupting to a new high:

Stratic Energy Corp. (SE.V)

Whether a stock is trading at 27 cents or 27 dollars, it is all the same to me:

Hearst Argyle Television (HTV)

Another stock identified by the bollinger scan:

Aberdeen Asia-Pacific Income Fund (FAX)

Yesterday, I wanted to have a look at the ETF FAZ, but erroneously typed in FAX. The stock also turned up in my scans today, so I would have found it either way:

BMC Software (BMC)

This stock is in a classic short term uptrend:

First Uranium Corp. (

Again, notice the tightness of the bands. To me, this means that the stock is going through a period of low volatility; resting before another big move.

In my experience, stocks like this tend to either explode higher or completely collapse. Either way, something big. Because of this, it may be logical to buy calls to limit losses in case of an adverse move.

Barnes & Noble Inc. (BKS)

I really like how this stock looks. Notice the tightness of the bollinger bands, and the imminent golden cross. If I was not in a margin call, I would buy this stock.

Mosaic Co. (MOS)

Going with the Flow of the Market

To many investor's surprise, the market has risen 6 consecutive weeks in a row. If this happened several years ago when I first started trading, I would say that surely the market would not rise for a seventh. I know now that this kind of thinking can be hazardous to one's wealth.

The reason that this mentality is dangerous is because you are only proven right as the market continues to move against you. Say you are confident that the market "must take a breather" so you short the market. If the market then subsequently rises for a seventh week in a row, your rationale for shorting is only reinforced, as the odds of the market rising for an eighth would seem even more improbable.

There are literally thousands of examples of markets doing what seemed impossible at the time. Just one example, and I am sure there are better ones out there, was what the S&P 500 did in 1995. This market basically did not go down for 18 consecutive months in a row:

Imagine shorting after the sixth month of gains there.

Another logical fallacy that newer traders get sucked into is relying on technical indicators. If you buy a market that is "oversold" your reason for buying only gets stronger as the market moves against you and becomes even more "oversold."

There is no shortage of examples of this for 2008. Here is just one example of a weekly chart of Citigroup:

Any investor who bought the dips in the RSI for this stock (or hundreds of others) got burned as money was remorselessly transferred from amateur traders to momentum traders.

What's worse is that there are dozens of other indicators new traders can use to delude themselves. Another example is the hilariously named "Ultimate Oscillator"

As the above chart shows, anyone picking a bottom in 2008's commodity sell off probably did not fair so well, despite what the ultimate oscillator was showing.

The bottom line of all is this is that markets often do what is unexpected, and you're better off buying when prices are rising and shorting when prices are falling.

CMS Energy Corp. (CMS)

I did 2 trades this week:

Covered KSU (Hard stop, also 50dma penetrated)
Bought CAKE

With the market apparently rising at the fastest rate since 1938, I am only able to come up with long candidates today. As a trend follower, all I can say is that the trend for the stock market is up, so it is only logical for me to be a buyer of stocks. Of course, if the trend changes, I will gladly scale into shorts again.

This stock was found by a scan that looks for tightening bollinger bands. In my experience, tightening bands within an uptrend tends to be profitable more often than it is not.

Another stock found by this scan was TEG. But this stock I think is more likely to work on the downside, and this is because the existing trend is down:

APAC Customer Service Inc. (APAC)

Observe the tremendous volume in this stock:

Myriad Genetics (MYGN)

A bullish flag could be forming here:

Lancaster Colony Corp. (LANC)

A break above $44.00 could be positive:

Precious Metals ETFs

Some precious metal ETFs are getting my attention today. Here is a daily chart of GDX, an ETF that follows gold miners:

From a trend following perspective, I could not go long or short this fund as the trend is technically sideways. But it will interesting to see how this potential island top plays out.

The next ETF that looks interesting is GLD, which tracks the price of gold bullion:

Gold is neither in an uptrend or a downtrend, but if the yellow support zone does not hold, this could change. For me to short GDX or GLD, the following criteria must be met:

1) The price must below the 50dma
2) The price must be below the 200dma
3) The 50dma must be below the 200dma

Besides that, an island top or a break of support is just a bonus.

More on Random Stock Entries

Last week I wrote about how it was not necessarily WHAT you buy that is the most important variable in stock trading, but WHEN you sell that is key. To further illustrate this concept, I have thought of the following hypothetical scenario:

Imagine that you trade with a broker that does not allow you to initiate any new positions. With this broker, you are unable to buy or short into any new positions; instead your broker randomly buys and shorts stocks on your behalf. Some of the positions added will be short, others long. Any stock/ETF that trades on an exchange is fair game.

With this broker, the only thing you have control over is when to liquidate positions. For simplicity, say you decide to liquidate whenever a stock crosses its 50dma. Therefore, longs are stopped out when they fall below their 50dma, and shorts are stopped out when they cross above their 50dma. Assume further that when a stock is liquidated, a new (randomly selected) stock is added to replace it.

Imagine you open an account with this broker, and the broker randomly "chooses" 5 long and 5 short positions. Assume that at this time, a strong bull market is underway. One by one the shorts are stopped out as the general market rises. Some of these shorts are replaced by more shorts, which are in turn stopped out again, while other shorts are replaced randomly by longs, which rise with the general market.

Eventually, your portfolio of 5 shorts and 5 longs stocks would evolve into a portfolio of 10 longs, as the shorts die off and are replaced by longs, which are rising along with the market. This portfolio would likely remain intact for as long as the bull market raged on.

Eventually, the bull market would become exhausted, and the trend would change. This could happen in a matter of weeks or years; there is no way of knowing. But when it does happen, a few longs will likely breach their 50dma, and become stopped out. Once a stock is stopped out, it is randomly replaced by another position, either long or short. If it is another long position, it may very well get stopped out again if the bear market continues. If the randomly selected stock is a short position, it will likely thrive as the general market is falling.

As the bear market continued, long positions, one by one, will be stopped out and replaced eventually by shorts. It is also worth noting that the weakest longs would be the first to go, while the more resilient longs would be held the longest.

The net effect of this process is that this portfolio would be mostly long during bull markets, and mostly short during bear markets. In bull markets, it will have a tendency to "select" the strongest stocks in the strongest sectors, and in bear markets it will have a tendency to select the weakest stocks in the weakest sectors.

Sadly, very few bloggers focus on when to sell, instead focusing soley on what to buy. However, one blogger that understands this concept is Olivier Tischendorf. Here is a quote taken from a recent blog entry:

Your job as a trader is easy. Once you’ve identified what kind of stocks you have push your winners. Kill your losers. No hard feelings.

To summarize, I would like to repeat this sage quote from William Eckhardt:

It seems to be part of human nature to focus on the most hopeful point of the trading cycle. Our research indicated that liquidations are vastly more important than initiations. If you initiate purely randomly, you do surprising well with a good liquidation criterion.

PHH Corp. (PHH)

I only did one trade this week, which I already mentioned in my post on the Australian Dollar. As for today's stocks, I was only able to identify long candidates. I spent about an hour scanning, and I literally could not find anything in a decent downtrend. Actually, the only thing making 52 week lows were ultrashort ETFs!

To some, this may seem like a contrary indicator. Personally, I do not know which way the market will go next week. I sometimes get touches of hunches (to quote Ed Seykota), but I try my best to ignore them. All I can say is that the path of least resistance right now is up.

MF Global Ltd. (MF)

Cheesecake Factory Inc. (CAKE)

This stock came up on my 26 week high scan. The last time I looked at this stock was in October/November, when I was short it.

Stec Inc. (STEC)

Claymore China Real Estate ETF (TAO)

One wonderful aspect of ETFs is that they can give investors exposure to sectors that previously would have been close to impossible to attain. This ETF is a perfect example of this. According to the issuers information page, this ETF is designed to:

...replicate, before expenses, the performance of the AlphaShares China Real Estate Index. The Index is designed to measure and monitor the performance of the investable universe of publicly-traded companies and REITs deriving a majority of their revenues from real estate development, management and/or ownership of property in China...

Below is a daily chart of the ETF, ticker symbol TAO:

Personally, I find this ETFs recent victory over its 200dma favourable. I will not be adding this ETF to my portfolio, however, since I am already long too much stuff as it is (AMZN, HANS, OCN, FXA, UGA, TIP).

Although the aforementioned securities are all very diverse, they could all suffer if there was a sharp correction, in which everything is in the red. At all times, I prefer to have a mixture of long and short positions.

The Australian Dollar (FXA)

In my opinion, the Australian Dollar is showing signs of strength. I would be willing to buy Australian Dollars for as long as it remains north of its 50dma.

An ETF that follows this currency is FXA. I am going to buy calls on this ETF today:

TeleCommunication Systems Inc.

Here is a new stock that came up in my 26 week high scan. Independently, Olivier Tischendorf has also identified this stock:

Green Mountain Coffee Inc. (GMCR)

Stock is making a 26 week high:

Force Protection (FRPT)

Here is a long candidate:

Chattem Inc. (CHTT)

William Eckhardt on Random Entries

Here is a bit of concentrated wisdom from trend following trader William Eckhardt:

It seems to be part of human nature to focus on the most hopeful point of the trading cycle. Our research indicated that liquidations are vastly more important than initiations. If you initiate purely randomly, you do surprising well with a good liquidation criterion.

In other words, Eckhardt is saying that if your method of selecting stocks involves throwing darts at a newspaper, you can still do okay so long as you know when to get out.

This concept of achieving surprisingly good results through a random process has also been observed in other areas of interest. One book I read, The Selfish Gene, by Richard Dawkins, gives a very interesting example, which I will summarize:

Imagine that you are a coach trying to put together a team of oarsmen to compete in the next Olympics. Of the candidates competing there are oarsmen that are fit, unfit, right-handed, and left-handed. The ideal team would consist of the most athletic candidates; half of which would be right handed, and the other half left handed.

Assume further that as a coach you are blind. Nonetheless, your task is assemble the best team possible. To accomplish this, you randomly assemble candidates in a boat, and time their performance. Afterward you randomly assemble a new crew, and time the results again. Over time it would become clear that some oarsmen are consistently found in the fastest boats, and that some work better with right handed oarsmen and vice-versa. It would not be long after until the coach identified the fittest men, and the proper proportion of right/left handedness. In fact, this blind coach, by simple timing random runs probably could assemble a better team than the most experienced and discerning coach.

You may think that this may work in theory, but not in real-life. If so, I recommend you buy a copy of Michael Covels Trend Following, and read the fascinating story of how trend follower John Henry was able to purchase the Boston Red Sox in 2002 and, through a technique known as Sabermetrics, led that team to the World Series.

New Trend Following Stock Scan

I did these trades this week:

Sold STAR (closed below 50dma)
Shorted VIV (see below)
Sold SLV (closed below 50dma)

I mentioned earlier in the week that I would likely short VIV. On Thursday, I went ahead with the trade.

This stock was identified with a new scan. I have given more thought to this scan, and I do think that the logic behind it is sound. The scan finds stocks that are showing recent short-term weakness within an already existing long-term downtrend.

Of course, I will still be using my other scans, and looking for stocks making 52 lows/highs, but I think this scan will add some diversity to the mix:

Momentum Trading and The Japanese Yen

On the currency front, the Japanese Yen is certainly looking interesting. The Yen is near 3 layers of support right now:

1) the 200dma
2) the psychologically important 100 level
3) at Gap support

HeadlineCharts says that the Yen appears to be in a new downtrend. I think he could be right.

Ocwen Financial (OCN)

This is one of the few stocks that is working out for me. A flag could be forming with OCN:

Wyeth Inc. (WYE)

This stock is behaving just like a technical analyst would expect. A break above the green zone would be favourable. Most importantly, the trend is up:

iPath S&P 500 VIX Short-Term Futures ETN (VXX)

For a while now, I have been perplexed as to why there was no type of fund that tracked the VIX. I read some opinions in various market forums that such a product would be too complicated to maintain, or that the fees to run such a fund would be prohibitively high. But I thought to myself that the mechanics behind such a fund would be no different from a commodity tracking ETF.

Well, at long last, Barclay's has taken the initiative, and recently introduced such a fund. The ticker symbol is VXX, and a link to their information page can be found here.

From what I gather, this fund should track the VIX index reasonably closely. The VIX index tracks the average implied volatility of the 500 stocks that compose the S&P 500.

Implied volatility is one of the factors needed in order to price an option, and tends to rise when there is increasing fear in the market. In other words, anybody selling an option is going to demand higher premiums when there are more risks in a market, just like an insurance company charges higher premiums when they perceive more risk.

Generally, there is a loose inverse correlation between the VIX and the S&P 500. For an interesting chart comparing the two, please refer to my previous blog.

Anyway, the fund is so new, that it is not worth posting a daily chart of it. However, I have constructed a 15-minute chart that compares the fund against the actual index ($VIX):

As you can observe, the fund seems to follow the VIX index reasonably closely. In terms of whether to buy or sell this fund, I would personally trade it just like anything else. This means buying if it is in an uptrend, and shorting if it is in a downtrend.