A bit of revision

Yesterday I was asked by a good friend and loyal reader to provide a refresher on how I set about my analysis of the market. So here is the first in what I plan to be a series of essays which cover the basic elements that make up my thinking about the market. For those of you who know it all and are only interested in the bottom line, just skip to the end of this post for my latest thoughts.

First let me remind you that I do not claim to be a fount of wisdom. I do what I can and in this blog I describe what I see and how I interpret it.

Playing the stock market is a fascinating occupation and in some ways is unlike any other. In most disciplines you learn your skills and strive for perfection. In playing the markets the important qualification is realising when you have got it wrong and knowing what to do next. Mistakes are inevitable. That is not to say you don’t try to get it right for as much of the time as possible.

There are just two things I am reasonably good at:

• One is picking shares when the time is right
• The other is not being there when the market turns sour.

 In this first refresher I am going to describe how I try to pick my moments for entering and exiting the market. And when I say exiting I mean selling up and going into cash. No half measures. A falling market pulls down all shares including good ones.

So here we go. All basic stuff. No rocket science. The market is made up of buyers and sellers and by watching the way the price moves I try to guess where the market is headed next. I see price action by looking at the graphs of market price movement. Because I want to know how the whole market is moving, I look at the “Index” which measures what the market is doing.

Mostly I look at the daily chart, so that is where I shall focus my attention. I favour candlestick charts because provide lots of information about what has happened during each day's trading. A little imagination allows you to interpret what has been going through the minds of the market participants. Knowing this helps me  guess what is likely to happen tomorrow.

What each candle shows

Each candle on the chart represents one day’s price action. First the colour:

• If the candle is red the day’s closing price is lower than the previous day’s closing price
• If it is green the price closed higher than the day before
• If the colour is solid the price closed lower than the level it opened in the morning
• If there is a white middle to the candle it closed higher than it opened in the morning

The body of the candle (the fat bit) represents the movement between the opening and closing prices for the day.

The two thin “wicks” above and below the body show the highest and lowest prices that the price achieved during the day.

Those wicks give some information that can be used to infer what was going through traders’ minds during the day. A long wick below the body suggests that sellers succeeded in pushing the price down by dumping the stock, but buyers sensed the opportunity to get a bargain and pushed the price all the way back up again.

A bunch of committed buyers in the market makes me think that, other things being equal, there will be a follow through and the market will go up tomorrow. And vise versa.

A column of marching candles

Looking at a column of marching candles tells me where the market is heading. There are only three ways to go: up, down or flat.

The market has a sort of collective mind. With the right sort of skills one can guess what that mind is thinking. Imagine you are reading the expression on your friend’s face to judge if she is happy or sad, angry or calm. Reading the market by looking at the charts is a bit like that.

At any time there will be players in the market who think that shares are cheap and will want to buy more, and those who think shares are too expensive and will want to sell the shares they hold.

The mass of shareholders will be doing nothing, but they don’t count. They will just sit there and pat themselves on the back when the market is going up and say to themselves “how clever I am.” When the market falls they will wet their pants and still do nothing until it's too late.

Collective memory, support and resistance and trends

Traders who are active in the market behave as if they have memories of what has happened before and this recollection is reflected in a shift in the balance of buyers to sellers. It’s a bit like a conditioned reflex. When the price reaches a certain point the balance switches and a market that has been going up will change to go back down and vise versa.

These boundaries are support and resistance lines. They can hold for days, months or years. When price action respects these lines the market is said to be trending. Buying shares in a market that is trending upward is the road to riches. Spotting the end of one of those trends, the break of support, and cashing in profit is the key to fortune.

The market also remembers old highs and lows and when it reaches those points it also encounters resistance or support. These are drawn as horizontal lines on the chart.

At the bottom of the chart a vertical line how many shares were traded each day. Occasionally the volume of shares bought and sold spikes. This means that the market has been more active than usual. I pay special attention to these spikes because it suggests to me that a shadow has passed across the face of my friend and I can expect a change in her mood. 

\That's enough for now. There'll be more another day. I hope this helps to clarify the comments I make each time I post.

Back to Friday's action

Friday's action was not decisive. Monday is Labor Day. It's a holiday in the US and traditionally it signals the end of the summer vacation period and the beginning of the Autumn (Fall) and winter term in the stock market year. What happens next is anybody's guess and Friday's action gave no clues.

Switchback

Brent Crude in US$

After that massive drop and then a long weekend, for those of us in London, the market turned round rather sharply. I could have closed my US shorts yesterday but I didn't. I couldn't even kick myself because the market could have gone either way. Further falls are likely but safest to bank the profit and worry about further falls tomorrow. So I closed off the positions at the open and walked away. I expect tthe next step down will come soon. I suspect the sharp rise was partly short covering.

In the mean time my gold is moving on up. I shall have to start worrying about whether to take profits as it hits the resistance level.

I bought some oil this morning (in ETF form) and that is doing well. Today's main chart shows the reasoning behind that trade very clearly.

Didn't we do well

Last Friday's call on the market was beautifully timed. I am not one for patting myself on the back, I could so easily have got it wrong but not on Friday. The fireworks I had been looking for shot up into the sky. Dreadful metaphore because what happened was that the markets broke their support levels made a dive. I had shorts in place and bought more as the markets in London and New York opened, even though a large part of the move had already taken place overnight. I made half my profit for the year so far on Friday so those predictive volume spikes are doing their stuff for me.

My portfolio is now 64% short ETFs 10% gold and 26% cash. My profit for the year so far (from April) is 6% while the market has fallen by 8.1% (my benchmark is the FTSE and I measure in £s). A modestly good start to the year and just what I need after my disasterous performance last year. I am going to have my work cut out if I am going make up for last year's catastrophe and earn my salary for this year. The main thing is that I did not lose my courage and was ready to move on.

Friday's performance was not just shorts, it was also that gold I bought a few weeks ago. That shot up on Friday too. To my mind this is a worrying sign, for gold normally weakens when the $ strengthens which it did on Friday (at least it did when you factor out the effect of terrible jobless numbers in the US that were published before the US markets opened). And it shot up as markets tumbled, a return to the old relationship which has been absent since last Autumn. To me this suggests that fear has really returned to the market. We must see how this develops over the next few weeks.

FTSE closed for a couple of days now to celebrate the Queen's Jubilee. Could cause a problem if I need to sell UK holdings.

Big day today?

Those new support lines (I should say old support lines because they go back to February and April last year) have been working their socks off to hold the DOW up for 9 days now.  Then yesterday there was a spike in volume and an interesting candlestick shape. (I'm not too hot on candlestick shape analysis but it looked interesting with its long wicks and short body.) Main thing is that it was associated with a modest volume spike.

Result is I'm looking for fireworks today, could be up, could be down. I'm guessing down. At the moment the futures markets are showing a fall for the DOW but rises for the FTSE and the DAX. Only time will tell if I'm right. Luckily I'm not a nail biter.

In the mean time my gold is going well but mainly because of the rise in the value of the dollar

Pause for breath?

The volume spike gave due warning of a change. Initially it showed a change of direction and, as I expected, the market rallied on Monday. Since then there has been an almighty tussle between the bulls and the bears. On Tuesday the Dow was pulled up and down but closed more or less unchanged. On Wednesday the bears were out but lost ground seriously as the day went on and once more the close was unchanged. Thursday was mostly the bulls' day though bears fought back in the afternoon before losing out in a late rally. And then, at last, Friday saw a dip.

So the volume spike seems to have presaged a pause in the sharp decline that has been in place since the beginning of May. I cashed in my shorts with a hefty profit on Monday, but was a bit too quick to get back in when the market weakened on Wednesday. So I sacrificed some of the money I had made. I have nipped out and in and am now back in to my short positions.

Having made the judgement that we are in line for further falls I have put money on it. You have to go back an awfully long way to find any evidence that there should be support for the market at this level: February and April last year. My guess is that support is temporary. As ever, if I am wrong I will pull out.

My other investment was made on a whim. The ghastly Eurozone crisis festers on, so I have bought a chunk of gold. Apart from anything else it keeps some money out of the clutches of banks that are vulnerable to any currency disaster. So far the investment is not too bad. Nothing spectacular but I might have caught the bottom by a fluke, not by judgement. So I sit and hope I'm right. Roll on next week.

Thirteen days in May

So we have had almost 13 days of uninterupted fall. Just one tiny recovery day. I had been expecting it for weeks and there had been three false starts. It's an almost 7.5% fall from the peak. The big question now is whether this is the bottom. The spike in volume suggests that for the time being it might be. I shall certainly be worrying on Monday and will be ready to cash in the profits on my shorts.

All of this analysis has been done without reference to the news. However much I try to insulate myself from it news leaks in through my ears and eyes and I am aware that Europe is in the grip of a panic about Greek and Spanish banks. This has to be worrying because noone is immune from a banking collapse. It would be foolish to assume that national borders would protect banks in one country from disasters in another. My response to the panic has been to buy some gold. This has had very modest success. Surprising given the scale of the risk. On Monday, if I sell my shorts, I shall be sitting on loads of cash, very vulnerable to what is happening in the banking world. What to do with it will be the next challenge. More precious metals? Shares in big solid companies in consumer basics? US bonds? There is no clear place of safety.

I suppose I will just have to go on worrying. Anyone got any ideas?

Tortured on the rack

The news yesterday was full of it: GREEK CRISIS HITS STOCKS! But as you can see from the charts a fall was to be expected and, measured by recent market activity, it was not especially big. The lower support line almost held and we are left scratching our heads. Will it go lower or will it not? This morning's futures market says not:: a 40 point rise in the Dow, a FTSE that will open flat and a modest rise in the Dow.

The FTSE looks more like a down trend but even there you can see that yesterday's fall was not out of the ordinary. The fall in the DAX was even less dramatic.

Never trust what you hear on the news. Watch the charts and be afraid unless you get a clear signal. We have now been in limbo for six weeks. That's more than 10% of a year. It's the worst possible type of market for making money. It is impossible to be confident about short positions and holding stocks is mighty risky when there is the threat of a big decline. Woe, woe and thrice woe.

The bulls are holding on

You will know that I are strongly on the bear side of this market, that I entered my bear positions far too early and got stopped out. You will know too that I am holding short positions again. Net result is that I am very marginally down on those trades since the beginning of my financial year which starts on the 6th April (just like the British financial year.) So to answer the question that I used to entitle my last post: No we're not there yet.

I have always found it extremely hard to trade the market on the short side, the more so at present because I no longer see any relationship between the market and the reality of economic life. I would agree that there is an argument that says that we are in the economic doldrums so some people think the only way is up. They believe the prospects for those companies that have a grip on their debts are good. In addition with continuing low interest rates companies with good cash generation offer better returns than bank deposits so there is a good reason for strong share prices. 

However, a massive shadow hangs over the market. Banks only survived because their huge portfolio of toxic debts has been taken over by governments. They were already almost overwhelmed by their own debts. The solution which has, most effectively, kept this creaking show on the road has been the printing of money. I cannot see how this can go on without some of the wheels coming off. We already have commodity inflation and the prospect of this seeping into inflationary pressures is ever present.

As you know, there was a time when I saw safety in precious metals, but I have had little to say about those for some months as I have stayed away from a collapse in their prices. Their time may come again but not yet.

My favoured territory has always been stock picking among undervalued companies, and this has kept me fed and watered for many years now. But I fear buying into companies which, by their nature, are illiquid and would be impossible to sell if the s**t hit the fan.

So what do I do? For the moment my strategy is this: 

• I will take my profits on my open short trades and see what happens next
• I will keep my eye open for rallies on the market and try to take quick profits out of beaten down shares
• I have just decided to spend money on learning how to trade foreign currencies properly

I hope this will be enough to keep my head above water.

Are we there yet?

We have now had two days of heavy falls. Judging by the futures market and by the performance of Asian markets overnight we are due for another nasty day today. So has the slide that I have been waiting for, preparing for at such a high cost finally arrived?

My short positions are slowly returning to profit. I still have to recover the losses from my early short foray that I closed in mid April. I opened more positions on Friday. So I am backing my judgement big time - 28% of my portfolio. Whether or not I am right still remains to be seen. I have found that taking short positions is a risky business. But then you can't expect to make money without taking risks. The money you make in this game is a reward for taking risks. So I hold on tight and stick with the white knuckle ride.

Fear factor

I am sitting on heavy losses from my shorts on the FTSE S&P and DOW. Yesterday I almost threw in the towel as the market powered through the previous highs on the Dow. But then it pulled back and closed below previous highs. The close was still a local record. The situation on the S&P was not so bad, we are still well below previous highs. The big disappointment was: no spike in volume. I am waiting for a crescendo in trading. This would show that those sitting on the sidelines have finally been suckered in, and the market his at last ready to fall.

But I am  pretty close to my stop loss so the next day or so will be the end of my patience.

I am not a great one for listening to news but an item caught my attention yesterday. Alan Greenspan made a statement. You remember him, he was the guy who single handedly landed us in the s**t.  In a Bloomberg interview he said that stocks are very cheap. His argument is superficially coherent since it is based on the low PE ratios of S&P companies. I continue to believe that we have is asset price inflation generated by the the printing of money, so I continue to fear a big bust. The day will come when it becomes obvious that central banks can no longer sustain the weight of their collective borrowing and the banking system will start to unravel again. I just hope that when it happens I will be in a relatively safe place. But there is no point in being right in the long term and losing money in the short term so I will have to pay attention to my stops and find something else to do unless omething happens soon.

Waiting

I have not been updating because there is so little to say. Here we are waiting, waiting, waiting. And it's a painful wait. It's so hard to get the timing right. When the market shoots off in an upward direction it takes massive courage to hold onto shorts which are losing money, particularly when my capital base is so small. Result is that I cut my losses and then I'm not there when the market moves off in the direction I expect. Fear of the bear trap is ever present. The best I can do is to control the money I put at risk so that if I do get it wrong my loss will be manageable. I then hold on tight and go with the ride as long as I can bear the pain. The notes on the chart show why I am holding on.

Those damned bulls

I am feeling the jaws of the bear traps gripping my ankles. Who'd have thought it: straight through the 13000 level and sticking there all day long. No volume spike but we are back to those days of huge daily price movements. I have yet to throw in the towel. If it goes on like this I am going to have to sit on the sidelines and watch developments that I lack the skill or resources to handle. I cannot afford another year like the last one.

Today is decision day and its going to be hard. But the first rule of investing is that you must, above all, protect your capital. If you fail to do that you have no chance of re-entering the game. Take your losses and wait for better times.

I did it

The market recovered on Thursday and then fell on Friday. I bought more shorts as I planned. Now I wait to see if the slide will continue or if I have been suckered into a bear trap. No real way to tell until it happens.

The market held above that support line of 12880 for most of the Friday and only slipped in the last 30 minutes of trading. Perhaps this is a good sign for my position. Only time will tell. That waiting game again.

Climbing back on the horse

It is hard when you have lost a lot of money to get back into the market, but you need to grit your teeth anddo it.

I indicated in my last post that I am now bearish about the market so the only way to go is short. I bought short positions on the US and UK markets yesterday through SUK2 and DXD exchange traded funds. I turns out that I went in too early for the market continued its retracement today. I'm holding on and planning to buy more when the up-tick has come to an end. 13000 is the strongest resistance point and it also represents the half way point of the downward move.

Not much more to say. I wait to see if I am right.

Woe is me

Back after three week of absence and at the beginning of a new year for my portfolio. On the 5th April each year I cash up, review my performance for the previous year, revalue any holdings at their market price on the day, and start with a clean sheet.

 My performance last year was disastrous. Almost half my losses were chalked up during the last three weeks. I was too slow to cut my losses. I was holding a portfolio that was far too risky to be left without proper supervision and I lacked full access to data which would have warned me that a major shift was taking place in the market. Too late now to grieve, I just have to work hard to make up the losses.

A quick look at today's chart shows what has happened and also what I should have done if I'd had been able to see events unfolding more clearly:

• the support line, respected by the market since October was broken on the 6th March
• it looked like a false break down because the market recovered within a week
• support was broken again on the 20th
• this followed a sharp spike in volume on 16th, the day of a new high

Those last two events should have been my signal for retreat. I actually held my positions until the 29th March by which time my losses were dramatic. To add insult to injury one of my US holdings had it's listing suspended on 28th March. I have written off that holding and this accounts for about a third of the loss accumulated during the past three weeks.

So where are we now? Yesterday the Dow closed bellow the critical 13000 level and faces a couple of previous resistance levels which are now potential support levels. I do not hold out much hope for a happy outcome. Share prices have been riding high and we are approaching the summer which is rarely a good time for the market. I enter this period with almost 90% cash and so I am now protected from danger and will be well placed to take advantage of any rises. For me the best outcome would be a sharp market fall which would mean that bargains would reappear.

Precious metals and commodities have done no better than shares. I have no precious metals but still have my cattle holdings which are not doing well. My other holdings are tiny.

Where are we now?

Service will be patchy for a while. But I will be back.

What a jump! More than 200 points and it took out the 13000 level (purple line), burst above the diagonal trend line and broke through an important peak that occurred just before the 2008 market collapse (top blue line).

So where to next. As ever I am not foolish enough to predict these things. But I have a well invested portfolio so that tells you where I'm putting my money. The futures market for tomorrow looks promising. I bought a whole bunch of "surfing" shares on Monday. By this I mean ones that:

• have an upward trend
• have displayed a wave motion in price 
• are near the bottom of the wave
• the value of the move from the buy price to the mid point of the wave movement is worthwhile.

In the UK I have bought TT. KIE PMO STAN KAZ RIO. All are in profit since Monday and STAN is showing a 3.5% profit and is close to the point where profits are taken.

In the US I have bought ZSTN USHS ALNY WNC and LCAV. These are doing reasonably well and have very high profit targets but are being dragged down by poor performance by LCAV.

My US picks of 8 March are showing excellent returns. Hong Kong shares bought the next day are, rather disappointingly, neutral.

Report comment overall: could do better, but is improving.

This information is provided so you can watch. I do not recommend shares.

Back in the doldrums

After last week's scare we are back in the doldrums. The market has recovered - a bit. It has bounced through our two resistance levels. (You will remember that these are highs established in May and July last year. The next resistance level which I have just added was established in May of 2008, before the 2008 market crash.)
Currently the market is struggling with the 13000 level which it has breached briefly before falling back. It is also below the diagonal trend line support level.

At present I working on the assumption that we are poised on the brink of a renewed bull market which may be short lived. I am therefore picking shares that should generate short term gains using two strategies:

• I am currently experimenting with a month by month share picking pattern. I buy shares and hold them for a month and then replace them with a new batch. The reason for this rapid rate of turnover is because the shares I pick are in reasonable companies that have been severely beaten down in price. These shares can show spectacular returns but carry a high level of risk and meteoric percentage rises can quickly evaporate. These are shares that I seek out in the US, Hong Kong and the UK
• I am also buying shares using my tried and tested UK system that looks for shares which have out performed the market and have exceptionally attractive fundamental characteristics. PE ratio, predicted growth rates etc.

So last week I was frightened out of my positions based on the first strategy, with a moderately better than neutral outcome; and held onto the shares bought using the second strategy.

As things settled down and the market recovered I bought back into strategy A, a little more cautiously than before. The US shares I bought were PCX DMND STRI AMRS PMFG. They are already showing a nice chunk of profit. In HK I bought 886 267 2328 2342 and 1828. They have yet to show a profit. In the UK I strengthened my portfolio of strategy B shares with VP. BMY RNO and SPD. I'm still waiting for an uptick in those.

Remember that nothing here is a recommendation. I mention what I have bought so you can all watch and then have a good laugh if I fall flat on my face OR think how right he was if I don't. 

Pip pip and good luck with your endeavours.

Wrong

So I was wrong. Hasty reappraisal of tactics. Swift implementation of stop losses. Winding down of positions and then sitting back to tend to my bruises with an enhanced war chest. Wondering whether I should hedge with some short positions. Too early to tell.

And then this morning. One of the pleasures of holding some Hong Kong shares is that I can get up in the morning and see what has happened overnight. I could have gone to bed leaving sell orders but I decided not to. I don't have an automatic feed for Hong Kong so its a question of manually looking up each share.

First though I looked at the futures market which was expecting a 30 point rise on the Dow. Then the HSI - the Hong Kong index was only down 150 points. Not bad for an index that can easily fall several hundred points when its feeling peaky.And then I went to look at the individual shares I own. 6 out of 9 were up.

Futures are indicating a 17 point fall in the FTSE. Not massive. So here I am sitting on the fence. I think I'm going to do this: Wait for the open and see how black the clouds are looking. If they are dark I shall do a bit more pruning of the portfolio and throw in some small shorts (how do these puns find their way into my head?) and I shall do the same with the US market. The HK market has about an hour to go. If my position starts to deteriorate between now and then I'll take some profits.

Nil desperandum.

Will it hold?

Hello David. Thanks for your comment. I agree that caution is needed here. (see comment on last post - no pun intended, but there could be a hidden message.)

The fact that you look at the evidence and find it points to a a top and I look at it and think a breakout is more likely is why the market plods along unwilling to do anything much. Buyers and sellers are matched and each side is trying to wear down the other. I see that two resistance levels have been broken on the Dow. Others see the failure to breach the 13000 level. Either side could be right. My modest optimism is just that: modest. Tomorrow I will go through my holdings and stop some losses and possibly take some profits. I have yet to decide whether going back into silver is a good idea now. Not only is it outperforming gold but it is much more volatile so there is much more danger.

A big part of tomorrow's work will be reviewing stock picking strategies. So my bullish mood continues unabated. Only a big drop in the Dow will shake that.

Just to keep my feet on the ground and to keep me worrying (worrying is best) I show two shots of the S&P 500 today. It shows a failure to break the highest resistance level and a break down through the next lower resistance level which should now be offering support. It has also broken down through a diagonal trend line support level that has held since the end of December. If those portents are to be believed it is a case of hold on to your hats. "It's a game, i'nit."

What's new?

That massive dive in the gold price (5.5% in a day) has had no kind of follow through. The price drifts about at the same spot it ended the day on Wednesday. The volume spike on Wednesday was big but not as great as the last real biggie that occurred on 26 November last. And the volume follow through on Thursday was very limited compared with other such events. And then on Friday trade was pathetic. Sliver showed a similar pattern.

What is extraordinary is that none of the other main markets were affected. It was as though someone dropped a huge rock into a pool and it sank without ripples.

By now you will know I take little notice of the news and allow the market to tell me what is happening. But with something as strange as this I was curious to see what others made of it so I took a little peek. It was much as I should have expected. It's amazing how many ways grown men (and women) have to wrap up the words "I have not the faintest idea." while still pretending to be on top of what is happening. Better still the fall came as no surprise to them.

My next trick is to decide whether I should go back into those very profitable gold and silver positions or is this the beginning of the end for the precious metals bull market. I can divide that question into two parts:

• do I still feel confident about the equity market? (My basic idea here is that equities seem poised to make a big breakout on the upside and I am perhaps 80% convinced that this will happen.)
• could the precious metal markets yield a better return than the equities? (I am fairly clear about the answer to this question - if I am right about equities I am convinced that I can make more money by share picking in a rising market. I can cash in my profits and if If feel the need to buy precious metals I will be in a position to buy more gold, silver or whatever.)

The risk I am running by doing this is that I could get caught out by a catastrophe which would catapult precious metals into the stratosphere and leave me struggling to dispose of my shares. Something to mull over in the next few days.

In the mean time the Dow plods on finding it hard to smash that  13000 barrier leaving my portfolio languishing with it.

One little idea did come out of listening to all those explanations of why gold was dumped as Bernanke spoke. It would appear that platinum has been outperforming gold since the beginning of the year and did not take the big hit that damaged gold. And then I looked at the charts and found that platinum and silver followed the same trajectory. I think I feel safer with silver. But a lot more thought needed here.