Tag Archives: ETFs

What to do when market confuses?

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Market seems sending mixed signals. At times like that I like to zoom out to a longer term to see a “bigger picture”.

For this week I chose EEM not that it is of any specific situation. Many ETFs are forming very similar patterns.

Step one – zoom out to a monthly view:

EEM Monthly Chart

I am trying to predict a pattern before it is solid. On this chart I am looking at major reversal points and their volume. Here volume confirms the bounces from the lower range of what I am guessing might be forming. Volume at rejection points (upper range) was not significant, but MACD cooperated.

Step two – zoom in to a weekly view:

EEM Weekly Chart

I am trying to zoom in on the possible pattern. It seems in tact. Here also volume confirms the bounces. Rejections are also in harmony with MACD. As you can see the same support/resistance level at $44 is visible with more detail points of crossing over/under.

Step three – zoom in to a daily view:

EEM Daily Chart

I am looking for a possible next move. EEM has been rejected four times from the upper level of down sloping channel. It doesn’t mean that this channel is “hardcoded” somehow in the memory of the market but it is quite possible that many traders are watching it and trading accordingly. The current price is in a significant distance from the upper level and a bounce from the lower range of the down sloping channel is of high probability.

There is of course no guarantee that EEM will bounce soon. The weekly chart still shows some room to the downside before next significant support.

Eva

Don’t forget to make money

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If you are long this market and happy watching your position(s) grow with the current market, don’t forget to actually make money from it! Greed is good but it may blind a trader by the hopes of infinite move in desired direction.

A trader makes money when a winning trade is closed. The money on paper doesn’t count – it is only a dream about a winning trade. Reality is the cash!

No trend lasts forever and it’s just a matter of time when the change comes.

You feel good and better every day. You keep checking your account daily or even few times a day. You enjoy watching the numbers grow. Joyful feeling pushes some traders to “love” their trades. That is a very dangerous and emotional situation. It would be very difficult to make a logical decision to cash out and “divorce” your favorite trade.

So what happens if a trader can’t cash the winning trade? The market change comes. Surprise! No, that’s nothing – stay the course, etc. Many traders keep saying “it’s just a correction”. They can’t sell and they do not want to sell. The account keeps shrinking, at first just a little bit, then after some bounces, even more.

You do not want to have your winning trades become your looser nightmares.

Now is the time to keep an eye on your winning trades and make sure that you have a very strong exit plan that will not let you hesitate and question it.

The next test for SPY is coming around $137.00 – $139.00

SPY 5 Year Monthly Chart

Establish support levels that you do not want to violate and keep moving them up if the markets keeps marching up. When the moment comes you have to act. You are in it to win it! There is always another trade that will make you new money.

Eva

Buy and hold and hold your breath

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Proponents of a buy and hold strategy had more convincing evidence years ago, but with the advent of lightning fast information and high speed trading they no longer have a valid argument.

The buy and hold model pretty much became obsolete when the S&P topped at 1,552 and the NASDAQ topped at 5,132 in January, 2000. In fact, if you had put your money to work – which the greatest number of individuals in market history did – back in January, 2000, you would still be down almost 19% on the S&P and 47% down on the NASDAQ. That’s not accounting for inflation; that’s pure losses over more than a decade.

So, if you were long stocks and you (or your broker) decided to tough it out when the market began to collapse in 2000, you’re very much underwater. If you don’t mind being underwater by double digits after 11+ years, then buy and hold is most definitely for you.

Proponents of buy and hold will argue that there’s been equally painful periods throughout history where it would have made sense to tough it out. Perhaps, but we’re living in a different world now, where hedge funds and individual traders have access to sophisticated data and trading systems that weren’t around even ten years ago. So, individuals who try to hold on through thick and thin are now subject to the whipsaw action that’s become more the norm rather than the exception. Throw into the equation the ever pervasive effects of world events – i.e. – increased possibility of economic collapse in other countries – and it only increases the likelihood of rapid market deterioration. In other words, the pros today operate on a shoot first, ask questions later mode, thinking in terms of minutes, hours and possibly days, rather than months down the road.

Naturally, such short term mindedness puts the average individual in a disadvantaged position. So, if you are trying to manage your 401k on your own, you best have a full understanding of what’s really going on out there or your portfolio will be eaten alive.

There are plenty of instruments available to the average investor, particularly Exchange Traded Funds, ETF’s, that mirror the movement in the market. For example, you can easily buy ETF’s that go up or down based upon market action, but simply buying and holding on to those ETF’s for a long period of time can be a recipe for disaster. Yes, if you are lucky enough to jump into the market at its bottom (when in fact, that’s just about the time when the majority of investors bail out), then holding for a longer period of time could be profitable. But, timing the market perfectly – that is, buying at the exact right moment and selling at the exact right moment – is akin to hitting the lottery.

Thus, I will argue that the average investor will be better off to sometimes be out of the market completely – even if they happen to miss a nice run to the upside – while preserving precious capital that can be put to use when the market is more predictable. Holding in a market that has been down for over a decade makes no sense. It might have worked years ago when there was a more level playing field, but not with today’s rapid trading environment that calls for lightning quick decisions.

Looking for similarities

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I check once in a while if any of ETFs form similar patterns. Why?

When I identify that some ETFs trade somewhat together, then I can just choose the one that looks more predictable, has higher beta or has a better entry point and use it to put on a trade.

When I trade, an answer to the question: “why?” is much less important than an answer to the question: “what?”. However finding that some ETFs don’t follow the same pattern, keeps me on my toes for monitoring possible pattern changes.

I take nothing for granted. When a group of traders “decides” that they see a specific technical formation and the news gets out, more traders also see it and act on it. With time and aggregate volume the trade is “done” – there are very few new traders getting on board and they will go hungry soon.

Try to watch a group of antelopes, for example, feeding on grass. A leader will find a new fresh green area and the crowd will follow. Slower ones will get there last when all the grass is gone already. The process repeats…

Do EWZ and EWC look similar? I think so.

For the next 3 weeks I will be trading from Europe. It will be quite interesting to get exposure to their media interpretation of recent events.

Eva

Fear or greed?

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Or maybe both? In this bipolar market both feelings are quite powerful. Even a fear of missing the market move is a power by itself.

One day the headlines read: “Market tanked on economy”. Few days later:”The market rallied on economy”. Really!?

On days when the moves exceed 2% seems that there is barely anybody on the “other” side of the trade. Where is everybody? Be very careful either you are short or long. Do not overstay your welcome. If your trade was only for a quick gain – take it.

I haven’t seen enough fear in this market yet. The faces on CNBC, Bloomberg and alike are quite sad. But there are no big headlines yet about the end of the market. That indicates that many traders are still holding on to their positions – this phase is still full of hope.

The worst for the market would be a slow drifting down with diminishing interest from traders. Not enough motivated buyers or sellers and no quick resolution.

I would be very interested in adding to my long positions in major market ETFs on a day of a panic selling when traders are giving up the rest of their long positions. On days like that a reversal is quite possible. Trading the reversal is typically impossible to execute well, so I will be looking into entering some trades just after a huge drop with a plan. There is a very high probability of short covering after a huge drop. That will either develop into a reversal or at least a bounce. One way of trading that is to take quick profits on a bounce with 50% of the position and use the technique of moving up stops on the other 50% of the position while implementing a mandatory exit if the price drops below the low of the day or below your entry point (if low of the day is too far).

The above trade is not my standard way of trading but the market is not “standard” recently either.

Once we find a bottom, remember about the resistance levels, which were confirmed on the way down.

Possible pattern on SPY 5 years weekly is a H&S completing the H now – possible test of $95-$100 zone to finalize the “neck”.

SPY 5 Year Weekly Chart

Eva

Are you a long term investor?

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Maybe our turn to try is coming soon? I am a short term trader myself. However under special conditions I will switch to a “long term” on a portion of my trades.

“When market is rallying – I always feel like I have too little money in my trades”
“When market is tanking – I always feel like I have too much money in my trades”

I learned to ignore that phenomenon and just stick to my trading rules and trade less frequently and smaller in times of market larger shifts.

I received some questions not so long ago on how to invest for a long term at the time when the market was pressing up since the last major bottom in 2009. That was not the time for me to think about “holding long term”. It was the time to sell higher. Now that trend is being challenged.

I am not good at trading shorts. I tried several times and I failed more than not. I am an ok right handed tennis player but when I switch the tennis racket to my left hand – I am awful!

If you read about my preferred setups you probably noticed that I play them from the long side only. I have some trades active almost all the time, and this is no exception. You may see my previous blogs for more information.

I always follow quite strict rules on risk management so my trades had been smaller recently. On some of them I am going to assume a longer “holding” time. I can do that with relatively low risk because I trade broader market ETF. The risk of those to drop additional 80% is close to zero. If that happened however we would have bigger worries than just money in the bank I suppose.

Let’s say an account is invested about 20% of today’s total value. It could be even one and the same ETF widely traded like SPY. Let’s say the SPY drops further 10%. The account like this will go down “only” 2%. With SPY dropping 50%, account like this would be down 10%. That’s assuming no trades are made on the way down!

How many traders loose more than 10% before their stop is hit? I consider the account with 20% currently long the market “under control” (this may not be true if that 20% is parked in a single company stock). If a trader tries to time an entry and hits multiple stops on the way the loss would be probably the same or greater.

If you were caught in today’s market madness you must decide if with your current exposure you are safe and can prevent “selling at the bottom”. You have to make that decision. If you don’t feel comfortable you may need to trim your trades further so you don’t have to panic.

Many large institutional traders are trading with leverage. Money has been cheap recently. Institutions, pensions etc have to invest and keep investing. Cash is not an option for long term – actually cash gives a negative return with today’s low yields and rising inflation. Same is true for bonds – negative real yield. Huge recent selling easily pulls out the leverage.

How low can the market go? I can’t predict, however when I think about how easily the cheap leverage can be removed – the market could go down further.

Good news for long term investors: there is no place currently for huge amounts of cash to get invested at good profit. So eventually it will flow back to the market. The challenge for us traders is to notice when that process starts.

I am carefully trading in anticipation of a tradable bottom (or multiple attempts). I keep in mind that technicals will not be clear in times of panic.

Thus I am using the 5 year weekly line chart of SPY without any indicators with exception of just resistance and support levels.

SPY 5 Year Weekly Line Chart

Panic of longs will be visible with heavier selling. Panic of shorts will be visible with sharp rebounds. Oversold may stay oversold – these indicators do not work well in times like that.

I am on a lookout for any king of positive divergence, after more selling for a longer term long entry in one of market ETFs (like SPY, MDY etc). Good example of such was in 2009 lower low in March 2009 with higher high on MACD.

SPY 5 Year Weekly Candlestick Chart with MACD

Eva

Playing the catch-up game

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I do not chase the trades. It’s against my rules. I rather look if there is anything, from my selection of ETFs, which might try to play a “catch-up” game.

Most of the time I find at least couple of candidates, as it was the case this time.

What do I look for? Good risk/reward: ETFs that have a support with lower risk = closer to the support and enough room until resistance.

Why does it work most of the time? Possible reasoning: a lot of traders will be thinking to catch something. They will not want to miss the market move. They will look for what had underperformed and has to “return to the median” etc.

This time I had my eye on EWZ and EWC (see my previous blogs).

On June 27th SPY was fighting for life at deep waters of SMA(200) with MACD trying to cross over.

On the same day IWM was already in a better shape, fighting for life at more shallow waters of SMA(20), but below SMA(50). I like that! It was time to look for “underperformers”.

EWZ was in the open deep ocean waters, far below SMA(200) but with support around $70 (see my blog “Who took the money?” From June 20th 2011)

Here was my choice of low risk, good reward trade under the conditions of a good market.

So do not chase and do not despair, look for a good trade within your rules. And, of course, always manage your risk.

Happy 4th of July!

Eva