Little Bio Stocks Flying

Small bio stocks have been going strong recently. It maybe there a strategy to catch little jumpers while there are jumping. The hard thing is to find a pattern when they still start to jump and when the jumpers stop. It looks they start to jump when the general market has been rallying for a while and they stop when the general market starts to reverse. If this is true, it can be used a signal to catch the jumpers and to measure the health of the general market.

Here are two jumpers:

Peak Indicators

When the stocks move higher and reach new highs, more and more people try to predict a peak.  Fundamental valuations, technical divergences, and extreme sentiments are the parameters people use for predictions. All these parameters are relative. They might work in some scenarios but not others. To me, timing is the key. Trading is like a battle, you need to explore the situations to find out when to start, retreat, support, enforce, and end. Evaluate the situations and move along with the forces.

Currently following peak indicators are still missing:

• New low expansion
• Volatility expansion
• COPP cross and divergence
• Paper Cover Stories
• Extreme sentiments, like AAII above 50

Pattern in Action or Hindsight

The stock patterns are very hard to spot on time. They all look good and impressive in hindsight. To really find a good trade setup and a right entry, traders have to be intimate with stock moves day in and day out. Use daily chart to know what is going on with a stock, and weekly or monthly charts to have trend perspective. It really takes patience, courage, and discipline to ride a trend to the end.

NVDA Monthly

NVDA Weekly

A Bear in a Bull Market

Cerner looks really weak, especially in this bull environment. It has broken down a HS shoulder and stayed there for a few weeks. It could be a good short candidate. Sometimes, the weekly RSI divergences call out the intermediate tops impressively.

Will robots take over?

After I just heard over someone talking about robots in a few occasions recently, along with recent strength in industrial stocks, I thought I shall check out robot stocks. Today I happened to see one, iRobot. The stock broke to all time high with persistent momentum. Probably just keep an eye on it.

Final Blowout or a Start of another Leg

This upside move of the stock market is led by bank and industry stocks. Based on the volume, momentum, and directional expansion just out of a big base and tight range from a lot of stocks, the move might have more legs.

The high beta / tech stocks are lagging this time, especially leaders of the previous up leg. Also there are divergences of market internals. This could mean a start of a bear top, but some stocks could move significantly higher before they go down.

The best thing to do might just go with flow, riding the uncertainty with a flexible mind and discipline approach. That is what a trader is supposed to be.

Top Volume Pattern

When a stock moves very little with extreme large volumes, old timers might say something is cooking. On other side of a coin, if a stock moves up with very little volumes, it is not good as well. Of course, volume and price are all relative to their context.

Class Top and Down Trend Development

From time to time, you see classic patterns in hindsight. You'll be lucky to catch one or two in real trading, and even tougher, to right them all the way to the end. It looks it easy to spot a big trend developing in a weekly chart.

Weakness Developing in the Equity Market

Since the March low, the stock market has been in a upward trend for about eight months. But some weaknesses developing now might sign a deep correction is near.

1. Divergences in market breadth and price, both NY A/D ratio and High/Low ratio.

2. Divergences between price and volume. While the prices are moving into new highs, the volumes are decreasing. When the prices come down, the volumes are increasing.

3. More and more stocks break down.

4. Major emerging market indexes and leading stocks show bearish volume patterns

Markets to Watch

Crude Oil has the potential to break out for a up leg. It might break low to shake followers out before it moves upward.



I like breakouts from the short downward trendlines of tight patterns. Long-term moving average crossover is a plus.

Divergences in the Equity Market

1. Divergence between NY A/D line and Dow Index.

2. Divergence between S&P price and volume

These divergences show some weakness in the broad markets now. The market might strengthen again and make them go away. Or these divergences stay for a quite long period of time until the market starts to break.

Baltic Exchange Dry Index, Commodity Prices, and Global Economy

First here are some background and explanations of Baltic Exchange Dry Index:

The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange, which traces its roots to the Virginia and Baltick coffeehouse in London's financial district in 1744.

Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand). The supply of ships (cargo transports) is much less elastic than the demand for them, so the index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as building materials, coal, crude oil, metallic ores, and grains.

Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.

Now, let us look at the index chart below from InvestmentTools.com.



The index is free falling like a waterfall. It penetrates three major bottoms from 2008, 2005 and 2001 respectively. It is really ugly.

Below are charts of CRB index and Gold (GC) with the index.

BDI and CRB



BDI and GC



It looks like commodity prices still have rooms to go down. How about the global economy? Good Luck to us.

Unprecedented Volalitity

The market volatility this month is unusual both in concentration and in magnitude. There are four large moves that are more than 7%, two upside and two downside. This kind of market behaviors happen only during the Great Depression era.



From the chart above, I wonder whether this kind of market volatility might stay with us for a relative long period of time. The chart below also shows the unprecedented volatility happenning now in the current market. Bands in the chart marks two standard deviations.

Money As Debt

I just finish watching the video "Money As Debt". It is the best work I have ever seen in explaining how money works in the current society. You might like it too.

Dramatic and Sudden Events

In daily life, we are used to normal events and average changes. They make us feel comfortable and safe. So our minds are programmed to think in a normal and average way. But things that cause fundamental changes in all aspects are sudden and dramatic events.

This principle applies to the trend-following trading very well. The trend-following trading uses sudden changes of market behavior, such as breakout, to enter a trade; it ride along to expect a dramatic trend; and it uses a sudden abnormal reaction against the trend to exit a trade.

Also trend-following uses the stop loss to control the risk. So if a dramatic and sudden event is against a trade, the trade has a small loss. If the event favors a trade, it has a huge profit.

Currently, a dramatic event are developing in the global financial system. The following chart gives us a nice picture of it.



Where does this event leads to us? No one knows. But I feel the interview below is very interesting.

RAY SUAREZ: Finally tonight, we return to a subject on many minds these days: the financial crisis. Our economics correspondent, Paul Solman, checked back in with one particularly prominent voice in the investment world and his colleague, who guided his thinking.

Here is the pair's sobering conversation on what may lie ahead.

PAUL SOLMAN, NewsHour Economics Correspondent: One of the world's hottest investment advisers these days, Nassim Nicholas Taleb, author of "The Black Swan," who's been warning of a crash for years, betting on one, and winning big.

He's been ubiquitous in the financial media of late, from cable TV's "Colbert Report" to the BBC's "Newsnight," where he was infuriated by what he called "bogus accounting."

NASSIM NICHOLAS TALEB, Scholar and Author: The first thing I would get immediately, immediately, I would suspend something called value at risk, quantitative measures of risk used by banks, immediately.

PAUL SOLMAN: We sat down with Taleb and the man he calls his mentor, mathematician Benoit Mandelbrot, pioneer of fractal geometry and chaos theory. And even more than feeling vindicated, they're both scared.

NASSIM NICHOLAS TALEB: I don't know if we're entering the most difficult period since -- not since the Great Depression, since the American Revolution.

PAUL SOLMAN: The most serious situation we've been in since the American Revolution?

NASSIM NICHOLAS TALEB: Yes.

PAUL SOLMAN: Professor Mandelbrot, can that possibly be true?

BENOIT MANDELBROT, Mathematician: It's very serious.

PAUL SOLMAN: More serious than the Great Depression, possibly?

BENOIT MANDELBROT: Possibly. I hope not.

...... See the source below for the full interview.

Source: PBS: Top Theorists Examine Rippling Economic Turbulence

Pivot Points

Pivot points are turning points in price movements. They are places where buyers or seller give up their positions, so they involve emotions. The more intense the emotions are, the more important the pivot points. At extreme cases, one pivot point, such as price spike or crash, might define the turning point for a secure long term trend. Most of cases, more than one pivot points connect to a trend line. The break of a trend line may decide the direction of a trend.

So pivot points and trend lines are important tools to use to decide the entry and exit of a trade. Here are three steps that Jesse Livemore used to enter his trades.

1. Watch the tape.


2. Establish your pivot points.


3. Be ready to trade along the line of least resistance.

Pivot points are easy to see in hindsight but difficult to spot when they are developing. It is even hard if you like to have information from media and your mind is strongly biased.

Keep your mind open, clear and objective, then pivot points and lines of least resistance come to you. you go with the flow.

Below are some charts with clear pivot points and lines of least resistacne. I feel disappointed I find them in hindsight but not they come to me natually.

Japanese Yen



Australian Dollar



Canadian Dollar

Dollar and Other Currencies

Last Friday, Dollar had a largest upside move in many years. It also broke out a six-month base. Other major currencies, such as, Euro, Australian Dollar, Canadian Dollar, British Pound, Swiss Franc had the largest one-day drops within years.

Dollar Index



Euro

Cut Loss Short and Fast

In trading, cut loss short and fast is one of principles to achieve consistent and profitable results. Following this principle is one of the common attributes of successful traders, though, they might implement it in different ways.

Here are my understandings of this principle and I like to follow them consistently in my trading.

• Always have a stop loss in place.
• In a trading session, I enter a position but I have a loss around the close of the session. I close the position.
• After I enter a position, I have profits for a while. Then the market stalls, goes again me, and gives me a loss. I close the position.

It seems that traders have tendency to let loss run. They are unwilling to experience feelings of loss. They hope the market can come back to their way again.

The Postive Intentions of Failure and Loss

Failure and Loss normally bring people negative feelings, such as pain, anger, frustration, and so on. People also are unwilling to experience those feelings, so they regard failure and loss bad and try to avoid them.

But negative feelings of failure and loss have positive intentions:

• They tell us that something is not working or doesn't function properly any more, let it go.
• We might be able to learn something from our mistakes that cause the failure and loss.
• We might study more in the areas that we are undertaking.
• Others.

Failure and Loss are the part of a process. We might embrace them. Willingness to experience feelings of failure and loss gives us the courage to trial and error and can help us to learn from failures and to grow. A Chinese saying that I like:

Failure is the mother of Success

Refllatio

Source: London Banker