Trader’s Narrative

Tony Oz is an accomplished trader and educator - a rare find in the trading community. He has not only demonstrated his unparalleled skill, over and over again, he has been extremely forthcoming and transparent in his methods as well.

Of his several books, “How I Make a Living Trading Stocks” is even an account of a short period of time in the post-2000 Tech bubble where he shows exactly what he traded and why in great detail. Even more amazing, during this intense bear market, he took mostly long trades. Tony’s methods are surprisingly simple. He relies on technical analysis, resistance, support as well as tape reading.

From time to time he provides general market comments but it has been a while since we last heard from him. His previous market call was in October 2008 when he caught a classic ‘falling knife’ for a quick trade. Recently, due to a family matter Tony took some time off from trading. I’m glad to hear that things have worked out well and Tony can direct his attention to the stock market once again.

Here is his most recent commentary:

The smart thing to do right now is to probably fade an extended upward swing move by identifying an intraday reversal pattern and selling the market short. If such a position is taken, it would be prudent to place a stop loss above the intraday high, this way a trader would not risk too many points. A target around S&P 920-930 should be realistic for a short position entered at 955-975.

It is always hard to call a top or a bottom no matter what the time frame a trader is looking at, so a trader should not try and do that. However, the S&P had a nice run from the 870’s to 950’s, and it may come back into the channel at some point in the near future. Consequently, going long right now may be painful if a trader’s time frame is longer than a few days. (Please note! If the market pulls back first and then it rallies the above short-sale strategy is invalid. This strategy is only valid for an “EXTENDED” upward swing, which means without a day off).

For the traders who are looking to buy a pullback from this run, a good strategy would be to use the 50% retracement rule from the low to the high.

An investor may ask, “Why is an entry here risky?” And the answer would be as so: Let’s say the S&P goes to 1020. This would be a 140+ points run from the lows we just made 7-10 days ago. A 50% retracement will take us back 70 points, which will put us back at 950, which is exactly where we are right now

Source: Tony Oz Newsletter

Tony also mentions that soon he will be updating his classic book: “How I Make a Living Trading Stocks“. This is one of the most sought after books and since it has gone out of print, the prices are astronomical. I’ve read and re-read the book many times and can attest to its value. So keep an eye out for the updated edition coming out in October 2009.

In mid May, I pointed out the similarities between the technical formation we were seeing now and what we saw at the end of the bear market of 2002-2003: Comparing Wedge Formations: Then and Now. The S&P 500 has fallen out of the wedge formation - by trading below the lower trend line (see previous link for charts).

Something else noteworthy: the S&P 500 closed above its own 200 day (simple) moving average. For those keeping count, the index has spent 358 trading days below that threshold. And this is the second longest streak in its history! The one that was longer? You guessed right if you said sometime in the 1930’s (August 5th 1932 with 414 days).

The Nasdaq closed above its long term moving average in early May and then spent the whole month bobbing and weaving above and below to finally close 8.5% above it today. Even the NYSE Index managed to climb above this line in the sand. The Dow is the only major index still not above its long term moving average.

The next formation that we may end up seeing is what occurred in 2003: a flag consolidation pattern. According to Technical Analysis of Stock Trends by Edwards & Magee:

An Army that has pushed forward too rapidly, penetrated far into enemy territory, suffered casualties and outrun its supplies, must halt eventually, perhaps retreat a bit to a more easily defended position and dig in, bring up replacements and establish a strong base from which later to launch a new attack.

A Flag looks like a flag on the chart. That is, it does if it appears in an uptrend’ the picture is naturally turned upside down in a downtrend. It might be described as a small, compact parallelogram of price fluctuations, or tilted Rectangle, which slopes back moderately against the prevailing trend.

These pretty little patterns of Consolidation are justly regarded as among the most dependable of chart formations, both as to directional and measuring indications. They do fail occasionally, but almost never without giving warning before the pattern itself is completed.

You can see the flag technical pattern in this chart from 2003. The script sounds familiar. After making a sharp low in early March and bottoming, there was a sharp rally that propelled prices almost non-stop until June. From then until the end of August, prices traded in a tight range. After this pause, prices continued to rise.

(As you’re comparing the two charts, note that the vertical scales are slightly different.)

So far, we’ve seen a relatively small flag consolidation pattern which took the whole of May 2009 to develop. Here’s what we may see soon:

The benefit of such a scenario would be that as prices grind higher - two steps forward, one step back - the long term moving average would flatten much faster. Then it would rise to support prices from under. As you’ll recall, when we looked at the two wedge formations separated by 6 years, the position of the 200 day moving average was one of the glaring differences between then and now (Comparing Wedge Formations: Then and Now).

Obviously what I’m showing is hypothetical - no one knows what is in store for us at the hard right edge of the chart. But I can’t help but project this potential formation onto the chart because of all the other similarities which we’ve seen so far between the two market periods. Although I didn’t foresee this rally coming and actually expect lower prices in the short term, I’m trying to keep an open mind because this rally has angered and confounded everyone. Just take a look at the recent comments here from readers!

I’ve yet to read a comment from someone who is outlandishly bullish and riding prices higher. Instead all I see are various degrees of vitriol heaped on the market and anyone or anything that attempts to justify higher prices. That’s just an anecdotal layer of sentiment we can let fall atop all the other more formal ones. Just something to tuck under your hat.

Justin Mamis isn’t that well known but he is the author of several trading books, of which “When to Sell” is far and away the best. His book was published in the 1970’s when he was writing The Professional Tape Reader. Yes, the same one that later Stan Weinstein took over. As you’d expect, the two have very similar perspectives on the stock market.

I was just thinking about Mamis’ book these past few days and trying to remember where I’ve put my old copy when I stumbled on Tischendorf’s post about it. Talk about synchronicity!

When you think about it, the ultimate decision is when to sell. I recall reading in the Market Wizards book series an interview that Schwager did with a trader who said that he had tested completely random entries and with his proprietary stop loss and trade management process, it had been shown to be profitable. Not as profitable as when the signal was triggered by one of his trading rules but still, profitable. But when you think about it, when to sell is really furthest from our minds.

Instead, we usually, painstakingly analyze and ponder when and where to enter a trade. This is a case where intuition isn’t doing you any favors. Anyway, Tischendorf quotes from the book:

Rule One of the professional trader is: When a stock doesn’t do what you expect it to do, sell it. No hesitating, no questions or doubts raised no conjectures of the way it should have turned out, or might still turn out, no dreams of how it will do what it was supposed to do‚ tomorrow. The pro never says, “I’ll watch it one more day”. He doesn’t phone an analyst who’s been following the company and ask, “What’s happening? Is there any news?” All too often, the delay in searching for the‚ “why?” is costly. The desire to be perfect is one of the prime bugaboos of the stock market, but it’s a compulsion that belongs on the psychiatrist’s couch, not on the exchange floor.

The whole book is really about tape reading. While technological advancements have made the “tape” an anachronism, the idea of watching the ebb and flow of the market is still at the heart of speculation. And that is why it is the one skill all successful traders have. It is an edge without which you can’t really expect to bank serious coin. This is the skill that Steve Cohen developed as a teenager by hanging around a local brokerage office watching prices scroll across the wall.

If you don’t have Justin Mamis’ book, When to Sell buy it, it will help you become a better trader. There are few trading books that stand the test of time like it.

And check out Tischendorf’s blog. He’s a trader from Germany who has many insightful posts.

I’ve been meaning to get to this but things have been hectic so it has had to wait for a quiet Sunday afternoon. Last month was the third month that I’ve raffled off a book to my readers. The previous ones were Tim Syke’s “American Hedge Fund” and “Hedge Fund Trading Secrets” by Robert Dorfman. Keeping the hedge fund theme, the latest book giveaway was about hedge fund due diligence.

In case you missed my original review, you can read it here: Hedge Fund Operational Due Diligence: Book Review & Giveaway

If you’re interested in Jason Scharfman’s book it is available at online and retail bookstores. It is not a general interest book, even within the area of investment and trading. But it is clearly top notch. So far there have been 6 Amazon reviews and they all give it 5 stars. The other online reviews, similar to mine, are also all positive. If you’re a hedge fund, thinking of starting one, or if you’re on the other side of the table, thinking of investing in one, you will save yourself countless hours of headache by picking up a copy and letting it guide you through the due diligence process.

In any case, I’ve contacted the lucky winner (you know who you are!) of the random draw and will be sending them their prize as soon as I hear back from them.

But I’m also going to giveaway a second copy to another reader. I know, I know, originally I said I was only giving away just one book… but why not? So I’ll be contacting the second winner (you know who you are!) and sending them their prize as well.

With that out of the way, I’m casting about for the next book. So if you’ve written a book and you’d like it to be reviewed and raffled off, drop me a line. Or if you have wanted to read a book on trading or investing and you think would be a good candidate, let me know in the comments.

Persevering readers will know of my admiration for Stan Weinstein and his classic book: Secrets for Profiting in Bull and Bear Markets

If you haven’t yet discovered this gem, don’t let the silly title fool you. Pick up a copy at Amazon - although, I just noticed that it is temporarily out of stock!

So either order it new and wait until it is available again or order one of the used copies and get it fast. But don’t leave this book out of your trading library. Whether novice or experienced, you’ll learn something because the principles outlined in Weinstein’s book are timeless. For other books that I recommend, check out the About section.

One of the major themes in the book is that at any point in time, any market is in one of four stages: basing, breakout or advance, topping, and decline. Each of these “stages” have specific characteristics which are rather simple to recognize.

No two market periods are alike since history never repeats. But sometimes, if you look closely, it may rhyme. So here’s a comparison of the past bear market to the current one, through the perspective of Stan Weinstein’s Stage Analysis.

Something which immediately jumps out at you, even at a cursory comparison, is the lack of powerful bear market rallies. During this bear market we just rolled over each time with no real effort by the bulls to put up a real fight.

During the last bear market, the S&P 500 Index rallied about 6 times (depending on how much you want to squint) to either approach or hit its 200 day moving average. For a few brief days in early 2002 it even traded above the ever descending long term moving average. In contrast, the most recent market action has pushed price below its long term moving average to an extent not seen since the 1929 crash.

Apart from that difference, the two bear markets do have a lot in common. To start, at the beginning of “Stage Three” the 200 day moving average flattens and the shorter, 50 day moving average crosses, falling below it (marked by “1″ on the charts).

If you want to nitpick, the long term moving average started to flatten out in early 2002 due to the massive rally from the depths of the abyss of the September 11th tragedy (marked by “a” on the charts). But the 50 day moving average remained well below it - it did not cross above it.

Throughout, the long term moving average slopes downward and holds its decline (marked by “2″ on chart) until late April 2003 when, finally, the long term moving average flattens and the 50 day moving average rises above it (marked by “3″ on the chart):
Continue reading ‘Comparison Of Bear Markets: Weinstein Stage Analysis’