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.

Here are some thoughts with my own conclusions at the end:

Ned Davis Research
A very respected institutional research house, Ned Davis’ company relies on 12 indicators covering sentiment, volume, volatility, and breadth. Right now ten are flashing a cyclical buy signal. But a unanimous result isn’t needed for it to be valid. For example, in the bear market bottom of 2002, only nine of Ned Davis Research’s indicators was indicating a buy. But they are not recommending to their institutional clients to start buying. They want to be patient and wait for a retest of the lows. If market internals are healthy on such a retest, then they would suggest going long.

Stock Market Cycle
There are patterns in the market’s history. But so far this year, the market has forged its own path. An election year should be a positive for market returns, especially in the later months of the year. But not this year.

The four year stock market cycle means that 2010 is the year to watch. But according to the decennial cycle, the 8th year in a decade has been good historically. Unless we have a miracle, this year will also be an exception. Here is the master of market cycles, Peter Eliades offering his views:

Credit Squeeze Relaxing
Both the TED spread and the LIBOR rate have receded. As well the price of “insurance” on default for banks has also dropped. There are mounting signs that we are seeing a thaw in the credit freeze that paralyzed the market. My only quibble is the short term rate (90 T-Bill rate) which continues to be pushed down. The bond market is telling the Fed to lower rates. Hopefully they will listen (unlike all the previous times) and get ahead of the situation rather than playing catch up.

Volatilitius Maximus
Volatility has been absolutely insane. There is no gentler way to put it. We’re seeing double digit (or close) moves in the market daily. It is both unnerving and exciting. And here I’m not just referring to the sky high VIX index but also to the breadth numbers which show extremes. The good news may be that such volatility has been historically associated with market bottoms. As I wrote two years ago, extremes in market breadth with the advance decline numbers swinging from one extreme to the other to gather “fuel” for a sustainable trend to be established:

Smart Money vs. Dumb Money
At every inflection point in the market, we witness the smart money and the dumb money do different things. This is how wealth is transferred from one group to the other after all. So far we’ve seen Warren Buffett extract very favorable terms with General Electric (GE) and Goldman Sachs (GS). Terms that the US government hasn’t gotten. That’s another issue though. Although you or I may not be able to negotiate the same terms, it is still valuable to watch what the smart money is doing.

Which reminds me of Tony Oz’s video where he called a bottom. Faced with a melt-up, he did what any smart trader would do, sell into the wave of buying.

Corporate insiders are also considered “smart money” and they have accelerated the rate of their purchases, pushing the buy-sell ratio to 2:1. This is very unusual because usually it is the other way around as insiders sell shares which are given to them as part of their compensation package. But caution is warranted because insiders are notorious for being early to the party - as much as one whole year.

The other end of this see saw is to watch the “dumb money”. I’ve gone into detail over the past sentiment overview regarding the public’s and retail investor’s pessimism during this crisis so I won’t rehash it here. Now that we are getting the first glimpses of the bulls returning, the most important aspect of contrarian sentiment comes into play; watching how the “dumb money” reacts to a recovery in the markets. If they continue to be fearful and pessimistic, even when the market recovers, then the chance that it is a real floor is much higher. But if they quickly switch sides, then we will see more downside.

Conclusion
My own hunch based on all of the above and more, is that this is a cyclical bottom. It is tradeable, and the volatility provides amazing short term opportunities for trigger happy traders but we are far from a secular bottom. You’ll know we’ve hit that when stocks and the whole equity culture of the US and the world changes. When people start outright hating stocks or even the thought of investing.

When everyone laughs at you or feels sorry for you for even hinting that it may be time get back in the stock market. When the valuation pendulum swings way to the other side and measures, whether based on price earnings or price dividend are so outlandishly extreme that you do a double take. That’s when you’ll know we’ve hit a secular bottom. One for generations.

Just got word that Tony Oz is thinking along the same lines and believes the market is near a significant bottom here. He bought a bit over $500,000 worth of SPY today and will buy more if the market declines again.

His reasoning includes the market having seen capitulation, pessimistic sentiment and he also points to the RSI which has fallen below 20. Watch the 9 minute video for more:

I’m glad to see someone like Tony Oz confirm my own thinking that we are close to a bottom - otherwise, we might as well just flee to the hills and look for a nice cave to hunker down in. Unlike, Jim Cramer, Tony Oz makes infrequent public market calls, so when he does, it merits attention.

Poor Cramer, he just may come to regret his somber advice for people to get out. But then again, knowing him, he will have no problem in sweeping that under the rug, along with all his other unprofitable calls which he never revisits.

Here is the latest video commentary by Tony Oz:

Apple is at a new 52 week high - is the Dow next?

Take a look at his analysis. He covers Apple and the general market indices as well as a few other individual stocks from his own proprietary filters.

“Apple has made a new 52 week high and the question that we’re going to ask is if Apple is a market leader in the tech stock [sic] is it indeed going to lead the Nasdaq into a new 52 week high?”

As this blog has grown, I’ve gotten messages from advertisers who are interested in reaching my readers. I’ve turned almost all of them down because I’ll only promote something that I believe will help people.

That’s why I want to let you know about something worthy of your attention: Tony Oz is offering a new trading course.

But this is a trading course like no other.

Unlike all the other trading courses and seminars out there which are taught by teachers who’s principle source of income isn’t trading, Tony Oz has demonstrated his trading prowess many times over. And unlike other courses which use canned material, static charts or at best simulators to teach, Tony will conduct all the classes live, during trading hours.

Using video conferencing software, all students will be able to see Tony’s trading platform and hear his voice live as he analyzes charts and setups and executes trades in real time.

Similar to a full semester long college course, it will run about 13 weeks (from September to December 2007) and encompass all the material needed to make you into a trader. Starting with general market analysis and going to individual stocks, Tony will teach you everything he does step by step. The course will cover multiple timeframes and trading styles: intraday trading, swing trading and even long-term portfolio management.

And like a college level course, you will have homework! You will have assignments which will have to be completed and also have the opportunity to review other students assignments and learn from their work as well. Of course, Tony will “mark” your homework but by seeing the mistakes and success of others and leaning from them, you’ll be armed with the critical knowledge to move forward.

The course is for all levels. So if you are totally new to trading, don’t worry. Tony will offer a special one day pre-course bonus session for beginners to bring them up to speed. Then it is on to live market data as the “course textbook”. As well, all classes are recorded and available for playback.

The downside is that because of this structure, there are a limited number of seats available. So if you’re interested, register now.

Believe me, I know there are a lot of people who would love to learn how to trade. And unfortunately there are also many “snake oil” salesmen who are ready to bilk them for all they’ve got.

That’s why I think Tony Oz stands out so easily in his field. He is the real deal. Now you’re probably asking, “ok, how much?”

This 13 week course costs $7,000. And yes, that’s a lot of money. But …

… if you register before August 10th 2007, as reader of this blog, the Trader’s Narrative “scholarship” will bring it down to only $4,995

When you consider that many have lost much, much more in one year or even one month trying to learn how to trade on their own, you realize that the tuition is actually very cheap. After August 10th, the price goes up, so shake a leg.

If you have any questions, you can contact me and if you like, I can even put you in touch with Tony Oz himself.