Schaeffer's Trading Floor Blog
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Dave says - "Lets be frank and admit that this is a lousy trading market. What to do? Extending your time frame is one thing, but that is risky. Who will want to buy your stock in two days, or two years. I continue to like AIG because institutional investors receive a steady source of funds to invest, and they tend to like these situations."

My response - I want to post this question for two reasons. One, because it offers a chance to share a mutual frustration and two, because it gives us a chance to explore alternative views.

Without a doubt this has been a rough few months as the SPX sits at nearly the same level it was at in early December. The risk to extending your holding period can be mitigated by decreasing your trading size or by using options, but both of those will incur a cost. In this environment, I think it is important to focus on the type of stocks such as those I showed in last week's scan or those you can find in the Special Tool Kit filters but others may find a different approach more beneficial...

And along the lines that each person will need to develop an approach that fits their personality, I would have to respectfully disagree on AIG as I think that optimism is too high given the problems lurking (more information can be found here) but I am by no means saying Dave is wrong.

Trading is about applying a consistent edge. What works for one person may not work for another. And many times, trading is not about what you do right, but what mistakes you can avoid. In other words, you want a style that helps you trade away from your weaknesses. In this case, I see AIG as overloved so I would avoid it, but someone with a different analysis style may be able to make money with it.

As the old Wall Street saying goes, it is the differences of opinion that make a market...

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Buying

by 5/23/2005 2:13 PM
Stocks quoted in this article:

It looks like the bulls are starting to come alive as my alert for NYSE net ticks hit as the major indices pop to a new high for the session...


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Stocks quoted in this article:

Nazeeh says - "Nick, Can you comment on the implosion we saw in the last few days in the Nasdaq and the QQQQ volatilities? I believe both closed at all time low! "

And Stuart says - "Nick, VXO : 11.50 : taken a real whack. Back to the recent (fairly extreme) lows. Time to get cautious? What's your take, please?"

My response - The two volatility indices I keep an eye on are the CBOE Market Volatility Index (VXO) and the CBOE Nasdaq Market Volatility Index (VXN), and both are back to showing relatively low readings. The VXN is at its all-time low (for data going back to February 2001) while the VXO is near its annual low and back to levels not seen since the mid-1990s.

Since I am in the camp the refers to these as "fear gauges" it is clear there is a lack of fear on that front. However, the two articles I noted this morning...

...offer evidence that the overall picture isn't quite as clear as that.

My take is that the low volatility indices do signal complacency, but that in-and-of itself isn't enough to derail a rally. Especially when you look at the daily chart of the QQQQ and see it now has the wind at its back...


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Chart Chatter - XLE

by 5/23/2005 1:07 PM
Stocks quoted in this article:

On Friday, Bernie explored the big picture on oil in his commentary - "The Battle for Black Gold"... With his comments in mind, I was just going through some charts and the daily action of the Energy Select Sector SPDR (XLE) caught my eye.


Created with SuperCharts by Omega Research

Here you can see a downtrending channel, the 50-day moving average and a congestion zone near 40. I wouldn't call any of these measures a silver bullet, but I do like to use them as a way to measure when a trend may be changing.

For now, the XLE is still locked in a short-term downtrend as it trades below its 50-day trendline. A move above this congestion would be the first sign of strength, but the upper rail of the channel (which is aligned with the moving average) is what I will be watching for as a break may offer that the selling pressure has run its course.


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Open to Debate Part V

by 5/23/2005 12:01 PM
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I began this series of posts on Friday. If you missed any of the discussion, you can click on the links below to get up to speed...

My goal with the posts above was to lay the groundwork for this statement - you need trust your edge and take trades as they come because you accept that losses will happen and know that you have the appropriate loss control measures in place.

While I agree with Mike that it can be useful to go back and dig into trades in order to refine your edge (what we call the post mortem process) I think this is better done in aggregate. In other words, second guessing each individual trade can leave you flustered and confused. (Believe me, I have had days when I couldn't tell you up from down because I was turned every which way trying to find the "perfect" solution.) Yes, the ITRI situation could have turned out to be losing trading, but with an appropriate style of loss control for your strategy, that is acceptable.

It may help to think of it as a casino does. They do not worry about each individual event because they know they have an edge over the long term. Any individual player may hit big today, but they know that odds favor the house over the whole. However, you can bet that they are always evaluating the "big picture" to make sure their overall edge remains in place.

As a trader, you want to become comfortable (but not complacent) with the fact you will have losses so that you will be able to capitalize on opportunities when they present themselves...


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