The Importance of the Opening Level in Gaps. $CCL $RCL $ADBE $WAG $study

I never leave a position open in a stock that will have an earnings release. That is gambling in my book. Once the earnings are out they offer excellent volatility, especially in a week where the indexes barely moved.

All three broke out after the earnings release, at which point you have to decide whether you will fade the move or not. Making your own assessment of an earnings report and what the market reaction should be is risky and difficult ; a better option is to wait for the market to tell you what to do.

I suggest using the opening level as a guide. If a stock is going to break out convincigly it must not re-visit its opening price for it shows lack of certitude on the part of the break out. Its like a 400 meter runner that starts strongly and opens a distance to the other runners and slowly sees it reduced as the race progresses. You might want to short these and go long those that start strong and never look back.

ADBE gapped up 6.2% to $31.00 and never really went anywhere.

WAG gapped up 7.9% at 39.75 and had an even cleaner break of the opening price than did ADBE.

RCL had a smaller gap up of  2.6% . It behaved differently than the previous two in that it re-tested the opening price and it held. The opening price became an important support.

What happened to RCL was even more interesting although it had no earnings release. It gapped up 3% and never looked back on its opening price, never giving a hint that it might be a good short despite its apparently exaggerated move. In fact you should be looking for support levels from which to go long in powerful moves like this that basically could not care less where the opening level was. Its the runner that starts strong and finishes strong.

$AMZN overvalued? Yes...buy it! $study

I always like having an ideia as to the valuation of a stock  I trade. For a day trader like me this may help OR hinder you as I will explain. First the valuation : Analysts expect 43 billion in sales for the year ending in Dec. 2011;  around 30% growth. Let us use a very optimist profit margin of 5%.
    
                        43 * 0.05 = 2.15

So 2.15 billion dollars in profit; let us apply a P/E of 30:

                        30 * 2.15 = 64.5

At yesterday`s closing price of $175.57 , $amzn had a market cap. of 78 billion and an Enterprise Value of 73 billion.

So it seems overvalued . I will now try to forget this exercise and not let it bias me into not buying it for day trades as long as the important $173.50 support holds. Too much thinking about fundamentals may be harmful to your bottom line.
 

My son in Cascais telling me to sell three contracts.

"Prognosis only after the game" - A move is overextended only in hind-sight. $study

An interviewer once asked football player João Pinto, then playing for Benfica, what his prognosis was for the game. He dryly replied "prognosis only after the game". I will describe two successful day trades  I made based on  assuming the moves were overextended, one in $HD and the other in $AKAM.

The AKAM trade was done on Monday 15th November. It was falling around 6% against the sp500 on an Oppenheimer downgrade .http://blogs.wsj.com/marketbeat/2010/11/15/oppenheimer-cuts-monster-stock-akamai-to-market-perform/?mod=yahoo_hs . The week before the stock had fallen given worries of lost business at Netflix http://seekingalpha.com/article/236411-netflix-inks-content-delivery-deal-with-level-3-confirms-akamai-worries?source=yahoo . The first buy trade was at 10:52 and I sold the position at 15:52 .

In this trade as in the next one I hedged market risk by going short the SP500 via $SPY; I shorted 130% of the AKAM position.

The Home depot trade was done yesterday, 16th November. Results came out in the morning and were ok. The stock was outperforming the SP500 by about 5%. I thought this was excessive and started  shorting at 10:16 . I closed my position at 14.47

I was long 90% of the position size in SPY. Again, I was betting on the relative performance of the stock, not its absolute performance.

The thing about both trades is I had to make a judgment call on whether the moves were excessive or not; unlike the football player at the beginning of this post,  traders have to prognosticate before the end result is known in order to make money.

The link between not using stop losses and Peter Sellers in "THE PARTY" $study

Sometimes (many times!) I go into trades and don’t immediately insert a stop loss order. I then find myself looking at a small loss then a large loss and then a very large loss. I realized that the emotions I feel as this happens are perfectly depicted by the scene in "The Party" where Peter Sellers destroys the bathroom.


He should just have walked away when the water did not stop running; that would be his stop loss order. Instead a disaster ensues. The inability to act and take your losses is perfectly depicted by his bewildered look as the toilet roll doesn’t stop rolling (1minute 55 secs.).

$DE The trade I should have made. $study

$DE had been trading aboove 69.22 for the last couple days. This was a clear resistance and now support level. On Friday the agricultural products gapped up, again, as represented, for example by $JJG. The sp500 opened with some weakness but $DE gapped up and during the initial morning weakness never went below $69.72  which was still positive for the day. Best of all a clear double bottom was established at 9:58 . Nothing is certain in trading, but all of the above indicated a possible breakout and best of all a clear stop ($69.60 for instance) was established.

Easy Trade I Screwed Up $ORCL $study

$ORCL had good results and many houses were lifting price targets in the morning. Its not expensive , the SP500 was stable enough so I gave it around three minutes at the open, liked what I saw and bought at 26.69. Soon after I sold at 26.99 and it could be argued I should have held on longer with a stop 10 cents below my entry. Either way it was a good trade.

The problem is what happened afterwards. I started shorting around 26.85 and throughout all the area shown by the rectangle in the graph. What was I thinking!! Well I was thinking it would range trade and I would make a few pips...but then it crossed 27.00 and never broke it again. On the re-test at 12:10 I should have covered...Basic Trading 101.

So what have I learnt ?(and I should know this by now!!!). Follow the logic (cover at 27.10ish after support did not brake) and more importantly do not throw logic out of the window (what was the basis for keeping shorting at 27.20 27.20 27.35 ? None!! It was just stupid...failure to acknowledge a small loss led to a big loss. Ended up covering at the end of day for a nice loss.

One big mac, no coke please. $MCD $KO

Reading the Tape so as to avoid losses. $AKAM

I entered thursday short the market, including a short position in $AKAM. I was not too sure about this position; $akam is a "weird" stock but $nflx was down heavily on wednesday the market was not strong so I thought maybe high beta stocks might fall.

But come thurday mornig , the market is indeed falling a lot in the pre-market, but $akam was suspiciously stable. I decided I would give $akam a very short leash; I would give it a chance to fall quickly at the beggining or else... When it showed no relative weakness in the first minutes I covered at 9.31.31 and at 9.33.26
Good thing I did , because from then on its relative performance was very stong. I use relative (to the sp500) strength often to tell me what a stock "wants" to do.

A trading mistake.

I went into the employment numbers heavily short. This might have been a mistake since I had no particular insight into the numbers. The only rationale was we were at recent highs so maybe a better than consensus number was needed for significant upside. The real reason was I was on a loosing streak and was hoping (hoping ...how embarassing) for a bad number.

But this is not the mistake I refer to in the title . Rather the fact that , lucklily, the numbers were a bit weak, and I suddenlly saw myself with almost $3000 in profits...and then I got greedy! The sp500 was falling 1.5%, a big move...but I thought it would go down 2% (why!?) so I relaxed and held to the close...and my excellent profit turned into a mediocre $600 profit...and leaves me hoping (argg!) for a neutral or down opening on monday.

So summing up...do not get greedy. Also do not let your recent perfomance influence you. In my case my abismal recent performance influenced me into being greedy , since consciously or not I´m sure I was trying to hard to make up for recent losses...normally I would take the $3000 .

Contrarian versus Trend trading

Type "trend trading" in google and you get 5 250 000 results. Type "contrarian trading" and you get  2 690 000 . ( It would be funny if contrarian >trending !)

$GS and $MS will suffer from prop spin-off

I beleive one of their advantages , if not the main one, is that their flow (customer) trading gives them an advantage into what the"market" is doing. This allows their prop. desk to benefit...in a way its kind of legal inside trading. If they install a real chinese wall, this advantage is gone. (This applies to other investment banks as well, but more so to $GS and $MS...just look at the % of profits from Goldman´s famous FICC department.)

SP500 new recent high not convincing.

While the sp500 reaches new recent highs, the russel 2000, the banks, and the semis could not give a shit. very suspicious.

Thoughts on my trading style

I believe most successful traders develop a style that fits their personality for whatever reason, consciously or not. The basic choices available are trend following or mean reversion AND your time frame. I trade predominantly in the "square" under mean reversion on one axis and intraday or overnight in the other axis.
My investment horizon has a half-life of three days ; i.e. one week IS the long term for me.

OK earnings; bad reactions

$INTC had great earnings was up 6% and ended up 1%. $JPM $BAC $C beat earnings (not revenues) and all are down; a lot of talk about provisions being reversed, but that is one thing , another is simply making less provisions...worth investigating. Any way maybe the market haad gone up too fast from 103 $SPY to 110.

Summarising , earnings OK but doubts about future economic growth weighing (China stock market doing crap). Also euro has rallied, debt situation in Europe seems to have inproved with reasonable auctions in Spain , Portugal and Greece...but all that does not mean Europe will post any meaningfull growth...

Is it Resistance or Breakout; THAT is the question

"Recognize the difference between when to employ trend trading techniques(buy breakout) and range bound (short resistance) & you're 70% there"

$ADBE stock overreacts to earnings

Yesterday $ADBE underperformed the market by around 7%, after posting results the night before. The results were ok or even good, beating expectations, although guidance seemed conservative. (Adobe beats expectations) . Furthermore, $ADBE has been underperforming in general as can be seen from the chart, part of the reason being its current "fight" with Apple (Apple atacks adobe´s flash).

Analyst´s were pleased with the results, while some worried about future margins, others saw reasons to maintain their bullishness. (Analysts reactions to earnings)

I have no particular opinion on Adobe´s long term prospects, but it seems that given the above, plus a reasonable forward P/E of around 15, there seems to have been a tradeable overreaction

$SBUX Outperformance

$SBUX ripe for a short trade against the SP500

Review of Fading Trades $VMW $CRM

A couple of days ago both $VMW  ( http://jpotrading.blogspot.com/2010/05/is-vmw-bubbly.html ) and $CRM had gone into my radar due to their outperformance of the market.. Then on the 3rd of June both went up more than 7% against the market. The only reasons I could ascertain to cause this were UBS lifting the price target from $64 to $75 and especially comments by Microsoft´s CEO Steve Balmer including $VMW among its four main competitors.( vmware-now-on-microsofts-enemies-list-ubs-ups-estimates) . $CRM went up supposedly due to it also being in this cloud computing business.

I went short both stocks against the SP500, and both underformed the SP500 by around 3% in the following days. So what this trade involved was having the stocks in the back of your mind due to previous research so as to have the courage to make a judgement call when "extreme" moves occur; that it was not based on any or strong enough news and will have a good probability exhibiting of mean reversion.

Even a day trader such as myself needs to have a good sense of market and sector valuations to correctly gauge market sentiment. With the talk of famous hedge fund managers buying C and BAC I decided to examine some bank valuations and apparent low nominal dollar prices I decided to examine some bank valuations.
Tangible equity and return on this variable seem to provide the fairest estimate of what a bank´s normalised earnings will be. I retrieved bank tangible equity per share (TES) figure from the bank´s web sites, and applied a 20% return on tangible equity (ROTE) in the first table, and a, in my opinion, more realistic 15% ROTE in the second table. In both I combined the resulting earnings per share (EPS) with a price to earnings (PE) ratio of nine to obtain a "fair value".

With the above 20% ROE, all are undervalued except for WFC. Lets use a more conservative 15% ROE and see what happens:

We now have WFC even more overvalued, BAC and JPM are basically at fair value and C is still undervalued.

$GIS...potential short?

Made money..but did I trade well?

Reasonable money making day, but coming into friday situation was as follows; was short high beta stocks , $BIDU, $CRM ,$VMW(average beta 1.70) and the latter two were up 7% on thurday. At the end of trading thurday I hedged 60% of my shorts with sp500 etfs, since I did not want to risk a bullish jobs report.

Well the jobs report was not good and the euro continued collapsing and the SP500 ended down 3.50%. So my hedge lost me money but that was fine. What bothered me was my high beta stocks should have fallen much more than the market and they did not really...particularly my bigggest short $VMW which behaved with a beta of 1.0  .($BIDU -4.25%   $CRM -5.50$).

$OIH outperformed and $GS did really well down only 1.20%.

Day´s Summary $VMW $FCX $CRM

Market went nowhere really. Early in the morning bearish comments by $FCX about china (and overnight China actually fell) reported by bloomberg and fair enough $FCX fell 4% .

Balmer from $MSFT included $VMW as one of the four "enemies" and UBS reiterated buy and upped price target to 75 from 64 , and it crushed me going up 7% as well as $CRM.

$BIDU went nowehere , neither did $APPL. Closed my short APPL.

Banks underperformed. $DIS corrected, and the euro was very weak...close to lows.

Underperformers of the day

The following behaved according to post title : $HD $LOW $MMM AAPL $VMW $DELL
In fact market was basically lifted by financials and mainly energy related stocks...$OIH up 6%.

Outperformers: $DIS $DE $AXP

Shorting $DE

Had to short $DE. Up 4% AND at point of maximum outperfomance against SP500...just have to decide now if pure short or against SP500.

What´s up with $DIS

$dis outperforming sp500 by 2% today on remarks by ceo on park bookinks continuing to trend upwards...will keep an eye for possible short versus market.

funny

$HD outperforming

Keeping an eye on $HD for a short against sp500

What´s down $JNPR ?

5% underperfomance by juniper seems a bit much. Only news was downgrade by UBS.

Bank stocks cheap?

This article makes a case bank stocks might be cheap...i do not agree...will expand on this later.
http://dealbook.blogs.nytimes.com/2010/06/01/do-hedge-funds-have-it-right-on-bank-shares/

$AAPL cheap?

Apple is up this morning while futures are down 1%...everyone upgrading them due to good overseas Ipad demand...looked at it with intent to short it...but I was surprised it actually is NOT expensive. Assuming a conservative $15 per share x 15 = $225...and it has $25 in cash...currently trading at $258, so definitly not in bubble territory....do NOT short it.

$COH good trading stock

$COH close to max. relative valuation...maybe cause $TIF had  good results? Anyway good for a "calm down" trade...

Bidu bubbly?

Is VMW bubbly?

VMW has outperformed the SP500 by the most since its post IPO madness. Looking to trade it against SP500 .