Short-Term Trading System

The Seven Considerations:

1)  Ascertain the probability of the overall market continuing its trend or reversing.

• Is the general market going up or going down, and for how long has it been doing so? More than 3-5 days in one direction is unlikely & risky.
• The general market stochastic (14/3) must be heading in the right direction (long/short).

2)  The trade itself must be aligned with the overall market –congruent and directional.

• Up market for an up trade (long) ↑, down market for a down trade (short) ↓. Don’t go long in a down market, nor short in a market upswing. The macro environment and the individual stock must line up.
• The ideal trade is to go long/short at the precise moment when the overall market has turned your way.

3)  You must have a plan before each trade. Quantify the accepted risk ahead of time - the point at which you’ll agree to quit – your stop loss –before you act. 1% is a common rule.

4)  Research the trade:

• What are the fundamentals?
• What are the technicals? Do they support the fundamentals? What is price saying?
• Is the stock on the right side of its consistent moving average? If it’s on the wrong side, don’t touch it.
• Look to M/A crossovers for confirmation.
• Many trades will not ‘line up’. That’s ok. Consider only those that meet your criteria and thus increase the probability of success.
• Choose leadership for longs, weakness for shorts.

5)  At the time of the trade, look for extremes, or rather, wait for them.

• The entry point is critical
  
• The lows and the highs are the most important: the lower the buy on an intraday level, the safer the trade will be and the tighter the stop. The same (but inverse) is true for shorting.
  
• Buy in tranches. The 1st trade must be profitable and have a stop beneath it before entering the 2nd trade, and likewise the 3rd.
  
• The goal is to raise or lower the stops to the stock’s original purchase price, and let it run. If the stop ends the trade – there’s a negligible loss. It if runs, there will be a profit.

6)  The princess in the fairy tale kissed a lot of frogs til she found her prince. It’s the same with trading. One good trend $ will make up for a dozen small mistakes. Several good trends will add up to many nickels in the jar.

• Each day there are at least two or three good opportunities.
• The subconscious is able to find them and recognize them. Trust it. There is no need to force a trade.
• Part of being a trader is being a whole person: healthy, active, and at peace in other areas of life.

7)  The Ultra Proshares - such as URE, USD, UYM, UXI, ROM - are superior to stocks for trading, especially at market turning points. These ETFs offer a lot of movement without the news-risk inherent in individual stocks.

Technical Indicators Useful for trading

*
1) ISEE Sentiment Index
From the International Securities Exchange. There is a descriptive article on the ISE page from the Wall Street journal describing this indicator. This data works best if you download it into an Excel spreadsheet and then plot the chart. The ISEE differs from other put/call ratios in that it includes only trades of customers opening a new option position rather than closing one, and it excludes transactions made by market makers. Thus it is a short-term indicator of how investors feel about their stocks now. For the last 2 years the sentiment index has fluctuated in a relatively narrow range; the buy signal being 90 > 100 on the 10 day moving average. The sell signal has been just north of 125 (Jan 3/08; May 1/08; Sept 3/08). During the more significant rallies of 2006-08 it ran as high as 145 until it suddenly reversed (Nov 3/06; May 16/07; July 17/07; Oct 16/07; Nov 6/07). By the time the overall market peaked in October 2007, there had already been a prelude of three (3) significant periods of market weakness (Sept 15/06; March 17/07; Aug 16/07).

2) SPX Fair Value and the Fed Model
When stock prices decline to the point that the SPX yield is higher than bonds, investors will likely allocate more capital back to stocks.

3) VIX Volatility Index
Historic
Current
From Stockcharts.com. The premier volatility (uncertainty) index. Readings above 17.5 are bearish; above 25 and up to 32 reflect extreme bearish sentiment in the market and thus a possible turning point. Levels below 17.5 were typical of the 2003-07 bull market. Sustained levels in a range of 17.5 to 32+ were normal during the latter stages of the 1990s bull market and the bear market of 2000-02.

4) VXN Volatility Index
Historic
Current
From Stockcharts.com. The Nasdaq Volatility (uncertainty) Index. Nasdaq bull markets have sported relatively benign readings in a range from 12 to 25. Extremely high readings were a feature of the VXN during the latter stages of the 1990s bull market and throughout the bear market of 2000-02. The current surge of volatility is a point of concern because it may mean we are returning to a sustained period of uncertainty and oscillating swings in stock prices.

5) Speculators: Bulls vs. Bears
Nasdaq SPX DOW Russell
These charts measure the spread between two sets of very speculative index mutual funds: the Profunds Ultra bull and the Ultra bear. The daily performance of each fund is 2x the percentage return of the underlying index (or its inverse). A 6 week exponential moving average (EMA) is included as a support and resistance marker and as an indicator of a trend change (when the ratio crosses above or below it).

6) SPX Momentum Indicator
2002-10 SPX
Current
From Stockcharts.com. This chart analyzes price strength on the S&P 500 Index by tracking the percent of SPX stocks trading above their 50-day moving averages. A 10 and 25 day exponential M/A is superimposed over the percentage. When the indicator's 10-day moving average (M/A) crosses above the indicator's 25 day M/A (or vice versa) trading signals are triggered. Levels above 80% indicate the market is reaching its highs, and conversely, when the indicator is at or below the 25% level, the market is approaching a valuable buy point. In bull markets the momentum indicator will rise quickly to the 80% mark and then "coast" for several weeks as SPX buyers trade toward a plateau. In a bull run any drops in buying pressure below the 25% mark tend to have a pronounced v-shape formation (quick fall, quick recovery). In bear markets the opposite is true: the momentum indicator will quickly form v-shaped tops but extend the bottoms for weeks as sellers unburden themselves of stocks.

7) NYSE Opportunity Indicator +Historical (1991-Present)
Maximum oversold readings in this indicator (near the -370 green Line) have been great buying opportunities for the SPX 500. Selling points are above 350.

8) SPX w/300 day Moving Average
A bull market is born when the SPX 500 rises above its 300 day moving average and stays there. During the last bull market (2003-2007) the SPX rose above its 300 day moving average in early March, 2003 and continued upwards through several tests of the moving average until January 3, 2008. The SPX has since decisively broken below its 300 day moving average and we are now in a bear market.

9) SPX Bullish % Index
The $BPSPX measures the number of S&P 500 stocks on their Point and Figure Buy signals. The higher the number, the more stocks that are participating in the rally. Like other indicators, you look for confirmation or divergences. Above is a chart of the S&P 500 with its $BPSPX as an overlay. Right now, only 31 percent (lower scale) of all S&P 500 stocks are on their Point and Figure (PnF) buy signal. This is bearish for stocks. During the October peak, that number was about 70. In early 2007, the $BPSPX was well above 80. (rev. 1.11.2008)

10) Nasdaq Momentum Indicator
2002-10 Nasdaq
Current
2002-10 NDX 100
Current
From Stockcharts.com. This chart illustrates the percent of Nasdaq stocks trading above their 50-day moving averages. A 10 and 25 day exponential M/A is superimposed over the number, while the price line underneath remains invisible. Signals: Highs (sell) are above 70%, lows (buy) are below 25%. This assessment tool should be combined with readings from the Nasdaq's short-term volatility (next).

11) Nasdaq & Russell 2000: the Moving Average Crossover
A simple and powerful indicator to discern the "right side" (bull or bear) of a trend. The chart illustrates the point where the 5 day moving average crosses above (or below) its 10 day moving average. When the red line crosses the blue line and the lines continue to diverge - a crossover is indicated and a trend change has occurred. You can use this indicator in conjunction with the momentum indicator (#10) above (there isn't one for the Russell). The momentum indicator reveals the trend (and the likelihood of it continuing); the crossover gives the correct timing to act.

12) Nasdaq Volume/SPX volume
Divides the 30 day moving average of the Nasdaq's Advancing (up) volume by the NYSE Advancing volume. Spikes in the volume correlate with market tops.

13) Nasdaq 100 Opportunity Indicator +Historical (1991-Present)
Maximum oversold readings in this indicator (near the -400 green line) have been great buying opportunities for the Nasdaq 100 and its exchange-traded fund, the QQQQ. Readings above 120 are overbought signals.

14) Nasdaq Bullish % Index
The $BPCOMPQ measures the number of Nasdaq stocks on their Point and Figure Buy signals. The higher the number, the more stocks that are participating in the rally. For the last three years each successive top has featured a bullish percent level near the 60% mark. Bottoms on the index seem to always land close to the 36% mark. The current level of 24% is extremely oversold. (rev. 1.11.2008)

15) NYSE & Nasdaq Summation Indices
From Stockcharts.com. The McClellan Summation Index is a popular market breadth indicator calculated from the number of advancing and declining stocks on the NYSE and Nasdaq exchanges. Derived from the McClellan Oscillator, it is a good indicator of the market's immediate forward trend. The McClellan Oscillator is used for short term trading. The Summation Index is a longer range version of the McClellan Oscillator and is used for identifying major market turning points. To read more about this indicator see The McClellan Summation Index at Stockcharts.com.

16) NYSE & Nasdaq Summation Indices (Historic set of charts)

17) NYSE & Nasdaq New Highs and Lows
The spikes of highs and lows (below) are indicators of trend changes in the market
Nasdaq: # of Stocks hitting new highs
NYSE: # of Stocks hitting new highs
Nasdaq: # of Stocks hitting new lows
NYSE: # of Stocks hitting new lows
Nasdaq: # of Stocks hitting new lows (historical)
NYSE: # of Stocks hitting new lows (historical)
Nasdaq: # of New Highs / new lows
NYSE: # of New Highs / new lows
Nasdaq: # of New Highs minus new lows
NYSE: # of New Highs minus new lows
Nasdaq: Volume in stocks advancing
NYSE: volume in stocks advancing
Nasdaq: Volume in stocks advancing (Historical)
NYSE: volume in stocks advancing (historical)
Nasdaq: Volume in stocks declining
NYSE: Volume in stocks declining
Nasdaq: Volume in stocks declining (Historical)
NYSE: Volume in stocks declining (historical)
Nasdaq: Vol advancing/ Vol declining (lows)
NYSE: Vol advancing/ Vol declining (lows)
Nasdaq: Vol advancing/ Vol declining (historical lows)
NYSE: Vol advancing/ Vol declining (historical lows)
Nasdaq: Vol declining/ Vol advancing (tops)
NYSE: Vol declining/ Vol advancing (tops)
Nasdaq: Vol declining/ Vol advancing (historical Tops)
NYSE: Vol declining/ Vol advancing (historical Tops)

18) Leading Volume Indicator
2001-03 NYSE
Current
2001-03 Nasdaq
Current
Cumulative volume indicates the bias of Investors' ($) intentions. In this chart, the advance/decline lines for the NYSE and Nasdaq are compared to the moving averages of their up and down volume. If the moving averages (the blue bars) are weak or trending downward and the A/D line is advancing, this warns that that fewer and fewer buyers are taking stocks higher. This negative divergence was evident for the NYSE in Q1 of 2004, 05, & 06. But the converse is also true. If the blue bars (below 0) are trending upward, or are simply smaller, less volume from sellers is taking stocks lower and the underlining direction is up. This appears to be the case with the NYSE - which has a large preponderance of financial stocks, the source of the current downturn.(rev. 1.11.2008)

19) Dow Theory - Transportations/Industrials ratio
1980-2010 Tran/Indu
Current
The Transports are an early cyclical group while the more diversified DJIA is comprised of relatively later cycle groups. Therefore, it would be expected that the Transports would lead the DJIA into the early or accelerating stages of an expansion, and vice versa, into a downtrend. The Dow Jones Transports quite often leads the industrials at important junctures.

Baltic Shipping Rates - a good indicator of forward orders for the worldwide transportation of goods. A rising line shows expansion, a falling line indicates contraction. Every working day, the Baltic canvasses brokers around the world and asks how much it would cost to book various cargoes of raw materials on many routes internationally. Movements in the Baltic Index tend to precede movements in global stock markets. But the index also tends to presage higher interest rates. When more goods are being shipped around the world, they need to be financed. And that creates a greater demand for credit. The Baltic Index provides both a rare window into the highly opaque and diffuse shipping market, and an accurate barometer of the volume of global trade.

20) Helene Meisler- Overbought/Oversold Indicator
The moving average of the net of advancing stocks minus declining stocks in 4 daily time periods: 10, 25, 50, and 200. This indicator measures time and momentum, and is excellent at sniffing out those two to three exceptional buying and selling opportunities per year. As you click through the averages from left to right - from the lower moving averages to the higher 200 day moving average - the chart lines will smooth out and the trend will come into focus. Readings below (-150) on the Nasdaq and zero (0) on the NYSE are indicative of a bear market.
10 day M/A
25 day M/A
50 day M/A
200 day M/A
200 day M/A (1991-2010)

Nasdaq
Nasdaq
Nasdaq
Nasdaq
Nasdaq

NYSE
NYSE
NYSE
NYSE
NYSE

21) The Net commitment of Traders (COT)
S&P 500
Nasdaq
This bar chart differentiates the long and short biases of commercial traders with those of large and small speculators on the SPX and Nasdaq. The commitments of commercial traders' long positions relative to their short positions appears to be one of the best forecasts of market direction.

22) Commodities
Historical
CRB
Gold
Oil
Dollar

Current
CRB
Gold
Oil
Dollar
A new bull market in commodities began in October, 2001 with the rise of oil, natural gas, gold, metals, corn and other commodities. Above are some quick links to the CRB, gold, oil and the dollar. Recent action (July, 2008) shows a sharp contraction in all commodities after their parabolic run dring the first half of 2008. From the looks of oil and gold, this 7-year run may be over. (rev. 8/5/2008)

23) Leading Dollar Indicator
Bond yields tend to lead the US dollar by several weeks. They also are predictive of Federal Reserve policy. In this graph, the blue yield line (TNX) is charted 70 days into the future and overlaid on top of the dollar line. The assumption is that bond yields ($TNX) are a forerunner for the direction of the U.S. dollar ($USD

24) NAHB (National Association of Homebuilders) Housing Index
25) Consumer Confidence
26) Consumer Sentiment
27) Investors Intelligence Survey
28) Equity Put/Call Ratio

30) DRAM Exchange Index -DXI [Requires signing up (free) and automatic download of Adobe SVG viewer]
The DXI index provides users with an easy to understand graphical representation of the semiconductor industry's DRAM market trend. The index is calculated by multiplying mainstream DRAM chips with their respective street price. The DXI index not only reflects the output value of the DRAM industry, it also depicts the stock price changes of DRAM makers. Therefore, the index provides users with an accurate account of the highly volatile memory business and a strong correlation with the spot price.

31) Solar Stock Comparison Table
Click on the stock symbols for an overview of each company within the Solar food chain. Ramping solar stocks are almost always a sign of an overheated market.

32) Credit yields
This section includes Markit's weekly wrap on the credit markets, plus historical charts on yield spreads for AAA through BBB asset-backed commercial paper. Markit's new ABX indices make it easy to track the current values of different grades of commercial paper. Click on the blue-highlighted closing prices (for example: ABX-HE-AAA 07-2) to see a recent chart for each asset class. There is also a tab with a list of constituents. Since the rapid drop in 2Q'2008 the value of credit spreads has been quietly improving. (rev. 8.11.2008). Lastly, here is a table of all bank credit in the U.S.

U.S. Treasury Yields
This table compares the relative direction of yields. It illustrates the bond market's current view of the economy. A downward direction in long term rates relative to short-term rates indicates a slowing in the economy; it can also indicate a lessening of inflation expectations (which is positive for stocks). Rising long-term rates relative to short-term rates indicates a rise in economic output. A sharp rise or fall in the overall comparison indicates a turning point, usually several months in advance of its effect on the economy.

Short-Term
Long-Term
1 Month
3 year
3 month
5 year
6 month
10 year
1 year
20 year
2 year
30 year

33) Dynamic Yield Curve (Stockcharts.com)
May require a java download. (Wait a few seconds for this page to load) Compares bond market with the interest-rate cycle. Includes a live-action chart of short-term interest rates for the last 30 years, hyperlinked to the SPX 500 chart. For an analysis of the yield curve see The Yield Curve by John Mauldin. The primary value of the yield curve is its forecasting ability before a recession.

"The difference between long-term and short-term interest rates ("the slope of the yield curve" or "the term spread") has borne a consistent negative relationship with subsequent real economic activity in the United States, with a lead time of about four to six quarters. The measures... most frequently employed are based on differences between interest rates on Treasury securities of contrasting maturities, for instance, ten years minus three months....Predictive power has been found (to) include GNP and GDP growth, growth in consumption, investment and industrial production, and economic recessions.... The yield curve has predicted essentially every U.S. recession since 1950 with only one "false" signal, which preceded the credit crunch and slowdown in production in 1967. (Arturo Estrella, New York Federal Reserve Bank, Oct. 2005)
Additional Breadth Indicators
See attached link.

Jeffrey Saut Podcasts

Weblink
Mr. Saut is the Investment strategist for Raymond James brokerage. I enjoy reading his weekly missives and listening to his daily podcasts - as much for his horse-sense and knowledge of market history - as for the judicious sprinkling of quotes from classical literature he uses to illustrate his points. A weekly read of Mr. Saut will put you neither in the bullish camp nor the bearish camp, but aligned in the direction of the market, which is the way I try to trade. His morning podcasts are on the air 4 days a week beginning at 1:00 PM Eastern.

The Big Picture

Twenty years ago I visited my father in Florida. He had worked on Wall Street during the Great Depression and had been a businessman and active investor for almost 50 years.

He took me into his office and opened a large book of charts. He pointed at a thin red line running across one of the charts that stretched for decades. He said it was a composite moving average of all the mutual funds in America.

"When the market moves above that red line, I buy a couple of all-purpose mutual funds from a list and hold em'. When it goes below it, I sell. And I don't get back in until it rises above it again. I've tried many things in this game, but at the end of the day I've never found anything better than this. And remember, there's no such thing as buy and hold for the long term. It doesn't work that way."

Twenty years have gone by and his simple advice has outlasted every other strategy I have tried (and I've tried many). Which leads me to that thin red line on his charts, or what I've come to know as the Big Picture, the 300 day moving average of the SPX. The stock market follows this index religiously, and the red line indicates whether a stock market is in a bear or a bull mode. The American companies that comprise the S&P 500 are a good barometer of the underlying economy.

Here's how to grasp the simple logic of the S&P's 300 day moving average. A worldwide army of investors and analysts wake up each morning and haggle over the value of the S&P's 500 publicly-traded companies. Billions of shares are traded back and forth. It's a huge foment, and trading continues throughout the day and into the night via the futures market. For the next 300 days - 18 consecutive months - trillions of shares exchange hands as investors seek a fair price ($) for the stocks in the index. The average of those previous 300 days is the number we seek. As Warren Buffett says, "In the short term the market is a voting machine, in the long term, it's a weighing machine."

Over the course of 300 days, the direction of the S&P relative to its long-term average becomes clear. In a bull market, the SPX 500 is consistently supported by its 300 day moving average and rises above it. In this scenario you buy - or hold - the dips. 

In a bear market, the index will break below the 300 day line dramatically and continue to drop precipitously in the weeks ahead. The safest strategy therefore is to be in the market only when the SPX is above its 300 day moving average. Avoiding the catastrophic losses of a bear market is extremely important, because the money you save will be available for the next bull market. 

Let's take a look at this methodology for 10 and 15 year returns. Using this strategy, a dollar invested in 1999 would be $1.79 today (March 21, 2009), resulting in a 79% return with a compound growth rate (CAGR) of 6%. There would have been two exchanges from funds into cash: in September 2000, and January 2008. For three of those ten years (1999-2009), the capital would have sat safely in cash while financial storms raged around it. 

If that same dollar had been invested in a buy and hold strategy, the 10 year return today would be a whopping minus (-39%) loss on original capital.  The difference between the two methods is a ratio of 3 to 1, or put another way, one investor lost 39% while the other gained 79% from 1999-2009. 15 year returns are better. A dollar invested in 1994 is $3.78 today - a 278% return with an 11% CAGR. The buy and hold return for 15 years is 64%, with a CAGR of 3.3%. The difference in total return between the two methods is 6 to 1. This is the importance of timing entries and exits along the 300 day line. The when is as important as the what.
 
What to buy?

Closed-end index mutual funds (ETFs) offer the best safety and the lowest fees. They are very liquid and trade just like stocks. When you buy one of these funds you are buying the general market, the whole list, and are diversified across all sectors.

80% of all money managers perform in line with their benchmarks (their goal) - the large indices - such as the Dow Jones Industrials, the SPX 500 or the Nasdaq 100. But another 10% under-perform them, so you've only really got a one-in-ten chance of finding a financial genius who will beat an index-based system in any given year.

Here's some of the index ETF ticker symbols: SPX 500 (SPY), Dow Industrials (DIA), Nasdaq 100 (QQQQ). If you'd like more leverage on the upside, you could choose one of the Proshares Funds: Russell 2000 Small-Caps (UWM), Nasdaq 100 (QLD), SPX 500 (SSO), or Dow Industrials (DDM). There is also the ability to diversify globally in emerging markets (EEM) and overseas country ETFs.

The average holding time for a bull market is 34 to 44 months, so you might glance at the S&P's 300 day moving average once a week during that time (if that's too much for you, you shouldn't be doing this in any case).

As the years roll by, as surely as summer moves into autumn, the news media will one day warn you of storm clouds on the horizon. The SPX will suddenly fall below its 300 day moving average. Alarms will sound - be explained away by cooler heads - and then re-appear. When that happens, GET OUT, stay out, and wait til the coast is clear.

So often in investing, what you don't do counts for more than what you do. Former Intel CEO Andy Grove once said, "Only the paranoid survive". Preserve your capital. The punishing thrall of a bear market is something to avoid at all costs. But when the storm is passed and the coast is clear, it will be time to begin investing anew. Like springtime, the tide will have turned. There is something miraculous in that.

"There is a tide in the affairs of men,
Which, taken at the flood, leads on to all good fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat;
And we must take the current when it serves,
Or lose our ventures."

Brutus, Julius Casear, Act IV Scene III: From Within the tent of Brutus

August 4, 2011 Note: The SPX 500 crossed above its 300 day moving average on August 4, 2009 at 1,000. It crossed below it again on August 4, 2011 at 1,225.  Adding the adjusted returns for the additional two years (2009-2011), the methodology yields a 118% return for 12 years with a CAGR of 6.7%. For 1994-2011, there's a 483% return and a CAGR of 10.93%. Buy and Hold for 1999-2011 remains negative (-2.5%) and for 1994-2011 the return is 160% with a 5.8% CAGR.

Trading Rubrics

(Updated March 20; August 21, 2009)
Enclosed below is a summary of my strategies gleaned from many years of trading 

Overview

As a point of beginning, probably the most important preparation for trading is cultivating a mental and emotional state that works in harmony with your goals.

Trading relies on good instincts. Trusting your 'feelings' and the instinctive way they can inform you is essential. Such feelings can protect you before a downturn and confirm a new upswing as it unfolds.

Your mind must be clear of anxieties and rested before undertaking the kind of decision-making that trading demands. At the end of the day, a trader's primary tool will be himself, not the market's condition.

The time I spend away from trading is often more important than the time I spend doing it. There is a harmony in nature that spills over and 'sets aright' the soul of a person. 'Days of rest' - for example, spent in nature, walks in the woods, along the seashore, or by a lake - refresh me and bring me more in touch with myself.

Non-attachment is also essential - to money, to one's faults, to past mistakes, to future intentions. This is easy to say but hard to do. The main thing: the past is water under the bridge, the future is still in the future, and the present - NOW - is the one thing you can control, the one thing you can change. Forget your mistakes and those of others, and move on.

The single focus of trading is attempting to place a bet precisely when a new opportunity presents itself. Regrets about "blowing a trade" can create a negative mindset that traps you in the past and perpetuates mistakes. Agonizing over mistakes thwarts the creative process and is counterproductive. An accomplished trader acknowledges his mistakes quickly and moves on. Life specializes in second chances. We are not the past. We are now. Trading is done in the present tense.

It would seen obvious the best follow-up to success is to continue with what's working, and simply 'sit' on a trade in order to let it unfold. However, I have had very little success with that methodology, even though I have always wished for the contrary. For me, it seems, today must be the day. Tomorrow will take thought for itself. 

Jesse Livermore, the great trader of the 1920s and 1930s, said he made more money by sitting than by any other method. He followed what he called 'the lines of least resistance' (high-probability trades based on market conditions) and let the trend take care of the rest. Not letting a profit burn a hole in your pocket is one of the hardest things a trader must do. The urge to take profits is almost overwhelming, but "sitting" with a great trade can bring a fortune.

Expectations - the things I might want, hope for, or expect from the market - are a poor source of valuation. John Cage, the composer, said something concerning music that relates directly to trading markets, "To obtain the measure of a sound, pay attention to what it is, just as it is.' That's how we should approach the market - as it is, just as it is.

If someone had told me a year ago that Bank of America would one day fall to $3, Alcoa and Dow to $5, and Lehmans, Merrill, Wachovia and Washington Mutual would be 'gone' forever, I wouldn't have believed them. But it happened. Verities were shattered in the crash of 2008. Each day has its own truth and must be traded for what it is, as it is, not what we would like it to be. Developing this kind of flexibility is one of the best skills a trader can acquire, especially after a trend has changed.

Although the market offers enormous diversity, it becomes apparent over time that simplicity should be preferred to complexity. There is really only 'one' stock, and that stock is the market and the direction it's heading. If I am “right” about that, the rest (of the list of stocks) will follow. Therefore a trader must be bullish when it is time to be bullish; bearish when it is time to be bearish, know the difference between these two, and act accordingly. The importance of this cannot be overstated. Hoping on the wrong side of a trade can devastate a portfolio. I could go as far as saying that hoping and praying means I am wrong already.

The market is like a race on an oval raceway. The two long straight-aways have ovals at the ends, but the ovals are shrouded in thick fog. You can accelerate (percentage-wise and leverage-wise) on the straight-aways but when you enter the fog you won't know when the turn begins. Slow down or risk a crash. There are times when a trader will simply not know what's up ahead.

Levering up after SEVERAL days of an advance can cause the loss of all the profits from that advance in a single failed swoop. This is the biggest fault I have in trading - carefully building uprofits only to lose them all in a single, spectacularly ill-timed trade that is levered to the max.

Trading Essentials 

There are six primary elements to successful trading. First, attentiveness to market conditions and readiness at the market open (being there, ready to go). I have missed more opportunites over this one issue than almost all others combined. Staying up late; being tired the next day; or sleeping in; I was unavailable at the appointed time and missed a trade that was there to do. Opportunity waits for no man.

In the New Testament there is a story about ten maidens - 5 wise and 5 foolish ones - waiting for the bridegroom to come. He tarries and they eventually fall asleep. Suddenly at midnight the alarm is sounded. The groom has come! Five of the maidens trim their lamps and rise to greet him; but five others (the foolish ones) haven't brought enough lamp oil to last into the night. They must go out now and buy more. When they return to the wedding feast it is too late. The door has been shut. The opportunity missed.

The morale of the parable is a trading opportunity can knock when you least expect it. You can anticipate opportunity but not the timing of it. If the bridgegroom had come earlier, all the maidens would have been ready. But the successful maidens were those who were sufficiently prepared - even after a significant delay - and ready to act when the time came. They became the right people at the right place and time. 

"There is a tide in the affairs of me, which, taken at the flood, leads on to fortune; omitted, all the voyage of their life is bound in shallows and miseries. On such a full sea are we now afloat; and we must take the current when it serves, or lose our ventures." Julius Caesar, Act IV, Scene III, Within the Tent of Brutus. 

The remaining four essentials are adaquate liquidity (available buying power); rignt time for the market, right time for the stock, and a trade in a leadership group. 

Liquidity: without cash you are sidelined and cannot act (as in the parable above) if you want to do a trade. The right time for the market is buying after a period of weakness in an ongoing up-trend. Buying the dips is a successful strategy as long as the trend remains in place. Trouble can occur if the general market dips from a high just as you buy a stock that looks ready to move upward. The stock may be ready but the market isn't, and a loss occurs. The best trade set-up is a strong sell-off in the market with a protracted sell-off in a chosen stock - one that looks ripe to turn when the market does. Then you have the tide at your back.

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Attempting to "crack" a trend is one of the hardest things a trader can do. If you begin a counter-trend position in a strong trend, do so only at confirmed support or resistance points, and be prepared to close the position if it is broached. Consider what author John Kenneth Galbraith observed about counter trend rallies during the Great Depression.

“Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune...The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains. The bargains then suffered a ruinous fall. Even the man who waited until trading conditions returned to normal, saw the common stocks they purchased drop to a third, and in some cases even a fourth of their purchase price over the next 24 months. The bull market (of the 1920s) was a remarkable phenomenon. The ruthlessness of its liquidation was, in its own way, equally remarkable." 

At the bottom of a bear market there is so much negative emotion tied to stocks that almost nothing seems capable of turning them upward. Breakouts become breakdowns; follow through evaporates. The tables are turned against you at every opportunity. The primary emotion is fear and hope becomes dangerous. November 2008 and March, 2009 are good examples. 

A bull market is the obverse of this. The rise in stocks becomes a self-fulfilling prophecy, an inexorable stampede of buying. Negative news articles, cautionary statements like "too far too fast" only serve to throw more fuel on the fire, confounding bears who look at valuations. As I write, we are in a 55% melt-up that shows no signs of abating (August 21st, 2009). A dramatic sell-off might portend the end of festivities for a single day, maybe two, but buyers soon rush into to scoop up the dips. The more they do, the more rewarding it becomes, the more traders participate. 

Going against such emotion with a counter-trade is almost impossible. Trying to reason or connect the dots in order to understand it is also counter productive. Greed is omnipresent. Performance is all that matters. It's like running with the bulls at Pamplona; you can be gored if you veer from the pack or act cute.

In both these scenarios (bull and bear), the same suggestion applies - stick with the trend as your friend, as the mindset (that doesn't have to make sense), and take counter-trend profits quickly. If I buy a dip in an ongoing trend, I place a stop to protect myself, but let the position run til it's done. In my experience, that will always be longer than I estimate. If I am fortunate enough to be on the right side of a strong trend, there is a certain "suspension of belief" or lack of caution that must be exercised in a melt-up or a melt down. Terrific profits can be made in such temporary but dramatic situations. In conclusion, high-probability trades will have most - if not all of these elements in sync. 

Sell often. When I have a large gain in a single day (or after several days of gains) I transfer some of these profits into a savings account that’s out of reach of my trading. These small deposits are like nickels in a jar. They add up over time. I started this process at the encouragement of my wife. Jesse Livermore once commented on his own unpredictability - as he became certain of the wisdom of not trusting himself - that he learned to set aside money for his family that was permanently out of his reach.

Selling is a concrete benefit. It forces a trade, thus recording the profit or taking a loss. It removes the risk of losing profits or increasing losses. It retains sudden gains - often the result of a quick run-up - gains that could be lost as quickly as they were made. 

It also sets the stage for the future. I can only take advantage of new opportunities if I have the money to do so. When I buy and hold, that money is set aside and unavailable for new ideas. Thus I become the prisoner of that choice. It forces me to sit on the sidelines while everything moves around me. 

Money that is tied up is also "money at risk". If the position is in a leadership group, and the market is accelerating to the upside, it will probably work out fine. But if the market has already run, it can pull back, even considerably so. At the first sniff of a downturn, traders will overreact and sell the high beta stocks (the ones I like to trade) aggressively. And in the worse situation - the beginning of a severe downturn or a bear market - a new position could be catastrophic. The best time to go long is at the beginning of a general market upswing. 

A bull market will have several leadership groups. When a sector becomes overbought, money will rotate from one leadership group into another. It is the "pause" - the in between time - that is best for starting a position. Three things must coincide in a high-probability trade: the right time in the general market; a pullback in the stock, membership in a leading sector. They are much more important than holding to one's fundamental "belief" in a stock. If the market pulls back and the stock doesn't, that's a sure sign of its strength. If the stock pulls back compariatively more than the market, it is a sign of weakness or short-sellers at work in the stock.

Trading Afterhours 

There's great danger in "levering up" to an afterhours earnings announcement, especially if it follows a successful stretch of trades. Disaster always seems to happen when I've been on a roll. Invariably, my largest losses have come from holding too much stock through earnings announcements. It's a lot like gambling (pass the envelope please).

Here's my list of personal mistakes: Newbridge Networks in 1993; Intel options in 1996; KLIC and Intel options in 2002; AMD in July, 2007 and again in July, 2009; BAC in April, 2009. There was also the congressional decision (they voted 'No') on the original TARP bailout plan in October, 2008. Several of these catastrophic trades cost me 40% in a single day. Five of them destroyed my account (I held too long).

The experience was akin to climbing a steep mountain pathway for many days - sometimes weeks - only to slip suddenly on a rock and fall thousands ($) of feet in a matter of moments. 

Each time I decry my "small ball" way of taking profits - a method that leaves too much behind on the table - like a mouse scooting away with his cheese - I look back at one of these catastrophic trades (above) and realize the mouse has spared me again. The first goal of trading is to protect profits, the second is to avoid excess. This is a hard-won realization.

Another thing about trading an event - the limit order, size and price should be prepared ahead of time - and if it's a loss - the button pressed immediately. But it's hard to get to the story soon enough. The action moves so quickly these trades can drop to their lows in a minute or two.

Lastly, afterhours trades can be treacherous because of the light volume and the subjective reaction of traders to announcements. Hedge funds also apply a soon-to-be-banned technique called "flash trading" which bangs away relentlessly at the direction of the stock. As I write, I am booking a $1,300 loss because of a "quick" trade in Potash that I attempted in afterhours. Under these conditions it's not worth it because the probability of success is so skewed against me. During the regular session there are more soldiers on the field, making a bushwhacking less likely.

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NOW is quantifiable. Tomorrow is uncertainty. Circumstances may be probable but not predictable. “Perversely, seeking for optimality is a snare and a delusion” ...“It’s so deliciously profitable until it isn’t.” (Jeremy Grantham)

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An analogy attributed to Paul Tudor Jones II often comes to mind. I once read that he looked for low risk turning-points that you couldn't ignore, "There must be a pile of money sitting over there in a corner with a sign on it that says, "Take me. I'm yours." He said there was nothing special about pursuing these opportunities; just the obvious that anyone else in his situation would do. And he had the discipline to stay out until one of these opportunities came his way.

But we are not like him. He was able to wait until his ducks lined up - when it was easier to win than to lose. There's a lot of wisdom in that. We rush in, afraid of losing the moment. He trusted the future to bring him another superb opportunity; we try to force yesterday's trade today.

He also said that the greatest education for him was the commodity bull and bear markets of the late 70s and early 80s, especially the last third (the blowoff phase); when the markets went crazy volatile and fundamental values were cast aside. We've gone through a similar period in the last decade: the tech bubble of 2000, the real estate bubble in 2006, the commodities and oil bubble during the summer of 2008, and now the international stock market collapse of 2008-09.

Before these collapses, the soaring market upswing seemed unstoppable, and then - in a complete reversal - ever rising again. The last 3 months of 2008 and the first 3 months of 2009 were the most volatile markets in history. The SPX averaged a 4% move (up or down cumulatively) for 200 trading days. The semiconductor equipment sector, the financials, and the basic materials companies hit 20 to 30 year lows. The automotive industry was thrown back to the Great Depression - GM and Chrysler went bankrupt; only Ford survived. The financial sector was priced for insolvency.

Since that time I have learned not to trust myself, and to send trading profits to the plain vanilla savings account I wrote about previously. I witnessed Armageddon; hopefully I'll not soon forget it. I learned how to trade defensively in the midst of insanity. Back then, one wrong move and you could be through. Many were. Some of the largest publicly-traded companies rose or fell 30% in a single session.

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Here is a link to Mr. Jones' early days as a Wall Street trader (be sure to close the online ad first); then a May, 2008 interview where he accurately predicts the 2008 commodity crash; and an outline of the conservative trading style he uses now, ["How would you describe your general investment philosophy?" (2006)].
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Stocks that oscillate up and down for an extended period of time within a clearly defined range, can be very profitable if bought at support and sold at resistance (the lower and upper extremes of the range). This is especially true if the range is say 3 to 5 %, like 65-67, or 3.30-3.80, 10.80-11.40, etc. The key is waiting for the edge of the range before trading.

Tips on Buying: Use Leveraged Sector(s) 

Here's the list:
Small caps [UWM]
See For 40 Years, Small Caps Still Safest Bet in Stocks
Financials [UYG]
Technology [ROM]
Real Estate [URE]
Basic Materials [UYM]
Telcom [TLT]
Energy [UCO]
Semis [USD]
Solar [TAN]

Enter or exit “the market” when the 50 day moving averages of the SPX, [NDX, NDXa] and [COMPQ, COMPQa] give short term trading signals. Buy below 20%, Sell above 80% (this latter line is especially important).

The advanced decline lines of the indices give added confirmation. Buy near the green line [NYSE, Nasdaq] Sell above the red line
So do the Summation indices [NYSE, Nasdaq] 

On Balance volume (OBV) is important. The basic premise of OBV analysis is that volume-changes occur before the price changes. The strength in market action is reflected in volume first, not the stock price. As "Smart money" (institutions, funds, etc.) flow into a stock, a rising OBV will reveal their interest.

The interim direction of Goldman Sachs [GS] is a useful market indicator for the financials. Financials are the “heart” of the market and it will move in tandem with them.

Short Term Indicators

Never ignore the short-term stochastic indicators and RSI of the ETFs (or the general market) after they become overbought or oversold. The previous sentiment wave can beguile you into holding a position when it’s time to get out. Sudden gains morph into sudden losses. The breakout becomes the breakdown. 

A corollary of this is the gradual building up of an ever-larger position as it goes higher – only to lose it all in a sudden reversal off the peak. The leverage that made the trade so successful now becomes its destruction. 

Trading is always a matter of probabilities. Near-certainties at the extremes yield the best results. This is a simple concept that usually works. Be patient and wait for the right set up.
At the top of the range there is a 9 to 1 probability that a stock, ETF or market will retreat. The only time this does not apply is the beginning of a new bull market, when stocks can remain overbought for weeks. The same holds true at the bottom, but a bottom always takes longer than you think.

When short-term indicators hit the top of their range - after an extended run lasting several days – especially in a bear market or indeterminate market – the overwhelming urge of traders will be to SELL; and when these indicators hit a low - in an otherwise moderate upswing within the SPXa50r or NDXa50r – traders will again begin to buy. It's never wise to hold at the top nor sell at the bottom of short-term stochastic and RSI indicators.

The Great Wave

There will always be 3 waves running concurrently:
+ the short-term stochastic and RSI (trading)
+ the mid-term SPXa50r or NDXa50r + Advanced Decline lines (investing)
+ the long-term SPX 300 day moving average. (Market Direction)

Hang on 

Do not get “taken out” of a position at the beginning of a turn for the better. It's one of the perversities of markets that we must embrace risk when least disposed to, and act carefully when the going gets good. A turn for the better doesn't occur at first light; it happens in pitch black. The recent memory of a thousand bear claw-jobs might be fresh in your mind, but if the tide is turning, you must turn with it. There's always “shakeouts” at the beginning of a new intermediate cycle. If you sell one of these early, look for an opportunity to re-enter quickly.
If a stock spikes up at the open, take profits immediately and re-enter the position a half hour or so later. Do this for each day the strong upward pattern remains. The “morning pullback” is a reality. Take the spikes as an opportunity.

A normal buying stampede will usually last 5 – 6 weeks - the time it takes the number of issues trading above their 50 day moving average to go from 20% to 80+%.

Financial stocks are the 'heart' of the stock market. They supply the capital that greases the wheels of industry. The market will not go up without them. Bank stocks 'lead' the market out of a downswing. Similarly, the semiconductor stocks are the heart of the technology sector. No gadget is made without them. Their relative performance is a key to the performance of the Nasdaq.

The Dow Transportations are leaders in a new bull market. If consumers are buying (end demand) the transports will be shipping. When you have healthy (or ramping) transportation, financial and semiconductor sectors, a strong economy is on its way.

Investing

The same principles apply to investment accounts as to trading:
o Focus on general market direction (50 day or 300 day moving average on the SPX)
o Trade one or two large sector ETFs.
o More than this is too much diversification and superfluous trading costs (extra commissions).
o It is much easier to trade out of 2 positions than 10.
o The primary purpose of the account is to make ($) money, period. You're trading a specific asset allocation for a set period of time, nothing more. 
§ An investment is always for this term, this cycle.
§ “We make big bets on those relatively rare occasions when we have very high confidence. The big bets will always be available, and will always be career threatening. And that is the turf we have staked out: make the ‘near certain’ bets as large as we can, sweat out the timing problems, and pray…” (Jeremy Grantham)
§ “Heavy buy-and-hold equity positions are fine for long-lived computers, but for impatient humans – given as we are to waves of overconfidence and abject fear – they are simply dangerous and unsuitable.” (ibid.) Jeremy made this in reference to two 19 year periods of 0% performance (1929-48, 1965-84, and 26 years in Japan from 1982-Present)
§ “Markets are very mean-reverting over longer horizons. Asset allocation based on serious action at the extremes and inactivity the rest of the time has a good record and can be done quite simply.” Iibid.
§ “Asset classes are more inefficiently priced than stocks. In contrast, when picking one asset class against another, it is painfully clear when mistakes have been made. This immense career risk makes it likely that there will always be great inefficiencies (in asset allocation), for investors are reluctant to move money across asset boundaries. Consequently, there is great advantage to be had in getting out of the way of the freight train, rather than attempting to prove your discipline by facing it down. The advantage (in moving assets often across classes) is in both higher return and lower risk (avoiding the train). Ibid.

Market Direction

The 300 day moving average of the SPX determines whether the stock market is in a bear or bull market. 80% of all stocks will follow this general market direction.

In a bull market the index will touch the 300 day M/A line and “bounce” off it, moving higher.
In a bear market the index will break below this line and drop dramatically, as seen in January, 2008.

Overall, the safest method is to be invested in the market only when the SPX is above its 300 day moving average, and to be in cash when it is below it. Money saved from not being involved in the catastrophic losses of a bear market during the down periods is available for the next bull market when it arrives. The Big Picture is everything when the long haul is at stake.

The 50 day moving averages of the SPX and COMPQ can give trading signals to enter or exit the market on a short term basis, but this decision must still be made within the context of the 300 day moving average above (i.e, “don’t fight the tape”).

The general trend of the NYSE weekly advance-decline line will also add confirmation to a confirmed bear or bull direction. Bull markets usually last at least 4 years. Bear markets are shorter because their ferocity of wealth destruction occurs so quickly. The (2007-09) bear market (-57%) was rivaled only by two other bear markets - the 1929 crash with its ensuing Depression; and the great Nasdaq bear market of 2000-03 (-78%).

Bear Markets 

Selling is what typifies a bear market – whether it is short selling or investors continuously exiting their positions. Selling remains the enduring constant, just as in a bull market buying is the dominant activity. Sellers will sell relentlessly into every bear market rally, even the shortest ones. Because of this a trader must adopt the mindset of a “seller” in order to be successful. The only way to save profits is to sell and to sell often.

Holding a position too long can be a death sentence in a bear market, especially on margin. Buy and hold works in a bull market; but never in a bear.

A classic characteristic of a bear market is good news is sold and bad news kills.
Rampant uncertainty reigns. The next shoe seems always in the wings ready to drop. Breakouts become breakdowns. Whenever one feels safe to invest, the rug is pulled out from under you. 

There is no follow-through. Despair rules the day. Company fundamentals are often trumpeted as an excuse to buy, but as the bear market progresses all fundamentals fall by the wayside. Eventually nothing works on the long side and there is nowhere to hide. Comforting stock market “maxims” and truths lose their value under the barrage of selling. Former mavens (like Buffett) suffer huge losses and they seem impotent and irrelevant.

The market usually fades in the last hour of the trading day. Closing out before the end of the day is often a good idea because the after-hours news could wipe out a day's profits.

“I should have sold” or “sold sooner” is an oft-repeated regret during a bear market. The market will often rally the first 10 minutes of each morning (moving up because of hopeful bottom-fishers) and then fade. This is an excellent time to sell.

The dramatic spike is the tell-tale signature of the bear market rally. It’s not the beginning of a new trend. Rallies – even intraday ones – are most often short-covering spikes driven on the backs of vertical rises. They are sharp and brief. These should be immediately taken as opportunities to sell.

There is increased volatility – the market is very emotional almost all the time. Bull markets are driven by greed but bear markets are driven by fear. Since fear is a more powerful emotion, it leads to rash decision-making. The result of this rash decision-making is increased volatility. The more panicked and irrational people become, the more volatile the whipsaws will be. Panic selling leads to panic buying. Part of this is due to short covering and part is due from investors trying to catch a bottom.

Every bear market is made up of 2 or more major downward swings, or primary legs down, and at least 1 secondary reaction (rally) between two legs.

"Bear markets seem to be divided into three phases: the first being the abandonment of hopes upon which the uprush of the preceding bull market was predicated; the second being the reflection of the decreased earning power and reduction of dividends; and the third representing distress liquidation of securities which must be sold to meet living expenses. Each of these phases seems to be divided by a secondary reaction which is often erroneously assumed to be the beginning of a bull market.” – Robert Rhea, author of The Dow Theory (1932)

Signs that a bear market is ending
Zero confidence; investor sentiment is at a serious low.
No good news on the front pages, negative news permeates the media.
Lack of credit, lack of buying power.
Investors take money out of the market, because they actually need it
Unemployment peaks in double digits
Real Estate still remains down, commercial properties take a big hit, vacancies are high. 

“Be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but a subtle shade less black than the day before.” (Jeremy Grantham) 

Then:
Volume picks up on rallies and dries up on pullbacks (OBV).
Investors begin to buy dips.
Bad news is bought and good news is rewarded.
A slight improvement in sentiment evolves from the feeling of total hopelessness that heretofore gripped the market.

Trading in a Bear market
Concentrate on shorter time frames. There will be rapid up and down movements. Don’t be afraid to sell or make a mistake by selling too early. Tomorrow will always bring new unexpected opportunities.

Losses must be taken quickly & often. The first loss is always the smallest. A trader can be right just 30% of the time and still do very well if he cuts his losses quickly. (William O’Neill)
"It takes 20 years to build a reputation and 5 minutes to ruin it." (Warren Buffett)

Learn how to short, and short well. Concentrate on shorting -- Any time the market bounces you should be looking for opportunities to short. This is especially true of sharp bounces. They fool the most people and create the easiest opportunities.

Play the overreactions – the increased volatility and fear, brief but sharp rallies, and panic sell-offs will lead to over-reactions in both directions. Think like a contrarian and you’ll find some nice opportunities.

For longs, focus on playing oversold reversals rather than buying breakouts; buy stocks that have hit capitulation and play the ensuing rally.

Shorten your time frame. Take profits quicker. Don’t assume the reversal is going to lead to a sustainable rally. Instead, take profits and wait for the next opportunity.

If not trading, stay in cash, out of the market, or on vacation. Come back refreshed.

In a bear market almost everything will go down eventually. All sectors feel the pain. Groups that typically don’t correlate begin to correlate as the selling takes hold everywhere - not just among stocks, but across most investment vehicles. Stocks go down, bond prices go down, and commodities go down -- pretty much everything. Part of this is due to the fact that money is not simply taken out of the market during a bear market, it is destroyed. This is the opposite way that bull markets create money.

For example, if a certain market or trading vehicle has a market cap of $1,000,000 and a large investor or group of investors decide they want to cash out for say $50,000, they will not simply sell their shares for $50,000 and have the assets transferred to someone else. Instead, they will begin liquidating.

In an era of declining prices, this will force the price of the market down. By the time they are able to liquidate their $50,000 position, they may have pushed the price down to a point where that position is only worth $45,000. This is not a $5,000 effect on the market, though. In pushing the price down, the price of everyone else’s shares has also been affected.

Therefore, the $1,000,000 market cap is now $900,000. $100,000 of market cap has been destroyed. If the other market participants now want to cash out and move their money elsewhere, there will be less of it to move. This destruction of money means there is less money to invest anywhere, and therefore all markets are eventually affected.

Technical Indicators
The 75%+mark on SPX & NDX A50R momentum indicators accurately call a top. The only exception to this indication is at the overbought beginning of a new bull market and this is extremely rare.

The 20% mark on SPX & NDX A50R momentum indicators circumscribe the approximate 2 to 4 week period of a tradable low. This low is a gradual process -never immediate – with price bottoming last. The overwrought selling in a bear market can push this indicator to the –5 (or lower) level.

When the NYSE and Nasdaq advance/decline indicators are at the upper end of their ranges they also call the top. The tops of all four of these indicators (above) are sudden and rapid (usually within just one or two trading days); the bottoms on the momentum indicators are drawn out affairs that can linger sub-25 for weeks; the advance/decline indicators carve out lows below the norm at the bottom of their range.

The McClelland Oscillator and its summation index (SPX & COMPQ) are at the top when the market has topped.

Bull Markets
The single distinguishing constant of a bull market is buying. Pollyanna reigns. Investors buy every dip, relentlessly.

You might make mistakes, but things will still work out (the opposite of a bear market).

Because investors are naturally bullish, their mood has great power and this moves the market forward and upwards.“Faith is the substance of things hoped for, the conviction of things not seen.”

Opportunities abound. P/Es expand. The whole mood is one of expansion and all things are possible. Follow-through is reliable.

The market often closes at the high of the day.

Consumer discretionary (surplus $ retail choices), basic materials (the building blocks of industry), and semiconductors (foundation of tech hardware) lead the economic recovery. Small caps rally the most.

Trading in a Bull market
Use longer time frames.

The 15 - 30+ mark on SPX ; NDX A50R momentum indicators call a bottom. The tops during the beginning of a bull market can be drawn out affairs above 80, as seen during the entire 2003 rally.

The NYSE and Nasdaq advance decline indicators will continue to fall to the lower end of their ranges and accurately call a bottom.

The McClelland Oscillator and its summation index (SPX & COMPQ) are visually at their bottom when the market has bottomed.

One of the characteristics of a bull market is a series of rising waves. A trader has to be very alert to his location within these waves and the sequence that has recently expired. After several days of advance the possibility of a sharp pullback increases dramatically. You want to buy more risk when it becomes cheap and own less risk when it is expensive. The time to be "in" is before the advance, or as it is unfolding. Investing "after" the spike - when it finally looks safe to be in - is too late.

The important thing is the trend line - the market will eventually return to that trend. Breakouts become breakdowns and the whole process starts all over again. Thus if an opportunity is missed, it's missed - wait for the inevitable pullback and begin again anew.