That huge volume looks like distribution to me ahead of the strong resistance around 38. Looks like a good place to take some profits off the table if you've been long gold for a while. Just my two cents.
Wednesday, February 18, 2009
GDX - Rising Wedge
That huge volume looks like distribution to me ahead of the strong resistance around 38. Looks like a good place to take some profits off the table if you've been long gold for a while. Just my two cents.
Thursday, February 12, 2009
Testing new setups
This month I'm paper trading a couple of simple setups designed to work better in a choppy market. One is fading an extended move to a major support or resistance point and the other is a speculative double top at an important level. It is not the most comfortable way of trading as it feels like you're stepping in front of a bus sometimes, but it seems to have a high win rate. I'm using tape reading to filter out stocks with very high momentum.
Here is an example of the double top setup:
40 is a significant level and the 200 DMA was at 40 on the daily chart. I look for a bearish candlestick in the morning and expect price to get rejected at the same level as long as I don't see too much momentum on the tape. I like to see the tape slow and a mix of red and green (trades being executed at bid and ask).
Here is an example of the double top setup:
40 is a significant level and the 200 DMA was at 40 on the daily chart. I look for a bearish candlestick in the morning and expect price to get rejected at the same level as long as I don't see too much momentum on the tape. I like to see the tape slow and a mix of red and green (trades being executed at bid and ask).
Saturday, February 7, 2009
Market evolution
I've been thinking a lot lately about how dramatically the market has changed over the last year. The overall behavior of markets is a synthesis or average of the behavior of each individual decision maker participating in the market. Those with more capital have a greater influence of course. I think that market participants can be broken down into four categories: hedge funds, mutual funds, retail investors and retail traders. I'm going to ignore the effect of market makers, as their influence has probably remained relatively stable and doesn't apply to Nasdaq stocks.
From 2003-2007, hedge funds were a growing segment. When hedge funds were at their peak, they could produce strong, trending moves as more and more money was poured into the hot sector of the moment (i.e. oil). Today there are far fewer hedge funds left standing after the crash in 2008 and they have less money to manage. I have read that many hedge funds have resorted to intraday trading. According to Hedge Fund Research, the assets under management have declined from a peak of 1.9 trillion in 2008 to 1.4 trillion due to losses and investor withdrawals. This is a significant change.
I view the influence of mutual funds as more random. At the end of the month, they rebalance their portfolios which shows up as sector rotation. When they want to invest in a particular equity or sector I think they basically use programs or bots to buy in over time and I don't believe they pay much attention to technical analysis. Mutual funds control vast quantities of cash so their effect is important in the long term, but I'm not sure if their presence is predictable in the short term. The effect of mutual funds has probably decreased slightly since 2008 as the quantity of cash under their management is less vast. I'm sure that many seniors close to retirement have moved their money to less risky investments and that money will unlikely reenter the market.
If you define a retail investor as someone who invests in the long term and holds for a period of months or years, then I think you would agree that the number of retail investors has declined since 2008.
That leaves the retail trader. From what I've read, this is a fast growing segment. Brokers are gaining customers at a rapid pace. Many believe that buy and hold is dead and that our markets could be rangebound for several years, or even a decade as seen in Japan. The number of traders seeking to gain from intraday price moves has arguably grown considerably over the last year or two as holding anything overnight has become a very risky strategy.
To summarize, the effect of hedge funds is decreasing as there are fewer around and they have less cash under management. Large, trending price moves will likely be a thing of the past in the near future. I've noticed that the average intraday setup is now more likely to only extend to .382 or .500 (for the Fibonacci lovers). Less money at work means less extension. The influence of mutual funds has decreased. More retail investors are evolving into retail traders. Swing traders are becoming intraday traders. The intraday trader who used to hold for two hours is now holding for one. The scalper going for 5 ticks is going for 2. The retail trader segment is becoming very crowded. In the past I think that this segment could be safely ignored as most retail traders were riding on the coattails of the hedge funds. But I think today they (or we) have reached a level where they are starting to shape price movement as all other influences in the marketplace are contracting.
Hopefully this little essay has sparked some reflection on how the market has changed and how we can adapt our strategies to conform to the current market conditions. I think it was possible to trade using the same basic strategy from 2003-2007 but I doubt that there are many traders using the same strategy today as they were using during that period. As traders we must evolve along with the market.
Further reading on Hedge Funds:
http://marc.brightonhouseassociates.com/wordpress/2009/02/demand-increases-for-short-term-highly-liquid-trading-oriented-hedge-fund-strategies/
From 2003-2007, hedge funds were a growing segment. When hedge funds were at their peak, they could produce strong, trending moves as more and more money was poured into the hot sector of the moment (i.e. oil). Today there are far fewer hedge funds left standing after the crash in 2008 and they have less money to manage. I have read that many hedge funds have resorted to intraday trading. According to Hedge Fund Research, the assets under management have declined from a peak of 1.9 trillion in 2008 to 1.4 trillion due to losses and investor withdrawals. This is a significant change.
I view the influence of mutual funds as more random. At the end of the month, they rebalance their portfolios which shows up as sector rotation. When they want to invest in a particular equity or sector I think they basically use programs or bots to buy in over time and I don't believe they pay much attention to technical analysis. Mutual funds control vast quantities of cash so their effect is important in the long term, but I'm not sure if their presence is predictable in the short term. The effect of mutual funds has probably decreased slightly since 2008 as the quantity of cash under their management is less vast. I'm sure that many seniors close to retirement have moved their money to less risky investments and that money will unlikely reenter the market.
If you define a retail investor as someone who invests in the long term and holds for a period of months or years, then I think you would agree that the number of retail investors has declined since 2008.
That leaves the retail trader. From what I've read, this is a fast growing segment. Brokers are gaining customers at a rapid pace. Many believe that buy and hold is dead and that our markets could be rangebound for several years, or even a decade as seen in Japan. The number of traders seeking to gain from intraday price moves has arguably grown considerably over the last year or two as holding anything overnight has become a very risky strategy.
To summarize, the effect of hedge funds is decreasing as there are fewer around and they have less cash under management. Large, trending price moves will likely be a thing of the past in the near future. I've noticed that the average intraday setup is now more likely to only extend to .382 or .500 (for the Fibonacci lovers). Less money at work means less extension. The influence of mutual funds has decreased. More retail investors are evolving into retail traders. Swing traders are becoming intraday traders. The intraday trader who used to hold for two hours is now holding for one. The scalper going for 5 ticks is going for 2. The retail trader segment is becoming very crowded. In the past I think that this segment could be safely ignored as most retail traders were riding on the coattails of the hedge funds. But I think today they (or we) have reached a level where they are starting to shape price movement as all other influences in the marketplace are contracting.
Hopefully this little essay has sparked some reflection on how the market has changed and how we can adapt our strategies to conform to the current market conditions. I think it was possible to trade using the same basic strategy from 2003-2007 but I doubt that there are many traders using the same strategy today as they were using during that period. As traders we must evolve along with the market.
Further reading on Hedge Funds:
http://marc.brightonhouseassociates.com/wordpress/2009/02/demand-increases-for-short-term-highly-liquid-trading-oriented-hedge-fund-strategies/
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