Tuesday, January 28, 2014

It's Too Cold to Go Fishing

"Anita Venetian" Jesse Livermore's Yacht
 
 


Since 2014 began I have been saying to play small and when the market finally cracked I said to stay in cash or do some small very nimble trades. After a some good morning trades, I got emboldened only to then get cut up by many of those small trades. I learned the rules from hard knocks experience over the years, but its been so long since we had a bad tape that I needed a reminder.  Yesterday I got that reminder. I needed to touch the hot stove.

I day traded in small size, but still got beaten. The cause of my losses was the extreme lack of liquidity and choppy action of the market. The lack of liquidity put me in the position of trading individual stocks, and watching the bids or offers disappear as the stocks tanked or rallied - instantly evaporating my gains and turning them into losses.

For instance I would hit the sell button on a stock like CSIQ at $38.20 only to watch the stock instantly trade at $38.00. Ordinarily, I would have gotten out of my trade for a profit, but not in this skittish environment. Typical bear trend type of trading.



I love CSIQ as a company and believe it will do great this year. The much discussed possible hard landing in China will not affect the solar sector where CSIQ is a star and demand is supposed to keep on exploding upwards in China. But recently CSIQ got beaten up rightfully because of the market sell off, but wrongfully because of China. It may very well be in the buying zone, but I see no signs of a bottom in CSIQ and the market as of yet. .

There is a lesson to be learned here. That is to play very small, if at all. And to not over trade. Also most importantly, to stick to my game which is making money investing in momentum stocks in trending markets like we have enjoyed for the past 5 years. Right now there is no trend and my lack of patience cost me. Once bitten, twice shy. This is not the same market we experienced in 2013 and this tape clearly shows that I am not invincible anymore. Wake up call.

The main point is to do the thing that brought you to the dance, Day trading for the sake of day trading is not my bailiwick. Day trading when obvious opportunity appears is another story. So if we are in a trending market and a stock breaks out and whooshes to the point of being parabolic, then I typically take the opportunity to lock in the profits wait for a pull back and reenter the position if the stock starts to head back up.  I would call it opportunistic day trading. It is entering a trade as if it was a short term swing trade of several days or an intermediate term trade. If an opportunity to take advantage of an extreme dislocation comes along, thank the trading Gods and act upon it. If not, stick to your plan.

Some Examples:

1 - In the current tape, if the market has a nasty gap down after several downside days, that may be an opportunity to buy into a panic bottom.

2 - If the market has been down for some time and catches the shorts with a late day - say post  3PM rally - that may be a good opportunity. Note how the market rallied too early yesterday before collapsing again:




These are opportunities that I am always looking for, but rarely see. But they have happened several times over the years and resulted in great trades.

Does anyone know where Jesse Livermore docks his boat - above? We all know the story of how "Larry Livingstone" would fish for weeks on end until the market got better. It's too cold to go fishing and I'd probably bring a laptop on my boat if I did.

I shorted the SPY this morning and AAPL after the close last night on the earnings disappointment.



Unfortunately I covered my QQQ short prior to AAPL's earnings.  At least that was a logical cover prior to AAPL's earnings release. I fully expect to get squeezed at some point, but I think that I have to ignore the little wiggles - unless that opportunity to take advantage of a gift occurs. I will not stubbornly hold these shorts. I need to be flexible enough to look more at the bigger picture.





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