Sunday, January 11, 2009

One week into 2009, the averages go from green to red

The January effect of low priced stocks rising from Dec 30 through Jan 5 was in full swing as the averages climbed nearly 5% over four days through January 5 before ADP announced before the bell on January 7 that payroll numbers decreased 693k from the previous month. When the Department of Labor came out with their own number of -520k on Friday, Jan 9th, pretty much everyone who bought in the last four days unloaded everything turning the new year's 5% gain in the QQQQ to just over 1.2%. All the other indexes are now red for the year with the financials once again the worst sector down 7.6% just nine days into 2009.

While the big winners to start the year were coal (JOYG, PCX), casinos (BYD, LVS) and energy stocks; they all have retraced almost all of those gains in the past three days.

We're up only .4% ytd because we missed most of the gains but fortunately missed most of the losses as we've made two small trades with very small share sizes.

When you're in markets that are not trending as well as Oct 2008, trading smaller sizes allows you to still be in the game and forces you to watch the markets daily. We're in an environment were saying you are going to make 13% for the year is simply ludicrous. If you pay attention daily, you could make 5% or you could make 25% by the time 12/31/09 arrives. Risk management on every trade will allow you to maximize each trade so that any losses do not materially hurt your account balance. Because once your account hits zero, its game over.

When my nephew or niece gets to be around 21, if they start showing aptitude for it, I would probably want them to be aware of the index futures markets, specifically the ES (S&P 500), the YM (Russell 2000), and NQ (Nasdaq). For example, at the close on Jan 9, the cash market for the SPX at 890.35. Recently, I've been paying attention to how my streamer automatically calculates resistance and support levels or R1, R2, S1, S2. These are updated daily and approximate how a program trader would do at one of the market makers. The point is to scale out of part of a position if it is going in your favor to 1) lock in a guaranteed profit if the position reverses and 2) to allow the remaining position to ride a potential new trend.

Now its important to think of both scenarios so that you make an objective decision. We know the T2108 indicator on tradestation is still at a high 78% so from that perspective the lean is towards a move towards S1 just below 880. It probably could try to hold there before dropping to the 860 level which is S2.

On the opposite scenario, we could gap up to 899 or R1, pullback to 880 or S1, then go back up near the high from Jan 6 or around 925.

Confusing isn't it. When in doubt, stay in cash. But should something show up on an intraday scan, be confident in your analysis before the potential profitable trade disappears when everyone else starts to see what you're seeing (the self-fulfilling prophecy).

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