Rebel Traders – Analysis Without The Hype

I’ve written before about the importance of understanding your time frame when choosing a trade.  You don’t pick a momo stock for a long term investment, and you don’t pick a very slow mover to daytrade.  When choosing a stock for investment purposes, you take a long look at their balance sheet and their growth prospects, taking into account the economic and sector outlook.  For swing trades, you want to be aware of the economy and sector strength, picking your entry and exit based on technical analysis.  With daytrades, knowing what sectors are moving and having real-time news feeds are important.  These trades are quickly affected by news, rumors, press conferences, etc.  Of course, technical analysis and proper money management apply to all time frames.

 I’m bringing up this topic again, because the volatility, the uncertainty, in the markets makes trading more difficult.  Being more clear on your time frames when trading a particular stock can ease the pain a little bit.

The financial problems affecting the market have been brewing for some time.  The volatility we’ve seen lately is only the beginning of the consequences of massive credit expansion, not the end.  What may be ending is the ability to continue to patch the hull of a sinking ship.  This may indeed be the time that quite a few will have to suffer the financial consequences of their decisions.  It is only then that we can rebuild a stronger ship.  What does this mean to you, the trader/investor?  It may mean you will want to change the time frame for your stock trades.  It may not be the best time to buy a particular stock for long term investing, but it could be a good swing or daytrade.  Or vice versa.  There is no way to tell how long this volatility will last, but it will eventually calm down.  That doesn’t mean everything will be fine in the financial world, but it may make trading a bit less manic. 

Our reason for writing this blog and starting our service was to help people hang on to their money.  Yes, we want to help people, through education, increase their profits.  But, Chuck and I have seen traders who chase stocks all over the street, only to end up right back where they started.  Or worse, they have eaten into their capital.  Emotions are always a part of trading, and right now those emotions are running very high.  We had no idea that only two months after the inception of this blog, that the credit market would seize up.  For us, that meant helping people make sense of what was happening even more important, as this is no ordinary event.   To ignore what is happening, to try to put a positive spin on it, is a disservice to any thinking, rational human being.  We do not believe the world is coming to an end, even though the financial upheaval will make trading more difficult, it is not impossible. It may seem to some that we are “missing the run-ups” by being so bearish.  I actively trade every day, but we do not have an interactive site yet, and I will not make daytrading recommendations until then.  As for swing trades, some active traders have been a bit critical that we have not been taking more positions.  Some traders are willing to accept more risk than others.  We won’t criticize those traders for taking the risks, that’s their choice.  We have chosen to be more prudent, as preservation of capital is paramount, and we don’t take money management lightly.  We take our business seriously and do not assume (as some other sites seem to) that our readers simply have money to burn.  I always bristle when I hear someone say that a trader should never invest more than they can afford to lose.  If you are gambling at a casino, then that saying may be true. Whether one can lose some money and still survive is not the question.  But we’re not gambling here. The question, for me, is WHO in the world would go into trading with the idea of possibly losing all of your capital???  Lose your capital? Why would you do that?  This is why money management is so important. 

I know what it’s like to live under various financial conditions.  I know what it feels like to wonder where your next meal is coming from, as well as the comfortable security of earning a living and being able to pay my own way in life.  That’s what money is all about, isn’t it?  Having enough to be able to pay for your needs, anything more than that is gravy, right?  I know very few people who don’t have at least a little worry about having enough money in the future to take care of their needs.  I’ve also come to learn that those who don’t need to worry, NEVER had a cavalier attitude about money, either.

A quiet day was expected and a quiet day is what we got. Most of the big money holders are waiting for the economic events to unfold this week before they decide on how they are going to position their funds. With the odds in favor (as far as those on the street are concerned) of at least a 25 basis point cut in the Fed Funds Rate this Wednesday, there is some hedging in the financial sectors for an upward advance in some financial stocks. Today we saw light buying in some of the financial’s in the anticipation of a "FOMC bounce" afterwards. Will there be a bounce if they cut rates? Will it hold? Good questions. When the FOMC cut rates on September 18th by 50 basis points and also cut the discount window rate by another 50 basis points the financial’s did bounce. And if you blinked you missed it. Since that rate cut the financial’s continued their downward march. So don’t always think a rate cut will stop the financial sectors from going any lower. They said back in September that a rate cut would stem the bleeding, it did not. Will another cut stem it this time? Can’t say, there is too much weakness in the financial arenas to gauge at this point if another rate cut is going to do it or not. If you were a high risk trader you could put some money on the XLF going into the FOMC announcement, but it is a high risk trade. I will be in cash heading into the announcement, better safe then to get surprised and have the market go against me. Remember that some of the possible rate cut is already getting priced into the market. So there is the potential for a short pop, then a sell off. No telling what would happen if there is a 50 basis point cut, some have speculated that that would signal even bigger problems exist within the economy and that could send the markets down. And on the other side of the coin there are those who say it could rally. We remain in the middle and will see which way it goes, then decide how to play it.

Some earnings came in after the market closed tonight, it was essentially a mixed bag. If I had to put a number on it of who beat and who missed I would say it was about a 50/50 split of beats and misses. One notable stock is SWHC (Smith & Wesson), they issued a dismal earnings report and lowered guidance for the year. In after hours that stock went down almost 26% (ouch!).

A small lesson tonight on the importance of trend lines and how they communicate danger signals to us. Every stock trades in one of three directions, up trend, down trend, or trading sideways. And each trend can be put into one of three categories, major, intermediate, and minor. A major trend is one which is in force for a minimum of 2 years, an intermediate trend is one which is typically a few months to 2 years, and the minor trend is days to a few months. When trading any stock, long term investment or a short term swing trade, always pay attention to the trend.

As you view a stock chart you want to identify the trend by drawing a line under all of the lows as the stock price has been going up. A valid trend is one that can be marked with a straight line and which intersects at least three points along the way, and you project that line into the future so that you can use it as a gauge to see if the trend of the stock remains in force, or if it breaks it. Technical analysis is at it’s core, the study of human behavior. There are many nuances in technical analysis, all of which tie back to the two basic fundamentals of what makes the markets operate in the first place, greed and fear.

For every action on the chart there is an underlying force driving that action, it is either greed (buying up) or fear (selling out). Every bit of news, rumors, earnings expectations, feelings of the company executives, their cash flow, the products they make or sell, and the list goes on and on. Everything perceived or believed about a company is reflected in the stock price. And all that combined knowledge (fact or fiction) comes back down to greed and fear. So when you watch a stock chart trading on a trend line and you see a divergence, or a break away from that trend that means that one of the two basic building blocks of the market has shifted dramatically. In the case of a down ward break from a trend that signals that fear has taken over for reasons which may not be completely understood or known. Sometimes all it takes is a little bit of inside information to be exchanged between a few mutual funds and they decide to sell out, or it could be a rumor on the street of a bad earnings report is coming, any number of things. Think of it this way, a large group of birds is flying over head and you notice that they suddenly change direction. What was it that sent them running (flying) the other way? All it takes is for one of them to get a sight of something dangerous and that fear is quickly spread to the flock. Same on Wall street, but the birds are the traders. In the stock market, when something happens that drives fear to the forefront, we as traders need to be watching for the signs of the flock moving the other way, for they are taking their money with them and the bird that stays behind could be eaten up by the dangerous bird (which spooked them in the first place), or all alone and holding the bag (reduced stock price).

Always remember, that whenever a trend is broken it means something has changed the trading psychologically of those in that stock, it does not matter what caused that shift, what is important is to recognize that it happened and realize that it may be serious. So you should exit the trade to protect your gains before they turn into a loss. Not all trend line failures will offer you enough time to gracefully exit the trade, but many will. Always use trading rules and technical analysis to your favor, it can save you a lot of money.

The chart shown here is a perfect example of what happens when a trend line is broken, it signaled something was wrong, and the next day the company issued bad news. There was a day before the news hit in which you could have gotten out of the trade and held onto your gains before the bottom fell out. Print out this chart and paste it on your wall, refer to it often, for this is why trend lines are so important and how they communicate to us that something is changing in the stock, and it may not be pretty!

Oh, and Smith and Wesson, there was a danger sign on that too! That trend line broke back in September and offered lots of time to exit the trade. Trend lines are your friends, know them, learn them , and use them

Now if you used the charts to tell you when to get in and when to get out that very same $5,000 would today be $29,166.22! See how some very simple trading discipline and technical analysis turns a “losing your shirt” into making good money. And you did not have to be an active day trader to accomplish this. Using the technical analysis criteria for this test resulted in only 24 trades since 1995 when you first started.

1. Control your losses. Keep risk to a minimum. Only after you learn to practice this step can you move to step 2.
2. Make profitable trades.

The charts of the financial sectors have been signalling trouble for weeks. I have said a month ago that the financial crisis was going to spread. I stopped actively entering into new swing trades back then. I said that trading in this kind of environment is too risky. Now we see that it is getting worse. Many stocks of banks, brokerages, and other financial related companies have lost huge amounts of their value. IF your a “buy and hold” person you are feeling the loss hard. If you had used the simplest of technical analysis tools you would have known when to sell. You would have sold, taken your profits, and left your money sitting in your brokerage account (most of them pay a very small interest on money that is just sitting in your account and not in a stock) while you watch from a safe distance the market get worse. Then later when the storms are over you take your money and buy the stock again if you still like it. Now you are able to buy more shares because the price is less and then using technical analysis again you stay with the stock until you get another signal to get out. That is how you make money consistently. Take a look at the books I have listed on the right side of this web site. They are there for a reason. Every one of them I have read, every one of them is the best in my view, and they are worth every penny. If you are just starting out get the book written by John Murphy “Technical analysis of the financial markets“. John is an excellent writer and his books are easy to read. Then get the book “Trading for a Living” by Dr. Alexander Elder, and then the book “Trading in the Zone” by Mark Douglas. If you start with those 3 books alone you will learn how to make good trades, learn how to get out of a trade to protect your capital, learn the art of technical analysis, and learn how to be a disciplined trader.

I will close out tonight’s message with a quote from one of the best.. Jesse Livermore:

“A loss never bothers me after I take it. I forget it overnight. But being
wrong – not taking a loss – that is what does damage to the pocketbook and to
the soul”

And what a day is was indeed… I have some very interesting market analysis tonight. Be sure to check out all of the charts in this post!

Tonight I am not going to talk about individual stocks. Instead I am going to focus on some of the market sectors and the broad market health. Before I dig my teeth into that I will highlight the events of the day.

In the pre market we had earnings from more home builders and as expected the results were terrible. Perhaps even worse than some were expecting. But one thing that stood out was that the housing problems appears to be spreading into the commercial construction now. This was further reinforced when the Durable Goods data was released this morning. It was showing capital expenditures had declined whereas business spending was concerned.

Then we also had today the growing fear that the sub prime (and now the prime) lending issues could erode some of the big M & A activity. Large company buyouts, mergers, etc. would be impacted by more problems in the lending sector. And today a lot of companies that are already in a takeover (but not yet finalized) pulled back some as investors were growing fearful that the money needed to make the acquisition may not be there now. This may be more fear than reality but it is still worth mentioning as it is important. Once private equity and/or other companies can’t secure the assets they need to do take overs, mergers, and acquisitions then the bull market will then be running on only 3 legs.

These events sent the market into an outright selling frenzy. At the end of the day all three of the major indices recovered some but in my view this was not all bargain hunters stepping in to start buying. It was a lot of shorts covering at the end of the day to take their profits. When the major indicators today showed the panic selling was underway hedge funds and other very large money movers started shorting just about anything with downside room. And these hedge funds that shorted large amounts of money today made a good deal of cash today when in the last hour they started covering and banking their profits. Remember that on just about any down day that at 3pm you will see a bounce. The last hour is when shorts start covering and bargain hunters come in for the kill. Today I feel it was more short covering than bargain hunters.

So that is what got the selling started. Early in the morning RebelTrader swing trade NightHawk Radiology (NHWK) gaped up at the open (last night they released good earnings) but I quickly saw what was looking like heavy profit taking and the price was going to fall through the floor. So I sold my entire NHWK position. That swing trade provided me a 5% gain today. Later I added to my position on FEEC when it broke above the next buy point. Because of the market conditions today I raised my stop level to $1.60 so that if FEEC fell back too much I would exit the trade at break even. And that is what happened. FEEC is still good, I will re-enter when the time is right.

That leaves only one currently open swing trade and that is WWAT. And that is sitting today at a 16% gain.

Ok, now I’m going to move on to some in depth analysis of the market in general. Some of the things I’m going to say in the next few paragraphs may be a surprise. What I mean by that is some of my analysis goes against some of the talking heads on TV. But I call them like I see them and I feel we still have trouble ahead of us. There are some significant resistance levels that need to be overcome in order for me to believe that the tech sector is ‘hot’ as some are saying. I’ll start off with that. The chart shown here is the “SOX” as we call it. It is the Semiconductor Index. Look at the chart and observe that currently we are right up against a resistance level. If the overall market continues to be weak then this resistance level will be strong and the index will turn around (and the tech stocks with it). If however the index is able to “break through” the resistance then I will be bullish on tech. But until it does tech remains questionable and I will trade it with extra caution.

The next chart is the Philadelphia Bank index ($BKX). It shows that this week we fell below a major trend line. Once a major trend line is broken we are in new territory whereas we are no longer in an uptrend. Now the index will trade sideways, fall more, or have trouble getting back above the trend line (remember that once support is broken that support line then becomes resistance).

The next chart is the Housing Index (a good index for all things housing, construction materials, etc). The chart ($HGX) shows a head and shoulders pattern. In technical analysis a Head and Shoulders pattern is the name given to a chart that exhibits three main events. A rally that peaks (left shoulder) and then another rally that is even higher (head) and then followed by another rally that is lower than the previous one (right shoulder). From those three events one can draw a neck line. When a stock or index fails the neck line the trend is taking a turn for the worse. This chart says we have larger troubles ahead in housing, construction materials, and in turn the mortgage business.

Next is the S & P 500 Large Cap Index ($SPX). On this chart notice how we have come to rest right on top of a very significant support region. This support must hold otherwise we will be in for an even bigger market meltdown.

Next chart is the NYSE Composite ($NYA). Same thing as with the S&P. The index has come to rest right on top of a significant support line. This must hold! Otherwise lookout below..

Next is the Volatility Index ($VIX). I present this chart in a new way tonight. I examine this chart in terms of when bull markets and bear markets have been in control. Remember the big market bubble that came crashing down in 2001 / 2002 (that was the big tech bubble burst). That was a bear market. Notice on the VIX chart the volatility in 2001, 2002, and 2003. See how high it was back in the bear market. Then at the end of 2003 and early 2004 we started a new bull market and the volatility declined all the way until 2005. Then the volatility started trading in a rectangle pattern up until now. But today the volatility broke above the pattern! Could it be that we are seeing the very early stages of a new bear market approaching? Wait until you see my next chart!

This chart is the NYSE index of new highs – new lows ($NYHL). Look at this chart carefully. I have indicated where the bear market was and the current bull market is. But what I want you to notice is the blue trend line drawn above the new highs. See how over the past 3 years the trend has been declining. This tells me the economy is declining and taking companies with it as reflected in the decline of new highs over the past 3 years. Some interesting things to ponder.

Now I am not saying that we are on the verge of an outright bear market. But I am saying that we are at a difficult time and finding good swing trades will be tough. But I will do my best to find them for you. There is always money to be made… finding the right plays at the right time is what I am here to help teach you how to do.

Good night Rebels!

I said in my earlier post that construction problems were now spreading into the commercial sector. The durable goods data confirms this as capital expenditures has declined.

Keep your stops in place on any trades you have active. Remember, good traders and investors will always put a tourniquet on a loss. Never let a trade take you more than 8% in the red. 8% is the absolute maximum. Personally I try to limit my losses on a swing trade to no more than 4% (and sometimes even less depending on where support levels are).

Please…. never invest or trade on hope. That will erase your money. You invest and trade with a plan and that plan is to ALWAYS limit your losses. When a trade or investment does not work out you sell and move on. Don’t keep holding it and think it will get better. What if it does not get better.. then you have an investment that starts out at a loss of say 10%… you say “no problem” it will turn around, then your down to a 25% loss. Now you say I can’t sell here because it is too big of a loss to sell here. I’ll just hold on and one day it will come back. Then your investment is down 50%. Never tell yourself I will hold and wait for a turnaround. Because you don’t know if it will. Don’t trade/invest on hope… Always have a plan and get out before your losses get bad. No matter how much you like a company or their products you never let that influence your investing smarts. If you go red you cut the loss and limit the risk to your capital.

So many investors fail because they fall in love with companies and think the companies will never do them wrong. Or they let their investment brokers tell them to keep holding on to a bad investment. Just like financial advisers were telling investors during the Enron collapse. Listen to your own logic and discipline, it is your money… not theirs.

With the markets getting attention again with the new highs achieved today. I want to share an article I wrote some months ago. It highlights how one must remain in control. Don’t get caught up in the excitement of the markets, or of any particular stock for that matter. Here it is:

The stock market is alluring with its vast amounts of money being exchanged
every second.

The sights and sounds of the floor of the stock exchanges inspire in us the
images of a fast paced nose to nose horse race, the fever pitch of a baseball
game, the feeling of rolling the dice in Vegas. It is sexy, it is powerful,
and it is addictive.. It conjures up within us all the dreams of being
instantly rich with the roll of the dice or the well placed bet on which horse
will win..

For stock traders and investors the dreams of fortune come from “winning
the game” of stocks. The problem is that there is no one throw of the dice or
one pull of the slot machine handle.. In Vegas you can loose everything on
one roll of the dice.. In the stock market you can not approach your plans
of being wealthy the same way you would roll your dice on the tables in
Vegas.. You have to control yourself, plan your next move, and strike like
a tiger when the time is right. And more importantly you have to sit on
your chips and only gamble with a percentage of your chips at any one
time. That is how we manage our portfolio and protect our
capital.

Because in Vegas if you bet the farm and the dice don’t stop spinning in
your favor.. you’ve lost the farm and your out of the game with nothing. In
the game we call the stock market.. there is no “blowing on the
dice”… there is no “come on baby…daddy needs a new pair of
shoes”… For if that is your approach to the stock market then you have
already lost the game.. for you are relying on
hope… not a strategy.

Walking up to play the stock market game requires a whole different
mentally. Sure the attraction of fame and fortune is what brings many
traders.. But the ones who win are the ones who come into the game with the
plan of not winning. Yes.. I said that correctly.. Let me say that
again.. the winners in the stock markets are those that plan every move,
every step, every trade with the intention of not losing any money.. Accept
little looses and let the winners add up. If you run into the stock market
expecting to win big in the first few weeks… you will be out of the game
in no time.. Your approach to the stock market game must be to take bits and
pieces at a time.. Don’t go for the gusto in one shot… that is the
wrong attitude and will drive you to make bad trading decisions. Winning in
the long run requires careful and precise moves… such as a chess game.
Don’t let the lure of the ‘big money’ drive your trading decisions. That
will lead you to the soup lines. Instead make it your plan to NOT lose any
money, then the money you gain will add up slowly. This will also allow you
to remain focused on your trading style and remain disciplined to that trading
style.

Once the heat of the race takes over your emotions then mistakes will be
made.. And the ones who remain cool, calm, and in control of their strategy
will be the ones taking your money when you get wrapped up in the heat of the
money. Remember… when we perform technical analysis of the charts
and apply the understanding of greed & fear it is WE that will
be taking the money away from those being caught up in the heat and
excitement of money.. The stock market can be a vicious game.. the
money made every day by traders is not mysteriously printed
somewhere… For every dollar someone makes… someone has lost.. And
in order to be on the winning side.. remain in control.. don’t let the
excitement and lure of big money take over your emotions.. For if you do
then those that sit on the side lines; disciplined and waiting to strike; will
be there to take the money from you.

As of the market close, July 12th, 2007 the current open trades:

WDC 4.4% gain (open)
AKS 3.8% gain (open, average cost $38.58)
ONT 3.3% gain (open, average cost $2.77)
BIG 2.9% gain (open, average cost $29.91)
GRP 2.2% gain (open)
ALGN 1.2% gain (open, average cost $25.29, multiple trades)
NTGR -0.9% loss (open, average cost $38.79
WWAT -2.2% loss (open, multiple trades)

JDSA -5.3% loss (closed today)

Multiple trades means this is the second time a trade is being attempted on that stock. The gain/loss calculation takes into account the gain or loss from both trades!). Gains/losses are calculated on the average cost where the stock play has been to scale into the trade.

Money management stems losses and keeps the winning trades in play. You do NOT have to win every trade. That is not possible by anyone. All one has to do is win more than you lose over the year and your ahead. After each trade is completed you put that cash right back into your capital for use in the swing trade methodology, increasing your buying power as time goes on. Remember, take your trading capital you set aside for swing trades and divide it up into 10 parts. And each part is what you use for one swing trade,one stock. So no more than 10 stocks will be owned at any one time.

Where you read that I scale into a trade with a 1/3 or a 1/2 that means I have taken that one 10% part and cut it into more parts. This way I enter into the trade a little at a time until the whole 10% part is loaded into the one stock. This is done to protect capital. The more the trade works the more you add until it is loaded. The scaling into a stock is even more important in times of extreme market volatility where it can change direction in a flash. Under normal conditions entering a trade is usually in 1/2’s and in some cases (depending on the situation at the time) will enter the trade with the entire 10% part all at once.

For the new members of the site please read this earlier post. Click me!

If you are new to the concept of swing trading please, I encourage you strongly to start out by paper trading and reading some books on swing trading. Never put all of your money into one trade, ever! That is financial suicide. Practice how to manage your capital and it’s 10 pieces for swing trading. Get a feel for how swing trading works and the concept of compounding your gains into the next trades.

In this post I highlight AXR (Amrep Corporation). AXR has been on the Rebel Traders watch list for many weeks. It is a play on a trend reversal along with a high short interest.

Amrep began in 1961 and began trading on the NYSE in 1972. The primary business of Amrep is magazine subscription services, and real estate development (Fp80 comment: The two business operations of Amrep could not be further apart, processing magazine subscriptions AND real estate development is not a successful business model in my view). Amrep has their headquarters in Princeton, NJ (25 miles from RebelTrader HQ). Picture shown is of the building they occupy from the real estate owner in Princeton.

Amrep started getting attention in June 2006 as shown by the increase in share trading volume and in the span of 8 months went from $35 (special dividend adjusted) to almost $150 per share. The share structure as provided by Thomson Financial data provider is:

shares outstanding = 6.65 million
shares in float = 1.73 million

As you can see based on the share float it does not take much buying activity in order to get a substantial price movement in the shares. What had taken place was the share price got way ahead of the true share value (based on fundamentals, market cap, and growth rate). In other words people were willing to pay up for the stock even though the business suggested it was not worth that much. In July and October of 2006 Amrep reported EPS numbers that were way ahead of analysts expectations, and that brought buyers to the table thinking the company was way under priced. Always remember that investors and traders will pay what they ‘feel’ the stock is worth. Hype goes a long way to the investor. Greed & Fear drive the real price movements

But in January 2007 Amrep released quarterly earnings and they went from an EPS of 2.42 (October 2006) to 1.04 ( 132% drop ). Reality had set in. Now all of a sudden investors were holding onto a stock that was in no way worth the value they paid for it in their views. The massive sell off began late January 2007 and has been a straight drop ever since.

The share price of Amrep is nearing a more realistic value now based on the actual earnings of the company. More importantly is that the share price a level investors “feel” it is worth? Where the price will stop falling can only be answered by technical analysis. At the present time on a weekly chart there are weak signs that it may have bottomed. But I caution that those signs are weak. (see the weekly chart shown below). What we need is to see more evidence of a reversal in the works before we can consider this a swing trade (mostly to capitalize on the short interest covering). We do this buy using the charts to establish criteria to test those conditions.

First we have long term support areas. Currently the share price is close to one support area with a stronger one below it. Is this the support area that is going to hold and be the base for the start of a trend reversal? We can’t say. That is why we next set conditions which must be met to confirm to us that the bottom may have been established. We then look at a closer view of the stock chart to show the trend line and a baseline level we want to see the share price trade at to give us confidence that buyers are working up the price (daily chart shown below).

Is Amrep worth $46.91 a share (July 6th closing price)? Is it worth even lower than that and we will drop to the next support region around $34? A company with a current P/E ratio of 6 may sound good and may sound like a bargain but P/E ratios don’t necessarily indicate that the share price is undervalued or even a good investment. A stock always trades at the price the investors perceive the value to be. And this is why I rely on the technical analysis of the tape (charts) to tell me what investors are willing to pay for a stock. Go back to Amazon a few months ago. They had a P/E of over 100 leading into their earnings release in April. Many analysts were saying that the price of Amazon was overvalued already and that any further upward price gains would be difficult. Well they were all wrong and even with the way overvalue condition investors bought up Amazon shares like they were printed on money themselves.. If one were to use P/E as a guide for determining growth potential or the lack thereof the chances for successful investments/trades will be lower. In swing trading I never use a P/E ratio. I look to the chart to tell me what the investor is willing to pay. And when there is a consensus that it is time to start buying upwards, then I join in for the ride and then hop off before the ride ends. Don’t want to get stuck at the end of the line in a roundabout and then head back down.

Some early buying on low volume led to end of day selling on higher volume. The DOW experienced an intraday swing of over 200 points. Up almost 100 by mid morning to down almost 100 by late afternoon. The combination of higher crude oil prices, the car bombs discovered in London, the holiday coming up, the already volatile markets conditions, and the end of the quarter “shifting” of assets by the money managers at mutual funds all led to the markets behavior.

Look at the DOW chart I have in my public chart list. Keep in mind that we are still inside a trading range. The markets are still undecided here. While I am bullish on the markets for the near future the fact that we are in this sideways trading range makes it difficult to get too heavy on new trades. What is happening here is that for every attempt the bulls attempt to rally the bears come to the party and kill it. Makes swing trades very difficult.

The one current open position in the FP80 portfolio (BIG) also pulled back on Friday but is still above the buy price. We are waiting for it to advance above $30.50 as a confirmation of more buying intensity before we go in with an additional 1/3 of our swing trade funds. Scaling into a swing trade or position trade is the safest and smartest way to trade. You get the advantage of having some of your money in at the lowest price while at the same time we are testing the trade (dipping our toes in the water). And if everything is OK then we go in all the way. Normally I would scale into a swing trade by starting with 1/2 of my normal swing trade funds allocated for any one trade. And upon confirmation of a successful setup I add the second portion. But with the increased volatility right now I am temporarily using 1/3 as my starting position. By doing this the risk is reduced even further if the markets take a dive and the stop loss point is triggered then the loss on the trade is even less than if you had gone all in from the start. Reducing ones risk is always a key to success.

To help illustrate the concept of how one should divide up their capital for swing trading see the chart here (click on the chart to enlarge). Remember, it does not matter how much you set aside for swing trading. The concept is to take whatever that amount of funds is and divide it up into 10 slices. And then each swing trade becomes one slice of your total swing trade funds.

I am working on some new swing trade charts and ideas. And I will post new charts by Sunday night for you to view.

Final thought for the day. The hype in Apple (AAPL) is done. The excitement in the iPhone is done. And for now the stock price of AAPL will likely pullback as the hype is quickly vanishing.