Big Money

In current volatile market I constantly need educate my clients on conflicting signals in the market.  Certain stocks can be very bullish but the bigger indices could be forming bear formation.
- Oftentimes I said, indices have hit the top, and I was right. But the certain stocks could still be thundering higher.
- Indices could be plunging but some stocks stay resilient.
Ultimately the main indices would rule the direction of overall market. It’s only at the turning points we will see a large conflicting signals whether it’s topping or bottoming process.
From my experience as a broker, my clients prefer to hear one side of the story and of course something that favoured them. The problem is that they do not see what I see in this market, and this could be a missing link in my passing of messages to them.

Today one of the client asked me whether Biosensor is a good entry at breakout level.
I spotted activities in Biosensor yesterday (see Biosensors:ongoing accummulation) but few seems to be interested into buying at low price.
And today market became hot and a number of people started noticing positive activities in the stocks and would like to participate in the buying side.
One of the stock in the top volume is biosensor and it fits all the positive technical breakout with above average volume.
In normal market this type of breakout would have 80% chance of followthrough which means it will move higher over next few trading days. As we’re in less than bullish market with conflicting signals (after recent run up) I would weight the chance of success is only 60%. Instead of carrying over our usual position size, we need to be nimble with max 1/2 of our usual position.
The Dow futures which was positive in the afternoon (SG time) has finally turned red due to less than rosy jobless claim.  What happen to Biosensor tomorrow?  Would it sink? or would it be thundering higher?

If you’re not over exposed you may not be worrying too much with tonight’s outcome. The problem with traders are they only look at potential profit and forgotten potential loss. Managing position size is infact not less important than looking for right entry/exit.
And in fact this money management will determine how much you will profit in the market in the long run.

Biosensor rose more than 4 fold from its $0.225 low and the shallow correction in May only reaffirm that this stock is stil on its uptrend.
The past 3 months narrow trading range with the shape of uptrending triangular formation signaling ongoing accummulation.
The immediate resistance is at $0.83 with shortterm target at $0.90. A medium target of $1.30 is more likely once they get more approval in different countries (probably by Mid 2011).
Today it just announced that its Drug Eluting Stent System is approved for sale in Taiwan.

If you’re interested on research report by Nomura for Biosensor please contact me.

Follow up from bearish rising wedge which I posted last week:

Despite gain in some stocks such as Genting and Statschipac as well as strength in Hangseng, they do not picture an improvement of market breath.
Potential of further rebound to digest recent loss is very likely but the overall sellers still outweigh buyers.

I expect August to be slow month and mostly the stock will trade within a range.
A possible bigger move could be in September and statistically this is a very bearish month.

This morning the Japanese gov just announced slower growth:
http://www.cnbc.com/id/38717422

Let’s see how market unfolds.

The US market has greatly ignored the worse than expected economic news. It’s a lesson to be learned that market is selective in its reaction to the news.
It is not the news that maintain the market movement but it is the momentum that keeps market going. However market won’t be going forever in one direction, it is either consolidates or reverses its main direction, depends largely on underlying fundamental.

Generally we’ve seen a number of commonly traded stocks on the pullback while the unknown pennies are dominating the top volume in Singapore market. This is a very common phenomena where the market players have lost their trading ideas and bring up the pennies as next trading target. The retailers who look at the big gain will mostly be enticed to trade the pennies and they’ll mostly be the victims in this market.

S&P500 rising wedge
S&P500 rose on tight range and ignored all the worse than expected economic news. What concern me is the rising wedge formation which is a bearish price formation.
The psychology behind the bearish rising wedge is the loss of upside momentum on each successive high. A trend will reverse if a price momentum weakens. 

At this stage of market the preservation of capital is more important than looking for capital gain.

Many indices such as S&P, SSE and STI have hit my price target.
I liquidited most position except Hi-P, StatsChipac and Goodpack.

All warfare is based on deception

Hence, when able to attack, we must seem unable;
when using our forces, we must seem inactive;
when we are near, we must make the enemy believe we are far away;
when far away, we must make him believe we are near.

Sun Tzu, The Art of War

Since my earlier posting of shooting the ducks the market seems to fool most traders by planting deceptive bear pattern before current strong rebound.
The smart money seems to understand and apply Sun Tzu’s Art of War strategy which remains useful in any war game.
In my early stage of understanding this market I have to unlearn many studies from technical analysis books. By applying TA blindly we’re fighting  a war while enemies holding our war plan.

The deception explained in the chart:

1. We have seen a deception of market breakdown below 5th Feb significant low and they are on 6th May,  25th May and 8th June. These are the levels where the amateurs are placing their stop loss orders.

2. The market heading higher to form right shoulder (Head and Shoulder formation). As many people were still bearish they could have shorted the market on its way up and finally many options are expiring on 18th June (3rd Friday of the month).  The market was forcefully held up till option expiry date despite a number of bad news. This act would force many put holders getting nothing out of their options.

3. Market immediately reversed after the options expiry date. This act will shake out many long-side holders and they have to cut loss when the bearish H&S pattern was confirmed on 20th July.

4. Once the H&S confirmed the long holders exited their position and the short started entering the market. However the short was soon fooled and were running to cover their position when Dow run up significantly on 7th/8th July.

What we saw are actions of the market against conventional technical analysis entry and exit.
So what we learn from the books or seminars are the sure way to lose money. Your chance improves if you use the TA knowledge by thinking like the smart money.

Whenever the US market made the strong gain, the price usually opened at its peak and come lower.
This is a common pattern partly due to following reasons:
- extreme eagerness to buy in order not to miss it
- short sellers are caught and need to cover the position
- smart money are pushing at higher opening price to unload the shares

So we have 3 reasons why we shall avoid buying at open whenever we see huge rise on Wallstreet.
The reverse is true when the big drop happens the price usually opened at extreme low and recover at later part of the day.

If we do like to buy after we identified a trend confirmation such as last night, it’s best to wait till the price reach equilibrium.
When the trading price stabilizes we compare the current price with opening price and when we see the current price is higher than the opening price, we see a positive price gain.
For buy-side investors it’s best only to enter stocks that are making positive price gain as it confirms the trend for the day and that may carry through the next day.
Most of other stocks are just too weak for our interest despite a positive picture in US market.

In tough market condition like now,  it’s the best time to identify the real leaders for the next run up instead of sentiment play in most stocks.
What I can obviously see is that strength in technology stocks despite the current poor  sentiment. The stocks such as Armstrong, UMS, Cheung Woh, Hi-P and Venture have been resilient enough to absorb any bad news that have been hitting the market.

- Recently that was talk of Armstrong being taken over by third party but the talk is still in progress and may take months.
- UMS has broken 2 years high and the share price is still rising
- Hi-P gained 40% in less than 3 weeks.
- Cheung Woh is trading above 52-weeks  high and it looks stronger

So instead of focusing on so many sentiment driven stocks, it’s time to get back on these few stocks that have shown their strength in poor market.

The fear of market collapse is still with us and if I use chart as most of TA practitioners do, I’ll see only doom days ahead.
Just look at the chart of my earlier posting that we’re forming similiar shape of 2007 ( Are we repeating 2007? ).  The chart for major indices look terrible and nothing look positive at all. And the recent breakdown in BDI only support the idea of more doom ahead. The elliot wave practitioners mentioned that we’ve already completed the 5th wave up and the major selldown is on its way.
(more…)

After past few years trading fulltime in the market I’ve finally figured out what is in smart money’s mind.
It’s just amazing how they always go against the crowd’s belief and make money out of them.

In recent example is the selldown in the market (see Dow hitting 9727 level). The obvious support for the Dow the Feb 2010 low and the ducks are lining up there for stop loss. The smart money knows they need to shake them off by breaking the support level. And this shake off created more volatility, fear and this is where the ducks get shot. How I know this? This phenomena happens almost everyday in forex while it’s only happening in major events in stock market.
(more…)