August 24th

It's not often that a €45,000 bet on the Dow Jones paralyses one with boredom.  This is the holiday season on Wall Street, however, which means light trading volumes and choppy, listless trading in general. 

I'm used to taking at least one half-decent set-up per week.  Sometimes, you might get a multiple of opportunities on any given week - other times, nothing's happening, in which case you should step aside and just wait.  Instead of waiting, boredom saw this silly monkey force a trade this week, scaling into a position at 11,450 and adding to it at 11,330.  There is absolutely nothing noteworthy about either of these levels - this was a lethargic 'let's give it a shot' type of trade.  Dumb.

Tedium triggered the trade, which has chopped around without giving me either heartburn or joy.  Up a few hundred, down a few hundred, that kind of thing.  I really should have exited the position.  If you realise that you're in a trade that offers no better odds than the flip of a coin, then that's the logical thing to do.  I've a definite stop loss order in place - this is not one of those conviction trades that you add to at successively lower levels. 

The irony is that the week hasn't been a complete desert for Dow traders, with a decent short opportunity presenting itself at 11,700.  I've mentioned on numerous occasions that there's strong resistance at this area and getting short here would have made a lot more sense than my half-hearted long effort, especially as the recent rally attempt has been petering out.   

There are two lessons to take from this rather uninspiring story.  One, always wait a decent opportunity.  You don't have to make money every week or even every month - sit tight and wait.  Two, keep an eye on additional markets if you're the author of a trading column and don't have the luxury of waiting around for weeks on end.  There's always something happening in the world of stocks, an area I really should be dabbling in more.

Take Anglo-Irish.  It shot up from under €4 to over €7 during the market upswing in the last few weeks of July.  Nice for anyone who got in low, although bottom-fishing isn't my style.  Getting short at €7 was a real no-brainer, however (obvious technical resistance in addition to the fact that the stock was utterly overbought).  It fell back to €5 over the following week - juicy profits indeed.  From there, it rallied once more to the €7 area before being rebuffed once more and was falling back to the €5 level this week.  Anglo, like all the banks have been for some time, is in an obvious downtrend so I'd be reluctant to get long but shorting the rallies - well ,it's not rocket science, is it?

The Irish banks trade like dotcoms these days.  Double-digit intra-day moves are common as muck.  This is fertile territory for active traders.  I've always focused on US stocks and indices but that needs to change, given the current Irish market.  Besides, Irish financials seem to be broadly following the US banks, only in a more exaggerated fashion.

Talking of the Irish banks, I've had a few emails from traders itching to get short.  I'm guessing that the gloomy headlines surrounding poor old Fannie and Freddie have got many traders in apocalyptic mood towards bank stocks in general.  The banks might very well go much lower in the coming weeks, I don't know, but I'd be reluctant to short at the moment, given the magnitude of the recent declines - Anglo, Bank of Ireland and IL&P have all suffered losses in excess of 20% over the last week or so and AIB hasn't done much better. 

Sure, you might short now and make a mint but another snapback rally of 20-30% might also ensue.  Clever shorts have made a bundle in the banks by shorting when the iron is hot.  Less clever shorts have been burnt alive by the suddenness and strength of the occasional rallies, however.   It's always better to pick your spot than to jump in out of a fear that you'll miss a move or a desire for action. 

I should know. 

Weekly profit/loss: -€160
Overall balance: €21,902

Comments

[NoTipsHere]

Hi MarketMonkey,

I agree that its useful to have your eye and be familiar with several tradeables rather than just one, such as the Dow. I fully agree with the point that you made in a previous piece some time back, that you have to be "intimate" with the index/stock in question and that it has to move. Movement is your way into possible tends that you can predict/guess in advance, which is what you are doing as a multi-day or day trader.

The Dow may have been sideways for a few days but there is still movement in her. eg: On the 21st and 22nd it went from 11,340 to 11,620 in 2 days, almost 300 points. And yesterday it dropped down to 11,385, a drop of 240 and over 2% in a day. That is enough movement if you ask me. Hopefully you got in on one of those.

> Take Anglo-Irish. Getting short at €7 was a real no-brainer It fell back to €5 the following week. From there, it rallied once more to the €7 before falling back to €5 - shorting the rallies, well ,it's not rocket science, is it?

I dont think these were exactly no-brainers. The banks were at very depressed values so there is no guarantee that any rise (rally) will indeed fall back again. BOI went down as 4.40 and is now at 5.30 or so but knowing where it will go next is hard to predict as these valuations are very low.

> The Irish banks trade like dotcoms these days.

I dont think they trade like the dot-coms did nor the current internet stocks. They have attributes of their own, a business that has assets, a business that is still making profits, but a potential for a storm to turn into a hurricane and for many of the loans to turn unpayable. The shares are therefore priced somewhere between the doomsday scenario and a "normal" valuation. Neither analysts or investors know the tue value of these businesses for now. Things should become a little clearer over the next couple of years, but whilst the property markets remain 'effectively' stagnant, there are large potential risks.

Good luck this week ....

NoTipsHere

[Market Monkey]

Hi NoTips
That trade referred to had a very happy ending :). Column went to press before the surge in volatility. Still shouldn't have taken the trade however - better to have waited for Dow to trade near bottom of its recent trading range than to enter in the middle of its trading range like I did. As for the drop back down from 11,620 - would have been better to get short near resistance at 11,720. Entering at 11,600 would have been acceptable but I still think traders should be as picky as possible rather than jumping the gun.

Re. Anglo and banks - IMHO, shorting near 7 was a no-brainer for the reasons outlined. First test of resistance/support is always a good time to get short/long. Next time, it might very well go beyond 7, I don't know, but shorting any rally continues to look like a very obvious move to me. Trend is your friend...

Re. dotcom analogy - am not saying the banks are worthless like dotcoms, am saying that they trade like the dotcoms used to, ie, hugely volatile. Anglo, for example, rose by over 70% in a few weeks before dropping by 30% soon after and then rising another 40% or so in double quick time. It then lost over 20% in last ten days. All that since the start of July and IL&P behaving similarly - wild stuff!

[NoTipsHere]

Hi,

> That trade referred to had a very happy ending :).

Thats good to hear.

> better to have waited for Dow to trade near bottom of its recent trading range
> As for the drop back down from 11,620 - would have been better to get short near resistance at 11,720.

Therein lies the challenge for all traders. When the market is moving gradually sideways as it has done since mid-July, its difficult to pick either long or short correctly. Its more or less a lucky guess. Waiting for the market to hit a resistance level such as 11,720 may not happen. And there can be valid day-trades or multi-day trades available to snap up if the trend is reasonable to your hunch.

Looking at a 2-yr chart such as this:
http://uk.finance.yahoo.com/q/ta?s=%5EDJI&t=2y&l=off&z=m&q=l&p=m50,m200

The 50-day trend line would seem to be a limiter at the moment. Values are well below 200-days and the peaks of 13,000 back in May were a case of recent "irrational exuberance".

It looks in the general market that things should trend to the down side at some stage. The market has been taking a breather from that precipitous fall since May.

The 200-day ma bulled over the last 5 years from 8,750 to 13,500 in January and is now around 12,500. 10,500 or 10,000 seems unlikely so we could have a lot of sideways movement for sometime to come. Picking short-term trends is therefore a reasonable method. Selling the rallies, or buying the fallers.

NoTipsHere