Bias Keeps the Apple Away

logo-apple-macintoshAmericans encourage the pursuit of the American dream, proudly hailing our country as the land of opportunity. We love a good rags to riches story. We love to root for the underdog who we will faithfully support and encourage in the hope of seeing a transition to become the next great American success story.

Somewhere along the way though, an arbitrary line can get crossed which prompts the masses to look at great American success stories and see them for being overachievements. Having too much success? You’re not the lovable underdog any more. Time to knock you down a notch or two. If you’re too successful at doing what you’re good at for too long then you start to become hated by some.

The New York Yankees. Starbucks. Bill Gates. All are known for great success. All have legions of people who either love them or hate them.

Apple (AAPL) is another of those success stories. Somewhere along the journey from Jobs and Wozniak scrounging money to cobble together and sell handfuls of rudimentary computers to becoming the iconic global behemoth it is today, the company has attracted its share of people who can’t wait to see the mighty Apple fall.

I have owned several iPhones and I love them. Haters would call me a fanboy when all I really am is a consumer of a product I enjoy using. If I discovered a product I thought I might like more than my iPhone I’d give it a try to see if I preferred it. I like Apple but I’m not married to Apple.

cloudedjudgementI’ve traded in and out of Apple many times over the past years, but since I now regard it as a core holding of mine I chose to maintain my position through 4Q earnings. To come to that decision required tuning out a lot of noise and speculation though. I couldn’t help but notice some respected traders on media outlets and on Twitter voicing their negative opinions about Apple and Apple investors. What was surprising to me about it was that negativity reflected directly on their bias and loss of objectivity, something I would not expect from traders of their caliber. Is it Apple’s great success that motivates rational thinking to become biased? Has missing out on that success in the past influenced opinion about the future? Some want to see failure happen when they haven’t been along for the ride, after all. Regardless, the fact is no one really knows what is going to happen so speculation is just that, but when bias of any kind figures in to the equation then judgement becomes clouded.

This comes to the heart of what this post is all about which has also been the tag line on my Twitter profile since day one:

“Study those who know, share what you learn, think on your own”

I don’t always hold positions through earnings. I based my decision to hold my Apple position on personal research and observation. Had I let the bias of others cloud my judgement I might have been persuaded to sell ahead of time and watch from the safety of the sidelines. Fortunately that didn’t happen, and fortunately it worked to my benefit.

Think on your own. Be your own trader.

Technical Difficulties

technicaldifficulties

Skimming through some charts today I noticed a weaker looking television media theme appearing in the services sector. Here are weekly and daily chart looks at three of them.

Shaw Communications (SJR) Weekly Chart - January 23, 2015

Shaw Communications (SJR) Weekly Chart – January 23, 2015

Shaw Communications (SJR) Daily Chart - January 23, 2015

Shaw Communications (SJR) Daily Chart – January 23, 2015

Shaw Communications (SJR) has been selling on higher than average volume all month after putting in a double top, however after disappointing on earnings and revenue reported on January 15 selling accelerated and drove the stock forcefully through the 200 DMA. Look for the short setup if price penetrates the October low of 23.31. SJR’s IBD rating is 38.

Scripps Networks Interactive (SNI) Weekly Chart - January 23, 2015

Scripps Networks Interactive (SNI) Weekly Chart – January 23, 2015

Scripps Networks Interactive (SNI) Daily Chart - January 23, 2015

Scripps Networks Interactive (SNI) Daily Chart – January 23, 2015

Scripps Networks Interactive (SNI) is set to report earnings on February 12 so it may be range bound until then, however it is worth noting that the moving averages are turning negative after printing a recent lower high. I’m probably least confident in this short setup unless my price alert triggers below 70.61. SNI’s IBD rating is 57.

Viacom (VIAB) Weekly Chart - January 23, 2015

Viacom (VIAB) Weekly Chart – January 23, 2015

Viacom (VIAB) Daily Chart - January 23, 2015

Viacom (VIAB) Daily Chart – January 23, 2015

Viacom (VIAB) earnings are close at hand set for January 29, but the technicals here are worth noting. Moving averages have rolled over negative and strong selling since January 14 has been paired with a weaker retracement. If volume kicks in on another drop I’ll be watching for a short setup under 64.79. VIAB’s IBD rating is 50.

Follow My Lead

Back on September 8 of last year I posted a chart of Cheetah Mobile (CMCM) along with this tweet:

tweet-cmcm-8sep14

CMCM was at 30.35, closing strong on good volume just two cents away from the previous August 19 all-time high of 30.37 – in my opinion a prime breakout candidate to consider. The following day it popped to 30.77. A common rule of thumb is not to buy a breakout unless it reaches at least ten cents higher from the break, so everything looked good to go at that point.

Price faded from there and the breakout failed with CMCM closing that day down 10% from my mention of it. A month later it was down 46%. Despite the outcome, it was nevertheless a good setup idea, however I passed on it in favor of taking a position in SunEdison (SUNE) which I preferred to be in at that time. No harm done, and I’ve since taken a position in CMCM on January 5 at 16.60.

The crux of this story comes from a conversation I had last week with someone I know personally who I was unaware was following me on social media. What he said was, “Cheetah is starting to look good. Do you think it will get back to $30? I’d like us to get our money back.”

Uh oh.

cmcm-lemmingsI explained that I did not take that trade and was only in CMCM from earlier this month. That was met with a measure of surprise, but although things seemed a little awkward there appeared to be no hard feelings on his part. I encouraged him to judge the pros and cons of his position on his own and decide if it was worth holding or selling even though I knew this was someone who evidently didn’t have a plan of his own to work with nor did he seem to be utilizing any kind of risk strategy. More than likely I suspect he’ll be holding his position to the break even point or until the end of time, whichever comes first.

I am consistently researching to develop trade ideas and setups to have targets ready for whenever I have capital available to deploy. Ideas may linger for a while with me or just as easily be forgotten in favor of others as quickly as they appear. If I see something interesting that looks to be a favorable risk / reward setup I will often post a chart of it on Twitter, however I may or may not be involved in trading it then or in the future. They are merely ideas I see which I feel are worth presenting, however it is up to each trader viewing any chart to determine how it fits their criteria and suits their own individual trading style to interpret and decide what it means to them. A setup I might think is a good long trade could be seen just as favorably to someone who sees it as a good short opportunity, and that’s fine. One will be right, the other wrong. Knowing what to do with that trade either way before and after the fact makes all the difference in the world.

There are many traders on social media posting charts and ideas all of the time. When I see something interesting I always evaluate it on my own merits though. Never do I follow any other trader blindly into a trade. With all of the infinite variables to trading styles, time frames, objectives, risk tolerances, etc., it’s foolish to simply mimic whatever someone else is doing. A trader who develops a habit of following will never develop into a trader of their own who can earn their success and lead their own destiny.

My advice is simple: don’t follow traders or mentors and be a follower, follow traders or mentors and be a thinker.

The Deceptive RSI Indicator

sale-redarrowThe best advice I’ve found that applies to the Relative Strength Index (RSI) is that overbought can stay overbought and oversold can stay oversold for a lot longer than you think, and that the RSI indicator is best utilized as a complimentary indicator and not as a tool to signal buy and sell points.

To illustrate this, I don’t know if a better example exists than NewLead Holdings (NEWL). Before being delisted from the NASDAQ last year, NEWL spent a great deal of its existence paired with an oversold RSI. Now trading on the OTC market, not much has changed.

NewLead Holdings (NEWL) Daily Chart - January 16, 2015

NewLead Holdings (NEWL) Daily Chart – January 16, 2015

NEWL closed on March 5 at 14,850 prior to entering oversold levels the following day. It remained oversold uninterrupted through December 15 where it closed at .02. Taking the oversold RSI as a buy signal expecting a rebound led to more than a nine month ride and a 99.99% loss.

I still keep the RSI Indicator on my charts to give it a quick glance, but I consider it the least important indicator I use. The best use I’ve found for it is actually counterintuitive to what most people probably think it is meant for, and that is to find trending stocks that are overbought and oversold.

Here are two links to Finviz stock screener results that demonstrate what I mean:

Overbought Stocks – RSI Over 80

Oversold Stocks – RSI Under 30

If you roll over or click the ticker symbols on these result pages you’ll see most of the overbought stocks are in persistent uptrends and most of the oversold stocks are in persistent downtrends. Stocks you might think would be ripe for rebounds from overbought and oversold levels are actually more likely to keep trending in the direction the RSI is indicating.

Don’t get hung up on using RSI as a contrarian indicator. What goes up can keep going up, and what goes down might bring you down with it.

FXI Trade Strategy

A few looks at the iShares China 25 Index Fund (FXI) seem timely since it’s near a pivotal price point offering a low risk / reward trade depending on your outlook.

iShares China 25 Index Fund (FXI) Monthly Chart - January 16, 2015

iShares China 25 Index Fund (FXI) Monthly Chart – January 16, 2015

Seen on the monthly chart, FXI’s trend, while erratic, has been decidedly up leading to November 2010’s 43.08 high. Thursday’s trading peaked pennies away at 43.02 before backing off  to close the week down 1.86% from that point at 42.22.

iShares China 25 Index Fund (FXI) Weekly Chart - January 16, 2015

iShares China 25 Index Fund (FXI) Weekly Chart – January 16, 2015

A closer look at the weekly chart left behind a bearish spinning top candle to end this week. Risk on a short position from this point with 43.08 overhead is just 2%. Support for a long position since October has been narrowing from the 200, 150 and 20 DMAs with risk from those areas measured at 9.4%, 6.8% and 1.6% respectively.

FXI can make relatively fast moves in either direction. Choose your trade strategy and manage risk accordingly.

Drowning In Complacency

If you’ve only known trading or investing in a bull market these past recent years and are of the long only crowd you’ve been fortunate to be living under aligned stars. Everything has been peaches and cream….er, except for that little incident in October involving a 10% correction. Still, you have to be thinking, “What, that? No problem! Bounced right back to new highs!”

Miss Market was generous then as she has been with every “buy the dip” V-bottom we’ve seen for some time now. Growing accustomed to that positively reinforced outcome can lead to a serious habit of overlooking the importance of risk control.

pooldunkRemember first learning to swim? Usually it’s an enjoyable experience full of carefree fun, but for most it’s only a matter of time before a mischievous friend sneaks up from behind and suddenly introduces the elements of volatility and panic with a good old-fashioned surprise head dunk. One moment everything’s fine, then the next survival instinct kicks in and oxygen becomes of paramount importance. You come up for air and suddenly your perspective of that swimming pool has changed drastically. Miss Market has of late been that mischievous friend delivering volatility while at the same time handing out “get out of jail free” cards to longs who may or may not be cognizant of the term “cyclical” when thinking of markets.

It’s not about the futility of predicting when the bull run ends, it’s about being prepared for it when it does. If you’ve had a sick feeling in the pit of your stomach any time these past months due to volatility in the market that’s your survival instinct letting you know risk management needs to be a primary consideration in your trading or investing plan. Know where your exit is before you enter a trade. Count your lucky stars that you’ve been saved thus far and prepare yourself for the dip that has no bottom in sight.

Third Time’s A Charm?

Q2 Holdings (QTWO) has found support twice on it’s upwardly mobile journey at S1 support levels in August and October of last year. The current S1 level at 17.45 and recent 17.57 low offers a compelling risk / reward range target. It’s a thin trader though – volume selling below 17.45 would be of concern.

QTWO’s IBD rating is currently 73 with EPS expected on January 28.

Q2 Holdings (QTWO) Daily Chart - January 15, 2015

Q2 Holdings (QTWO) Daily Chart – January 15, 2015

FTA 3.0

I recently migrated my blog to new digs with far more preferable hosting accommodations, however in the process of saving my old content only the text was saved, not the images, rendering uploading that content relatively useless since it was primarily image dependent. The result of that means I’m starting off this version only with my first post of 2015.

I love Twitter but when it comes to expressing myself or sharing content in a way that requires more than 140 characters it’s nice to have my blog available as an outlet for that purpose. Similarly to keeping a journal, composing thoughts and ideas here helps me focus and think more clearly about them which then hopefully translates to better decision-making.

Regardless of whether anyone reads my ramblings or not, it is beneficial to me. I study many mentors who generously offer the wisdom of their experience and advice so I hope in some way if anything I write about can be beneficial to someone else beside me then it’s that much more worth my time and effort to write about it here.

So here I go. Thanks for visiting!

Truth or Dare

It’s time to come clean on 2014.

I executed 248 trades during the year – 148 profitable (63%) and 92 for a loss (37%). Two of those were exceptional wins – InfoSonics (IFON) for +144%, which was my first double, and Arotech (ARTX) for +100%.

Before those though, the very first trade I made was RF Industries (RFIL) on January 2nd which I bought at 7.95. At the time RFIL was IBD’s top-rated under $10 stock, however my timing could not have been worse. Before the ink was even dry on my trade journal RFIL pre-announced an earnings miss that gutted my trade for what became a 15% loss. Not the way I wanted to start the year, but I put it behind me and soldiered on.

Early on in the year my account was up 13.3%. Despite the win/loss numbers skewed in my favor, by the end of the year my account was down about as much. Aggravating to say the least, but it did not take much effort to locate the source of the problem after reviewing my trade log and journal.

Out of 248 trades with 92 losses, only 5 of those losses accounted for largely affecting my overall results.

I have had a tendency to not let winners run and to allow some losses to run too far, but it’s an embarrassment to acknowledge that just five poorly managed trades dominated the outcome of 248 total trades, especially after doing well in so many other instances. Those five train wreck trades involved various combinations of just three cardinal sins of trading which I am well aware of but failed to honor anyway:

  • Failing to exit my position when I knew I was wrong
  • Changing my strategy in mid-trade
  • Adding to a losing position

It’s incredibly frustrating that I could exhibit measures of skill and discipline on 243 other trades yet recklessly dismiss those hard-earned traits on 5 others leading to disastrous outcomes. These were painful lessons I have already learned but evidently haven’t learned enough to avoid repeating them.

Despite 2014’s results, I can say I never really entertained the thought of throwing in the towel. I absolutely love trading and studying the markets far too much to even consider it. I pursue all of my interests with single-minded focus and passion until I achieve the success I’m looking for. I believe I have the necessary conviction to overcome the obstacles that are holding me back from being a consistently successful trader, so I’m choosing to pick myself up, dust myself off, and move on toward that goal.

Starting a new year is a great time for reflection and adjustment. Going into 2015 I’m trying to make better choices and smarter decisions. At the time of this writing I’m holding nine positions, all of which are presently green. I’ve exercised the discipline to exit two other positions for small losses. It feels as good to utilize discipline and take those losses as it does to be holding nine winners. That’s a total of eleven winning trades in my book.

Onward and upward. Good luck to you in your trading!

A Smooth Sea Never Made A Skilled Sailor

stormyseas

It’s nice to be able to sail to destinations on calm waters, but you can’t control the seas. When not on shore and rough waters appear the best a sailor can do is navigate safely through them. Experience, skill and execution of the process needed to achieve that goal successfully are vital. The markets are no different for traders.

Times like these reinforce how much I love studying the stock market. Win, lose or draw, I always find myself eagerly looking to garner as much information and knowledge out of every experience I have, both trading and investing, to see how I can apply my ever-growing education to the future. Regardless of wins or losses, I invariably finish each day reflecting on events that have transpired, journaling or writing notes, then preparing to face the next day. Every lesson learned adds a tool to my toolbox. Hopefully each instance leads me one step closer to becoming a consistently good trader and investor.

If there is one thought that is paramount in my mind at this time it’s the importance of having a process in place to deal with any situation the market presents, and the extraordinary swings of the market during the past three months have certainly punctuated that. Drawing on the benefit of hindsight, think of how many instances in the market where if told the outcome in advance you would have said, “No way is that going to happen”. If anyone said yesterday that 48 points would be heaped on top of Wednesday’s 40 in the S&P who would believe it? Yet if you happened to be positioned improperly for it without a process to get you out of danger then there’s little left to do but be steamrolled. Being firmly long or short at any given wrong time under volatile conditions can be a recipe for a quick disastrous outcome.

I know I can forecast all I want, but I can never predict. The only real control I have is in how I act and react, and a process sets the parameters in which those decisions are defined. Having a process that defines risk and takes emotion out of the equation when navigating a stormy market is perhaps the best lesson I’ve learned to date.