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1.28.2017 - Financial Intelligence Report Bookmark

Trading Questions
I’m going to take a slightly different route today, because lately I’ve been getting some really good questions about “trading” the market, and I figure it makes a lot of sense to try and answer them to a larger audience. So, for today let’s talk trading.
One question I just got was in response to a post I had made where I said that “for the average investor, it is usually not wise to trade during the first hour of the day, commonly known as amateur hour.”  The question was basically “why don’t you trade during the first hour of the open market?”  So let’s dissect that and see why.

First of all, we have to realize whom I’m speaking to. For the most part my subscribers are not daytraders.  90% of them have a life. They have jobs, kids, school, careers. They can’t sit in front of a computer screen all day watching the level 2 screens for depth of market. They can’t move quickly as in placing a trade at 9:45 and exiting at 9:47.  For the more casual investor, he simply can’t move fast enough to deal with the first hour. Why is the first hour so weird?
To be fair, I do at times trade in the first hour. But NEVER and I mean really never in the first  15 minutes of trading. More times than not, if I’m going to be doing something in the first few minutes of an opening market, I’ll be selling positions into say a “gap up” open.  So again, why the aversion to the first hour? Well frankly it’s like this....
Contrary to what you might think, the market is NOT there to make you money. It exists to take your money. Always and forever, remember that. So what happens more than not is this; a ton of what Cramer calls “home gamers” see some form of news in the premarket. They think to themselves “wow, that’s Great XYZ is going to fly today!”  So the pull up their E-trade or Ameritrade account and place a premarket order. 

This is not inconsequential folks. Sometimes there’s thousands and thousands of orders for stock placed in the middle of the night. Sometimes people are watching late night TV and see a commercial for a product and they run over and place an order for the company that makes it. All in all, overnight and premarket orders are substantial.
In the past it was market makers that would see all that volume, and boy that would get their juices flowing. ( now 99% of the thinking/adjusting is done by algorithms )  So what they would do is look at all those pre-orders for say XYZ, and move the price of XYZ higher. Say XYZ closed the day before at 50.00. But now they have orders for several thousand shares of it and worse much WORSE the bulk of them are MARKET ORDERS.  That means the person that sent the order has not limited how much he’d like to pay for it. He’s just telling them “Get me 1000 XYZ”   Now the market maker is drooling. So what do you think he’s going to do to the price of XYZ? He’s going to hike it. Maybe by a LOT.

So, the bell rings and the market is now open. XYZ which closed the day before at 50.00 opens at 52.20. Then they start filling those overnight orders. One by one as the orders come off the computer, each filled order might move the stock up a few cents. So, by the end of the first 10 minutes of trading ( or even just 3, or 5 minutes) , XYZ which closed at 50.00 yesterday, is now 52.90 by 9:40 today.
But there’s a catch. They’ve now filled all the current backlog of orders at the highest price they can basically get away with. Now the order book flow is down to just average volume of orders. Well if XYZ was 50.00 yesterday, it is a tell that with average volume the stock is really worth 50.00 bucks or maybe a “bit” more if there was some supporting company specific news. Guess what happens to that stock now? It starts drifting sideways and down. The very stock that you pre ordered with a Market order and got filled, is now down 1.50 for you. Well guess what? That gap up open and initial order-filling run, is very often the HIGH OF THE DAY. Hell, it might never get there again.
Naturally if you’ve got good trading platforms and you’re sitting there watching the action, you can get involved in all that hot mess if you want. I rarely do. I’ll let that first 15 minutes do its thing. I have great tools and I’ve been doing this for a long long time and I still don’t want to get involved then.
So if you’re a casual trader/investor, what’s the best bet then for making an entry? Don’t forget the entry into a stock is the most dangerous time of all. Nothing stinks more than buying 500 ABCD at 25.50 only to see it at 25.10 half a minute later. So what we tell our more casual traders is this... Let the first 45 minutes of the market go by. If you’re a bit more aggressive, then let the first 30 go by. Then make note of the absolute high the stock made in that first 45 minutes of trading. THAT price, what ever it is, should be your new “entry” level.
Let’s suppose we’re looking at the DEF imaginary company. It gapped up from yesterday’s close, and by 9:48 it had hit 77.45. But it faded back as time went on and by 10:30 it was down to 77.20. My personal entry into this stock would be at any time during the day that it EXCEEDS that 77.45 high of the day. If a stock exceeds its first hour high of the day, at any point  during the session, that is about the best indicator your going to get that the price rise is real, and it could very well go higher for you.
Okay so you’re thinking, why not buy that morning pull back? If it hit 77.45 as a high and pulled down to 77.20 why not load up at 77.20? Because the stock has just proven to you that with all the available market volume that was at their disposal, it topped out at 77.45. That number is now a resistance level. How do you know it will receive the buying volume to once again get past that level? You don’t. That morning high could be the days high, the weeks high...or 2 years of high. It is better for the stock to prove itself by actually exceeding that morning high, rather than “hoping” that when you bought the dip, it was going to return higher.
Is this strategy fool proof? Nope, in market land, nothing is. What you try and do is whittle down the risks. In 25 years of trading markets, this is the best way of entry that I’ve been able to find for the more casual trader.
Next up, “scale and trail”.  I was asked why I like to sell half my position once I’m up a bit, instead of letting it ride.  Okay here’s the  answer.  If you have a truly “trending” market, you want to buy a lot of a good stock and let that puppy ride. But what if the trend is sideways? What if the market’s just put in a month of sideways chop like it did from December till Wednesday of this week? Well in a market like that, one of the best ways I’ve found to play is this....

You know the market’s been choppy. Up a day, down for two, up one, sideways, then up two, etc. So, what I’ll do is...find a good looking chart with a clear resistance level. When the stock exceeds that level, I make my buy in.  Say I got lucky and I’m in at 27.00 and by 2 pm it’s 28.10.  What I’ll often do is sell some. Why? Because in a choppy market, that one dollar gain you have could vanish completely the next morning. Now I like just going for half’s but it could be just some.  Say you bought 500 shares. If you’re up a dollar ten a share in 4 hours, why not sell half, and leave the rest in play in case it goes for even more? Right, and that’s what I do often.
Scale and trail comes in when you just take a “little off the top” and follow the stock higher with your stop loss. Say you have 500 XYZ at 27.00. When it hits 28, you sell 100 and move your “stop” to say 27.45. Then it hits 28.50 and you sell another 100 or 200 and move your stop to 28.00. Then it hits 29.00 and you sell another hundred. As long as it keeps chugging higher, you scale back your position, knowing it will reverse ( nothing goes up for ever) but taking profits along the way.
There’s a side benefit to doing this. Again, let’s say you bought in at 27.00 and you bought 500 shares. Now you sell 250 at 28.10. The 250 you’ve left in play might double cross you right? It might fall instead of continuing to rise, right? Right. Well by locking in that first half, if it falls to your original entry, you can step off and still have a 250 dollar plus profit. But... what if you really really want to hold it because you think it’s just a one or two day pull back? The 250 you hold could sink all the way down to 25.90 and you would still not be losing a penny. In other words, by selling half on a decent quick gain, it allows you to expand your “stop limit” by the amount you made on selling the first half.
I hope you explore these two strategies and incorporate them into your own trading style. Trading is a tough way to make a living and don’t’ let anyone tell you different. But the more tools you have under your belt, the better you’ll become. Good luck.
The Market....
You all know that the DOW made it over 20K. It has also held above that level for 3 days. However like so many things about 2016 - 2017, it comes with anomalies that do indeed raise your eyebrows.  For instance, take a peek at this:
According to the latest Bank of America fund flow analysis based on EPFR data, in the latest week, US equities saw $6.3 billion in outflows, the largest weekly redemption from US mutual funds and ETFs in four months, since before the presidential election.
So at the very time that the DOW was in lift off mode to all time new highs, 6.3 billion dollars was pulled OUT of the markets. Interesting, no? Yep.  But wait, there’s more. After a full month of trading sideways, when we finally did break out above 20K, surely everyone and his brother participated right? Uhm, well, not so fast.  On the very day we got up and over 20K, trading volume on the SPY was 84 million shares.  That was Wednesday. On Thursday; surely they piled in, right?  59 million. How’s about Friday? 59 million. In other words, there’s been no volume confirmation of this move.
So we’ve got 6 billion leaving markets and being deployed in bonds, and we have a clean break to all time historic highs on relatively punk volume. These are NOT the sorts of action that make you feel warm and fuzzy.  But then again, I’m using analysis based on some fundamental premises. Unfortunately fundamentals went away ten years ago. Today we have central banks that can print money and buy stocks on a whim. Who cares if pension funds, insurance companies and the like are pulling out...when one trader at the Swiss National bank can buy the DOW stocks and keep things “up”.
And so it goes. We continue to nibble on good chart set ups, and we take our profits on half the position and try and let the other half ride.  For an example of how that works, at 10:40 am Friday, ( our second update to our paying members for the day) I said I could see taking ADI on a move over 75.35.  At about quarter after 11, it did just that and I took on 400 shares at 75.39.
On our last update of the day which we sent at 2:20 pm, I said this:  “I'm almost willing to sell half of it already. Why? In at 75.39 it's at 76.64 as I type this. Taking over a buck on 200 shares and leaving 200 still in play isn't a bad way to end a week.”   At 2:58 pm I sold those 200 for 76.86.  That was $1.47 per share on 200 shares = 294 bucks. But the best part is...I still have 200 in play if it wants to continue higher on Monday.
We will continue to hunt and peck, leaning long but not over extending until we see what this market is going to do. My hunch has always been that we’d get over 20K, make one last hurrah run higher, pull in more sideline sitters....and then roll over into a 10% correction. I still think that. So for now, we take what it gives us. 

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