Up by the stairs. Sun Jun 6

A quick Sunday post. Disappointing US job numbers have knocked the US indices down over 3% and I'm regretting that I was keener on scenario B than scenario A. To recap, I was working with two main possibilities both of which hypothesised that we were having a retracement rally. Scenario B had the rally grinding up close to 4650 while the target for scenario A was pretty much spot on with a forecast of 4450-4500.

The 60 minute chart above shows how it unfolded in quite a textbook manner as an a-b-c correction with the c wave subdividing into 5. It sounds arcane but it's a pretty standard elliott wave interpretation of a common enough event. What I'm kicking myself about is that I was holding a few longs still in the event that this might unfold into a bigger rally. It certainly could have but the risk/reward had shrunk to the point where I was taking the wrong side of the bet.

I had seen something similar in Fmg, for example, but not taken the signal and also seen a slighly different retracement pattern in stocks like Ipl and Sgp which I did take but only in a modest way because I hadn't really accepted the implication of the patterns cropping up. I know why too - I'd been pretty much maximum long for the last couple of weeks and had got into the habit of being bullish so that I was looking at the market with rose coloured glasses.

It's quite easy to lose mental flexibility and I usually try to have a couple of positions on board at any one time which are opposite to the general thrust of my book. Not so much because I expect to make a lot out of them but because they help to keep me balanced.

The next question is whether the market will go straight to new lows or make a higher low. I think it's most likely to make a higher low and then trace out a retracement quite like the very recent one, but perhaps with a smaller range. The reason I think this is because the highs of this rally clearly overlapped the swing low on May 7 so that the close on June 3 was higher than that May 7 close. This ability to trade through previous lows, even if only temporarily, implies that the fast, exploratory part of the fall is over for the time being.

So, we get a higher low and another, more tepid rally. If that happens, then we can get another downtrend to new lows. The chart, below, is a daily of the Xjo back in late 2008, early 2009 and there was something similar to what I'm imagining. A rally through late November to early January which slightly overlaps the October 08 swing low. This rally retraces through to late January then has a second, very weak attempt which has failed by mid February, clearing the way for a drive down to new lows. It's not a perfect match, it unfolds much slower than the recent move, but the salient points could turn out to be similar.

I'm getting a road map which might turn out to be useful but it doesn't answer my most pressing problem which is when to cut my longs and whether the market will have gapped too much for me to put on any short positions. Usually in these situations, the open is the worst time to sell or put on shorts but it's definitely a stock by stock proposition. Smaller stocks can be forgotten or defy gravity for an hour or two and provide opportunities to get out or get short.
I'll have to wait and see. More tomorrow.

Rangy. Fri Jun 4

One week to go till the football world cup in SA and about 12 hours to go until the US jobs number. The big picture website has an article explaining how there is no clear consensus for this month's numbers, in fact there's a huge range from the highest to the lowest of the estimates.
This has engendered some caution today after a nice bounce yesterday and I guess I share that caution. I'm happy to have a pretty small book at the moment. It's still long but I have added another short today in Ipl.

It's similar to Sgp (which is close to stopping me out) in that there's a retracement which might have traced out 5 waves and a couple of recent swing highs which provide low risk stop levels. If it's the first part of a larger retracement - ie, an "a" wave of an abc move - then it will probably fall most of the way towards the recent low of 275.

12.13 The market is down 50 points or 1.1% now and it's starting to look overdone in the context of Asian markets where the Topix and Kospi are flat and the Hang Seng is down about 0.6%. With the potential for a big surprise tonight in either direction the probability is that we'll recover a little from here.

2.22 We haven't had much of a bounce and it's faded away so that the market is down 47 points again. I'm hoping for some strength from here on in because I only sold half of my Ipl at 314 and it has drifted down to 308. I'd like to get the rest of the short position in place at 312 or better.

4.17 Well, a rally of sorts came along to leave the index down 37 points while the Spi continues to bounce now that the physical is closed. I was able to sell a smidgin more Ipl at 310 on the match out.

Disaster fatigue. Thu Jun 3

It looks like the market is tired of bad news and last night saw a nice bounce in the US indices. Nice because my positions are predominantly long and my one short position in Sgp hasn't gone anywhere so far. It's 11.23 am and the Xjo index is up 2% and is on the day's highs.

My featured trade is a long position in Murchison Metals, an iron ore stock. After the big sell off this has been in a fairly tight range for the previous 8 trading days and with a stop around 180, I'm looking for a move towards 240. I had a few on board anyway but went long some more today at 201.

In the short term, I've been working with the scenario that the last few days of pull back hadn't overlapped the congestion on May 26 and 27 so that there was a strong chance of a 5th wave move to a new high. We're almost there now so I need to be careful and take some positions off, if necessary, because there may not be much left in this rally.
To be clearer, I'm still working with two main possibilities: the one where the rally reaches about 4450 to 4500 and a more bullish case where it swings up towards 4650. Under both scenarios, I felt that there was more upside but now it's trickier because this is where the potential outcomes diverge.
When I look at individual stocks, I can see room for more gains so I'm leaning towards the bullish case.

11.49 It's still a fast moving market so that my stops and targets are generally diverging away from where I actually get out of and into trades. I'm persisting with setting these levels though because when things settle down it becomes easier and wiser to stick to them. At the moment, time spent on any swing is more important than usual; it's always a key factor but in a fast market even more so.

3.28 The market is up over a hundred points with pretty much everything higher. I've just had a look at the top 100, only 4 stocks down (small amounts), 2 unchanged and the rest up. It bodes well for another up day.

The Black Knight. Wed Jun 2

The overnight report on FNArena has a nice summary of the problems affecting markets at the moment with the Israeli attack and the increasing problems with the Gulf of Mexico oil spill being just the latest. Like Monty Python's Black Knight, the Australian market is ignoring these flesh wounds and charging into the black after early losses.

My featured trade is a long position in PanAust which is a copper and gold producer with interests in Laos and Thailand. A few brokers have recently affirmed buys on the stock and though there's development risk and sovereign risk, it seems to be built into the stock price. Anyway, I'm not a long term holder here, just buying at 48.5 as it breaks out of a small congestion with a stop at 46. Here's the daily.

1.30 pm Macquarie has been one of the beneficiaries of the turnaround after just about holding support. I'm less enthusiastic now, regretting a lazy entry and just hoping for something close to square as a good result on this. Here's the daily.

I bought my first set of options on the little spike up which was not the greatest risk reward. The second set was ok as I was using the higher support level just above 4200. However, it has already been chopping around now for a couple of swings so it doesn't bode especially well for a strong rally.

2.34 It's another topsy turvy day with the market back on the early lows at 4380, down 33 points after reaching a high of up 15 points. I'm stopped out of Awe at 200 and have cut Pna for square because I'm not so keen on chasing breakouts but I thought there was a chance it could surge today on a new high. I'm also a little chastened from having chased Mqg to my cost and trying to stick to my strategy of putting on low risk trades.

2.42 Having already cut my featured trade, here's another one. It's a short in Stockland at 387. This has rallied up in 5 (maybe not complete though) and there's a potential stop level at the 396 level where there was a retracement high.

I'm happier with this trade because I'm following my methodology here.

Peaks and valleys. Tue Jun 1

A few times a year we have these occasions when the markets are on hold as the US or most of the European markets are closed. Quite often the market will form a slow valley or slow peak over the two days which doesn't have an awful lot to do with what's going on outside the quiet period. For example, on a negligible lead the market might run up 1% and then retrace 1% the following day.
In this particular case, we've had more than a negligible lead because the US market fell around 1% on Friday but it was on low volume and possibly triggered by nervousness over the downgrading of Spanish bonds and furthermore, the Eurozone markets were unconcerned last night. Normally, it would be slightly surprising that we fell almost 1% by 11 am but it does reflect the nature of these days. I've done some buying here and there and the market has recovered a few points but I am a little concerned about buying too much because it's not out of the question that the retracement could be over.

2.02 The day was starting to pan out according to the template as it recovered from a low just before midday but another shake out has left us still down by 35 points or 0.8%. Despite my positive spin on Macquarie the market is less confident and they are down by 1.7% with the calls down to 69 cents. The other banks are weak too as the market waits for the RBA interest rate decision for May. Rates are widely expected to be kept on hold although it will be interesting to see if there's any hint that they could drop back in the months ahead now that Europe's woes have worsened and the Australian consumer seems to have hit a brick wall.

4.10 The RBA left rates unchanged and I saw no hints of a softening bias creeping in. Despite that, the market recovered somewhat into the end of the day. The Xjo closed down 16 points.