A couple of mornings ago, I was speaking with a colleague who started trading a few months ago. After a little ‘getting used to it’ period, he actually had a relatively sustainable period of success. To his absolute credit, he didn’t go nutso with his trading in not letting anything get to his head. However, as is inevitable with all traders, he suffered a bad day a few weeks ago. This created an issue. Many people would simply double or quadruple their trade size in an effort to get everything back. He did not. Other people would fail to adapt to changing circumstances in trying to stubbornly trade the same exact way with the same size. He did not. However, he has fallen into what I call the “prevent defense” trap (which his actually the easiest of the three to break). In football, for those who know the sport (much less those who don’t), everyone knows of the term ‘touchdown’ and the myriad of ways to get one. What people don’t discuss is how to stop a team from scoring a touchdown. The good defenses are aggressive no matter what. However, particularly when teams are ahead late in games, they go into ‘prevent defense’ mode, i.e. the thought that by not giving up a big pass, it lessens the likelihood of allowing the other team to score. While there are selected instances whereby a team uses up a lot of time to score, many times, the same result happens- a team scores anyway in the same amount of time simply because a series of short gains are made. Thus, my moniker for it at least 1 of every 3 times is ‘prevent the win’ defense because in an effort to be conservative, many times a team can lose the game because of it. I give the very long analogy to demonstrate as clear a relevant tenet to trading as I can because the same principle applies. While it is not good to be overly aggressive if things are not working out, it is also not good to play scared for an extended period of time because of a fear things will keep not working out. If your trading relies on split-second timing and you hesitate, you’ll miss out on trades. If you are doing trading which requires you to stay in perpetual motion, you can’t just totally stop or pull back dramatically. What I do after a hit is to simply cut down on my trade size until I get a rhythm going. Once I do a few successful trades, the greed component kicks in over the fear as the confidence creeps back. But I don’t just stop pushing buttons nor totally refrain from what is I am trying to accomplish. So, if you take a sudden shock hit, realize after taking a little time to suck it in that many more trades lie ahead and the focus should be on the future. Trading is an odds game…sometimes things won’t go right. But from a purely scientific approach, if what you are doing works most of the time, you’ll be fine as long as you do, well, what it is you’re supposed to do. Thus, fully understand that- and let that thought pervade your psychology rather than excess nervousness of taking another massive loss otherwise what will happen is that you’ll find yourself taking a series of small losses rather than the one big one- you’ll wind up in the same place only over a longer spate of time.
Markets overnight in Asia were thoroughly disparate in performance with Tokyo flat but Hong Kong was down 2%. Markets in Europe were lower as well with London down 0.3% and Frankfurt off 0.7% amid rumors that Spain’s debt will soon be downgraded. Commodities are down across the board with oil and gold trading off by about 1% each. The dollar is marginally stronger against the euro and yen but well off of its highs. Bonds are ahead, but have given some of their strength back as well. CPI came out generally in-line with the Empire Manufacturing Survey better than expected (10.6 vs 3). Industrial production (0.3%) and Capacity utilization (75.0%) are out at 9:15AM. NAHB Housing Market Index (17) is out at 10AM with Crude Inventories due out at 10:30AM. After all of this, futures are very slightly lower. Stocks seem to be trapped in a range; there is a ceiling as evidenced by the two afternoon sell-offs recently plus the lack of major news but certainly a floor underneath as the government conducts its operations and money managers try to pad their performance. For the day, it’s likely that stocks will remain rangebound with no major move either way. The focus will likely be on earnings plays (such as JOYG), the solars on the heels of FSLR’s numbers last night, the media mention plays such as POT, and relative weakness/strength plays which can really move on the whiff of any market movement.
Reiterating-
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.
If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-
Good- The following stocks have good news and/or a strong technical pattern
SAM- raised earnings guidance
FSLR- raised earnings guidance
BSDM- closed near a high after launching its MicroThermX microwave ablation system
SRDX- named new CEO and exploring options for pharmaceutical unit
MNKD- closed near a high
VMC- closed near a high
IBM- closed near a high
LULU, DECK- featured on “Mad Money” last night
POT- featured on Fast Money” last night
MCBC- closed near a high
CYPB- closed near a high after receiving (and rejecting) a $6/share bid from Ramius; accepted $6.50/share takeover bid this morning from Ramius
JOYG- good earnings
ACL- reminder of company’s stock to be acquired by NVS for $168/share
EPCT, NVS- announced start by NCI of phase II trial with Crolibulin in anaplastic thyroid cancer
Bad-The following stocks have bad news and/or a weak technical pattern
CBST- lowered revenue outlook on weak Cubicin demand
APKT- closed near a low
CTRP- closed near a low
MA- closed near a low
IVX- announced stock offering
LXP- stock offering
VECO- closed near a low after a brokerage downgrade
GS- closed near a low
LFT- closed near a low
OVTI- closed near a low
MIPS- closed near a low
SAFM- closed near a low after posting earnings
TGA- closed near a low on weak drilling results
HCP- 40 million share offering at 32
Earnings:
WED DEC 15 BEFORE
JOYG
WED DEC 15 AFTER
ABM AIR
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
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