Tuesday, April 22, 2008

Price Gaps

When looking at a price chart of a stock market index like the Nasdaq, there are places where the price of one day is separated from the next day's prices by a space which is called a "gap." Most often prices will eventually "fill" the gap on the chart. There is a very strong tendency for gaps to be filled in most market conditions. After the gap gets filled, the prevailing larger trend usually continues. So, these gaps provide good price targets to look to initiate a new trade/purchase, if it confirms a short term extreme from a contrarian perspective.

Last week there were two gaps created on the chart. I expect that at least the most recent gap will be filled before a strong price move upward. That still leaves approximately a 1% further decline before the gap is filled. At that point, I think it would be likely that we hit a short-term extreme in pessimism and I will look for a new entry into QLD.

2340 is the Nasdaq level to watch for this recent gap. 2286 is the support from the prior gap, which may possibly get filled as well.

Thursday, April 17, 2008

Contrarian Investing

The models I follow and will be using on this blog are based off of what is referred to as a "contrarian" approach to investing. Behavioral finance research and the history of financial markets show that group think ebbs and flows between emotional extremes. The typical person is most extreme at the absolute worst times. The same is generally true for crowds as a whole.

Markets are also fractals, meaning any small time frame or price movement will follow a similar pattern to something seen on a greater scale. So there are little waves of emotion that flow within big waves of emotion.

This blog will take a fairly short term approach to identifying the extremes that occur every couple weeks and then put that in perspective of the larger emotional tides that take months or years to unfold and reverse. The investing approach is to buy short term pessimism in a market that is rising on a longer term time frame. The converse will come into play at times as well.

There is a plethora of useful data availabe both publicly and for purchase from market exchanges. This data can be analyzed statistically and back tested to show predictive value. Then they can also be used to identify extremes in near real time and take advantage of that for investment opportunities.

The site that I find to be most outstanding in this type of analysis is sentimentrader.com. There is a link to this site on the right side of the screen. It is a subscription based service for a very reasonable fee, and would really be for someone who is going to put the information to use.

Hope this is helpful.


Wednesday, April 16, 2008

Close out first trade

Today the model is in "overbought" region and should be taken as a signal to close out the last trade recommended.

Today's closing price is 76.09 which I will use to calculate the return %.

Trades Closed
QLD Entry 4/9/08 73.97 Exit 4/16/08 76.09 % Return = 2.87

So this ended up being a nice example for the first trade on this blog. It was not exceptionally good or bad but it was positive which is nice. For someone who is actually trading this, you would exit tomorrow morning. If you can consistently make trades like this every couple weeks your return would far outpace the market and keep you out during most of the bad times.

At this point I will wait for the next short-term LOW extreme to trigger in the model. There is much evidence that the next few months should be generally positive, so I don't want to buy QID on this HIGH extreme to try and make money on the market declining from here.

Next post may be a random though later in the week.


Wednesday, April 9, 2008

First Trade 4/9/2008

The trade is to BUY QLD. The entry price (today's closing price) is 73.97.

The next update will be on the exit of this trade.


First Day Blogging

Hey everyone (or no one right now actually), I have just started a blog which will pertain to investing/trading the stock market. My goal for the blog will really be to create some dialogue within the family about investing and various strategies for your individual goals. We have an intelligent and quantitatively minded family, and I think we may all be able to learn from each other.

To try to keep this blog applicable to basically everyone in the family, I want to focus the ideas around a " lazy" or maybe "not so lazy" portfolio that can be used in an individual brokerage account to significantly outperform the markets over time (could be used in an IRA also). Also, while some of you reading this may not know this, there are relatively simple ways to profit during times when the markets are going down as well as when they rise.

I have a certain basic model that I will use to indentify trading opportunities. When the model "triggers" I will post the date, fund to buy, and price on the blog. Then I will post the same info and profit/loss on the the blog when exiting the trade. I will keep these archived/posted so that you can follow them over time. I would estimate the average holding time per trade of between 1 and 3 weeks. So over the course of a few months, you may begin to get a realistic idea of performance and volatility and see if it is something that you would be interested in using.

The funds I will be using will be mainly QLD and QID. These are exchange traded funds that double the performance of the Nasdaq 100 fund, QQQQ, to the upside and downside respectively. So, if the Nasdaq 100 rises 5%, the QLD will rise 10% and the QID will decline 10%. The converse would be true if the Nasdaq 100 declined by 5%. This allows you to buy the QLD when you expect the market to rise and to buy the QID when you expect the market to fall. So your returns will be double that of the Nasdaq 100, which is a good thing if your model is succesfull and horrible if your model is not successfull.

One main draw of this style is that say the Nasdaq 100 rises 10% after you buy QLD and then you sell. You have made 20%. Then the Nasdaq 100 falls 5% after you buy QID, then you sell. You made 10%. So you made 30% total while the Nasdaq 100 gained a total of 5%.

Please write comments, so that I don't get bored and stop blogging:)