Trading Journal October 7, 2011 Mike Doran – Managing Director

Third Quarter earnings will begin to parade out beginning next week. In the last few days, the market has attempted to stage an oversold bounce on light volume. Now four days into the rally, the Stock market has not made any serious follow through attempt which would increase the probability of long exposure with the fund.

As long as the general market is trading below key moving averages on the longer weekly timeframe, the bearish case takes precedence.  For now, we are stalking and awaiting precise signals that follow our trading plan. There are a number of stocks meeting multiple time-frame trend conditions on the short side that could be approaching higher reward-to-risk entry points. The same holds true on the long side for a very select few names. The path of least resistance we believe, in the short term is lower.

In establishing short positions, one thing I have learned is that the analysis setting reward-to-risk targets for potential winning positions needs to be strict in terms of meeting the correct parameters of our system. As a general rule we need to be choosier for short trade candidates than a corresponding long. When it comes to trading on the short side, our timing needs to be more accurate and one will not get away with sloppy trading execution as much as we would in a bull market. My mantra is to be as disciplined as possible with following our plan and signals. Results will take care of themselves if a sound disciplined investment and trading process is followed.

When a market is much oversold, as it is now, it would not take much to get some follow through and for the rally to continue. Below is a daily chart of AMZN (top of chart) with the Market or NASDAQ Index (bottom of chart). Our job on the long side is to ferret out true potential leadership that is acting better than the market. Big institutions are usually supporting and increasing positions when stocks hold up better. Amazon (AMZN) so far is exhibiting this strength with a much higher high and higher low. We want to find long stocks where we can begin to establish positions when a sweet spot like this begins to present itself.  As a general rule a “sweet spot” is always preceded by a rally stronger than the market and a pullback that is not as deep or severe during a correction.  You can see the market in early October actually undercut the prior low of late August. One caveat is very short term: AMZN is rallying off its higher low around early October a bit weaker than the market and this must be watched. Today the action and spread in the stock is much better.

 

Trading Journal 10-7-2011

 

Each investor must evaluate any stock carefully for their own tastes and investment decisions. We are only showing a front-end process to how we begin to find possible candidates, should a sustainable rally continue.

Have a good weekend!

Michael Doran

President, Managing Director
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