Friday, May 23, 2008

Intraday Psychology

Cliches like "Sell in May & Go Away" and "Trend Setting Tuesday" are proving their worth this week. We wrote extensively about the Transport Index's double top at 5514 and it did in fact fail, dropping nearly 7% from that 5514 level this week. POTC did mention it was better to miss a few percent than to dive in at a double top; looking back at our forward looking advice, the psychology was correct.

The S&P 500, after touching 1,440 on Monday and being up 16 points at one time, did an intraday reversal and closed up only 1 point. Art Cashen, a highly respected NYSE floor trader mentioned that fact and pointed to anemic volume, something that we reported to our readers. Then the cliche "Trend Setting Tuesday" took the Bulls to summer school and taught them a hard lesson in market mechanics.

It is not in POTC's best interest for the market to go down, although we do accept and embrace volatility since our 8th Commandment reads "there are two sides to the market, take advantage of that leverage." Please remember Google (GOOG) a month back, it made a $90-plus move up in one day after the earnings report. Quick Psychology: It is a "market of stocks", NOT merely a "stock market", and those who learn the inexact science of market mechanics take advantage of days like these and begin to build long positions and buy less expensive calls as premiums vanish. Perhaps many Americans will choose to stay home and not hit the highways this Memorial weekend? Perhaps GOOG will see much better comparables over last year's Memorial Day clicks through? We sure think so!

The Psychology of the Call team is always looking-forward with our reader’s best interests in mind. Pertinent to that sentiment are the 11 commandments of trading, which we recommend that you follow regardless of whether it’s an up, down, or sideways market. We wish everyone in the U.S. a safe and proud Memorial Day weekend, and extend our good wishes and gratitude to our faithful readers in more than 70 countries around the Globe.

The Eleven Commandments of Trading

1. Never trade more than 10% of your total capital/account value in any one position.
2. Cash is King, and we recommend keeping 20% liquid to take advantage of dislocations and volatility.
3. Cut losses to 15% maximum whenever possible. If your psyche is shaken, step away and don't trade for 1 week.
4. Take and enjoy profits of 30% or more.
5. Never fall in love with a stock and never force trades or over trade; remember commandment #2.
6. Never accept excuses from management, period.
7. Use technical and fundamental data & psychology/sentiment from the conference call to select trades.
8. There are two sides to the market, long & short; take advantage of that leverage.
9. Understand the significance of the macro geo-political economic environment.
10. Unforeseen events/shocks will happen, inverting the market upside down (remember commandments #1 & #2)
11. All of the above are void without reading the Psychology of the Call.


Anonymous said...

Nice work on the transports double top. I thought you had blown it but it looks like what you said is right, good job. What do you think for next week after the holiday?

Anonymous said...

We're working on next week's 'Psychology' and will have it posted Saturday night. We are obviously VERY cautious unless the Congress and Senate come up with an emergency energy policy, like drilling in Alaska, possibly?
Also we would turn bullish IF the Fed moved interest rates up and strengthened the greenback, causing crude to fall off the rails. Alternatives are the future, but NOT the savior short term, as costs are still too high for consumers struggling from real estate and inflation. Hope to have you back Saturday night ...