Wall Street Craps – 2012 Global Ebook Finance Award-Winner

MARKET OBSERVATIONS FOR SEPTEMBER 25, 2012: The stock market is going through a very shallow correction in terms of price. I would expect the market to begin a short rally any day now as part of institutional window dressing. That rally should take the Dow to a new closing high. But the early part of October could bring the long-awaited swing to the downside in order to counter-balance the excessive euphoria and complacency in the market. That move down could end up being steep and swift as well. So be prepared!

Key market indicators show the following:

• McClellan Summation Index – is on the verge of turning down. This is warning us to beware of the market failing at the upcoming retest of last week’s highs and then falling sharply afterwards.
• Investor Sentiment – is mid-ranged in the short-term and in the sell area long-term.
• NYSE Breadth Oscillator – Ultimate Indicator reading of 27 which is a short-term buy signal.
• Nasdaq Breadth Oscillator – Ultimate Indicator reading of 32 and needs to close below 30 to signal a buy to confirm the NYSE signal above.
• Risk On/Risk Off Indicator -Ultimate Indicator reading of 53 and needs to close below 30 to signal a buy.
• Fear & Greed Index of Investor Sentiment – is now in the “Extreme Greed” area warning of market danger

For now, the best advice is to remain on the sidelines getting ready for a retest of last week’s highs. For nimble traders, a short-term buy signal could come around Wednesday with further weakness in the market. That buy signal would be for a very short ride up to new highs. Be ready to sell out quickly if the new high does not have strength in other areas to confirm.

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In regards to Apple (AAPL), the stock may be finally making a case for weakness. A Wall Street Craps trading tool called “The Apple/Google Trading Indicator” has just flashed a sell signal on Apple. This indicator shows the relative strength of Apple vs. Google/Android in terms of leadership. I use it as an early sign of strength or weakness in the world’s most popular company, Apple. And today, it says “sell.”

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MARKET OBSERVATIONS FOR SEPTEMBER 20, 2012: The stock market has blown above its trading range with a successful test of the old highs. And while this move seems to have been triggered by obvious good fundamental news, a wise investor would be smart to go with the trend which is up. There’s nothing worse then being too clever in your analysis so that you end up fighting against a strong bullish trend with risky short-selling strategies. Remember that a market doesn’t change direction until it reaches a clear point of exhaustion which is not necessarily the most extreme price.

The McClellan Summation Index is consolidating its gains as shown by the cluster of dots on the chart. It may be regrouping for another charge to the upside.

Other key market indicators show the following:

• Investor Sentiment – is neutral in the short-term and overbought in the long-term
• NYSE Breadth Oscillator – has a reading to 51 and may come down enough for a re-entry point in this rally.
• Nasdaq Breadth Oscillator has a reading of 49 and may signal a new entry point with a short-term decline
• Risk On/Risk Off Indicator – actually flashed an overbought sell signal on Friday.
• Dow Theory/Dow Transportation Average – this index has not confirmed the strength in the other major averages. This is a concern for me as it signals that a top is being formed here. A new DJIA high in the short-term does not look like it will be confirmed by the Dow Jones Transportation Average. That would be a classic sell signal according to Dow Theory principles.

For now, the best advice is to remain on the sidelines getting ready for a chance to reenter the market on short-term weakness. That signal will be triggered by oversold breadth signals from the NYMO and confirmed by the NAMO. That could come in the next week so be ready. But if the weakness in the Transportation Average persists, I’d sell out and move to cash on the next DJIA high in all trading and speculative funds.

Quick Update: The Transportation Index fell sharply while the DJIA made a new high on Thursday’s close. This is a classic non-confirmation according to the Dow Theory. Expect market weakness at any time now.

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MARKET OBSERVATIONS FOR AUGUST 22, 2012: The stock market went to new rally highs today before settling back. This intraday high will probably be tested within 5 trading days. If this new high is not confirmed by a majority of indicators, I will go on the assumption that the rally has seen its peak. Investors and traders can expect either a short-shallow correction that sets up a top or a deeper correction that sets up another leg up. Either scenario is possible. The key is not to fall in love with any particular scenario & read the correction accurately for clues.

Key market indicators show the following:

• McClellan Summation Index – appears to be reforming in order to support another leg of this rally. This could mean that the current correction serves to eliminate the excess bullishness and refuel the market for more higher highs.
• Investor Sentiment – is in the mid-range area with no clear signal (more room on the upside)
• NYSE Breadth Oscillator – Ultimate Indicator reading of 47 and may flash a possible buy signal on a short-term correction.
• Nasdaq Breadth Oscillator – Ultimate Indicator reading of 56 and may flash a buy signal on a short-term correction
• Risk On/Risk Off Indicator – has a reading of 68 and has recently flashed a short-term sell warning
• Volatility Indicator – had a recent reading over 100 which is a clear sell warning

For now, the best advice is to remain on the sidelines getting ready for a near term correction in the stock market. If we get a buy signal from the NYMO and NAMO, then it might be prudent to put a small wager on some quick upside action (Example: QQQ). But large long positions should look to lighten up as the market retests the highs within the next 7-10 trading days.

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In regards to Apple (AAPL), the stock has had a big run-up on anticipation of the new iPhone release and other fundamental reasons. It is reaching overextended levels and smart investors should consider taking some chips off the table at this very opportune time. Note: The “Money Flow Indicator” and “Ultimate Indicator” are both flashing very clear “sell signals” right now.

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KNOW THY SELF & ADJUST YOUR PLAY ACCORDINGLY: People have deeply ingrained core values that are centered on the issue of money. Your ability to win consistently at Wall Street Craps is largely controlled by these underlying core values. So “Know Thyself” and play accordingly.

The famous Greek maxim “Gnothi se auton” (“Know Thyself”) is inscribed at the Temple of Apollo at Delphi. For centuries, people seeking advice from the oracle at Delphi would read the inscription and throughout the years philosophers offered this same advice to their students — and I’m doing the same thing here. If you’re a person who has deep issues with self-esteem, impatience, fear, indecision, doubt, insecurity, or worry, then trading the stock market will probably not be a good fit for you. That’s because your natural habits or patterns of thinking will likely resurface under the stress of trading funds in your account.

A good lesson that one can learn about their own nature is summed up in the following line: “The way you do anything is the way you do everything.” So if you’re lazy and undisciplined in one area of your life, it’s highly likely that you will be lazy and undisciplined in your stock market trading. And in the latter case, your chances of succeeding in a challenging game like the stock market are very slim.

Once you understand more about your own natural behavior, it is perfectly okay to either: (1) take a healthy break from stock market trading, (2) quit playing the game all together, or (3) continue dabbling in the stock market with only small amounts of money, simply for the love of the game.

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“The worship of money and the condemnation of money exist side by side, sometimes even within the same individual.”

Herb Goldberg and Robert T. Lewis ~ Authors of Money Madness (2000)

NOTICE WHAT THE GAME MAKES OF YOU: Playing the stock market at a serious level is not for everyone. If you find that playing the stock market game is bringing out the worst in you, then perhaps you should dial down the pressure so you can return to the kind of person that you want to be.

A few signs that the game is getting out of control for you include: (1) you’re spending too much time alone watching or obsessing about the market, (2) your losing positions in the stock market are ruining your weekends or family outings, and (3) you’re becoming noticeably more negative, less tolerant, and unbearably moody. Some simple suggestions for playing at a less stressful level include: (1) make smaller bets, (2) trade less frequently, (3) hold for a short time period, (4) eliminate the use of leverage, and (5) stop buying individual stocks or Exchange-Traded Funds.

For more extreme cases, you should consider confining most, if not all, of your stock market activities to buying or selling traditional broad-based no-load indexed mutual funds for the longer term. That way, you can participate in the overall growth of equities in a passive, yet intelligent, low-cost, low-risk manner.

Comment: The stock market can be a stressful activity that causes people to behave in ways that reveal internal emotional or character flaws. And the chances of success will be greatly limited by those emotional problems that show up when a person’s investments go in the wrong direction. So for those investors who possess these kinds of problems, it is better to step aside from the market and resolve your personal issues before returning to action.

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“True financial freedom doesn’t depend on how much money you have. Financial freedom is when you have power over your fears adn anxieties instead of the other way around.”

Suze Orman ~ Internationally Acclaimed Personal Finance Expert

SEPARATE THE WINNERS FROM THE LOSERS: Winners will only continue to play at games that they consistently win. Losers continue to play games that they consistently lose. If you find yourself a consistent loser at playing the stock market, change your approach or find another game.

Realistically, not everyone will experience success in trading the shorter-term trend of the stock market. The stock market game involves inherent risks, challenges your emotions, and tests your ability to manage money effectively. It’s entirely possible that this game or style of play is just not your cup of tea and, therefore, should be avoided.

If you love the stock market but have trouble trading the shorter-term movements, then consider eliminating the play money or speculative portion of your asset allocation plan. Place all of that money into the less volatile growth funds part of your allocation strategy, to invest in the intermediate term instead. (Note: An example of this would be to align your asset allocation so that it reads: 80% security assets for the long term, 20% growth funds for the intermediate term, and 0% play money for the short term.)

Comment: While the stock market seems to capture the attention of most public investors, the bond market is a much bigger investment arena to the institutional investor. With the advent of Exchange-Traded Funds, it is now possible to buy highly-liquid and actively-traded bond funds on the regular stock exchanges. A simple strategy of buying a portion of your funds in high quality long-term Treasury bond funds (example: TLT and IEF) and lower grade high-yield corporate bond funds (example: JNK) can give many investors a consistent return that exceeds stock market players with less risk and stress.

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“The ability to make a decision is another characteristic of a winner in money matters. I have found over and over again that those who succeed in making large sums of money reach decisions very promptly and change them, if at all, very slowly. I have also found that people who fail to make money reach decisions very slowly, if at all, and change them frequently and quickly.”

Venita VanCaspel ~ Author of The Power of Money Dynamics (1982)

TALLY YOUR RESULTS: If your wins are consistently small and your losses are consistently big, then quit trading or continue to play small for the love of the game. Leave your serious money in low-risk stable investments for the long-term.

It’s always wise to take a periodic inventory of your investment results. If there’s a consistent pattern of losing, you may have a hidden flaw in the way you play the game. In many cases, emotional self-sabotage can prevent even smart investors from winning — regardless of the actual strategies they may employ.

Until you find and fix the flaws in your game, it makes no sense to increase or continue your current level of play in the stock market. A lack of consistent positive results means that there is something wrong in either your thinking, feeling, and/or actions regarding your stock market investments.

Comment: If you are getting angry, frustrated, disappointed, bitter, or depressed about how stock market trading or investing, it simply means that there is something that you don’t fully understand…. understand about the stock market, understand about your investing tactics, or understand about yourself.

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“Most new investors try various markets, lose money, and finally acquire some knowledge through bitter experience. This is roughly analogous to learning how to drive by having a series of accidents.”

Samuel Case ~ Author of The First Book of Investing (1999)

DON’T RETURN TO PLAY THE MARKET IN THE SAME MONTH: The stock market requires time to realign itself for its next move up. The market rarely gives a major sell signal and a major buy signal during the same month.

Major shifts in investor psychology require time to develop. The public almost never goes from greed to fear in less than 31 days. If you sell out of your stock positions in an intelligent manner, it makes perfect sense to go away for at least a month without any fear of missing out on a low-risk intermediate-term buying opportunity. A careful study of previous stock market declines will reveal that a large number of major corrections exhibit at least two legs down in price and duration.

Comment: “Two legs down” means that you can expect two separate trends during the course of several weeks where the general stock market moves in an overall downward direction. Each “down leg” will reach a lower level of stock prices before reaching a point where prices temporarily stabilize. This means that there will be a space of time between the two down legs where prices level off before resuming their downward march towards a potential major bottom and low-risk buying opportunity.

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“I try to wait until things set up just right before I take a trade. Then, when I’m ready to take the trade, I slowly count to ten before I pick up the phone. It’s better to have the wrong idea and good timing than the right idea and bad timing.”

Linda Bradford Raschke ~ Professional trader

THE CASINO IS ALWAYS OPEN: Figure out precisely what you did wrong, as well as what you did right after each losing trade. Always forgive yourself for your mistakes and realize that opportunities for improvement often come disguised as misfortune or temporary defeat.

Resist the urge to get back into the market right after you have cashed out. Remember that the stock market will always be there for you to play in, and that it’s not important for you to participate in every minor rally. Have the patience and understanding to wait instead for the next big opportunity, which will present itself on its own time table and not yours.

The great thing about the stock market is that every bottom is followed by a top. And every top is followed by a bottom. It’s been that way throughout history and you can expect this pattern to keep reoccurring well into the foreseeable future.

Comment: Realize that some opportunities to trade for profit are going to escape your grasp. Resist the urge to play the “what if” game and don’t concern yourself with minor stock market moves. Instead, let the market set itself up for a more clearly defined up move.

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“It would be foolish to overlook the human vice of greed. The successful trader must be able to recognize and control his greed. If you get a buzz from profits and depressed by losses, you belong in Las Vegas, not the markets.”

Mark Richie ~ Professional commodity trader

COME TO GRIPS WITH YOUR LOSSES: Figure out precisely what you did wrong, as well as what you did right after each losing trade. Always forgive yourself for your mistakes and realize that opportunities for improvement often come disguised as misfortune or temporary defeat.

A wise individual realizes that there is absolutely no value in beating themselves up for something they have done wrong in the past. After all, you cannot change the results you get in the stock market anymore than changing what you had for breakfast the previous day. Remember to be kind to yourself and choose instead to accept the lesson of your mistakes, uncover any bad habits, improve your system, regain your emotional balance, and move on to your next opportunity.

Recognize that your path to fortune will always have some bumps along the way. The sooner you get over these bumps, the sooner you will be ready and willing to trade successfully the next time around.

Comment: The stock market teaches you valuable lessons about investing and life more through defeat and pain than victory and joy. The purpose of pain is not for you to suffer. The purpose of pain is to heal yourself and then help other to heal from the same thing.

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“Every investor should be prepared financially and psychologically for the possibility of poor short-term results.”

Benjamin Graham ~ Legendary professional investor (1896-1976)