Absence

I'll be busy packing and leaving U.S this week. Blogging is likely to resume late next week. Meanwhile, check out my del.icio.us for some good readings and as always, good trading!

The Disciplined Trader: Developing Winning Attitudes

During such difficult and volatile trading times like now, I thought it was a good idea to read The Disciplined Trader: Developing Winning Attitudes by Mark Douglas. As the author rightly puts it, successful trading is 80% psychological and 20% methodological. This book is all about managing your emotions in the ups and downs of the stock market and acquiring the mental skills needed to stay in the market. If you're looking for technical indicators or trading strategy, look elsewhere.

His books is structured into 4 parts:
Part 1: Introduction
Part 2: The Nature of Trading Environment from a Psychological Perspective
Part 3: Building a Framework for Understanding Ourselves
Part 4: How to Become a Disciplined Trader

He listed 10 typical trading errors that have specific cause rooted in thinking methodology that can be changed. Of those 10, I can identify with 3 of then:

-Not acting on your instincts or intuition
-Planning for a move or feeling of one building, but finding it hard to execute, thereby denying self of opportunity to profit
-Focusing on price and monetary value of a trade

Obviously, my key problem lies in self-confidence and self-trust. So how to overcome these problems? One very good solution is to place the order in the market ahead of the anticipated move. This will keep me from having second thoughts about the entry since its placed in advance in the system.

A few chapters in this book is not so easy to read as they are all about psychology: association, memory, beliefs, but I think Mark Douglas puts it there for a purpose - he wants us to go back to the very root of these psychological issues and understand how they are being formed.

One very outstanding phrase from this book which I like very much is this: "Mistakes don't exist. They just point the way to something we haven't learned yet and obviously need to know". Wow, positive thinking! Mark Douglas emphasizes alot on this as he believes that positive energy is expansive.

On a final note, I have to add that this book is not recommended for those who have just started out trading, because most likely you have not gone through the ups and downs and will find it hard to understand. For those who have been trading for some time, I'm sure the themes discussed in this book will strike a chord with you and you will find it useful to apply the techniques for effecting change in your behaviour / attitude towards trading. I highly recommend you read at least this book or Mark Douglas's other book - Trading in the Zone. Do not underestimate the power of psychology on trading.

Keep An Eye on XLF, XHB, XLY and XLE for Rally Strength

We discussed about the VIX and I gave my opinion that the market could turn last week. For the last few days, we've been seeing rallies in the market, especially in the weak oversold sectors like Financials, Homebuilders and Consumer Discretionary. We've also seen continued sell-off in Coal and Steel sectors after brief spell of consolidation. As I said on 9 Jul, watch for a retest to go short or get some Put Options. It retested and broke down again last week, hope you caught some of the action.

What about the week ahead? The major trend is still to the downside and watch for resistance at 1270 for the S&P 500 index. Also watch the Financials (XLF), Homebuilders (XHB), Consumer Discretionary (XLY) and Energy (XLE) sectors closely to see how long this rally can go.

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Mon: Leading Indicators
Notable earnings: AAPL, BAC, CNI, EXP, SNDK, QLGC, STLD, TXN

Tue: FOMC member Plosser to speak on economic outlook
Notable earnings: BHI, BJS, BRCM, CAT, CE, CERN, CPO, CME, DD, HAL, ILMN, LXK, LMT, OXPS, PNRA, UPS, USNA, VMW, UAUA, WB, YHOO

Wed: Fed's Beige Book
Notable earnings: AEM, ARG, APD, ATI, AMZN, ABFS, GSK, CMG, CNH, COP, EMC, WIRE, FFIV, FDG, GD, WFR, NTGR, NIHD, OSIP, PFCB, BTU, PEP, PFE, QCOM, RC, R, RYL, VAR

Thurs: Initial Claims, Existing Home Sales
Notable earnings: MMM, BUCY, BG, BNI, COG, CENX, RIO, CYMI, ELN, LLY, ECA, FTI, FXL, ESV, GMT, GPN, GR, IBKR, ESI, LTM, NEM, SBNT, OXY, POOL, POT, RSH, RVBD, SIRF, SII, HOT, SYT, TZOO, TRMB, TMO, TRA, UNP, VDSI, UNP, VSEA, WYNN, YRCW, ZBRA, ZMH

Fri: Durable Orders, Michigan Sentiment, New Home Sales
Notable earnings: ACI, BEC, BDK, CVH, NFLX

Week Ahead: 14 Jul - 18 Jul

We are heading into the earnings season and we've got many Tech and Financial bellwether stocks reporting this week. Add that to loads of economic data as well as Options Expiration week, its going to be very interesting. As always, be sure to check for earnings date when you're holding overnight positions.

Mon:
Notable earnings: PNRA, NVLS

Tue: PPI, NY Empire State Index, Retail Sales Business Inventories
Notable earnings: CSX, ETN, INTC, JNJ, JBHT, USB, GWW, STX

Wed: CPI, Capacity Utilization, Industrial Production, FOMC Minutes
Notable earnings: ABT, EBAY, GCI, LUGK, STJ, WFC, YUM

Thurs: Building Permits, Housing Starts, Initial Claims, Phil Fed
Notable earnings: Notable earnings: HOG, JPM, MER, MSFT, EDU, NUE, NOK, PNC, UTX, AMD, COF, CMA, CAL CY, ESLR, FHN, GILD, GOOD, KO, ZION, VMI

Fri: Options Expiration
Notable earnings: C, HON, SLB

VIX - The Fear Gauge is Up Sharply

Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) nose dive more than 50% within these 3 days as the market has been intensely focused on them along with the financial sector. Talks of them being possibly insolvent and plans of placing them in a conservatorship continue to put the market in a tail spin. Placing them in conservatorship would means that stocks of FNM and FRE be worth very little or nothing. It will also put the burden of providing mortgage access and liquidity on to the shoulders of taxpayers, which I believe nobody would ever want that to happen.

With all these pessimism, is the market in panic mode and capitulating? Here's a look at the VIX:
As I'm writing now, the VIX has moved up sharply close to 30. During the last 2 market bottoms in Jan and March this year, we hit a high of 35 before the carnage subsided. While we are still some distance away from 35, the VIX move today point to significant fear in the market. With bellwether stocks reporting earnings and Options expiration next week, it could be a turning point.

Coal & Steel Sectors Breakdown - Wait for Retest

Alcoa Inc. (NYSE:AA) officially kicked off the earnings season today and is up almost 3.5% after hours. All eyes are on earnings & guidance report card this quarter. Will the high commodities cost and economic slowdown affect company guidance to a much greater extent than analysts expect? Or are expectations already so low on the street and the pessimism set in that market will actually turn for the better?

As you already know, we are now in a bear market. But be prepared to expect some relief rally this week as the market rallied strongly in second half of Monday session and today. This is the first bear market I've encountered in my trading experience and it is a tough market to trade because of the sharp brief rallies that could stop you out of a good trade and then go your way again. Be highly selective in choosing your trade candidates and be sure to manage your risk wisely.

I mentioned in my last post that commodities and energy sectors were good places to be long in or have Call option position in the last quarter. How quickly that has changed! Steel, Coal and Energy stocks were the most beaten up over the last few days. These sectors, which have the strongest uptrend, have since broken down with very high volume. Here's a look at Steel and Coal:

Market Vectors-Coal ETF (NYSE:KOL)
There is good support and consolidation at 47.5 right now. I expect a retest of the 52.5 region. When retest and fail, be ready to load up on Put options either in KOL itself or coal stocks.

Market Vectors - Steel ETF (AMEX:SLX)
Another former market darling, this sector has been showing signs of weakness with lower highs printed and officially broke down on 2/7. Its too late to enter Put options now in my opinion, at least from a risk/reward perspective. Wait for a retest near the 100 region.

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Wed:
Notable earnings: SGR

Thurs: Initial Claims, MPC Rate Statement, Paulson & Bernanke to testify on financial regulation

Fri: Trade Balance, Michigan Sentiment
Notable earnings: GE, FAST

Sector Performance in Q2 and June

Above is a chart of sector performance in June. Only sector above water was Energy. And that sector, along with commodities should be about the only places to have some call option positions. Needless to say, Financial sector was the worst hit, with waves of rumours and write-downs tearing this sector apart. Technology, Consumer Discretionary and Industrial sectors were also not spared the hit.

This one is Q2 sector performance. Energy is clearly leading the way. While there has been talk that Energy could be topping soon, until it stops printing higher highs and higher lows, I think the trend is still up. However, the outlook for general market is grim as some major technicals have been broken in June.

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This is a short week due to Independence Day on Friday. Enjoy yourself and battle the bears when you are back.

Mon: Chicago PMI, Michigan Sentiment

Tue: Construction Spending, ISM Index
Notable earnings: APOL

Wed: ADP Employment, Factory Orders
Notable earnings: FDO, AYI

Thurs: Nonfarm Payroll, Unemployment rate, ISM Service

Fri: Markets closed.