Story lines to trend lines of managing money

Another day in the life of the markets… We all want to explain the action relative to the data and the news, but sometimes you just have to look at the charts and go with the trend… or else go play golf. Today the dollar rallies on the FOMC news and the fairly strong GDP reports for Q2. The buck moving higher pushed oil lower, gold reacted to the buck and gold miners¬†dumped lower in response. Otherwise boring day for the markets in a myopic view.¬†Technology stocks led the NASDAQ up 0.4% to lead the broad indexes along with some optimism about the outlook short term. In the end it was a lackluster day and we will watch to see how tomorrow unfolds to end the week.

As you know I pay attention to the news and story lines in and around the markets daily. Each morning I attempt to write ten ideas/stories more or less about the market that could/should create a buy or sell opportunity. Obviously if one or two work out during the day I am happy to trade or invest in the specifics of the idea. Before the day starts each idea is vetted for risk, where would I buy the position, what could add to the opportunity ideally, is it a sustainable idea or swing trade only? I ask a lot of questions to myself for the reason that the better the questions the better the answers. Better answers will generally lead to better opportunities. Today I want to look at three of the ideas from my list that worked today. Please note the other seven did not work today… tomorrow they have to make the list again based on the reality of what happened in today’s trading environment. Generally most¬†of those that didn’t work today won’t make the list tomorrow. Why? Simply put… they didn’t work and based on the day invalidated themselves relative to the idea or opportunity. Trust me… most days I have to limit how much I watch during the day.

The point of this ramble above is to give you insight into how ideas, stories, opportunities and trading all line up if you are doing your homework. Always be looking for what relates to your beliefs currently about the markets as it relates to investment opportunities.  Then let the charts define your entry, stop and targets.

First idea today… Facebook (FB)! I read and skimmed the earnings reports along with investor response as reported in the media. I then asked myself… does this reaction make sense relative to the actual news about earnings? The simple answer is yes, if you are looking for a reason to sell… no if you are looking for a reason to buy. I was looking for a reason to buy the stock in light of the forward looking projections despite the jump in expenses. Thus, if Facebook sold off this morning and found support, reversed to a level of logic… I would buy the shares. $92.60 was the support line of interest. The stock moved below that level to $91.80… but, then it bounced back above the support level and I used $93.50 as an entry point. Thus, I bought it with the intent of it moving back to the $99 level of resistance. Based on the close I can now raise my stop to the support level of $92.60 and have a ninety cent risk on the trade or roughly one percent. ¬†The moral of this story is sometimes what makes sense in the media… doesn’t make sense fundamentally and technically we pick our points of entry and risk management. We will see how it unfolds, but I already know what my worst case scenario is for the trade.

Second idea today… NASDAQ 100 index (QQQ). tested the 50 DMA last week. bounced and moved back to what was a key support level at $111.10. Closed above that point¬†on Wednesday. Futures were pointing lower… Facebook and friends were the reason, not enough likes on the after-hours earnings post. If the test reversed in Facebook it would follow that technology could follow the reversal… That is exactly what happened giving me the entry of $111.25 on the trade. Based on the close the stop is $110.75 or fifty cent risk, less than one-half of one percent. Now we see if the trade works out on the upside as the broader market story unfolds. If not… I know my worst case scenario.

Third idea today… Small Cap index (IWM). Tested lower last week below the 200 DMA and held. Moved back above a key support level at $121.25 Tuesday. Held the move and tested on Wednesday. Same as with the QQQ trade looking for test to start the day and recovery. Got that and the entry at $121.50. Stop on the trade is the 200 DMA $120.89 or a risk sixty-one cents. Tight stop, but this is a market that justifies controlling the risk of the trade. I know my risk and the target for the move is $126.50. Biotech will play a key role in how this trade unfolds as it was one of the reasons the sector declined, thus the sector carries clout with the broader index. And so,¬†I manage the risk accordingly.

Others left on the list to be consider in the morning… Short bonds on FOMC rate hikes, biotech bounce off support again on Thursday needs to follow through and give entry, China on the downside again as the issues continue to show weakness in the economy, semiconductors follow through on bounce off the lows, banks rebound and find there upward bias, India gets some respect for growth versus being lumped in with the rest of the emerging markets, and speaking of emerging markets… stronger dollar more downside for EEM. We will see how they all unfold. Trading is a matter of seeing what is happening from the headlines to the trendlines and letting the trades setup in a format and opportunity that makes sense relative to the risk they present.

Hopefully this gives you some insight into how short term trading looks through my eyes. There are days the stars align and it works, and there are days when nothing happens and I wonder why I spent so much time looking at it all. Managing money is as much an art as it science. The challenge many of us face is taking ourselves to serious… relax and let the market be a canvas for painting in which¬†part is done by you and the rest is done by the psychotics trading beside you in the markets. When it is all said and done the psychotics will blend with your “perfectly logical view of the markets” and create a painting that looks like Monet’s Gardens. The longer term trades are similar we just have to lengthen the view and give a wider range to account for the doubters/major psychotics as they arise.

Managing money will make you psychotic if you don’t find a way of dealing with the ups and downs of a cat kicking world. Story line to trend line… it only make sense.