Mid Week Pit Stop

I have decided to post twice a week. One during midweek on wednesday to talk about my own trading strategy and interesting case studies and one on the weekend to share my view on market outlook as well as particular stock outlook.

First of all, I am someone who follow charts a lot. I have to look at the chart for whatever decision that I make and it has to agree with me. I use candlestick charts all the time as they portray a better picture of price movements than bar charts and certainly line charts. Usually, my posts will include a lot of charts and some graph jargons that may confuse many people out there. So I have decided to highlight some of the common graphs that I look out for.

Many have questioned the use of charts and I shall not argue with you either because I do not agree with PURE technical analysis either. After all, the market is made up of humans who are the most unpredictable group of animals on the planet. So I believe its best that we exercise some sort of caution when dealing with graphs and use some of our instinct and logic. (more on this in the future)

There are about 40 unique candlestick charts in total. I say unique because some are very similar in my opinion. I hope I have not missed out any others.
Take a look at the website below. They have explained all the charts so I shall not repeat them.

http://www.leavittbrothers.com/education/candlestick_patterns/

Personally, I do not use all the chart patterns. I tend to look for certain patterns, which I believe to be more useful than others. I use dark cloud cover, three white/black, morning and evening star, dragonfly and gravestone doji and tweezer bottoms/tops. In addition to these, I look for major standard chart patterns like triangles and head & shoulders along with standard trend lines for support and resistance.

My trading mentality comes mainly from the book "How to trade in stocks - Jesse Livermore". Even though, he is not explicit about his main trading strategy but he highlights a few important trading rules that are really very beneficial and applicable in today's market.

Quote: "But if after a long steady rise a stock turns and gradually begins to go down, with only occasionally small rallies, it is obvious that the line of least resistance has changed from upward to downward. Such being the case why should anyone ask for explanations? There are probably very good reasons why it should go down… " Reminiscence Of a Stock Operator

Reminiscence of a stock operator is actually similar to "How to trade in stocks - Jesse Livermore". Now line of least resistance sounds very simple to follow but I will say it is only simple if you can see far enough and understand the overall environment the market is in.

A good recent, soon to be a classic example is the Hang Seng Index.

From the chart, we can see 9 white soldiers along with a long rickshaw man in between. Indicating that HSI had closed on friday at a level higher than, if not equal, the index level on monday for 10 straight weeks. It was a period of time where bad news are good news and good news are very good news. Sadly, I didn't ride on this crazy run; I was very bearish at that point of time when HSI was about 24000. Certainly, economy outlook at that point of time was pretty bad - housing was bad, credit market was uncertain and liquidity was at question. But the crowd ignored all these negative news as they welcomed the 1st Fed's rate cut after so many years. You know that this run has to stop. Bad news is still bad news after all and will come to the spotlight sooner or later. But the question is when? Notice, that after these 10 strong weeks, we have finally come to a possible turning point - the first week, which HSI closed lower for the week. Notice how the whole movement becomes clear with those white and black candles.

I was in an investment team of four at that point of time when we were all very bearish with the market and that HSI must come down inevitably. I noticed the hammer formation and told them that it was the first week that closed lower and bulls were running out of steam. All of us agreed that it should the right time to buy some put warrants. ( we lost a fair bit buying at 27k and 28k) We didn't hold our position long and I had a part to play in this wrong decision made. The rest of the story about the market is history. I am not trying to preach candlesticks here but to use show it in order to portray a clearer picture. The fact that it was the first black candle after 10 white really showed that the line of least resistance might be changing direction.

The trend is your friend until it turns on you.

Okay, review on my trades from here onwards.

UOB was pretty unexpected. Even though BAC was bad, Dow was bad; UOB is standing at $20.90 as I am writing this blog. But it was a trade call with no confidence. Cosco saved my day. It is now at $3.50. However, Shanghai market is still very fragile and I still dislike China stocks for long term. Cosco opening price on monday was $3.09 and it went to a low of $3.04 so you should be able to get at opening price. Closing at $3.30 would yield you a 6.7% gain in two days. Actually Cosco was showing a potential three white soldier on tuesday so maybe you could have altered your plan and ridden it to today. Nonetheless, it was a good call I supposed.

Moving on to overseas market. Oil is standing at very close to $119 now, in fact it hits $119.90. Inventories will be out later in the day and probably that will be the spark to $120 or maybe it will pull it down from $120. I think the latter is a more likely case. We are therefore expecting a pull back right now so inventories should be higher than expected to provide it an excuse to come down. It will be a decent profit if you bought it on monday around $117. Yahoo is at least satisfying. I don't think there will be an increase in bid so $31 is where we are looking at right now. We will have to wait till friday I guess.