Wang’s Happy Trading

Submitted by Optiondragon

When the “Madness of Crowds” takes hold of the the market, I turn to the Greats for solace and advice. They’ve seen it all and lived through many more cycles than I have in my relatively short lifespan. Wisdom can only be taught or experienced through time. Books are the gateway to each mentors teachings and can be very valuable when market conditions change or when you are ready for change. Sometimes I love rereading books in order to refresh my mind into the thinking of what the Greats thought and find words of wisdom during turbulent times. In Bernard Baruch’s autobiography, My Own Story (I do recommend to readers), Baruch offers some advice that is fitting for today’s markets,

“Just why do we fall victim to such madness as the frenzy of stock market gambling that preceded the 1929 crash? I believe it is largely a reflection of the curious psychology of crowds which has been demonstrated again and again in human history. It was a financial reporter for the old New York Herald, John Dater, who first set me thinking about the strange behavior of crowds. In the early 1900’s on my return froma a trip to Europe, Dater interviewed me on board ship. We got to talking about panics and Dater urged me to read a book he had come across, entitled Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackay. Dater and I went around among the secondhand bookstores until we found a copy.

Mackay’s book, which was published originally in 1841 and reprinted in 1932 by L.C. Page and Company, is a remarkable documentation of the unbelievable crazes that have swept mankind down through the ages. NO nation has been immune to these frenzies. If the supposedly stolid Dutch were overcome by the Tulip Craze, the volatile French had their Mississippi Bubble, while the sturdy English had their South Sea Bubble.

As I read the accounts of these madnesses, I was tempted to shout, “This cannot have happened!” Yet within my own lifetime I have seen similar deliriums in the Florida land boom of the 1920’s and the stock market speculation that led to the 1929 crash. These crowd madnesses recur so frequently in human history that they must reflect some deeply rooted trait of human nature. Perhaps it is the same kind of force that motivates the migrations of birds or the mass performances of whole species of ocean eels. There seems to be a cyclical rhythm in these movements. A bull market, for example, will be sweeping along and then something will happen- trivial or important- and first one man will sell and then others will sell and the continuity of thought toward higher prices is broken.

“Continuity of thought”- what a wonderful expression that is. It did not originate with me. The first time I heard it was while I was operating in steel stock which J.P. Morgan was trying to accumulate. The general market was on the rise. Then, while these operations were going on, the stock of Rock Island broke. At the time I happened to be with Middleton Burrill, who remarked, “That collapse is going to break the continuity of bullish thought.” I had never heard the expression before, but I saw at once that Burrill was right and even though Steel was being supported by the Morgans, I sold and took my profits.

Another strange thing about these crowd madnesses is that education and high rank is no immunization against the virus. Mackay’s book is full of examples of how kings and princes, merchants and professors have succumbed to these crazes. In our own day the stock market madness of 1927 to 1929 swept through every level of society. I can remember my own feelings in those days. From 1928 on I felt uneasy about the level of stock prices. Looking out over world affairs, I could see where a new surge of prosperity might be touched off if we could solve the problem of reparations and war debts- then weighing down as heavily on world trade as the Old Man of the Sea on Sinbad the Sailor. On the other hand I did not like the effects of the loosening of credit that the Federal Reserve had begun in 1927.

In August of 1929 I went to Scotland for grouse hunting. While there I recieved information from home of a proposed exchange of the stocks of a number of old-line companies for the stock of two newly organized holding companies. This exchange promised to raise the stock of the companies affected to a fantastic figure. I cabled three men I knew intimately, asking thier judgement of what was going on. Two of the men sent me non-committal relies. But from the third man-who occupied one of the highest posts in American finance at that time- I received cable describing the general business situation as being “like a weathervane pointing into a gale of prosperity.” I know this man believed what he cabled me because in the crash he lost every penny he had.

Shortening my visit in Scotland, I decided to sail home…soon after I landed in New York, I decided to sell everything I could. In the dark years that followed I reread Mackay and found his tales curiously encouraging. For if his book showed how baseless are man’s moods of wild hope, it showed that man’s moods of black despair are equally unfounded. Always in the past, no matter how black the outlook, things got better.

Whatever men attempt, they seem driven to try to overdo. When hopes are soaring I always repeat to myself, “Two and two still make four and no one has ever invented a way of getting something for nothing.” When the outlook is steeped in pessimism I remind myself, “Two and two still make four and you can’t keep mankind down for long.”

How to Make Money Selling Stock Shorts By William O’Neil

Excellent book to familiarize yourself to successful shorting, a shorting strategy and how to approach the concept of shorting.
Half of the book is full of charts with technical analysis of big gainers that became great shorting opportunities. These six rules provide a guidline.

Six Rules for Short Selling

1) The general market should be in a bear trend, and preferably in a position that is relatively early in the bear trend. Shorting stocks in a bull market does not offer a high probability of success, and shorting stocks very late in a bear period can be dangerous if the market suddenly turns to the upside and begins a new bull phase.

2) Stocks that the would-be short seller has identified as candidates for short sales should be relatively liquid. They should have sufficient daily trading volume so as not to be subject to rapid upward price movement if the stock experiences a sudden rush of buyers that can result in a significant short squeeze. A general rule of one million shares or more traded per day on average is a reasonable liquidity requirement.

3) Look to short former leaders from the prior bull cycle. Stocks that offer the best short sale opportunities in a bear market rend to be the very same stocks that led the prior bull phase and had huge price run-ups during the bull market.

4) Watch for head & shoulders top formations (explained and shown in the book) and late-stage, wide, loose, improper bases that then fail. These are your optimal short sale chart patterns.

5) Look to short former leaders five to seven months or more after the stock’s absolute price peak. Often, the optimal shorting point will occur after the 50-day moving average has crossed below the 200-day moving average, a so-called “black cross,” and this may take several months to develop. Once a former leading stock has topped, monitor it closely and be prepared to take action when it signals an optimal shorting point.

6)Set 20-30% profit objectives, and take profits often!

If you are trading options you should adhere to the stock price stops as well as developing option price stops. (i.e. hard stops, trendline stops, pivot line stops- stock and option graph). Shorting should be more of a strategy in a bear market since three out of four stocks follow the overall market trends. O’Neil also notes to set cover stops at half your normal rate. So say you usually set stops at 8% below your purchase point O’Neil recommends you set your cover stop 4% above your short price. The reason being is because shorting is a more delicate and disciplined game where you don’t want to get burned.

Short ideas will be discussed and watch lists for longs and shorts will be posted at Happy Trading continuously.

Dr. Brett Market Sentiment Indicators
As you know I am a big fan of Dr. Brett and love is books. Must read.
His recent comments on his blog are a real treat for those trying to gauge oversold conditions and market sentiment. I believe in order to find the highest probability trades you must analyze fundamentals, technicals and sentiments. Sentiment is the only one that can trump the other two components. It is equally important to find the break of the bearish continuity of thought as it was when we were bullish. It is important to play defensive in a bearish environment and adapt your strategy to fit market conditions.

On Saturday, Dr. Brett posted his charts and thoughts on the Advance-Decline data to the present and market sentiment thoughts with his adjusted NYSE TICK and oversold divergences. In his recent bar charts I have never seen so many negative bar charts and data. Dr. Brett seems to be keeping his eye out for the capitulation or bottoming.

ERIN BURNETT
Last Thursday night Jan. 17, Erin Burnett was on Late Night with Conan O’Brien. She walked out with a sensor on her dress that they forgot to remove at the store! She makes light of it and Conan was outright hilarious with his jokes. Conan also brings up Cramer’s rant and Erin talks about the “say it don’t spray it” moment.

Please watch it for kicks!!! It is the January 17th episode and in Chapter Act 3 for Erin. She was beautiful and playful as Conan rips her! LOL

Famous MLK Quotes:

I believe that unarmed truth and unconditional love will have the final word in reality. That is why right, temporarily defeated, is stronger than evil triumphant.

Nothing in all the world is more dangerous than sincere ignorance and conscientious stupidity.
- Strength to Love, 1963

Let no man pull you low enough to hate him.

A man can’t ride your back unless it’s bent.

A nation or civilization that continues to produce soft-minded men purchases its own spiritual death on the installment plan.

An individual has not started living until he can rise above the narrow confines of his individualistic concerns to the broader concerns of all humanity.

We may have all come on different ships, but we’re in the same boat now.

When you are right you cannot be too radical; when you are wrong, you cannot be too conservative.

Whatever your life’s work is, do it well. A man should do his job so well that the living, the dead, and the unborn could do it no better.

Take care of yourself and the best of wishes,
optiondragon