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Get Ready for the Bear Market

Get ready for the Bear Market with O'Neill, How to Make Money Selling Stocks Short.

I found this book at Borders in Boston in the Investing section. O'Neill doesn't promise easy gains. Instead, he presents clear, beautifully presented charts showing each of his concepts. Glancing at his charts of Internet stocks during the dot-com boom makes it easy to see how the market had actually topped and was heading for a plunge. How anyone could not see this is not evident from the charts, unless one adds a dash of hope and a fervent belief that things that continue to ascend, must go even higher, forever. But other technical analysis mavens have already said that, no doubt. It's easy for me to say because I was not over-invested in the dot-com boom, nor do I necessarily favor bullish or bearish opportunities. Hence the appeal of O'Neil.

The gem of How to Make Money Selling Stocks Short is right here:
Top formations in the general market indices will occur in one of two ways. The first way is for the market averages to move up and make a short-term, new high in price on mediocre or low volume. This tellls you that demand for stocks is poor at this point and that the rally will soon be overcome by selling. The second way also involves topping while the averages are still an up trend. What happens is that there will suddenly be one, two or three days where the daily volume on the New York Stock Exchange or NASDAQ increases from the prior day, but the market averages actually make very little to no price progress (this is known as "churning") or even close down in price versus the prior day's close. We call these "distribution days," and when three, four or five of these begin to show up in a two- to four-week period, it's time to start raising cash and re-evaluating your current stock holdings.
He shows this with the 1984 Dow Jones Daily Chart, the 1990 Dow Jones Daily Chart, and the NASDAQ Composite Index 2000 Top Daily Chart. But the real proof for me is that I see those same patterns every day, intraday. When the Bulls call it quits the double, triple, and quadruple tops, accompanied by one or more lower highs, generally show the flagging bullish energy.

The new book I picked up at Borders was Alan S. Farley, The Master Swing Trader (www.hardrightedge.com). Farley starts by saying you should begin your trading day with the eyes, ears, and nose of a predator. Because let's face it: you take their money or they take yours. Do I buy this? Is it compatible with Eastern philosophy, with Buddhism, with yoga, with ahimsa (non-violence), or even Western religious tradition? Or it just a psychological stance, a mask one voluntarily puts on in order to "win" a "zero-sum" game? Is it even necessary?

Hmmm.....

Farley at any rate has a lot of other interesting things to say. Here are the highlights I've taken from the book:
"Look back at the day with complete honesty. Were exits taken when offered? Did hope replace good judgment? Were personal rules followed, and did that make a difference in the P/L record?" (Farley, p. 25)

"Don't use mediocre setups to escape the monotony."

The reason that Market moves during the doldrums are unreliable, is because market movers and institutions are testing support and resistance. Many breakouts and breakdowns will fail as trends and countertrends are tested through "fake-out games" (Farley, p. 23). At the same time, this can make exits attractive when trades move unexpectedly far in a favorable direction. The one time lunch can be played for a breakout or breakdown is when the Market has been consolidating all morning.

Take the right entry; do not chase entires. "Excellent entries on mediocre positions will make more money over time than bad entries on good positions....Enter in mild times and exit in wild times." (Farley, p. 397)

For entries, use market orders only when need to get in fast. Otherwise, use limit orders so as to bind the trading decision to a specific, pre-determined entry point.

"The markets lie in many ways. Deception shadows every legitimate move, and fakeout follows every real observation.... Shades of truth...move modern markets. Insiders have little motivation to carry price toward the current fair value. They grab better profits along the way, by taking two steps forward followed by one step back. Eventually they reach the goal, but not before leaving a scarred landscape" (Farley, p. 417). Therefore, ask: "What are the odds that this movement represents a trap?" Watch for fake-outs, whipsaw, and noise. Focus on risk management instead of wish fulfillment; look to longer time frames for the true trend; and seek confirmation of the move.

Set the stop at the line in the sand where the price action will show you that the setup has failed.

Use trendlines to gauge support and resistance.
The last book in today's series is: Bo Yoder, Optimize Your Edge.

Yoder writes in his own style. He has a fascinating way of describing the interplay between supply and demand. It all makes sense, and yet the description is quirky in a refreshing way. He seems to understand the market movements with quite some depth. Here are some of his gems:
Every strategy has its own unique cycles of success and failure, and takes traders through a payout/payback cycle. During losing periods, cut share size and gather energy and clarity.

Success as a trader revolves around your growth and development rather than around specific tools. Most traders waste time trying to increase accuracy, whereas they would be better served seeking ways to increase their reward to risk ratio.

Flipping from screen to screen and flitting from strategy to strategy is an addictive behavior, an attempt to generate dopamine highs so as to feel good in a "zero to hero" mindset." On the other hand, "profitable trading is enormously boring. You have an edge, no trade can make or break you, and you simply must put in the time it takes to grind out your profit for the month." Have a solid trading plan and follow it. The randomized "thrill" then will be taken out of the equation (p. 139).

Train your brain chemistry to look for monetary gain opportunities in the Market, rather than the good feeling of a rally or a drop. Harness objectivity. Control the extremes of pleasure (dopamine), and stress (adrenal) or fear (cortisol). If "fight or flight" takes over, then leave the chair, exercise, go for a run, or do some hard pushups, to realign your body chemistry. Burn off the hormones.

"The traders who focus on process, analysis, and who never lose a sense of playful experimentation in their relationship with the markets are the ones who can make money. Their profits are the byproduct of their skill, experience, and correct trading behavior" (Bo Yoder, p. 118).
I'm also working through a short but dense classic: Nicholas Darvas, How I Made $2,000,000 in the Stock Market is a hysterically funny account of how one trader evolved from ignorance to enlightenment. All of his early mistakes are easily recognizable. He is a true everyman. And his foolish errors led to clear insights, which form the basis for much sound trading lore today.


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The Law Offices of Michael H. Cohen offers corporate legal services, litigation consultation, and expertise in health law with a unique focus on holistic, alternative, complementary, and integrative medical therapies. The law firm represents medical doctors, allied health professionals (from psychologists to nurses and dentists) and other clinicians (from chiropractors to naturopathic physicians, massage therapists, and acupuncturists), entrepreneurs, hospitals, and educational organizations, health care institutions, and individuals and corporations.

Michael H. Cohen is Principal in Law Offices of Michael H. Cohen and also President of a nonprofit organization exploring legal, regulatory, ethical, and health policy issues in the judicious integration of complementary and alternative medical therapies (such as acupuncture and traditional oriental medicine, chiropractic, naturopathic medicine, homeopathy, massage therapy, energy healing, and herbal medicine) and conventional clinical care. Michael H. Cohen is author of books on health care law, regulation, ethics and policy dealing with complementary, alternative and integrative medicine, including Healing at the Borderland of Medicine and Religion, Complementary and Alternative Medicine: Legal Boundaries and Regulatory Perspectives (1998), Beyond Complementary Medicine: Legal and Ethical Perspectives on Health Care and Human Evolution (2000), and Future Medicine: Ethical Dilemmas, Regulatory Challenges, and Therapeutic Pathways to Health Care and Healing in Human Transformation (2003).
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Health care and corporate lawyer Michael H. Cohen has been admitted to the Bar of California, Massachusetts, New York, and Washington D.C. In addition to qualifying as a U.S. attorney, he has been admitted and to the Bar of England and Wales as a Solicitor (non-practicing). For more information regarding the law practice of attorney Michael H. Cohen, see the FAQs for the Law Offices of Michael H. Cohen. Thank you for visiting the Complementary and Alternative Medicine Law Blog.
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