Day Trader column for August 18 – 2010

Last week I suggested our market was set to move higher, as it had consolidated in a narrow sideways pattern for most of the previous week.   Monday of last week it had closed decisively above that narrow trading range and looked to be heading towards a higher close for the week, thus forming a weekly pivot point to the upside.  But, the rest of the week then proceeded to confirm the merits of waiting for that weekly signal before buying into the market.   I had been very tempted to pre-empt the market and buy a couple of stocks on the Tuesday.   However of the five stocks I have mentioned over the past two weeks, if bought, two would have been stopped out already at larger losses than would have been expected, as they gapped down on the open, after breaking their respective stops.   The other three are still hanging in there and one, Regis Resources (RRL), had moved to a three year high on Friday, after consolidating around $1.00 for the past five months.      

Most of the major world indices are in a position whereby if they move to new highs they will complete the fifth leg of a five point reversal.   If this happens I expect to see a major collapse in world markets.   Our market fell from a five point reversal in 2007 and if it goes to new highs (that is above 6,873 on the All Ords), then the subsequent fall could take the index to lows not seen for decades.    The volatility is likely to continue in our market while the rest of the world markets play out what I believe, is the final stages of a multi decade bull run.   We have recently seen a five point reversal form on the retest of the 2007 high.   We may see our market waffle around present levels or make one final run up before the fall.

I don’t think the time is right to short the market, as shorting in whatever form invariably involves leverage.  Trading in leveraged products in a volatile market can, and often does, lead to large losses.   This leads me to discuss the simplest way to short stocks or the market as a whole.  

Minis which are traded on the ASX are relatively simple to trade, although they are still a leveraged product.   They can be used to go either long or short. Minis are rather like an option with no expiry date, ie the maximum loss is limited to the purchase price.  This is unlike CFDs, which have no inbuilt stop loss, so losses can be more than the amount invested.   Minis also continue to have value until either the trade is closed out or it loses sufficient value to be stopped out.   Unlike options, with minis you will pay interest and other costs on a daily basis.   Interest is charged on and added to the Strike price.  The Strike price therefore changes daily.  

Before trading these products I believe traders would serve themselves well by acquainting themselves with the principles and practice of market analysis and risk management.   One advantage to trading Minis is the way they are structured to limit risk.  Although traders’ losses are limited to the initial investment, that can still be a significant sum, so caution should be exercised and an eye kept on volatility.      

For more information on listed Minis go the website of the issuer www.rbs.com.au    

For back copies of the column goto:      www.thedaytrader.com.au

Portfolio Position

Cash        $267,166

Shares     Nil.    

Total        $267,166

Starting capital $50,000 in July 2006