Podcast: A Look at Exxon and Mastercard

Pete, May 5, 2008 @ 4:15PM ET | Link | RSS | Read via Email | 6 Comments  

We look at Exxon Mobil and Mastercard in today’s podcast.

Exxon Mobil (XOM)

NYSE:XOM announced earnings of $10.98 billion in the first quarter of 2008, the “the smallest earnings increase among the world’s three largest oil companies, falling short of analyst estimates as production dropped and profit margins from refining narrowed.”

The most interesting story related to XOM was found at WSJ MarketBeat:

Mark your calendars: Exxon Mobil (NYSE:XOM) has been declared ’safer’ than a US Treasury security. In the context of the Investor Sentiment Cycle, it just might be the Enthusiasm phase:

Enthusiasm
Once it is widely accepted that economic and corporate fundamentals are supporting higher prices, a bell goes off. The bull survived The Big Dip. Those who had previously been afraid now have plenty of reasons – and proof – that it is safe to go back into the market and buy again.

At this point, we detect a subtle change in psychology, a shift from the fear of loss to the fear of missing out, and the appetite for risk becomes evident. Investors buy on faith, bolstered by analyst and media reports projecting the trend to continue. As price rises to new highs, they all scream, “It’s a breakout!” They are supremely confident that the best is yet to come.

The high made in the Returning Confidence phase typically marks the ‘point of breakout’ and becomes an important psychological number. We know this high is where sellers showed up before, and if price should sink below this area, traders and investors might come to the conclusion that the breakout failed, and therefore, begin selling in case the uptrend is approaching the point where it starts to bend.

At some point, all the buyers who want to be in the market have bought, and they stop buying. Smart money begins to take some off the table. The net result is rotation of buying and selling from sector to sector, causing the major stock indexes to stop going up in any meaningful way and price charts to churn and chop. In the old days, they called this ‘distribution’, marking the transfer of stock from smart to dumb money, from strong to weak hands. This area is where a buildup of participants in position to write sell tickets takes place. If price fails to move up or it comes back under the point of breakout, selling begins.

CHARTS


Daily bar chart with 50- and 200-day moving averages


Daily bar chart with Swing Line applied


Daily bar chart with InVivo.RMI.Stops and InVivo.RMI.Histogram applied

Mastercard (MA)

MA has been a huge momentum play:

CHARTS


Daily bar chart with 50- and 200-day moving averages


Daily bar chart with Swing Line applied


Daily bar chart with InVivo.RMI.Stops and InVivo.RMI.Histogram applied

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  1. Daniel on May 6th, 2008 11:36 AM

    Thanks Teresa and Pete,

    I love the new (complimentary) direction of the podcast. Teaching through examples helps a lot visualizing things.

    Keep up with the good work!

    Daniel

  2. Mike (via email) on May 8th, 2008 10:45 AM

    The irony of my increased mental burden as the result of my never-ending quest for market insight is not lost on me. The very reason I cannot figure it all out is that I’m always striving for deeper insight. I am convinced the reason those of the highly-developed left brain lobe are so keen on creating the perfect system trading plan is that they will relieve themselves of that burden of having to always ask questions. They can just set it and forget it!

    OK, I’m not writing you this note as a means to confirm a thesis or a call for assistance. I’m writing to relay a problem and to ask whether you’ve seen this in other traders and what if any measure you would suggest for dealing with this situation better in the future.

    The problem in the simplest terms can be titled go for the easy money. You know the metaphor in one of the Market Wizards books where one of the interviewees notes that the best returns become so clear that its like walking into a corner and picking up a bag of money? I agree in full and on those occasions where such a candidate is on my watch list and the subsequent price action confirms a trade setup, I have been rewarded handsomely. Of course this doesn’t happen every day, but every effort should be made to capitalize on these situations since they really do represent the easiest money I’ll ever make.

    Such was the situation with YHOO two days ago on Monday. As with every day, I already had a watch list on hand with various long and short setups. Early on the overall market gapped down and then drifted lower throughout the day. Therefore most of the candidates on my long watch list failed to trigger and the few on my short watch list weren’t doing much at all. So I had ample opportunity to fade the gap down on YHOO initially. Even with a modest position based on the risk of playing a spike bottom, a nice return would have been made by midday.

    Yesterday morning YHOO spiked up to start the day while the rest of the market spiked down. Fading this gap on YHOO would have involved the same risk as the gap down on Monday and would have resulted in another healthy profit as YHOO reached the first target below within an hour. Then if I was especially savvy I could have reversed the position and rode YHOO all the way up until the end of the day as YHOO rose with the rest of the market.

    See, I didn’t take any of these positions and I can’t really pinpoint why. I can’t tell whether it’s that I’m not yet savvy enough or lack the experience. I think the most likely candidate is a point you noted in the article with Charles Kirk and a point you have reiterated many times before: have the wherewithal and capacity to switch to a secondary plan when the primary plan is failing. This is a lot harder for me to do since I really don’t have the skills to transfer my mental energy and focus to a new direction until I’ve expressed all my energy built up in the primary plan in one way or another. Thankfully I’m getting better at not expressing this energy by just making the trade regardless of whether I should or not, but I’m still not very quick or proficient on the turnaround. I need to work on that but I don’t know whether I’ll be able to overcome my hard-wired mentality. I guess it’s just another in a long series of challenges.

    Thanks as always for the continuing insight.

  3. Daniel on May 14th, 2008 2:45 PM

    Four simple questions:
    I have just finished thoroughly reading the first part of The Ultimate Trading Course. Now I am on the second where you identify different trade setups.

    Question 1
    It seems logical to concentrate first on one trade setup, kind of master it and then move to the next. Would you do as I say? If this is so, which one would you start with.

    Question 2
    For scalping, are the In.Vivo.Stops what you would use as trailing stops or any other of the methods described in the book. If this is so, how tight would you use it, 1.1?

    Question 3
    Position size, would you use the method you describe on the Kirk Q&A? In the book it seems there are other methods but probably older than the one that you described.

    Question 4
    The InVivo.RMI.Stops and the InVivo.RMI.Histogram no longer work on shorter time frames (smaller than a day) and in longer time frames (week and month).
    Is this correct?

  4. Teresa on May 14th, 2008 3:12 PM

    You are working very hard and making good progress. These are all good questions.

    Answer 1

    The most important thing is to remember at all times is that trade setups take place within the context of the investor sentiment cycle. I always read the headlines to gather information on the sentiment and ask myself, “Where do they expect the price to go to? What is the surprise scenario?”

    I would suggest mastering the “stealth flag”, a “surprise” bull or bear flag that people don’t expect, just like this recent one on seen on the QQQQ chart.

    Answer 2
    For scalping, you could use the bars or InVivo.Stops (which came long after the book was written) set at 1.0.

    Answer 3
    I think the one given in the Q&A with Charles Kirk is probably the simplest to implement.

    Answer 4
    InVivo.RMI indicators can only be applied to daily charts. They will not plot on intraday, weekly or monthly time frames.

  5. Daniel on May 14th, 2008 4:16 PM

    Thanks Teresa for all the answers,

    Regarding Answer #3:
    It’s the simplest, but is it the best? Is it the one you are using personally?

    Regarding Answer #4:
    Is it strategic that it does not plot any other period? If so why isn’t the InVivo.RMI.Histogram part of PowerTools Trading System?

    Thanks,

    Daniel

  6. Teresa on May 15th, 2008 2:35 PM

    Yes, that is the one I use although there are other ways to go about it by cutting up your capital in advance like this.

    Yes it is strategic that the InVivo.RMI indicators only plot on daily charts.

    1. I don’t think it is a good idea for people to trade stocks intraday. Too difficult.
    2. The stops can hold a trend for weeks, so there is no need to go out into the weekly time frame.

    The eSignal code allows me to make it so that it’s “point and shoot”. I originally wrote the indicators in EasyLanguage for my own use but I don’t want to release it for TS because setting up the chart takes two steps.

    People who have used TS will need no more than a few sample workspaces to see how the indicators are applied, but as you can imagine, people not familiar with the TradeStation charting software will require me to write a “user manual” and I just don’t have the time or energy to do that.

    I have very little time to work as is, and I have to focus energy on R&D, not tech support. Unlike software vendors, we do not charge $3,995.00 and therefore, do not have 100 people in customer service on standby to hold hands. :)