Just 1 trade today… I talked about it in a lot of detail so you get a chance to see the whole trade selection process a little better. I occasionally get comments that make it clear that people don’t realize I look at more than the 3-minute chart. I just show the 3-minute chart because that’s the way I fine-tune my entry. And, since I always run out of time in my videos, that’s all I can do. But, there is always a lot more to it than that!

I know lots of traders were hurting today… the Q’s only finished at 72% normal volume… still rising but not quite there. Gotta remain careful!

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This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

I thought I’d give out a single stock pick, and as “The Fly” is wont to say, if someone had a gun to my head, I’d say “Shoot me if you must, but before you do…” Fly will probably melt this blog with an internets laser beam for stealing his shtick, but I live for action, remember?

Shoot me if you must, but before you do, short FED

Not to be confused with the Fed, FirstFed Financial Corp. (NYSE: FED) is a “holding company for First Federal Bank of California that provides various banking services in California”, including mortgages. They aren’t a sub-prime headliner since their specialty is in the Alt-A arena (which is starting to get attention along with sub-prime) in option Adjustable Rate Mortgages, where you can decide not to pay and the interest gets amortized negatively back into your loan balance. Note that American Home Mortgage used to be one of those lenders, and they imploded impressively recently.

This article from Seeking Alpha, while dated, does highlight the reasons why I think FED is in trouble. The gems below are for those who are “attention span challenged”:

Its mortgage portfolio is packed with risky loans known as option ARMS.

80% of its loans have little or no documentation to prove the borrower’s income or assets (Liar Loans –Prospectus).

The bulk of FirstFed’s income is derived from noncash earnings, largely from the deferred principal on its option ARMs. That so-called negative amortization constituted $223.9 million, or 68.4%, of the bank’s income before taxes in 2006, compared with 1.3% in 2004. In essence, FirstFed is booking profits on money it hasn’t collected.

Not only do they face default risk and the repricing of their mortgage portfolio, they also face the possibility of having to significantly restate their past income should they have a lot of defaults. They escaped relatively unscathed in the February-to-March sub-prime scare earlier this year, along with CFC, AHM, TMA and other “strong and unexposed to sub-prime mortgage troubles” lenders that are now being poleaxed. FED is kind of obscure, but once they make a few more headlines, I think that the bloodletting will begin in spades.

One problem is that a lot of the float is already sold short: 47.6%, so some strength in the stock or a change in the credit markets could start a good short squeeze. However, the short interest stayed high even in the face of the run-up from March to June this year, so I guess that’s a good sign that the shorts aren’t weak hands.

My price target on this one is 6, as in 6 feet under. I think they will cease to be, will join the choir invisible, push up the daisies and all that. I went short for a position trade today at $43.34, and with the sell off at the close today I may add more in the morning. A sharp rise here would cause me to reconsider the timing of my position.

As a side note, I had to LMAO at this timely recommendation. For your reference:

I guess $40 is the new $80? LOL

So “shoot me if you must, but” you know the rest…

**DISCLAIMER** I’m not recommending that you do anything. Do your own research and make up your own mind. Don’t just take the word of some moron from the internets about what you should do in the markets.

Stocks Mentioned In This Article
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This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

The markets were kind of dead to me, today, with no real spectacular volume in the triggering stocks on my watchlist. So, I decided to play more with the box play. It’s a pretty fun and easy-going setup to use, I’m discovering. It can take a bit of looking, on a lot of time frames, to find a decent setup in time, though. This is one I found off the 1-minute charts, making it more of a scalp than anything else. The stock was Thornburg Mortgage Inc (NYSE: TMA).

The Setup

Dow stocks were rising, and the NYSE TRIN was declining. TMA had gapped up strong in the morning, and trade-ideas indicated it was doing more than 5 times its normal volume. In the afternoon, it had flattened into a flat cup-like formation. Here’s the 10 minute chart just before I made my trade (complete with Scottrade’s patented “missing chart data” feature… see those two candles that are just a flat line? yuck…):

… I didn’t know if it was strong enough to make new highs, but I wanted to scalp the run up to test the highs. That’s why I was glad the one-minute charts set up with a box play.

Entry Criteria and Trade

I saw the box form on the 1-minute charts:

1. A local low is formed at 25.70. I draw a lower line.
2. The stock runs up to a high of 25.78. I draw an upper line.
3. The stock reverses back down to 25.70. This is an exact touch of the lower line. Perfect.
4. It runs back up to 25.78. This confirms the box boundaries. To enable the trade, the price has to run at least 25% back into the box before breaking out. In the book, the trade allows you to trade a breakout in either direction. For this play, I was only looking to go long.
5. The stock breaks out to the upside, after dipping to the middle of the box. This kind of half-reversal is a fairly textbook way for a stock to break out of congestion, so I was glad to see it. I buy, and my initial stop loss goes at the lower line, at 25.70. My profit target is the same height as the box, or 25.86.

Profit target was hit about 25 minutes later, which is longer than I expected. You can see on a one minute chart that it broke out in a pretty messy up/down/up fashion, but it never dipped back below 25.775, which made the trade easy to stick with. I kept my eye on the TICK and the TRIN for warning signs, but otherwise waited for my target.

To read about this play and several others, check out the “Mastering the Trade” book. I first read it before going pro, and I flipped through it again last night. I think it’s worth a second read, now that I have a lot more trading experience. A lot of the good trading books are that way, I’m finding.

Stocks Mentioned In This Article
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TMA	| |