Friday, August 29, 2008

Ouch the water is cold

Well, the market definitly turned yesterday. As you could see I widened my range anticipating a strong day. Have to admit that I am pretty stocked to have hit my 3rd high down to the cent. As I said I had entered a short position on wednesday that I needed to close at market open. I re-entered at the end of the day though. We gap opened which will require a fill, we entered overbought at the end of the day on the 60min chart, traded on very light volume and have very limited upside potential.

We closed above key resistance and technical lines yesterday and have one last leg to go before I am convinced of the upside - and none of this super light volme crap - 2 strong days and I am a bull for the short term. The trade pattern we developed yesterday is almost a replica of our previous top at 1312. Today is going to be interesting as we have a long weekend ahead of us and quite a bit of pressure.

Time and Price
3rd high 1321 - believe it or not this is a possibility today. Watch for stalling half way.
2nd high 1312 - of course our previous top and my magic number =)
1st high 1306
open/close 1300
1st low 1292 - of course expect support here, break will bring us back to 1282
2nd low 1282
3rd low 1276

Time wise we have three scenarios today. It is very likly that we will continue our rally on light volume to hit the 1312 with a potential of topping at the 1321 mark. Second scenario is a sideways day as we have a long weekend ahead. Third one is the sell off I was expecting yesterday though I have to admit it is less likly to happen today. If we are not selling off today we will have a very strong sell off on tuesday.

Trade Watches
This is a new section I am adding to give specific pointers at stocks or sectors that may make some moves.
1. Financials may find a top here as well. Watch the XLF and potentially enter some puts.
2. Retail is currently trading at key resistance lines as well. WMT and HD both need to breakout to continue on the upside. Watch both of them closely for a break or a drop. I anticipate a drop as the steam is out of this run
3. Dell got beat up in earnings but I feel there is a lot of potential. Pool HP, Intel and Dell together into a single position and you should see some gains.

Thursday, August 28, 2008

Jumped in the water

As anticipated we traded towards the top at 1282 and actually gained a few more points as well to a final top of the day at 1285. Here is where I would have expected a much stronger sell off, instead of kept our gains and closed at 1282 and above the 50dma of 1277. We have been trying to break free of the 50dma but have not been able to do so. Having closed this high is a good sign for the bulls and a bad sign for me - I entered quite a large short position yesterday with what I consider a great entry point.

We should sell off stronger today as we are running out of steam. Having closed so high and having reached 1285 brings us ever closer to the 1292 mark that cannot be ignored. From a technical side we are right along the 1x8 Gann Fan taken from 1312 top - a point we have not been able to break decisivly, a break here could lead us higher again.

Time and Price
3rd high 1300-1302
2nd high 1292
1st high 1285
open/close 1282
1st low 1276
2nd low 1266
rd low 1262

I am giving a bit of a wider range today. We are still maintaining ourselves in the same range and will break soon. Watch for action around the top today and watch how strong we sell off.

Wednesday, August 27, 2008

Walking along a narrow line

We traded in a fairly narrow range yesterday - and hit the high/low on the cent. Glad my price points are working out here. We went for the 1276 though I would have expected a final attempt at the 1282. We sold off back into our 1262 range and found some support to close right in the middle.

We are trading between 2 key ranges and the market will make a move soon. As you could see yesterday, the same as last week, we have been hovering at the 1262, a range that will be broken to the downside as the upside momentum seems to be gone. Technically we are in the middle and can head either way though it is my feel we will trade lower. I still feel we will make one last run at the 1282 - I need to make sure I watch action around the top properly (1282 or 1276) so I won't miss my entry for the down run.

Time and Price
Pretty much the same as yesterday
2nd high 1282
1st high 1276
open/close 1271
1st low 1262
2nd low 1252

Tuesday, August 26, 2008

I guess we are ....

Holy cow - 1292/1266, back to where we started on Thursday morning. Definitly a move I would not have expected especially this strong. Here is another one of those "would have, could have, should have" - my bad thursday position would have been in the money now.

I guess we did give up those gains we had built. If I would have been more careful I should have been able to forsee this drop, maybe not as drastic. VIX was bottoming, the standard "oil/dollar/s&p" had divergence and more importantly we had been trading on very light volume on our past up days - all signs of a strong reversal.

Well today is going to be an important day, we have our 1262 right around the corner. I had indicated last week that 1252 is going to be a very important point, based on how we have been trading 1262 has turned into the point I thought 1252 was going to be. So be very careful how we trade around this point.

Time and Price
2nd high 1282
1st high 1276
open/close 1266
1st low 1262
2nd low 1252

Considering the moves we have had last week and Monday we need to find how fast we go into which direction. A break of the 1262 will definitly lead us lower by quite a bit. Watch out for a bounce to the upside from this point. We have established 1262 as a fairly strong support point now so lets be careful and not ignore this.

Monday, August 25, 2008

Back on track?

Previous Trade Day
Being still frustrated from Thursday I am glad fridays call worked out as anticipated. We gapped in the open right at the first high at 1282, then went straight for 1292 where we did not break as anticipated. We held on to gains, said hello to the 1282 one last time and then retested the upper range twice. As mentioned a break here seemed unlikly and 3 tests is quite impressive - closing all the way on the upper band is an even more bullish sign.

We should expect some resistance at this point considering we have had a nice 30 pt run from our lower support ranges. It is important to see how we trade around the 1292 range today - getting back into this area will lead to a break today and hit 1302 - here is where we would see a change of trend.

Time and Price
1nd high 1302 - should be our top today - of course break will bring is back to the 1312
Open/Close 1292
1st low 1282 - we may stop half way to here at the 1286 mark though I do expect 1282 to be hit today though it is my anticipation we will test it only
2nd low 1276

Time wise I feel today will be more of a sideways day. We held on to our gains on Friday and we need to make sure we do not put ourselves into an overbought condition. Hitting 1302 today will be a trend changer as traders will take profits from a 40pt 3 day run. We have the weekend on our side so we may hold on to those gains today but I would not expect it.

Mid Term
Well, as indicated on Friday we still see ourselves in the overall uptrend that started on July 15th. We did have a breakout of the wedge/consolidation though we get ourselves back into that range. At this point its a bit more difficult to forecast price moves - my anticipation of course is seeing ourselves back in the 1312 range - a range I feel that will be broken on the next stronger attempt.

Friday, August 22, 2008

Bear - Say what?

wow was I off on yesterdays action. I was getting to confident in my calls and ignored what I should be doing - evaluating both sides and keep them in mind while analysing the way you trade. Yesterday I made one of the mistakes that I thought I had fixed - finding myself on the wrong side of the trade - I started a short position on our first peak in the morning hours - the market kept on going up and I kept on averaging down on each subsequent peak - it was too late before I realized what happened and had to close out my position with a huge loss by the end of the day - I am very glad I did that instead of doing the wrong and hoping for it to go down - something that I was blindly following (as you can see in yesterdays forecast - very one sided - very wrong - very expensive) - if you read my Tuesday and Wednesday posts you would say "wtf, you don't believe in your own words" - I always try my best to be objective on what the market is doing - something I did not do yesterday.

At least I nailed the high off by less then a point lol (sigh)

Well todays action is going to be trying to see how far we can go. We hit the 1282 mark yesterday and we can anticipate a break here to the upside. This is where we need to figure out what to do - 1292 very possible here. On the low side it is very possible to break down from here very fast - 1274 will tell is what direction we are headed.

Time and Price
2nd high 1292 - we all know this one already, we should expect a test here but no break. A break here and we will see ourselves back in the 1300's and a re-test of our top
1st High 1282 - of course our key point that needs to be broken to continue on the upside
open/close 1277
1st low 1274
2nd low 1266

Today should be a powerful day. I would expect a large trade range on an intraday basis. We need to watch how much we can hold on to gains and how we are selling off - I won't be able to be more accurate on the time component today as its fair game for bear and bull.

Mid Term
Well, here is where we can expect some changes based on todays moves. We are still below the previous trendline - however a rising wedge OR consolidation pattern is followed by a strong move into one direction - a move that did not occur. At this point I am more inclined to a continuation of our trend that started at the 1200's on July 15th. Keep in mind this is a counter trend to the primary bear market we are in - so watch out and do not go crazy thinking the worst is over.

Thursday, August 21, 2008

Just another day in paradise

Well this is how a dead cat bounces - I had indicated we will see a bit stronger off a move yesterday off key support ranges that did indeed occur (though it was not perfectly off the low I wanted). Highs and lows of the day ended up as predicted as well.

We should continue our breakdown from here on out as a continuation of yesterday's rally seems unlikly. As you can see we have a key point at 1262 that needs to be broken to continue on the low side. From a fundamentals perspective, a break here will lead us lower quickly - financials are breaking down, FNM/FRE are at the point of being taken over by the feds - there is more and more. Oil now at 118, dollar weakening again.

Time and Price
1st high 1282
Open/Close 1274
1st low 1262
2nd low 1250-1252

We should see further breakdowns off the morning open with a break of the 1262 today.

Wednesday, August 20, 2008

Watch the dead cat bounce

The market continued showing weakness and broke the lower trend line. At this point we have our final confirmation for the continuation of our bear trend. There was little to no support on the way down and we finally hit the low of the day 0.16 cents of my target where we saw some support.

As mentioned we have another leg to go on the downside to possibly hit 1252 where we should see quite a bit of support. While our overall trend is downwards we want to make sure we don't get caught on the wrong side of the trade even if its just short term as we entered our oversold condition on the 60min chart yesterday morning.

We should see further weakness in the market with failed attempts at a rally. We are nearing key support only 10 pts down from yesterdays low where we should see quite a bit of support.

Time and Price
1st high 1274
2nd high 1281-1282
1st low 1262
2nd low 1250-1252 - here we should see a bit more of a rally if this indeed will be hit today

Other Market Moves
Why doesn't someone kick me. AMR down 11% yesterday - guess I should have entered a bit quicker here after my Monday call to short. Oh well, the market offers many opportunities on a daily basis - there will be more.

Tuesday, August 19, 2008

Nothing found here

We have finally broken our trend for the first time now since July 15th - the market appeared very weak yesterday and was not able to rally even off key support ranges. My timing component was off quite a bit causing me to loose my proper entry points - I did not switch it up until it was too late and missed my entry for this down run.

Price wise, I am quite happy that my numbers worked out, not 100% accurate but close enough - hit the high at 1300, then went for first low at 1292 (with last stop at 1290), straight for 1286 - then stopped at 1282 and went straight for the final trend confirmation at 1274 that we did not break today. We closed below the trend line though recovered a little in the after hours. I said we need to wait for the last confirmation at 1274 and I stand by this - the market could have thrown a fake here and will attempt to retest the 1312 as I had indicated - very unlikly but needs to be considered.

Little bit mad at myself here - with the proper backup plan could have easily figured out the change in timing to be able to lock in some profits (sigh). I have to be careful on the downside now as we are nearing oversold conditions on the 60min charts, though the daily looks still acceptable for another 20-30 points down.

We touched last weeks lows and need to break those to continue on the downside - we are very close to that range so this will be part of today. On the upside of course we need to maintain ourselves above the 1282 range.

Time and Price
1st high 1282
2nd high 1289-1291 - a break here and I feel confident we may re-establish the search for the top

1st low 1274 - a break here and we will see the next low as well
2nd low 1262/1266 - both very close but going to include them as one low
3rd low 1252 - won't reach this today but including this due to its significance in the future

The market should continue to show weakness and only have small rallys off support ranges, it is my feel that the 1274 will be broken today

Monday, August 18, 2008

In search for the top

Well Guys, time is up for the market. Our trade range has narrowed down to an extremly close range that requires a break out. I anticipated a breakout on Thursday, none happened, then on Friday, none happened (happened to also be expiration friday so no action there). I feel today will be the last move of our leg. As some of you remember I called for the 1312 on 7/23/2008 - though I was off in timing the price point was correct. I feel on our last attempt today that this number may very well be broken to reach our 1322-1323 intraday number where our change of trend would occur.

Time and Price
We have quite a few numbers to consider today so be ready for more then usual.

1st high 1302 - of course break here to the upside
2nd high 1312-1313 - our top from before with a possible break
3rd high 1323 - we could stall half way there from the second high but this seems possible today
Open/Close 1298
1st low 1292-1293 - we know its importance here from previous tops
2nd low 1288 - by the end of the day this will be the bottom of our lower trend line
3rd low 1282 - bottom of trend line on Friday - a break here will change our trend but need one final confirmation at 1274

The market should spent the first part of the day attempting to reach the highs before our final reversal. While there is no economic data today should be a powerful day regardless.

Mid Term
As mentioned previously we are in a counter trend of our primary bearish move that is not yet over. The incoming reversal should bring us back to retest the lows - here we will see what the market will do by either entering another bear market rally (unlikly) or break the 1200 to go for new lows.

Other Market Moves
There are a few things to watch at the moment - Oil has been brought to 113 with major support at 110, we will see a reversal here in my opinion, same applies to dollar, the recent up moves that fueled the continutation of our market seem to be stalling and topping out as well. How do I anticipate trading this? - Go long oil after confirmation of 116-117 number, then short AMR (American Airlines) within 1-2 days after the long position.

Sunday, August 17, 2008

Trade Rules - Mid Term Strategies

A mid term trade strategy assumes trading against the S&P 500 via various methods but primarily futures. Mid Term strategies consider only one round trip trade for the entire strategy. Mid term requires a move of at least 2 days against the S&P 500 index or 25 points.

Capital Exposure
A mid term strategy should not exceed 2% of total cash capital available.

Position Size
The position is required to be split into 3 sub positions as each sub position is treated differently in terms of stops. For example if you enter a mid term trade position you may choose multiples of three - for example 30 futures contracts to be able to manage exists and stops appropriately.

Each mid term strategy requires a minimum stop of 6 points for the stop loss. Generally the stop range should try to extend over key support/resistance.

Note: depending on price action and potential for your stop to be run you may split your stops on the entire position into 50% on 9 points and the other 50% at 3 points to still allow the same capital exposure but a wider margin for error in case the entry is done too soon.

Once the position is established and moves into the money the following applies to each sub position.

Sub position 1 will have a trailing stop of the 6 points (from point of being in the money)
Sub position 2 will retain the 6 points stop loss and a limit exit after 12.5 points have been gained.
Sub position 3 will have the stop moved to break even after 12.5 points have been gained with a limit exit of 25 points.

If sub position 1 is still active after 12.5 points, extend the trailing stop to 12.5 points to be able to profit from continuation patterns where the market just runs =)

While the above rules for stops and exists may seem complicated at first, it gives you a much higher guarantee to profit once the market moves in your direction.

Position Planning
A mid term swing position needs to be planned for at least 24 hours ahead of time. A mid term swing position CANNOT be entered unless proper entry, stop and exit numbers have been calculated. If you "feel lucky" take a day trade - but do not convince yourself to enter a swing position that has not been planned just because the market is at some resistance of support level.

Trade Rules - Day Trade Strategies

A day trade strategy is one or more round trip trades around a specific direction. Either short or long. This strategy assumes trading against the S&P 500 via various methods but primarily futures.

Capital Exposure
A single trade as part of a day trade strategy may not exceed more then 0.5% of the total cash capital available.

Each new entry will always requite a 2 point stop. Once the position has been filled wait until the position has gained 1 point and then manually move the stop as a trailing stop until you hit your break even point. By the time the position has gained 3 points, your stop should be at break even.

Special Note: If the entry for the position is within 2 points of the high/low of the day keep the stop always 1/4 point away from the HOD/LOD until a minimum of 4 points have been gained. This consideration is still under review and I may remove this at a later point.

Maximum Attempts
A given strategy may only have a total of either 3 attempts, as in 3 full round trip trades or a total loss of 1% on available capital. Even if 3 attempts stop at break even giving you a 0% loss this strategy should not be continued.

Each re-attempt should only occur either 30 minutes after the last stop has been triggered OR once the market moves a minimum of 3 points (up or down) from your last stop. Whichever occurs first. This protects you from chasing a position when you feel the market is doing exactly as you thought it would move after you have been stopped out - many times this is an emotional attachment or disappointment due to a stop being triggered.

Special Note: After the fact it appears many times that the 4th attempt would have worked out in your favor of the original strategy. However that means that all previous 3 attempts were timed poorly. Additionally after 3 failed tries emotional aspects and chasing can come in very quickly and can mess with your head.

Position Additions
A position may be doubled in size after 5 points have been gained. However, stops for this must be kept at break even levels. Use proper patterns (such as the RSI retracement levels) to determine another entry. Again stops MUST be kept on break even for entire position.

The minimum gains for an exit is 4 points. Maximum gains are 10 points. It is possible to set this up as a continuation trade. If that is the case 50% profit will be taken at 10 points and the other 50% with a 5 point stop loss (meaning 5 points of gains on original entry). Worst case scenario this position will still net 7.5 points in gains.

Positions can only be opened after 9:45AM and no new position can be taken after 3:00PM. Any day trade may not be converted into a mid term trade and must be closed out at the end of the day.


Trade Rules: Hedging

Well this topic is long overdue. I have been talking about making a post for quite a while now and I finally found some time to do so. I have to admit, hedging is probably one of my weakest skills and I continue to struggle with hedging correctly.

In its most basic form a hedge is a counter position trade. Let’s assume you have a core long position in SPY. In the scenario the market overextends itself on the upside and signs of a reversal or retracements may near you have 2 choices; either take a partial profit, or buy insurance as a hedge against your core position.

So if you had $100K of spy shares, and you have a chance of a reversal you may decide to buy a spy put or even an inverse to SPY such as SH or SDS (proshares).

So we all know that already so let’s get a bit more technical.

Why to hedge?
For me I have a very simple rule when it comes to hedging, I want to protect my open profits and my core positions. A hedge is quite tricky emotionally as it’s a position against your core direction and belief. So you will be hesitant to take this position as you do not believe it will go into this direction – so forget about direction but think about your open profits. The other main reason is that your core position price and time targets for taking profits may conflict with the current market moves - so trade your plan on your core longer term position, but protect yourself from unforseen short term moves.

The most important thing about hedging is the size you want to take for insurance. You need to come up with proper conversion mechanisms that allow you to properly identify the size of instrument you want to use as a hedge. When hedging using ETFs you only have to worry about size, when using options you also have to consider time and strike price as well. I am not going into detail here on hedging via options as they are many articles out there that explain the different type of hedging strategies using options. Just be aware of the time component that can play some tricks on you. Of course it gets more complicate depending on what you are trading, futures, etfs, stocks, options, etc. When trading SPX (which most of us do here using various methods) you can always calculate it all back to your full SPX buying power and convert it back to the other instruments.

For me, the first step as a hedge is generally a 30%-40% size against my core position. The largest I generally go up to us 60%. There are rare instances when I hedge myself by 100%, and that generally ONLY happens after I had a strong run into my direction and met a profit target but are hesitant to take profits; OR the other most important instance is when I believe that the market is overextending itself beyond specific boundaries. This is especially important when you enter new core positions at specific breakout ranges. There are many strategies for entries, most of them are accompanied with stops, but as mentioned there are instances when I use a hedge instead of a stop.

Some basic rules I follow for hedges

Never hedge during trend days. This one has burned me quite a lot in the past. Let me give you an example. I had build up a wide range of short positions that I had held through a lot of pain with the anticipation of nice gains. The market opened with a nice GAP down putting all my positions close to break even, the market continued to trend lower and I saw open profits, excited that the pain zone had been removed I entered a big hedge as I did not want to see reds again. I kept on getting stopped out as we moved lower and I kept on hedging in larger and larger ratios. End result for the day, short positions up 5% for the day, loss due to hedging 4%. It happened again a few weeks later in a similar situation but I stopped hedging after the first failed attempt. The end result for the day looked a lot better but still a loss on the hedge and less profits at the close of the day.

So as a result, during stepping days (trend days) I let the profits run, yes the chance of an intraday reversal is there but it is very small and if it does occur it would put me back to where I started. Highest probability is a winning day. Think about this, if you have 5 different trend days in your positions favor, you may get one that has an intraday reversal, even if that happens you can hedge once the market fills the gap. In the end – it’s not a loosing day after all. So do not try to get fancy when the market is moving strong into your direction. FYI: Stepping day is a GAP of at least 0.80% (preferably 1%) with high/low of day being set within the first 10 minutes close to the open price. Other trend day scenario exists but this is the most common.

A hedge is not a trade – this is another one that I had to learn the hard way. A hedge is meant as insurance to keep my open profits at a level I desire. A hedge is really just there to keep this one number on my screen at a level I want. It should NEVER be considered a trade. If your hedge ends up making good gains, well then you need to re-evaluate your core position as you may be in trouble and the market has turned against you without you realizing it. The topic of gains on my hedge brings me to another new rule.

Only exit on a hedge is break even stop – this is pretty new to me and many may disagree. But a hedge will ONLY EVER be closed out at break even (sometimes a bit below depending on the entry). This here is probably the most difficult rule to follow but it supports the rule “a hedge is not a trade”. In the past I had closed out hedges after a few points because I felt that I got lucky locking in some profits on a counter trend trade (against my trade plan). Big mistake, market kept on moving and my core position kept on declining in value. So if you want to profit off a short term move on the market enter 2 trades, one as a hedge, and one as a short term trade using a DIFFERENT instrument. This will help separating the hedge gains from your gains using another instrument. I have been considering creating another account only to be used for hedging and removing the open positions from my UI to not trick me into closing out. While this account would be a looser it would get funded continually from gains made using my core positions. The important component is the balance on all your accounts at the end of the day that’s what you want to protect.