Over the weekend we said:
Keep in mind we are in a time period of volatility expansion and when coupled with a news driven reactionary environment you have all the ingredients for a chef Emeril "BAM" market. In both directions I might add. Its imperative that you maintain your composure and DO NOT allow your emotional state to dominate your thinking or trading, you need to monitor that. One way to do that is by NOT biting off more than you can chew per trade size risk management. This alone will ensure that you are able to make it thru any storm and be able to come out the other side none the worse for wear baring a few scrapes and bruises.
And this is the buzz for the week/month.
Below are your index charts
Here are your 60 minute time frequency charts
All the while in the channel we can still go higher and of course lower. Its all about the channels. Until we break to the downside expect to get chewed around back and forth. That all said could we still make another gap and go run for a retest of recent highs? If so it could be in the form of a REACTION from a news event and we all know the news event in mind right?
Hmm Friday mornings reaction to the new potential stimulus that from what we hear is about 300 Billion? You know, the one that we’ll do now and PAY LATER FOR? Huh? Wha? Say Again? More kick the can? More extend and pretend? Whatever we say.
Look one way or another the market is going to make the call on that whole speech come Friday morning. If the markets get popped on it? We’ve got major resistance just above.
If the market balks at it? Well then trend channel support is next stop then a break of the channel so you see either way we’ve got levels of support and resistance that we can use to manage our emotional state.
So you see until we get some resolve to the channel one is best to just let it work itself out.
As for the longside? Well with regards to the leaders I need to see some sort of chart pattern stabilization and right now I’m not seeing much I can work with from a daily chart pattern perspective. As for other things on the longside to look at? I’ve got one BUT it needs to pullback to some sort of support level as shown in the chart below.
So what is one to do? nothing but sit back let the leaders over the next few weeks come to us and that means a resolution of the bear channel that’s building itself out. Should we get a break of it to the downside for another leg down of a potential sell off? We’ll use that to be buyers on the longside but not really much in the way of leadership till then. Don’t forget, good things come to those who wait
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Game Plan for the week of 9-6-11
Use weakness to lock gains in our short sells. BUT until we break below the bear channel on the indexes we can just chew around it in wide and loose form.
That means whipsaws back and forth. Nobody is going to fault you this week for locking short sell gains on market weakness.
So what happens IF we were to retest the lows? Well we’d want to lock some gains along the way that’s for sure. What happens if we break new lows? Here too we’d use that weakness (strength on the short side) to also lock gains. Then If If If we were to get a September capitulation low? We’d want to be able to use that Greedy Gus strength on the shortside and Nervous Nelly face of capitulation fear on the longside to start picking off pieces of the leadership type names on the longside. At this point its really a matter of when than if all subject to wide and loose test your mental state till it occurs if it occurs. In the meantime we’ll take it a day at a time.
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Between Now And Year End Template
What happens after this 5th wave? Simple, if Elliott Wave theory is all about fives and threes then a three waves up counter-trend rally to the upside would be in order. Below is an example of a past market leader whose done just that, albeit the red 5-waves down sequence isn’t as extreme as the one we are experiencing currently but you get the point.
As you can see after 5-waves down we have a 3-waves up affair. Once that 3-waves up affair completes itself? Well you can see what typically takes place after the counter trend rally. It’s another sell off. You can also see this blue 123 waves up rally lasted a few months and that is common, it’s going to take that long to repair all the damage we’ve seen out there as it won’t be repaired overnight and just about the time it gets what ‘ll look as repaired? It’s time to roll ’em back over to the down side again.
As for 401k’s, mutual funds and long positions?.
(Note we are not talking long positions that have been held since eternity with a cost basis of nil or extremely low because to sell those the tax implications would be huge — we’re not talking about that type of money here)
It’s in that 3 waves up of 2 that when all said and done should look like a 123ABC up pattern. At the end of it, THAT is when you want to raise some cash in your 401k plan by moving out of equities and into the safest vehicle they offer.
For those who have a matching contribution where your employer matches you up to a certain percent? You are already doubling your money with the match what the heck do you need to have that money in the market for? So traditional Wall St. can keep getting their management fees while you get squat like you really have over the last 10+ years?
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SHORT SIDE WATCH LIST
ALXN
9-6 We are going to need to see stalling at the highs and or a break to the downside of the Pink line to get us to short this issue. Sure these pharma’s are strong relatively speaking but remember in bear markets they ultimately get them all.
9-7 Kinda reminds me of HANS. It too broke into a new high and staged a shake and bake. A shake and bake is where an issue breaks out into a new high gets everyone all excited and shaken up then ? Bakes them by rolling right back over. That’s wide and loose patterns for ya folks.
ATHN
EZPW
9-7 In the event the markets want to retest recent highs then the red line ought to act as a resistance level. And we all know what we need to do at resistance right?
TSCO
9-2 As you can see with all of them, none have yet to break and that’s good because it allows you to be prepared in advance should you need to take some action on the shortside be it to gain exposure in order to profit from a potential 5th wave or for one to offset longterm legacy longs that you’ll never sell anyway.
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LONG SIDE WATCH LIST
"Only The Best And Forget The Rest "
"We Trade What We SEE, NOT What We Think, Hear Or Fear "
RGLD as shown at beginning of newsletter, on a POH that is.
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FEATURED BUT NOT TRADE TRIGGERED BY US LIST
NOTE: All of the names on this long side watch list are INVERSE INDEX ETFs. This means that if you go long any of them you are essentially going short the indexes. Keep in mind all of the below are LEVERAGED that means 2-3 times market risk. It works for you and against you.
TZA
SDS
9-2 Tagged a support zone (resistance zone on index)and launched. Same goes for the other inverse ETF’s
QID
For those of you who own QID which is based upon the NDX 100 take a look at the NDX 100 chart below. Would you say its more of a buy right here? or a sell and at resistance?
SLV
9-7 As you can see today’s opening action for the most part took this issue to trend channel support and one could say the 50 day.
GLD
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All About Options In The World According To All About Trends
Over the weekend we posted an article in this space entitled:
OPTIONS — Your best friend and worst enemy
That article is at the bottom of this newsletter for reference anytime you need it.
NOTE: The exchanges recently started WEEKLY EXPIRATIONS of options. Going forward, make sure that you check to see which ones you are buying. Let’s stay with traditional options expirations which are the ones that expire the 3rd Saturday of every month.
Current Holdings
GMCR We are now long 1 September 105 put option to open at 12.95
As we post they are currently trading at 3.40 bid
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Let Your Stocks Tell You What To Do By The Action They Exhibit"
Short Side Positions
GMCR (We are now SHORT 100 shares at 94.90 as of 8-25-11)
9-7 Well as you can see in the current markets gap and go move this issue tagged the retest of the highs we mentioned on 9-2 and did you see what happened immediately? It sold off.
9-2 Could this issue retest its highs? Sure anything can happen. But if that were to occur I have a question for you. Then what? I mean that’s a major resistance level and coupled with what the indexes are sporting? Heck I’d be apt to think about shorting more should that occur. We’ll see.
Below is the last 14 days in one minute time frequency.
SRCL (We are now SHORT 150 shares at 80.69 as of 8-17-11)
HUM (We are now SHORT 175 shares at 74.22 as of 8-17-11)
I took this chart out a bit in time frequency today to show you a bigger picture view. As you can see it too has a first thrust down now in snapback rally mode much like a lot of other things out there. Complete with an ABC up currently showing.
CXO (We are now SHORT 150 shares at 85.19 as of 8-1711)
9-2 Lot of structure here. Overall? Locked in a downtrend channel with waves 123 and 4 currently showing.
LONG SIDE POSITIONS
TZA (We are now LONG 125 shares at 46.13 as of 8-16-11)
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To our NEW SUBSCRIBERS
What we’ve tried to do is break our watch list down into chart pattern recognition structure from a visual standpoint. Learn the patterns and the components of patterns and you’ll blow those Wall Street MBAs away. You don’t need a $3,000 software program either. All you need is a BURNING DESIRE to be the best that you can be and we’re here to help.
We have a lot of new folks here and we thank you! We want you to take it easy, get to know how the routine works around here for awhile and to feel comfortable.
We hope you all aren’t here because you are chasing performance. For us it’s more about educating and making you the best you that you can be first (that’s what we focus upon!). Like many of our long time subscribers they have all found out that they have no use for traditional Wall Street (and we don’t blame them) and it’s our hope that over time you’ll have acquired enough knowledge from us to say the same with conviction.
One of the most important things we want to stress is that of RISK MANAGEMENT via POSITION SIZING. You don’t need to stack your account with just a few big positions as we’ve seen it time and time again that those who get into trouble are the ones who take large positions and do not employ any risk management system IE shoot for the fences. Those are the people who live on the fringes of extremes and yes ultimately get burned.
As a guideline a good initial system is that of the following example.
Let’s say you have a $100,000 portfolio and let’s say that as a guide you never place more than 10% ($10,000) into any one position. Now let’s say that one day a news driven event hits (over which you have no control over anyway) and one of the positions tanks 20%. On its own that position is sporting a $2,000 loss, while that may seem devastating on its own its really no big deal overall.
Why? Simple its all about risk management being properly employed. What is the impact of a $2,000 loss to the TOTAL VALUE of the portfolio in this example.
Answer: A whopping 2% LOSS. Now you know why we say no big deal.
We can also tell you new people here that you will get stopped out of names and you will take hits. There is nobody on the planet living that has ever hit 18 holes in one and there never will be. We’d rather get you grounded in reality right away vs talking about pie in the sky all the time like a lot of other sites. In so doing your head is screwed on straight from the start and when those days happen (and they will) mentally it won’t mean a thing to you. To us that’s what’s most important is YOUR state of mind as it’s your most important asset. We hope you appreciate our honesty.
We have a very good retention rate here at All About Trends and a lot of great outstanding people here. We like to think that a part of that is being upfront about what can happen (in both directions). Verses those up 500%, I turned $50,000 into $3 million or some other absurd number to get you to bite. That’s not who we are.
WELCOME ABOARD!
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Lastly with regards to taking any trade:
Remember the moment you take a trade you are at the mercy of the market and have no control except when to sell. If you are not willing to take the risk and are not willing to pay that price do not take the trade. We are willing to take that risk knowing full well the end result could be a loss. That said make sure that portfolio management trade size is used accordingly. With any position you may take make sure that should something go awry the amount of total impact to your account does not devastate your acct. Try to stick to a 5% position That’s the key to portfolio management, not biting off more than you can chew.
Remember the mechanics of reality with regards to the stock market states a stock can only do one of three things: Up, Down, Nowhere. The moment you hit the enter button you are at the mercy of the market therefore the only control you have is when to sell/cover. You can’t manage your gains as you have none to manage initially. Knowing this in advance it allows you to stay in outcome, that being you will either:
1. Make a gain
2. Wash
3. Get stopped out at a loss
Remember the market IS the boss. IT is going to do what IT wants to do.
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OPTIONS- Your best friend and worst enemy
Let’s talk about options for a moment. First off this is a big universe with a lot of advanced strategies and terms like theta, delta , straddles, butterflies and the whole gambit. For the purposes of this conversation we’ll keep it real simple and not try to get to deep.
We’ll approach it from simple buy puts (short side) buy calls (long side). The first thing I want to mention is that options attract the fast money crowd in hopes of turning 500 into 10,000 overnight. This is also the get rich quick crowd. And more often than not these type of people get broke faster than they get rich. Please don’t be one of them as greed kills.
Time and time again we hear from people who like to trade options, and time and time again we hear the horror stories too. When we hear the horror stories nine times out of ten we can guess as to why their option went to zero. Nine times out of ten it was because they bought out of the money options or at the money options. This is the reason why 80% of those who do options lose money by the way.
Sure there are folks who use out of the monies and at the monies but those are experienced traders that know the ins outs ups and downs.
You see the trick is to NOT pay for time. You want as close to a point for point move as possible with the stock because there is nothing worse than seeing your stock move yet your option does nothing or very little, know the feeling?
So for All About Trends we only want to look at IN THE MONEY CALLS OR PUTS and we DO NOT WANT TO PAY FOR TIME, sure they cost more BUT we want to be as close as possible to being able to see a point for point move with the stock.
We hate paying for time. We want true value without the time. We’re not saying our way is any better than others, we’re just saying it’s what works for us.
Now let’s touch upon how we would build a portfolio dedicated to options and how to make it a piece of your overall portfolio via allocation. Keep in mind this is more geared towards beginners so you advanced people might be bored with it but then again it never hurts to revisit the basics every now and then.
At All About Trends Trends we talk a lot about never biting off more than you can chew and trade size position management. We do that for a reason, we do it so as to when Murphy’s law shows up it never devastates us or blows us up. Typically we try to stay within a 5-7% position size when we do a trade. The same thing goes for options. If we were to start a portfolio of options or shall we say allocate a portion of our overall portfolio to options the way we would look at it is the following:
For example, let’s say the total value of your portfolio is $100,000. The most we’d consider allocating towards an options strategy is 10% of the whole portfolio. In this case $10,000. So now you’d have a $10,000 option portfolio to work with. Now let’s say that you are the worst trader on the planet (we doubt that!) and you lose the whole option portfolio, what’s the risk to the total value of the overall portfolio? 10% in which case you live to play another day. Now let’s touch upon that $10,000 you allocated toward options. Let’s reduce the risk even further (and we haven’t even talked about what stocks to trade yet). Let’s take that $10,000 and split it up into no more than 10% ($1,000) can be allocated to anyone position as a guide. (Sometimes 1000 can get you 3-4 contracts you know). Now let’s say that one of those positions goes bust (and they will! and sometimes more than one at the same time we assure you.) What is the total impact to the overall options portfolio? 10% right?
Now let’s take that a step further. What’s the total impact to the overall investment portfolio of 100,000? 1% – that’s right 1 measly percent. When it comes to options you need to employ some sort of portfolio risk management structure parameters as this way you can get in trouble and you don’t lose sleep – you just have a bad day that’s all.
As for getting rich overnight? Forget about it. That’s just a marketing ploy. As for taking 50,000 and turning it into millions? Ain’t happening overnight but it sure sounds good doesn’t it? And that is why people bite on those marketing ploys.
As for time? We never go out months. As a swing trader we’re in positions for only a couple of weeks best case so why pay for the time to go out further in time when you don’t have to. When the stock moves whether it’s right away or not they sure seem to suck that time out of you just as fast anyway right?
Typically we’ll look at the front month (current month) or the next month but not months. When we say front month if options expiration is a week or sometimes even two weeks away we’ll look out to the next month and not the current. While time is our enemy in most cases, in this case it’s your friend. It’s just that you don’t want to pay for it
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Don’t forget you can view updates in the middle and the end of each trading day complete with current charts, along with our current performance at our subscriber only web site.
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