Reminder: Harlan is available to chat with Members, comments are found below each post.
"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 we might add. It’s 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."
Right now the market is looking for something concrete it can hang its hat on. Its nervous and that is why every little news ditty makes it react either positive or negatively. When it bounces it chews the shorts alive, when it falls apart if chews the longs alive when all said and done the net result is nowhere but all within the channel. All makes for a wicked trend channel and a market looking for something real it can actually hang its hat on.
Yesterday we said:
Its really a question of whether it will or won’t. Given the Full Stohs indicator in each of the index charts are in deep oversold territory (9-13 We are now back to overbought) we need to relieve that oversold zone before we can even consider another leg lower barring a headline news driven event.
As for the daily time frequency charts?
9-13 The only thing in a micro time frame that bothers me is the thin blue line. Its a POH. BUT overall we are still in this pink trend channel. A downside break and all bets are off on that little blue line. In some of the selected leaders shown below they too have that little blue POH line all within the trend channel though too.
I’m not saying they are all going break to the upside if at all, I’m just laying it out there because its a pattern we watch. Odds favor if for whatever reason we were to bounce higher within the channel then it would be based upon some little news article complete with the famous gap higher. Again, I’m just letting you all know its out there. But remember even if there were to be an upward spike we are still locked within the trend channel and its a bearish one at that.
Lastly, here is your chart for the day. Notice its the German DAX over the last six days?
Ahhh heck while we are at it here is the two day one minute chart of the NASDAQ Composite index.
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Game Plan for the week of 9-12-11
As of this moment in time we are locked in a downtrend as shown in the index charts. The overall trend is down and that is that (green lines in daily index charts). As of Friday’s close we stopped cold on the short term uptrend channel support off the Aug. lows (Pink lines).
If it breaks? Hang on to your hat as it’s welcome to the 5th wave down for you wave fans and for the rest of you it’s a downside break of the short term uptrend channel all within an overall downtrend. Yes folks you have have opposing trends within larger trends, think stair stepping down in this case and POL’s.
There is a good possibility that this whole correction isn’t over till we see CAPITULATION. In fact we’d welcome it, not only because we have short exposure but also because it marks the beginning of the end (could be a few weeks). At least of this down leg. Then we get the into year end push higher. Ahhhh but at what level does it start right? Isn’t that what we all want to know?
The quick answer is we don’t know but more often than not what we do know is what are the characteristics. The biggest is NERVOUS NELLIE caving in. Behind that is a market that looks ugly and scary. After all let’s not forget "It’s always darkest just before the dawn" right? In addition to that odds favor some news event be it here or overseas. Hmmm we wonder if Warren is going to end up eating that BAC stake when all is said and done.
We’ve used the analogy of setting up the pins to describe the markets and what they do. What we may have just seen is just that, a recent setting up the pins (bounce higher off August lows). If that’s the case then it’s time for them to bowl for strikes. That means knock the pins over so we can set em up into year end again in order to get the print. In fact they almost have to if we are going to make the magical "Up Into Year End" push to get the talking heads saying "See it wasn’t that bad" now was it talk that we hear every year into year end.
Who are they you ask? Why The Area 51 Folks of course, you know the ones who dominate the markets with 60% of all volume on the exchanges doing all the trading who buy Nelly’s fear that’s who.
What we are going to do is hang on to our short sells and look to add short side exposure. We’ll do that via any intraday strength (Here’s to hoping for an up open on Monday. )
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A Few Follow The Leaders Standouts
9-13 Still way overbought by the stoh’s standards.
9-13 Here too stohcastically speaking way overbought
9-13 Here too BIDU is also sitting in overbought territory.
As I said in the beginning of our newsletter under the SPX daily chart. These issues overall are still locked within trend channels and until they break to the downside of those channels they can sit around and chew one alive. We just feature these so as you are able to gleam what the leaders are looking like.
Aside from those little blue lines I really see no decent basing structures being built (Bottom of cups?) of taking place. Just falling knife lows with no real "Back To The Scene Of The Crime Retest".
Look I’m all for going long but I really need to see some structure I can be confident in and I’m really not seeing it to the degree or broad based that I can sink my teeth into. BUT it’ll show up at some point (it always does) and when it does? As usual around here it’ll be a when it rains it pours moment. Keep in mind we are just entering into the Sept. and Oct. time frame where markets tend to get decimated and lows carved out.
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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
9-11 Folks its all about channels. Downside breaks of them that is. There are TONS of names sporting channels out there. Downside breaks of those channels are the "What we need to see to take a trade on the short side". Given how many we are seeing? The market is talking so you better listen to IT as the market IS the boss vs a talking head or worse someone from the government here or abroad.
SFLY
NEW NAME
9-13 I hate to say it but I’d rather short on any retest of the 55 level. BUT the market doesn’t care what I want, its going to do what IT wants regardless. Still though the other trade on the shortside is a full fledged break to the downside of the pink line.
ACOM
9-13 Its no secret why we are deleting this name today as its way too far away from any sort of low risk short sell entry point.
9-12 Well there you have it, however I have a hard time shorting something that’s been falling for basically eight days. So when was the best time to have shorted this issue? Why on strength eight days ago of course. Hmmmm come to think of it, didn’t we short some TSCO this morning whose chart looked like this one eight days ago.
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. And yes Virginia V patterns are unstable patterns.
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? Let’s get the news is noise out of the way first.
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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 "
NONE for good reason
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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 ETFs
QID
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 1.15 bid
9-11 These expire this week. We’ll see if we can get the start of some capitulation or even a retest of the lows in the indexes this week which ought to help these. Here’s to hoping they get this issue this week. If not too bad because as you’ll see in the notes on this issue in our current holdings page this issue is an accident waiting to happen. I’m glad we’re short.
Remember, in bear phases they get em all and usually the strongest are the last to go. Besides this issue have a monster double top forming here.
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Let Your Stocks Tell You What To Do By The Action They Exhibit"
Short Side Positions
TSCO (We are now SHORT 200 shares at 65.19 as of 9-12-11)
9-13 Her we are still sitting up against the trend channel resistance but also look at the thin pink line. See it? Its a rising bearish wedge.
Over the weekend we said:
Lets talk about risk management for a moment from an educational standpoint.
What’s the risk? Well if it retests its highs in the 72 zone we’d be down 11% BUT then what? I mean its major resistance so are you going to stop out? Also knowing that the climate is wild in both directions and can easily roll right back over like we’ve see a lot of issues do? On top of that what if one were to take a 5% position (5% of your total portfolio) in it? Know what impact that would have on your portfolio should it make a run to 72? For illustrative purposes, on a 100,000 portfolio an 11% loss on a position that makes up 5% of the overall portfolio is a whopping 5/10ths of 1% loss to the whole. Really? that’s it? Yep. Folks, THIS IS THE POWER OF TRADE SIZE RISK MANAGEMENT.
This is exactly what will allow you to make it thru turbulent times! , Emotionally speaking.
GMCR (We are now SHORT 100 shares at 94.90 as of 8-25-11)
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)
9-13 Still in the channel so it can still chew around.
CXO (We are now SHORT 150 shares at 85.19 as of 8-17-11)
9-13 This issue MAY have finally broken the channel, that’s a good thing. See that minor support at 80? If this issue doesn’t break the 80 level if it gets there it can go right back up. The risk of covering a short sell at 80 is that 80 breaks to the downside and this issue falls apart without us being short. The other risk is we don’t cover at 80 and it takes off again back to 90. I think the proper phrases are: "We’re Damned If We Do, Damned If We Dont" and "We’re All Doomed to Make Decisions"
LONG SIDE POSITIONS
TZA (We are now LONG 125 shares at 46.13 as of 8-16-11)
9-13 Just one big wicked wide range Pullback Off Highs (POH). Thats a nervous market for ya.
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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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