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Yesterday we touched upon why its not always a good idea to short a big gaps down at the open and why its better to wait for the opening dust to settle. Today lets revisit those two stocks we highlighted for a moment.
Yesterday’s chart
Today’s chart
Yesterday’s chart
Today’s chart
So whats the moral of the short term story here? Always let the dust settle from the open. Folks this goes both ways by the way ala same deal on longside, wait for the opening dust to settle. For you day traders, scalpers and you "I’m going to get my 200 dollars a day (which is $1000 a week, $4000 a month, $48,000 a year and get out" folks? This is the only trade set up you ever need to know long or short.
Think about the above $200 a day game plan for a moment. That is HUGE over the course of a year folks!
So what exactly is $200 dollars a day? Why its 200 shares of a stock to move a lousy point, thats it!. On top of that? For the most part you are done with your day by noon and back to cash and not having to deal with gaps! Now thats a game plan for volitile times for you traders. All without any overnight risk. Which is where a lot of the damage is actually taking place long or short as evidenced by the last month or so. Heck on a 100,000 portfolio? Its a 48% return using simple math in a perfect world mind you all by going home with 100% cash at the end of the day. Get in, get your gains, get out long or short. What’s not to like.
As for the indexes?
After the last two day’s rout today’s bounce action is to be expected because we need to digest those gains on the shortside before another swing down (think reset the oversold stoh’s on the 60 minute index charts). And sure enough here we are backing and filling. Its also a support level on most indexes (S&P 500, RUT 2000) so everything we are seeing here isn’t out of line. We’ll see how nervous and skittish things really are though as we approach that magic last hour.
We are alright sitting with our short sells for the time being as we still haven’t resolved any issues in the EU. We did hear yesterday out of the G20 that they will do whatever it takes to fix the situation and are putting a plan together and will have one in the next few weeks (just about in time for the next installment to Greece, or maybe not. In our world that’s code for Greece will be a default but we need to do damage control to our banks (shore them up) before we let Greece go. Folks this is a highly fluid environment with news and rumors and just gibberish flying everywhere every few minutes. Slowly but surely we are winding down the amplified news driven time band with issue after issue being answered. First it was the debt ceiling,this week the waiting game was the fed and what they were going to do, next up the EU banks Greece and everything attached to that.
Once we get some of those unknowns out of the way HOPEFULLY we can get back to more of a normal market climate whatever that is these days. In the meantime take it easy on both sides of the coin per se. Its the weekend and I’m sure there will be all kinds of wild and crazy stuff hitting the news wires from overseas. That all doesnt matter as its all about the charts.
That all said there is a good possibility we aren’t done yet to the downside. After all we really haven’t seen any capitulation from Nervous Nelly on the long side nor any cloud nine emotional states from Greedy Gus on the shortside YET. Both of which are emotional extremes and mark turning points from a human psychology perspective.
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SHORT SIDE WATCH LIST
9-19 It’s 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".
9-23 This weekend we’ll touch upon some leaders that have really yet to "Get It’ to the downside and what we need to see going forward with those in order for us to consider a short sell in them if at all.
LULU
9-22 Broke to downside but has bounced back up to the pink line. This one can be taken right here BUT keep in mind if the Area 51 guys want to create a little havoc it could rally back up to the red line or 50 day.
With all of the above If If If the markets do take out the Aug. lows and this really is going to be a 5th wave of the new lows variety odds favor these names all retest they’re Aug Lows. That also means our short side positions do as well.
We are actually good with taking a small short position in LULU and are willing to sweat it out upon an entry.
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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
9-23 BUT! What happens once this fifth and final wave down is over? Are you going to be ready on the longside? NOW is the time we want to start to think about this because typically Sept. and Oct. is when markets bottom and are good for the rip roaring push into year end.
This is why going forward we’ll want to start a watch list from the standpoint of "What Do I Need To See To Make Me Take A Trade " on the longside.
We’ll start to do that this weekend.
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FEATURED BUT NOT TRADE TRIGGERED BY US LIST
NOTE: All of the names on this 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
QID
AAPL rolls to downside this issue bounces as AAPL makes up a big piece of this issue
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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.
NONE until the wicked volatility out there can settle down to a more normal stance.
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Let Your Stocks Tell You What To Do By The Action They Exhibit"
LONG SIDE POSITIONS
SLV (We are now LONG 250 shares at 38.87 as of 9-12-11)
9-23 We were fine considering one has no control over gaps yesterday as the 200 day average tends to act as a support level. But today’s gap (which here too nobody had control over) puts this issue at a major support zone. Still though this issue and the other metal issues have? Well issues. Any bounces and we’ll walk away. That is unless the ECB and the rest of the Central Bankers Country Club start printing money. Or have we all forgot that that has been a major theme these days .
GLD (We are now LONG 50 shares at 175.55 as of 9-12-11)
EGO (We are now LONG 300 shares at 20.76 as of 9-12-11)
9-23 See notes under SLV
9-22 Given our entry points and given that these are basically at or near some support levels we’ll gut them out for a bit here. BUT also given our entries and the small position sizing we have in each we are more apt to be more focused upon the total value of our overall portfolio and may walk away on strength in near future especially on any bounce. BUT that is us, a lot of you have these names at way lower cost basis’ and for many different reasons so you will have to think that thru on your own.
SHORT SIDE POSITIONS
9-22 Here is the bottom line, we have short exposure and we are staying with it!
TSCO (We are now SHORT 200 shares at 65.19 as of 9-12-11)
9-22 Trend channel support might not be a bad area for a little ringing of the cash register. Lets get there first then we can talk.
GMCR (We are now SHORT 100 shares at 94.90 as of 8-25-11)
9-22 Tagged the 50 day and bounced, still though in bear markets they get em all and once they get to this one its watch out , just look at a 2 year chart – lot of thin air down below.
SRCL (We are now SHORT 150 shares at 80.69 as of 8-17-11)
9-22 I’d be good with locking gains on a retest of Aug lows. Or even a retest of today’s lows.
HUM (We are now SHORT 175 shares at 74.22 as of 8-17-11)
9-22 Same here a tag of Aug. lows and I’d be good with locking gains.
CXO (We WERE SHORT 150 shares at 85.19 as of 8-17-11)
This morning we covered our short sell at 76.37 and are no longer in the position. the result of this trade was a gain of $1323.00
TZA (Which is really being short as its an inverse index fund)
(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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