My friends know how I agonized all weekend over taking the reversal signal my little system gave me Friday. This morning, I added ATM (at- the- money) Puts with some OTM (out- of- the- money) Calls as insurance. For you Greeks, the delta was weighted pretty heavily towards the Puts. As of this afternoon, the agony I experienced over the weekend has, shall we say, subsided:
That was my dilemma. As I wrote (and danced) about last week, my current methodology gave an outrageously strong buy signal Thursday (8/16) afternoon, and I piled into calls which expired the next day. Worked out nicely, but then I was left with the decision as to how to proceed- I had to sell the calls Friday (8/17), but I had just gotten a “buy” signal the day before, and usually they’re good for a number of days.
My two choices on Expiry Friday were:
Wait for “re-buy” signal to get long (basically, a pullback into the swing long), or
Roll the options forward- sell the August Calls and purchase Septembers with part of the proceeds, taking some chips off the table in the process
And now it seems I have the answer to my dilemma:
Monday didn’t pull back to 143, which is the level I had targeted for re-entry. It’s now clear that rolling into September Calls on Friday would have been the best choice, regardless of whether there was a pullback afterwards.
Getcha next time? Soon Amy, Soon.
OK, Snoopy Dance completed. I was pretty confident in the long signal Thursday afternoon, and loaded up on Calls which expired Friday (I have a witness, I swear). I hedged a bit, with OTM (Out of the Money) Puts - reduced my gain slightly, but cheap insurance in case of a catastrophic dive. I unloaded half the Calls just after the open Friday morning (in between Snoopy Dances), and the rest mid-afternoon when it became clear that we weren’t going to any significant new highs before the close.
I won’t talk specific numbers here, for obvious reasons. Let me just tell you, and the parasites that currently have a lawsuit against me for their car’s clearcoat scratches, and my ex-wife’s lawyer, that the overall amount is a small, insignificant number. It was, however, a sizeable percentage of my overall trading account (lawyers note: my itty bitty trading acount).
My RSI(4) trading method says the long is in place. My daytrading experience says Friday’s action didn’t look very pretty. My fundamental analysis says that the Fed dropping the Discount Rate is not only not the good news the market seemed to proclaim, it’s downright BAD news. The Fed has admitted they see the deflation, the looming crisis, and are warming up Ben’s helicopters.
However, these factors all work themselves out in different timeframes, and that’s what I hope to take advantage of.
Based on Friday’s action combined with the trading plan’s signal, I plan to get long again tomorrow on a drop below Friday’s close, somewhere between 140 and 143 on the SPYders.
That Long will be short-lived, because I think any upswing here will be short-lived. The longer-term (fundamental) situation is just too negative.
As I said in a previous post, I’m currently still in “Long-cash-Long-cash” mode, but expect to switch very soon into “Short-cash-Short-cash” mode, probably after the next time I take a loss on a long.
Let’s watch…
We got our buy signal, and we got long. In the previous post I’d said
I see Thursday 8/16/07 as a PRIME, and possibly the LAST, opportunity for a buy signal to emerge before we have to look away
and I also said
I will get long very aggressively on any good OGRe (Opening Gap Reversal) once it trades back into today’s range.
This OGRe wasn’t a pretty one, however. (For a more thorough discussion of how I view OGRes, see this post about Trading Opening Gap Reversals). We got our gap down, but then spent the day alternating between ecstasy and agony with those wide swings… until 3pm EST, that is. Then we got that outrageous “4 dollars straight up in 50 minutes on huge volume” rally right at the end:
The daily chart looks more like a nice clean OGRe since it doesn’t show those intraday vascillations:
Note that, per the Gospel According to Steve Nison (aka Japanese Candlestick Charting Techniques
This trade, like most I’ve written about the last few months, is based on my current RSI(4) -based methodology. These trades typically last from a few days up to about three weeks, with the majority on the “few days” end. So this is still a quick little swing trade in my book, not a pronouncement that we’re headed back for all-time highs.
I don’t think so. The macroeconomic factors haven’t resolved in the least. In fact, I’ve continually made fun of the talking heads’ using euphemistic language like “housing slowdown,” “slump” and the ubiquitous “soft landing” … we’re not even close to the last shoe dropping on the housing bubble (can we all agree on that term now?). I firmly believe there’s a Dragon in the Corner and that we’re about to enter the recession portended by the yield curve inversion starting in December 2005 (remember, the recession often takes 18-24 months to show up, but of course the choir has endlessly sang “This Time Is Different”).
Note the deflationary symptoms rapidly emerging: tight credit, reduced money velocity, and hey bugs… check your gold prices– who says gold goes up because people buy it when they’re scared? People are scared as hell right now, but gold is faltering because of the risk of big “D”. Oil’s down, too, thanks to the stronger dollar. And yes, I believe the Fed’s response will be to lower the target Funds Rate soon and start increasing money supply vigorously, but in this case, I’d agree that it’s about their only choice since we’re so far down the Rabbit Hole.
Also, I’ve extensively (exhaustively, painfully) backtested the RSI(4) method I currently use, and it’s told me something: in uptrends, it tends to cycle from the high 20s to the mid 80s, sometimes spiking into the 90s (i.e. skewed upwards overall). In downtrends, on the other hand, it tends to drift up into the 70s, then soar down into the low teens or even lower. The last few cycles, it’s been acting less and less like these are “pullback in an uptrend” swings, and more like full-fledged downtrend thrusts. I may be switching from buying drops to shorting rallies in the very near future.
Precisely! 
I had said I’d consider any close on the SPYders above 143.55 to be a buy signal. Alas, we got no buy signal. But we did get these:
The S&P 500 is into the red for the year
The VIX is at a 4-1/2 year high, and well away from its 10-day moving average (search the site for “VIX Fade Trade” if you don’t know the significance of that)
The water-cooler chatter has risen to a roar; it’s turned from “look how much money I’ve made” to “look how much money my advisor has lost me”
I see Thursday 8/16/07 as a PRIME, and possibly the LAST, opportunity for a buy signal to emerge before we have to look away so as not to watch the carnage.
Here’s what I’ll be looking for:
I will get long very aggressively on any good OGRe (Opening Gap Reversal) once it trades back into today’s range. Needless to say, that trade would have a stop at the low of the day in case of a failure. I will get long on any positive close above 142.25.
Anything else, and I will stand aside.
After yesterday’s solid selling, my current RSI(4)-based strategy has me going long on any close above 143.55 today:
On another note, Ugly has a post from a few days back called Jesse Livermore is a bad role model for traders. Some interesting discussion in the comments (of course I had to put in my 2c) relating to trading, and more importantly, to depression. Clinically depressed and Bipolar people are often drawn to trading, and it destroys many of them unless they learn to use it as a tool (a mirror, as I’ve discussed before), and not a way to try to “succeed” when what they view as their “failure” is actually coming from the inside.
Cheers. Let’s make some money.
Lady Fortuna smiled on my little world yesterday, as the order I entered (at 6am, before work) to sell at 150.50 on the SPYders was just barely triggered before the afternoon failure. The folks around work had to put up with my doing the Snoopy Dance.
That long entry was originally triggered a few days ago, as documented in this post. I actually added some calls Monday, after the buying surge following Friday’s drop. Those calls were up an obscene amount when they sold, but I’m not titling this post “How To Make 400% in Two Days” for a couple of reasons. One, I’ve been in this game long enough to recognize that quick gain for what it was: pure luck. Another, it would drive my traffic up, but only with rubberneckers, so it would hurt my conversion rate
Where does that leave us tonight? Well, we took on a handful of puts at 10:00 EST this morning with a little of that windfall (I was off from the ICK! regular job today). They’re pretty far in the black, another visit from Lady Fortuna, and I hope to scale out of them somewhere below where we are now (today’s close was 145.39). But that’s just the myopic trade. Here’s the big picture:
Based on my current RSI(4) method, a close below 144.10 will trigger a setup to potentially get long the next day. That is, as long as it’s not too far below 144.10, like down in the mid 130s. In that case, the long entry will be on hold, but no worries, the puts will be fueling the Snoopy Dance.
How was that for some intraday whipsaw action? The Qs ran through almost $5.50 of up- and- down swings before finally ending only about 50 cents above where they opened. I think back to the days when I would have lost half my account on action like this… going short, then getting spooked and flipping long, then losing money when it headed down, only to double-up on the next short to “make my money back” at the precise moment when it turned back up for 80 or 90 cents.
There are some proficient daytraders out there who likely made more today than any other day of the year, leaving the people who just look at closing numbers to scratch their heads and go, “The Qs were only up 37 cents, how did they make so much money?” Over five dollars’ worth of long, smooth swings, that’s how.
Me? I was at work all day, and it’s just as well. I can daytrade pretty well when we have some noodling and then the formation of a good intraday trend, but a wild day like today would probably still have me mopping up blood at 4pm Eastern Stupid Time.
To the swing trading: I’ve been waiting on that 2nd “Buy” signal I wrote about a couple of posts back. It would have officially triggered on a close above $146.49 on the SPYders today. Had I been home, I’d most likely be long even with them closing a few cents below that. Here’s why:
The action today drew a daily bar which dipped below the prior low, then rallied to close back above it. That’s a buy signal. Unfortunately, that low happened down near $144 at about 15:00 EST, and that buy signal happened 45 minutes later at a price of about $145.50, with a whopping 15 minutes left in the trading day. Not much time to jump in there.
But the late, strong rally on very heavy volume means I’ll be looking for an opportunity to buy tomorrow for a short-term swing trade.