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In an email exchange with LP yesterday morning, I’d said that I was not looking forward to entering a trade before what amounts to a 5-day weekend, but that I may have to if we got anything other than another down day-

If we can get a light down day on SPY today then a positive close tomorrow, I’m in (grade of B). A gap down and reversal this morning (grade of A), or light drop today and OGRe tomorrow (grade of A+) and I’m in. Spike down to new lows, then positive close (A). Or just a plain positive close today (B-).

Well, we did get one of those, and I’m in:

The alternative to developing a method and then strictly sticking to it would be to enter and exit “by the seat of my pants,” and I still have a full-time job (which I’m ICK! about to leave for) to prove how well that works.

Coffee Pot Crisis

A little entertainment for this Thanksgiving Eve. My coffee maker is about a decade old, was maybe $20 new, but makes (made) the best-tasting coffee on earth. I’ve even bought newer, more expensive ones, then reverted back to Old Faithful.

Yesterday morning I shattered the decanter. Is it me, or do they make those things out of the most brittle, breaks- into- fatal- shards kind of glass on earth? Anyway, I don’t usually have panic attacks (often), but I did then. Mister, I have GOT to have my coffee!.

Here’s my rather inelegant, but amazingly functional solution (had to tear the no-drip valve out of the basket, but it’s one big coaster anyway now):

“Coffee Pot”

I haven’t been writing much lately. Lots going on. Bought a house. Remodeling before I move in. I have a picture of my Acura TL with 1200 lbs of ceramic tile in it I’ll upload one day. Low Ri-der don’t use no gas now, Low Ri-der don’t drive too fast.

Parasites still pursuing their lawsuit, but it’s being delayed due to some “bigger money” cases, which I take to be good news.

Have had multiple awesome job offers in a short period of time, may yet find the perfect combo of pay, schedule and autonomy and finally leave The Hospital.

Right now, I’m sipping my favorite Hot Drink for a Cold Night (it dropped over 40 degrees in just a few hours last night). Unfortunately I can’t reveal the super-secret family recipe.

(Note this is not the famous cider promoted on the Bob and Tom show by the Dickens company…)

One of these and a bit of reading Vonnegut or Watts or Pirsig, and a crappy day becomes a very relaxing and pleasant evening.

Oh, and the market-

As I wrote last month, I took what was left of my account (mostly drained due to legal and home-buying circumstances) and loaded up on PUTS. The RSI(4) method I developed last Spring and Summer was screaming “short,” and I was just ready to get on with it, one way or the other. As mentioned, on October 5-10, I bought PUTS on QQQQ

I bought PUTS on GE

And, of course, I had to buy PUTS on AAPL

After time decay, the AAPLs ended up in the red, but the GEs and the Qs did ok. I did not manage to blow up.

Which brings me to my newly discovered rule of how the market works: The Market does not want you to lose money; it simply wants to foil any plan you have, which just coincidentally usually is a plan to MAKE money.

Monday afternoon (I have witnesses who hate my guts), I had had all I could take, the RSI was screaming again, and I flipped out of all the PUTS and fully into CALLS on the Qs. I actually entered very near the bottom of that candle:

I fought the overwhelming urge to sell those CALLS Tuesday on that Long White Candle, staying with the odds that after such a run the market would gap up Wednesday morning. It did, and I sold almost immediately. Nearly 200% in a day and a half.

I actually was so “in the groove” that I flipped again and bought a half position of PUTS Wednesday morning, but I had to go lay ceramic tile (see new home reference above), and sold them before lunch for a small gain, 20% I think. Guess if I had held them you’d be seeing the Snoopy picture again.

Anyway, I discovered, or rather remembered, why the different jobs and a few thousand more dollars working for someone else still doesn’t appeal to me…. because my time with my daughters is paramount, and as for income, this is my passion, this is where I want to make my living. As a guy I love dearly said in a trading interview last year,

The autonomy. It’s all on you. No one else to take the blame when you mess up, no one to steal the glory when you shine. YOU are the rate-limiting step, or to paraphrase Seinfeld, the master of your domain. I think trading attracts doggedly-independent individuals for that reason.

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) it’s not a hammer since the lower shadow isn’t at least twice the length of the real body. However, the real body on this monster is $2.31 wide, and the lower shadow is another $2.79 below that, which is still jaw-dropping.

Long, But Not For Long

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.

So Was This The Bottom?

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.

So You’re Overtly Negative, But You’re Aggressively Long Right Now…

Precisely!

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.

From yesterday: …causing me to get filled on a day that closed below my target. We’ll see how this hashes out tomorrow.

Yes, hash is quite an appropriate word.

Also from yesterday: The less-likely alternative would be for the bottom to fall out.

Did I say less-likely? I meant to say MOST LIKELY!

I’ve read somewhere that the market is actually a big leading indicator for most everything else (despite what CNBC would have us believe), and many of the reports and “news” we hear are really post-facto, with the best example being the LTCM debacle back in ‘98. None of us knew what to think when things fell apart in August (August? Are you kiddin’ me?). Then along about October or November, the fact emerged that the entire world economy had almost collapsed overnight. Kinda like, “Oh, by the way, we averted nuclear war by only a few minutes one day last year, but it’s OK now, so… no worries!”

So, stocks are being sold:

While bonds are being bought very heavily by someone, somewhere (note this is the yield… it goes down as the price of the Treasury Note goes up, i.e. under heavy buying):

Is this a little pullback in our long-term uptrend? I don’t think so, but I’ll trade my system regardless (which means I must now ignore the next “buy” signal I get and take the one after that… weird, but generally works better on days like today and 2/27).

I think stocks are being sold, bonds are being bought and yields are dropping precipitously in anticipation of something we “average” people don’t see yet; some economic news which eliminates any possibility of the Fed raising interest rates (not that there is such a possibility right now anyway), and in fact points to the possibility of lowered rates. That would only happen as a way to increase liquidity in the face of some severe, “unexpected” developments.

My two cents still says those developments have everything to do with real estate. Sub-prime, my ass. Easily three-quarters of the “prime” borrowers I know have financed, re-financed, “cashed out equity”, and “traded up” repeatedly until they currently teeter a few percent from owing more on the house they’re staying in (that ain’t ownership) than it’s worth. As more of them get sucked under by the whirlpool of decreasing home values, that whirlpool will expand, deepen and strengthen.

A friend called me up today (hey Read!) and we were talking about the nice uptick in volatility we were getting. Not exactly the words we used. But I told him how, back in the spring, I had considered stopping trading altogether, ignore the short-term action, and begin relentlessly buying a few shares of QID (the ETF which moves 2% up for every 1% that QQQQ moves down) once a week until I was 100% double-short. I had that much confidence in my… lack of confidence in the economic numbers we’re being fed. Fed. I’m all full of puns tonight. Must be the fatigue.

I didn’t do that. I like to trade too much. And by too much, I mean in magnitude and in sheer quantity. I’m convinced that a solid trading plan which profits in uptrends and downtrends is probably the best fit for me.

But, as I document here with great regularity, I could be wrong.

Now, back to the night job (mondo backtesting project… did you know there have been many many instances where “Buy & Hold” over a 10-year period actually produced a negative return? More later…)

On July 12 (just a couple of posts ago, since I’ve been distracted), I stuck my neck way out and wrote about a Wolfe Wave short setup on Google when it had been screaming higher. It included this chart:

This evening, I opened QuoteTracker to that same chart, with the ensuing data. As you all know after the “news” today, here’s what it looks like:

So, I’m a millionaire now, right? Wrong. As you can see from reading that entire post, I did a splendid job of noticing the Wolfe Wave, but trading it, not so splendid. Entry/exit rules too stingy, too anal, too cautious.

I did achieve my main goal which, as I said, was to post what I saw as an evolving setup, vs. waiting until after it played out (like, now) and singing the second verse of Woulda, coulda, shoulda. I wanted people to see that these things can actually be spotted in real time, but that it’s hard, and you can be wrong, and even if you do spot it, trading it correctly is another animal altogether. Upshot? This stuff ain’t easy.

Enough of that. What about the chart? Well, two things: often when the price tags the target line on a Wolfe Wave, it’s time to flip and go long. At the very least it’s time to cover the short. Number B would be the fact that big gaps down which draw a Long White Line (blue on this chart), indicating buying pressure right from the open, often mark a near-term bottom. [Note: this would be a stronger signal if we’d closed at or very near the high.] We may be in a nice position for a swing long now. However, if that long is going to be profitable, it will NOT break the bottom of the Long White Line, which is to say, a long trade from here would have an initial stop at least at today’s low.

The market is looking interesting, even though it’s midsummer and almost time to take a snooze for a few weeks (August is almost like trading on a holiday, except for weeks and weeks). Let’s watch.

A heads-up on a swing setup I’m watching on GOOG. I was thinking today about the significance of the fact that Google was not participating in the huge rally. I was poring over the chart, noting that each peak in the recent series of highs was on lower volume than the last. Then the words “series of highs” rang a bell- I took another look, and realized we’ve got a Three Little Indians setup.

About a nanosecond after this Dummy Spots a Three Little Indians setup, he mentally draws lines to see if it’s a Wolfe Wave. (For a step- by- step discussion of what I consider to constitute a Wolfe Wave, and the theory of how it plays out, you can refer to this post I wrote about an intraday Wolfe Wave). Today’s GOOGle chart meets my criteria:

The lines connecting the “1-3″ peaks and the “2-4″ troughs (blue on this chart) form an ascending wedge into an uptrend. The “4″ low is lower than “1″ but higher than “2″. And finally, the “5″ peak breaks above the “1-3″ line. Bingo. Wolfe Wave.

As I explained in that previous article, these setups are traded by shorting a break of the “5″ extension with a target (a clearly-defined target is the best part of these waves) derived by drawing a line from the “1″ peak through the “4″ trough:

On this chart, I’d short below the recent low around 540, with a stop at the high of 548.74. The extension line gives a target price of about 515 or so. That’s a target gain of $25 with an initial risk (Tah Dah! “R“) under $9, a very decent ratio for a swing chart.

The big question is whether it’s even possible for Google to fall with the market soaring like it did today. Well, it sure managed to close down today, so maybe it is possible.

What I do not want to do here is wait until after a successful setup has played out, then throw up charts and say “Look! If you’d bought here and then sold here, you’d have made a bazillion dollars!”. Everybody and his brother does that, and everyone looks like a genius in hindsight.

When possible (usually is with daily charts, not so much with intraday), I like to toss out an evolving setup, so we can follow along as it unfolds. Sometimes they fall apart. Sometimes they work out beautifully. Both scenarios are a part of trading, not just the pretty ones. You can never look at enough succesful setups on charts to be able to only trade the ones that work out that way. What you can do is recognize good setups, manage your risk, and trade your plan.

Let’s see where Google takes us, and whether the Wolfe howls.

I didn’t get to post over the weekend, but based on Friday’s numbers, my target exit price on SPY had decreased from 153.35 to 153.25 for yesterday. The day’s high of 153.36 clipped both of those levels, but ‘25 was the sell point. So trade #2 had a gain of $3.55 (entered at 149.70, exited at 153.25).

The strategy’s position at this point is back in cash, with only a buy point for today waay down there below 146.00. However, that will change with a drop below 151.50, at which point a “re-enter on the resumption of the uptrend” will kick in. These levels will change as newer data is added, and at some point a trade will trigger. Let’s watch.