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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.

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…)

A couple of the most promising strategies I’ve been pursuing lately are flashing potential “Buy” signals for the SPYders today. Here’s where we are right now (a bit before 1100 EST):

I’ll be getting long on a close above 152.05 this afternoon, should that happen. The way I do that is to make the trade around 1545-1558 EST, depending on the action during that period (i.e. once I’m fairly certain the close will be at or above my target level).

If there’s no trade today, there’s about an 80% chance there’ll be one tomorrow. The less-likely alternative would be for the bottom to fall out.

Soon I’m going to post a lot of data from the research I’ve been doing lately, as there have been some epiphanies which have modified 15 years’ worth of trading habits, and I’d like to share those. For now, I’m juggling “life” and pursuing the research, and writing is being relegated to the rumble seat. But I’m taking lots of notes, and plan to knock out a couple of really long, table-filled posts in the near future.

[Addendum (5:30 CST): Well, it didn’t close above 152.05, but I got filled anyway. I had to leave to go see a guy about “some bidness”, so at about 2:45 EST, with SPY hovering down around 151, I put in a buy stop for 152.05, figuring there was very little chance of a $1 rally in the last hour, but if it happened, I’d take some. As you know, it rallied hard right at 3:00 EST, then dawdled for the last hour, causing me to get filled on a day that closed below my target. We’ll see how this hashes out tomorrow.]

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.

Just a few days ago, I had discussed GOOG as a pullback play, when its chart looked like this:

Well, it did indeed break upward nicely from there, and now the chart looks like this:

A great little $20-plus move since the post, and about $15 above the trigger point of $530. I don’t have a rule in place for selling at a particular extension level on GOOG (”DSM I” only applies to the SPYders), so I’d fall back on the tried and true, and pull a Landry right here, which is to say, sell half the position and move my stop to breakeven. Barring a big overnight gap, that gives us a guaranteed profit of over 1R (our initial risk) on half the position, and leaves the other half in place with a stop at breakeven… in other words, a FREE RIDE. Sweet.

DSM I Targets for 7/6/07

The indecisive action and slightly lower finished changed the RSI(4) projections, and the targets are now as follows:

• Position: Long from 149.70 (this is still trade #2 since inception- the longer holding periods are good on commissions, hard on the nerves)

• Target: Exit at 153.35

• Stop: 149.60

Note that the stop has trailed up to the point where this is essentially a free position. That’s great, but we’re sooo close, and I’m really hoping to tag that target price first.

Bonds Did Bounce

In my most recent currency rant, I noted that the 10-year bond yield had pulled back to 5.0% and looked as if it may resume its climb. Looks like it did, with a bullet. Yields closed today at the very top of their range, at 5.14%. The dollar strengthened, but only very slightly. It should pick up some steam here, unless the Chinese or Japanese are intervening in the market. As I’ve discussed before, if they are, we’ll know by this tell-tale sign: bond rates will rise and the dollar will stay flat or even fall. Let’s hope that’s not the case, ’cause things could get pretty ugly pretty quickly.