Ugly Tuesday

We got the run up I was looking for, but buying dried up immediately and the sell off continued wih a vengeance into the close. After rising to R1 in thefirst half hour the Qs broke down to and through S1 at 10:45. A hairy bottom pattern in the 5 minute bars suggested a reversal but when the Qs again reversed off S1 (48.08) at 12:30, it was clear that S2 (47.63) was the next target. The Qs have now broken through the 50 DSMA on a high volume, engulfing, wide range, close low bar and although badly oversold, show no indications of reversing to the upside. The selloff in other sectors really was as bad as it looked, with the financials getting especially hammered.

The VIX also shows no signs of reversing, having displayed today a similar pattern of Thursday, with the current difference that, after Monday's run-up, the VIX is not overbought.

I'm finding it difficult to implement my usual options stategy as the market makers are sucking the premium out of both the puts andthe calls at a dazzling rate, perhaps as a tactic to handicap the straddle players. I am therefore moving to the QIDs, long and short, for my intraday trades until this situation improves.

Qs bounce; VIX fades: will it hold?

The Qs performed as expected today. After an inital pop at the open, the Qs retreated to the 50 day SMA and then inched up for the rest of the day.

The VIX also performed as expected. After the close high, wide range bar Friday, the VIX today showed a close low, wide range bar, falling back through the upper bollinger band.

Premium decay today was was exceptionally high, with both puts and calls losing value as the market modulated. I"m not sure whether this was a strictly a function of the volatility decline in the VIX or gaming by the market makers, but it was dramatic (an frustrating).
The current pattern typically shows another dip before any meaningful further move up (big question...how big??) and based on past VIX behavior the best guesstimate is up Tuesday, then down Wednesday for the Qs. I typically swing trade this Qs pattern based on a 3 bar/7 bar DSMA crossover. The current chart shows little inkling for such a crossover and I will hold on any new longs until such a crossover occurs.

VIX tops out: Qs hit 50 day MA

I closed my Qs calls this am on the initial pop-up for a net gain of zero. Ditto on the IWMs except I took a .03 loss due to volatility adjustments by the market makers.

The VIX showed the wide range, high close bar on a parabolic curve that I was expecting. At the same time the Qs displayed a wide range, close low bar right at the 50 day MA. Qs volume today was the highest since February 27th and with 7 down days on increasing volume the Qs may be ready for a breather. However,with a closing TICK of -680 and all technicals deteriorating, expect more downside follow-through to precede any turnround on Monday.

Clueless has examined the data on a weekly timeframe, and that scenario looks a lot more iffy. Take a look.

Qs back to support; VIX blows up

Well that was interesting. I unloaded my overnight Qs puts a little too soon this morning, thereby missing the huge downside gains I would have otherwise enjoyed. However, I did get to spend most of the day at the dentist, ultimately ending up with a root canal. Not quite sure which experience was the most painful . . missing the market or seeing the dentist.

Qs about at 50 day MA, which they haven't seen for a while . . but that was a touch, not a close, so we may see more selling before a real reversal.

The VIX went off the charts today and is now looking seriously overbought. I couldn't' find a pattern that quite matches the current one (help . . anyone), but VIX reversals typically occur at

long, close/high bars, so the multiple falling hammers that keep creeping up has me suspicious.

The portfolio is still 80% cash although I did initiate a long call position in the IWM and Qs towards the end of the day (although my judgment was pretty clouded as a result of the extreme jaw pain I was suffering at the time).

Are we done yet?

The DOW lurched forward today, driven by MRK, BA, IBM and XOM. Otherwise, no impetus.

After an opening pop and drop, IWM finally came alive at noon, and surged up to close just off the PP pivot and the zero line and now looks poised to drop again.

The Qs almost made it to 49.70 (49.67) before ratcheting down, then up, then down, then up .. finally closing up .05 on a downslope -20 TICK and an upslope .77 TRIT just below the PP pivot.

The VIX put on quite a show, rolling below S1 at the open and then screaming strainght up through R1 to top out at 19.46 in the next 50 minutes and VixandMore posted a BUY equities post.. The VIX then cylced between R1 and PP for the rest of the day, closing at 18.09.

I buckled up for the ride early on and managed to get in 2 good IWM trades (UP) and 2 good Qs trades (down) with a .01 loss on the 3rd Qs trade when I got stopped out just ahead of the pop (of course!), thereby missing a nice .06 profit in the next 10 minutes.

As mentioned yesterday, the current VIX pattern is not familiar and suggests more room to go.

Qs plummet; VIX shows teeth

The VIX broke through the upper band and is now precisely where it was a month ago. Looking back to July 10(not a band break), June 26 and June 7 we see band breaks and moves more than 10% above the 10 day SMA typically display impressive next day reversals and quickly revert back to the 10 day SMA. VIX and MORE thinks things may be different this tme.

The Qs blew though initial support at 49.70 and had the highest volume day since June 7. After 4 down days the odds are building for a reversion pop-up to 49.70, which probably will not hold . I don't think we will get a repeat of the June 7 scenario.

The portfolio is now 80% cash.

Qs stall; VIX in overbought range

The Qs never got far off the PP pivot on Monday. The TRIT flatlined between PP and S1 and both the TICK and the NYAD remained downslope all day. Yes, the Dow was up 92.34 but that was driven by 4 stocks: MRK, IBM, PG and XOM. For a Monday, this was not a strong day and based on the charts, I think the the Qs are going down to support at the 49.70 level before resuming any uptrend. Although the VIX is banging agaist the upper band and the spinning top suggests a reversal (down), I think we'll see a solid break of the band before that event. This could happen quickly, but one day pattern reversals favor Wednesday or Thursday as a best candidates. I'm holding back on new premium decay plays until I find some attractive setups.

Monday Series: Part 4 - Improving the Odds

Some traders learn from their mistakes ........ others never recover. Trading is an adaptive, dynamic process that is filled with risk and uncertainty. Those who fail to adequately recognize this simple truth are in for rough ride. Contrary to popular myth, there is no holy grail trading system. Consistent trading is about a state of mind and Dr. Brett Steenbarger over at Traderfeed tries to impress that truism unto his readers every day. I know many successful traders and frankly, no two trade alike ..... everyone is wired a little differently as a result of either nature or nuture. Whether you favor gap fades, momentum stocks, late day breakouts, new highs/new lows, moving average crossovers, algorithmic trading, neural networks, probabilistic statistics, etc., the trick is to make the system your own, to understand every nuance of the system and to meticulously define, test and follow the rules of the trading plan within which the system, or systems will be used. Here's another spin on the same topic and it's worth a close read:
http://www.chrisperruna.com/2007/07/11/the-holy-grail-of-trading-its-not-your-system/

Other intervening factors can contribute to trading outcomes, and traders need to avoid using them as crutches in the face of both good and bad results. Case in point: Charles Kirk has an excellent post on the role of luck in trading. Basically, you make your own luck through proper due diligence, positive attitude and systematic trade execution. There's no free lunch in the market. For the full text, see:
http://www.thekirkreport.com/2007/03/get_more_lucky.html

There are many free sites that provide trading algorithm testing, both forward and backward. Several of the sites have their own programmable rating systems to enable traders to rank stocks based on a variety of technical and fundamental criteria. Six of my favorites are: http://moneycentral.msn.com/investor/StockRating/srsmain.asp
http://www.powerratings.net/?home=2
http://www.daytradeteam.com/dtt/
http://www.trade-ideas.com/StockInfo/
http://www.tradetrek.com/online.asp

http://www.tradingday.com/

A wide variety of paid sites provide daily statistical and technical perspectives on the market, including timing indicators and signals. Two of the best are:
http://www.markettells.com/
http://www.sentimentrader.com/

I have mentored many traders and in my experience the ones that excel are the ones that think systematically, who have attained the self-disciple and focus to follow a trading plan (remember Curtis Faith from last week?), and who understand that trading is a business .... a serious business for those who seek to make it their livelihood. Successful trading is an incremental process based on precise and methodical risk management. Trading is not a hobby, a casual past time or a gaming proxy. Contrary to the Gordon Gecko persona, good traders also tend to display a profound humbleness, perhaps because they understand the fragile nature of their success. Having been a business owner and operator in my pre trading life, I understand these concepts quite clearly and when I was struggling with my early trading a couple readings of Alexander Elder's "Trading for a Living" brought things back into focus. I hope that some of the resources mentioned here can facilitate your path to consistently successful trading because there' only one thing more painful than learning from experience ....... and that is not learning from experience.

Friday's close

I finally got my call order filled after the Qs hit a very weak S4 (49.83) just after noon. The TRIT continued up for another hour sliding through S1 to top out at 1.94, and then reversing to confirm my buy signal. The VIX played deja-vu and mid-day soared back to short term resistance at 17.50 before rolling around and settling to close at 16.95. Next cycle.......back to 15s????? Going into the last hour the TICK and NYAD were downslope and the TRIT was upslope, so I closed out my MSFT and Qs calls purchased earlier in the day for a small gain. I'm expecting a swing back Monday in response to the overbought VIX , although the upper band was not penetrated and we may get selling follow-through before the reversal The VIX reading of 18.53 at 10:52 (pst) was a single tick anomaly and is not valid data. The current risk/reward picture does not look attractive and the portfolio is now 75% cash.

Swing low on Qs; MSFT swoons

Qs opened mid PP/S1 and promptly fell to S2 (50.09). I sold my overnight OTM puts at 7:00 (pst) for a ncie gain, and tried to buy the August OTM calls but the market makers are refusing to bring the bid down. Amazingly, the bids actually rise with each S1/S2 cycle swing while the Qs themelves remain net S2. Expiration games????? MSFT looked interesting on the pullback and I picked up some August OTM calls, which I will watch closely as there is still plenty of room to the downside if it turns. NYAD is flatline, TICK is downslope and TRIT is upslope as of 8:18 (pst).

VIX retreats to 15s: Qs perched on a ledge

As expected, the VIX retreated to the 15s and is now riding below both the 10 and 20 day SMAs. Adam has suggested that 15 may be the new 12 (that is; median trading range). The demise of the uptick rule is a hot topic of recent blog posts and the real effect on the TICK and VIX as short term trading indicators remains to be seen.

Per my plan, I closed my ATM Q calls 6 minutes into the open for a nice overnight gain. I was expecting a swing low back to PP, but this never happened as the Qs bumped between R1 and R2 all day....driven by the momentum of 100M shares of MSFT. TICK and NYAD were downslope last 1/2 hour, TRIT was upslope last hour. I took these signs as a cofirmed short bias signal and bought August slightly OTM puts at 12;45 (pst). In after hours trading, MSFT is down to 30.83. If it sticks, this could be the catalyst for a short term slide back to 49.00 for the Qs.

VIX hits band; Qs surge on heavy volume

The markets have exhibited the character of New England weather lately.....if you don't like what you've got just wait a few hours. Wednesday the Qs opened at S1 (50.00), chewed down past S2 (49.76) midday and then found major buying in the last 1/2 hour to push it up to PP (50.14). Volume picked up strongly into the close and after hours saw the Qs at 50.32 to mimic Tuesday's close. Thursday's open should show carry through, but expect the unexpected as earnings reports set off market gyrations. The VIX had an almost 7% range today, imploding for the last hour and heading back towards 15 level. The TICK and NYAD did not go upslope until the last 1/2 hour, and the TRIT went upslope for the last 1/2 hour completely contrary to what I would expect. (Can anyone explain that one to me????) By complete dumb luck a friend dropped over for a visit about noon, so I missed the Qs drop through S2 (and my intent to close my longs) and by the time I returned to my desk the Qs were upslope at S2. The portfolio is still net long, 100% hedged ATM. I am looking to exit my long ATM Q calls at the open, and to repurchase at the next intraday swing low to S1 or S2.

Qs hit S2

The Qs opened mid S1/S2 and modulated down to S2 precisely (49.78). We are now seeing the the bounce up.....the question is whether it will hold. VIX, TRIT and NYAD are all flatline at this point and TICK is upslope. Could be a bumpy ride today. I'm net long on this one, unless we retrace back through S2.

Qs overbought

The Qs rose to new highs on Tuesday, driven by the twin 800 lb gorillas INTC and MSFT. Both the TICK and the NYAD went sharply downslope in the last hour of trading. With INTC down 1.32 after hours and MSFT down .35, this may be the catalyst to pull the Qs back to support at 48.50 and the DIA back to 13700. IWM is not overbought and has been lagging the other indexes. It may now start to play catch-up. Volatility in the VIX Tuesday was subdued, opening at 15.58 and closing at 15.59 with a 3% range. The VIX BB is necking down to a new baseline in the 15 area.

Qs at 50

The Qs did edge thru 50 today, meandering around R1 before retracing modestly back to PP. Looking at the values at the close the expectation for today is that we'll see another run at DOW 14,000 and a further push up on the Qs although it may take until Wednesday to make the breakthrough. MOC volume in the Qs has dried up from Friday, suggestng this little pause has put some buying on the sidelines.

TraderFeed: Does this guy ever sleep?

Dr. Brett is always looking at the big picture and he has outdone himself today with an excellent collection of trading articles that can provide a solid working foundation for anyone's trading style and bias. Don't miss it.

Monday Series: Part 3 - Dealing with Uncertainty

"Risk comes from not knowing what you are doing". Thus spoke Warren Buffett in describing the attributes that made him so successful. How can the average trader make use of this simple homily in developing a mindset for consistently successful trading?

Traders constantly strive to be correct in determining both the timing and direction of market moves. Traders like to minimize uncertainty and have comfort that their trades have more of a probability than a possibility of being successful. Experienced traders appreciate that the markets provide a take-no-prisoners arena for competing against the most highly capitalized and best educated traders in the world who have no regrets about beating us on a trade and taking our money. Most successful traders have developed an edge, both perceived and actual, that there is a quantifiable probability that the market will move in one direction or the other, (or will not move significantly at all). Popular edges include technical analysis tools such as moving averages, pivot points and trend lines which seek to identify recurrent patterns in market behavior. These technical analysis and pattern recognition tools used in a methodical and consistent basis can help traders stay focused on current and developing market dynamics. At the same time there are always unknown forces and traders operating in the market with diverse goals and strategies that may not be logical from your perspective, so if you utilize a trading plan that posits anything can happen in the markets then you will always be right. Typically, Murphy's Law will prevail and “anything” will happen most often when you least expect it or when it is most disadvantageous to your market position. "In the Zone" traders have trained their minds to believe in the uniqueness of each moment in order to be open and perceive what the market is offering. These traders have accepted the inherent uncertainty of the market and have developed an almost detached state of mind that treats trading as a probability game. So far, so good, but this is where it gets interesting. Last Monday I mentioned Curtis Faith and THE WAY OF THE TURTLE. One of most interesting things Faith mentioned it that he believed most of the Turtles failed to achieve good results because they could not or would not follow the trading plan which they were provided. Other Turtles exited their positions too soon, missing the big moves that followed. They also avoided the 70% drawdowns (that's not a misprint) that Faith sustained. Anybody out there think you could live with even a 20% drawdown? I couldn't. Which brings up another point. I have a friend who is director of managed futures for a medium size firm. He oversees about 80 CTA's and reports that when many CTAs start to show superior performance they often choose to leave the firm and trade their own money. He further reports than in over 50% of those cases over the next year the CTAs have substandard performance or worse....... much worse. Managing other people's money involves a whole lot less risk than managing your own and although the stated trading plan may be the same, the frame of mind from within which it is executed can be dramatically different......along with the results. A common theme that is repeated by struggling traders is that they freeze at the trigger. They have developed a trading plan, have backtested it, forward tested it, paper traded it, and are confident that it will be profitable, but when it comes to laying real money on the line they are unable to act. Worse yet are the instances when the market moves against your position and you freeze, hoping that the market will turn. This is an example of not having a tactical trading plan......but the good news is......it can be fixed. Consistent traders display rigid adherence to the rules of their trading plan and flexibility in the expectations for how the trade will play out. While the trading plan provides a dynamic road map for navigating market fluctuations, the mindset provides the adaptive perspective to embrace and react to those changing market conditions. Most of the successful traders that I know do not focus on making money; rather, they focus on developing and embracing a unified mindset of technical, tactical and mental skills.

Next week: Improving your odds

Qs almost touched 50 Friday and show no signs of turning around as they are still NOT overbought. Carl Futia now sees the Qs at 53. I hate to be a shill for Carl but his calls have been impressive. With Dow 14,000 only a wink away, we'll probably see that too....maybe today as Monday's have the greatest probability for positive day follow through. I plan on pulling back on my trading this week, concentrating on short term scalps on the the Qs. Earnings and
various govt. reports could create some decent volatility this week and I prefer to have the exit nearby.

Go with the flow

As I mentioned yesterday, the VIX looks like it's forming a head a shoulders pattern. That post was early in the morning. By the close the VIX had formed a drooping shoulder and is now well on the way to the 50 day MA at 13.71. Amazingly, the Qs are NOT overbought at this level and will probably blow through the 50 target that Carl Futia posted last week. The markets are showing consistent upward bias on all tehnical indicators. Carl also posted a recent update to the domed house pattern yesterday and it's worth a close look. If he's correct ,the DOW has a upside target of 14,600 in November and the rest of the market will probably tag along. As a hard-wired skeptic of current market strength, I am looking at strategies to integrate Carl's scenario into my tactical trading plan in order to capture some of those potential gains while still hedging risk. Naked put selling short term is my current choice with some low risk setups still attractive. More on this later.

Ten Principles of Short-Term Trading

Traderfeed offers 10 concise principles of short-term trading today. Dr. Brett is always exploring the cutting edge of pycho, cybernetic, neuro, techno, statistical trading and his post today is a compendium of market dynamics that every trader should have firmly embedded in their mind and their trading plan before they trade.

VIX head and shoulders

As a follow-up to my earlier post, the VIX is showing a developing head and shoulder pattern, suggesting substantial further declines yet to come..next stop 50 day MA at 13.71.

VIX and More has reached a similar conclusion based on completely different, and much more sophisticated metrics, and these are worth a look (Wednesday's post).

The only thing certain in this market

I am constantly reminded that the only thing certain in this market is that anything can happen and if you are not positioned to respond to changing market dynamics then you will lose money.

Yesterday's VIX chart is a perfect case in point. Looking at the VIX daily chart we see that once the upper band has been approached, it is inevitably violated, typically on a wide range bar, followed by a wide range retracement through the bar. That pattern repeated itself today...the major difference being that the upper bollinger band was never violated yesterday. Although we did get a continued selloff of the Qs at the open down to S1, it was quickly reversed, with an eventual climb back to R1. Such is the nature of the markets. Accepting what the markets give you and tactically working those conditions is what consistently successful trading is all about (not that I'm able to pull it off as much as I would like). The portfolio is currently net long, but fully hedged with near OTM calls. To increase the near term hedge I bought slightly OTM August Qs puts at the close yesteday as the Qs/VIX both hit BB bands (shown on 10 minute charts above). This action has reduced my net theta, but my intention is to close this position, regardless of P/L, by Friday's close ...so the theta erosion should be minimal.

Active Trader magazine

Some great articles in Active Trader this month (August), including a nice piece about me in the Face of Trading. Although I subscribe to a variety of trader mags, this one consistently provides high quality info and studies that the average trader can utilize without extensive programming skills.

One little article in the current issue looked at 3 day pivot highs and lows for the SP500 over 10 years and found 222 pivot highs and 227 pivot lows distributed as follows:
HIGHS
Mon 52
Tues 38
Wed 50
Thurs 41
Fri 40
LOWS
Mon 37
Tues 43
Wed 60
Thurs 45
Fri 42
Looking at the skew of the data, selling positive Mondays' close looks like a good bet for short term traders.

Qs hit S3 at close

The Qs ran out of gas yesterday, closing just above the S3 pivot. The TRIT aso ran through 1, signalling increased selling volume. Based on the proximity of the VIX to the upper BB band, I think there is more downsde to come. Next stop 47.75 and if that doesn't hold, 46.50. The band breakthrough could be resolved quickly but a look at the VIX chart shows this has typically been a 3-4 day event, rather than a quick revesal.

Waiting on the VIx

These are daily charts showing price action as of noon today (pst). Based on the rising TICK slope and NYAD, I was tempted to get long at the 11:30 (PST) turn, but decided to hang back due to the position of the VIX. The TRIT is about to crossover 1...if it does, then further weakness can be expected, possbly for a day or two. Vix and More has noted this phenomenon previously and I am looking for technical signs to support a long bias on expiration week.

I am holding on the short term trades until VIX hits and closes at or above the upper band.

More on Tells

Here are two more free sites that provide some interesting tools for developing you own tells.
http://moneycentral.msn.com/investor/StockRating/srsmain.asp
http://www.trade-ideas.com/StockInfo/

Qs

The Qs opened today just above S2, then kissed it twice before leveling off. IWM has broken through S2 but shows signs of turning as we approach the first 1/2 hour. Mixed messages this am as both the TRIT and TICK are in upslope. I'm on the sidelines until I get some confirmation signals.

Inspiration

I'll be gone for the remainder of the day, attending an options seminar where I can network with other traders and swap lies about our fabulous successes. In the meantime, check out some of the demotivators on http://www.despair.com/ for some inspirational thoughts.