The Fed Roller Coaster

The usual wild ride following the FOMC announcement not to do anything. Clueless does a fine job of explaining the finer points of this typical swing pattern. It's amazing to me that each time this happens the media and various market types all appear surprised. Imagine the morning newspaper arriving with the headlines - "Nothing New, same old stuff as yesterday" and the market reacting with 100 point swings - you would be amused and otherwise hard pressed to explain what was going on. But there it is, with great regularity, the product of massive program trading, gaming by the generals and panic/greed of the uninitiated.
Another wide range day for the Qs (blame or thank the Fed), closing above the 50 DSMA, and with a touch of the 3/7 DSMA cross -my long signal. With 11 days to expiration I bought Qs, covered 50% with QIDs, rode them up for . 30 and sold the near 47s to lock in 1.5%. If we get continued strength tomorrow, I'll try the same thing with the 48s as my target. I prefer to wait until 2 weeks before expiration prior to putting on these trades as the theta is typically minimal for the first 2 weeks after the prior expiration, relative to the risk.

The VIX has retraced through the 10 DSMA and now looks poise to hit the 20. The MACD histogram is below the zero line and the 5/20 cross is heading down which suggests a solid move up in the markets for a few days. MAYBE. Buckle up.

Rollover?

Qs closed just below the 50 DSMA today after another wide range S1/R1 day.

VIX managed to hit another high today before falling back to approach the 10 DSMA. The wide range R1/S1 bar closed on the low the day, which suggests further downside likely tomorrow.

The TICK, NYAD and TRIT were all upslope the last 2 hours, with no range retracement, although the TICK readings were relatively tame. Whether these indicators reflected sustained short covering or genuine buying interest remains to be seen.

I was prepared to short XLF at the open, but it did not falter in the face of the "loaners" (WM, CFC) decline. The market makers kept the bid/ask spread on the puts at .15-.25, which is not an attractive buying environment. At that point, the markets began showing some strength and I stood back from any notion of shortng (happily).
Carl Futia sees this as the bottom, with new upside targets yet to come. Check out his new guesstimates.

SFO and system trading

If SFO isn't part of your regular reading material, it should be. Consistently high quality articles based around a monthly theme. Many of the articles are available online and a subscription is free. Last month featured some fine articles on the psychology of trading and this month (August) the topic is system trading and auto trading. Even if you prefer discretionary trading, you best be informed about what the rest of the big market players are doing. Keeping in mind that only 7-10% of the daily NYSE volume is retail trading, the 800 lb gorillas in the market (institutions and commercials) are using sophisticated algorithms, neural networks and probabilistic logic , coupled with leading edge computers making nano-second computations and executions to make life difficult for you. This series of articles may provide a little wake-up call for those who don't already appreciate how much the odds are stacked against them. I don't intend to convey a negative message here ... just a realistic one. Forewarned is forearmed.

Free Fall Friday

Heavy selling in the financial sector prompted by a Bear Stearns warning and a poor jobs report drove the markets down in the afternoon session and the usual selling crescendo in the last hour.

The Qs are not oversold at this level and 46.50 looks like the next support.
The VIX has bounced off the 10 DMSA and is headed higher through the upper band and it is not overbought at this level , even after making a new closing high.

The XLFs are suffering the most and the cross of the 50/200 DMSA is a negative sign, coupled with the technicals which indicate XLF is not oversold yet.
The market makers are really having a a field day with the high volatility . . . put spreads, normally seen at .05 are now running .20-.30. Placing limit orders based on intrinsic value is a very risky game at this point with the markets moving so fast and the risk factor is greatly increased by trading wide spread market orders. Not a happy situation.

Qs rally; VIX retraces towards 10 DSMA

Qs rallied up to R1 at the open and modulated in a narrow range for the remainder of the day, never touching another pivot. The entire market went flat line right at noon ... in expectation of another major surge ... either up or down. The NYAD, TICK, TRIT and volume flow all went into a suspended state for about 5 minutes and you could clearly see the quiet in the markets before the breakout . . . which turned out to be a break to the high side. Although the 3/7 MA cross has not yet materialized, the next short term trend for the Qs should be up ... with short term resistance right at 49.00.

The VIX did confirm the 4 day resolution pattern mentioned yesterday, declining precisely to the S2 pivot on the narrowest range seen for the past 5 days. The VIX has now fallen below the MACD (5,20,3) histogram zero line and the 10DSMA @ 20.47 is the next target.

Wild Wednesday

Another nail biter today as the markets set up to presumably follow the late day capitulation selling seen over the past few days. 12:30 approached and, if you were watching the option chains, you saw the offers lift in both the puts and calls without any equity action .... and then, as equities moved forward, the put premiums plunged. Traders had been conditioned like Skinner's rats to expect the late-day sell off, and I suspect there were more than a few transfixed by today's market behavior. Carl Futia has some interesting forecasting charts on the current state of affairs and I think they are worth a look. Today's Qs volume matched last Thursday (318M) and it remains to be seen how much of the 44M shares traded in the final 30 minutes was short covering (the last 10 minute bar of the day had a volume of 15M and a huge range of .48).

The VIX gave a dazzling performance ... climbing through 26 and then free falling almost 3 points to close at the prior high. The VIX is currently in uncharted territory and while there are precedents for these levels, the fact that the VIX remains close to the upper band suggests this cycle is not done. The typical pattern after a solid close above the bands is resolved on the 4th day (today), and although the markets did show impressive gains into the close, the VIX is still in nosebleed territory so caution is advised, as always, prior to initiating anything other than a short term position. Aain the VIX has reverted to NOT overbought status.

I was able to get off several good trades today ... shorting WM and TOL out of the box as the financials and housing continued to deteriorate (wish I'd bought AHM, but I was dinking around with other stuff and missed that swoon to .85), and then covering those shorts at the first turn. Later, as the XLEs began their slide I buy/wrote the near 68s at 68 for a 2.15 premium, which is a good 3% return for 17 days. Look at the 5 minute bar hairy bottom in the XLEs at 12:30 as the XLEs displayed a wide squat bar just below S2. Picture perfect buy setup.

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.