Archive | May, 2010

Daily Reflection: 05.20

21 May

First the scare, then the tear. Last Thursday’s price action was essentially mimicked today only with less violence. Below is an excel spreadsheet I use to record the market internals. The important columns to note are the Trin and the NYSE % change. The light orange dot represents a bearish Trin close on the day, the following day we had a bullish Trin close, but a bearish market. This is an extreme warning signal. When we see Trin readings above 2.0 and fail to rally the next day we are headed for an extreme slide which happened the following day (see red dot).
Where to go from here? We continue to stress the important of remaining delta neutral or at least hedged if you are delta long. We will be looking to add shorts/puts on any bounce.

Daily Reflection: 05.19

20 May

A choppy day today, but again nice size intraday swings on the /ES. The 6E was a nightmare to trade and we will be treadding lightly for the remainder of the week. We have three scenarios for tomorrow.

1. If we move up to $1123 and and sell off, we will have a downside target of $1088.

2. If we move up to $1123 and continue up through $1129 will have a bullish target of $1203.

3. If we open and do NOT trade up to $1123, but sell off from the open breaking our 1098.75 lows, then we will trade back down at $1056.

Daily Reflection: 05.18

18 May

Right from the open signs pointed to a gap fill, let me explain. Local pit traders (those trading their own capital) vs. brokers (those trading client capital) tend to fade the opening gap on the open of each morning. This means if we gap up, they are looking to sell, and if we gap down they are looking to buy. Knowing we never want to fight the gap fill (going long on a gap up, or short on a gap down). However some days we call gap and go days, that is, we gap up and move higher all day. We need three things for a gap and go day to happen, a gap (obviously) strong breath in the direction of the gap, and $BANK trading in the direction of the gap. We also look to the ticks for additional confirmation.

So now let’s rewind to this morning. We had a gap up, strong breadth of 7:1, however immediately after the opening bell, the $BANK index began to fill its gap. From here we look to the core sector list where we saw the SOX, XBD, and BKX all trading in the bottom of the list, as well as XLF in the bottom of the SPDR Sector list. This weakness in these core sectors led the markets lower and they remained weak all day.

Daily Reflection: 05.17

18 May

Gold stocks failed to break the highs of Friday, as the market sold off and then rallied into the close. What does this mean? We’re more bullish on stocks, and should see a decline in the VIX. When everyone expects the markets to go down, they go up.

Wk20: Market Forecast

17 May

The Dow Jones and the S&P 500 started off the week with impressive gains, making up for just about the whole slide from the previous week. The Dow finished the week up 2.3%, although, it spent Thursday and Friday selling off.

We are looking at the 10,400 level in the Dow and the 1120 level in the S&P which are their 50% retracements for bulls. As a case for the bears, the Euro currency has hit an 18 month low as a reaction to the European Union’s $1 trillion emergency package. If we see the Euro continue to slide, we are likely to see it weigh on equities and cause increased volatility in the coming weeks.

With gold stocks performing relatively well, we are seeing a “gold to stocks ratio” at only 1.1, this almost perfect correlation is a rarity, occurring only a few times dating back to 1928. As gold is a safe haven for investors in case of lower equities, we could possibly see a change in this correlation, I.e. (higher gold prices, lower equity prices).

With the Euro at 18 month lows and concerns overseas, we are likely to see continued volatility, which should be a very profitable environment for traders. Don’t forget we have options expiry this Friday, happy trading everyone!

Wk20: Watchlist

15 May

News announcements for the week ahead can be found here. These are the stocks we are watching for next week 5/16/2010…
Shorts: FXE, GS, LVS, WLP
Given that next week is Options Expiry we will be looking to buy June Calls/Puts on these names. We would like to balance the delta on the portfolio and we are looking at ITM options with approx 70% intrinsic value. Here is a demo of the TOS options tab that describes how to go about this.

Daily Reflection: 05.13

14 May

A very choppy day that provided many intraday setups. To continue our discussion on positioning and trade entry, I would like to stress the importance of NOT chasing moves.
We do this by identifying our entry, stop, and profit target before the trade is even placed. One of the hardest things for a trader to do, which may surprise you, is let his profits run.
A trader is quick to let a stop get hit, but often when a small profit is had, the trader gets nervous and exits the position too early. This can be avoided by having a money management strategy that moves the stop to break even + commissions at say, +2PTS on the /ES, or after a 1 or 2% move in a particular stock. Then you are able to “walk away” from the trade leaving your stop and profit target in place, giving you a free trade if it doesn’t work out.

Daily Reflection: 05.12

13 May

Positioning yourself a move is obviously the first step to a profitable trade. When analyzing the market with whatever method you prefer, keep in mind that the market will move with the least number of participants as possible. Understanding crowd behavior is in general more important than understanding complex economic theories.