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k1 Project – Trend Following II – Cooking with Optrader

My second month with PSW coincided with the huge increase in volatility and big drops of August 2007. In the midst of that craziness, Optrader posted a significant thread on his trend following strategy. This situation has recently been repeated, with the big drops on Nov. 8-9. Collected here are a bunch of those postings, arranged to give a beginner background on the strategy.

Farther down, after the comments describing the strategy, there are two case studies following Optrader’s moves through the big adjustments downward in the market (so far) this year, in August and November. There is an annotated QQQQ chart tying comments to the 15-minute candles for closer study.

This entry was posted on Saturday, November 10th, 2007 at 6:16 pm and is filed under Education. You can leave a response, or trackback from your own site.

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Comments


  1. k1
    November 10th, 2007 at 6:16 pm | PermalinkIgnore this user

    Background and Basics

    The definitive post of the strategy approach.

    Why use this strategy? If you follow Optrader’s progress through PSW, you’ll see tremendous success. But one caveat, which Optrader specifically asked be made completely, 100% clear:

    This is NOT a daytrading strategy!

    Now we dig a little more deeply into the motivations for the strategy, the rules that make it work, and the discipline necessary to execute properly:

    Trade with the trend
    Fear and greed rule the markets, nothing else. Every single move is exaggerated. When you think it’s gone down so much, when you think it is crazy, it is when it just keeps going. Remember this spring when we were going up like crazy for no reason? Same thing. This is why you need to always trade with the trend, and never try to guess tops and bottoms.

    Follow price, and only price
    I don’t know if we are out of the woods, no one knows. And it should not matter to us. We should only follow price, and price is going down, has been for a couple weeks now.

    Selling premium, not protecting
    Just so you know, I bought more puts than I sold. I always do this, on verticals and calendars as well. Just because I like the flexibility of being able to adjust both sides if I want to (I don’t like to be naked short options, too risky for me). Also, I wanted to keep a strongly bearish bias. My only goal with selling the $60’s is to get some of the premium back. It is not to protect myself against a bounce up. For that I use stops.

    Playing puts until the trend changes
    I only play puts on Qs until the trend changes. I don’t like to go against the trend but that’s just me.

    Reminding a member about the core elements of the strategy:
    Where was your stop on HLYS? Sorry to be repeating the same thing, but you can’t become a consistent, profitable trader if you don’t set your stops before you place a trade. try doing it, and you’ll see that your results will improve tremendously. Look at all the losses you would have avoided if you had cut your losses.
    Afraid of selling too soon? How many times did a stock go against you to finally reverse and give you a profit? This is very rare, and certainly not worth losing so much on losers that you let run.
    And believe me, your mind is much clearer and you look at the market in a total different way when you are not babysitting some positions that are going against you.

    Experiencing problems from not following the strategy
    Greg, yes, I should follow my own advice. Feeling the pain today. Fortunately this is the first day in the last couple of weeks that my account is down. I did not have stops on those Leaps because they were protected by all the puts I had. Was a mistake to sell them this morning on that drop. Did not follow the rule of letting profits run until the trend changes, even when profit are huge. I should have kept at least 1/2 position. I did keep some, like CROX, but no in no way enough to cover my Leaps. Still learning every day. But I will have to look at all positions at EOD and do something to protect them.

    References to get started
    Read books, more books, and then more books. I HIGHLY recommend “Trade your way to financial freedom” (I know, cheesy title, but the best book about trading), and any book from McMillan for options (especially “options as a strategic investment”).

  2. k1
    November 10th, 2007 at 6:17 pm | PermalinkIgnore this user

    Tactics

    Entries, Exits, Price Targets, Specific tools

    No Price Targets
    I never have price targets. I just follow the trend. I will keep going with the trend until the trend changes (for me it would be price above previous candle high, or close above 5MA). But that’s just me of course.

  3. k1
    November 10th, 2007 at 6:18 pm | PermalinkIgnore this user

    Entries

    Question
    Using YHOO’s 15-minute chart as an example, when would you conclude that it’s reversing its downtrend? Do you wait for a break above your applicable MA (I use the 15 MA on a 15-minute chart) or does the MA need to reverse upwards for a clear signal?
    and Answer
    It depends on what your time frame. If you are daytrading, then, on the 15 min the trend reversed on the 12:00 candle, when stock went above $30.90. I don’t use MA’s on intraday charts, only candles.
    For a swing trade, for a reversal I want to see one of the following on the DAILY chart:

    - Price goes above 5MA AND 5MA is positive (5MA(D)>5MA(D-1))
    - There is a reversal candle, which could be a bullish engulfing, a hammer etc…For a candle to be considered a reversal, it needs to happen on a high volume day.

    These are my rules for entries. Of course you have to use your own rules, but this is what I use to determine the trend.

  4. k1
    November 10th, 2007 at 6:19 pm | PermalinkIgnore this user

    Indicators

    MAs, not alerts
    I rarely set any alerts. I just have the MAs on my charts (this is all there is on them in fact).

    No Bollinger Bands
    BB’s are fine, but for me nothing that I can’t see by just following price on a simple chart. But this is VERY personal. If there is an indicator you like, please use it. It does not really matter. Again, what matters is risk management and money management.

    Identifying Breakouts
    There are 2 types of breakout confirmations:

    - Price/technical: wait for a last kiss goodbye or for price to go below next support.
    - Time: wait a certain amount of time with price below support to confirm breakout.

    You need to decide what works for you and your strategy. But, in any case, remember that it won’t always work and that you will get plenty of false breakouts. What matters is where you put your stop, as it is the only thing you can totally control. Personally I use a 15 min reversal to tell me that the breakout failed. 15 min might seem like an eternity in this market, but today for example is allowed me to exit around 132, at an extremely small loss compared to what would have happened if I had hold the puts all the way to the close almost 180 points higher.

    Reading Candles
    I consider bodies as well as High/Lows. Especially to spot bearish/bullish engulfings. For intraday charts I use only high/lows, as closing prices don’t mean much on a 15 min chart (what if closing was 2 minutes later for example?) and for daily/weekly mostly closing prices. I don’t draw trendlines anymore, but when I did I used closing prices and ignored most intraday movement on daily charts.

    Reading 15-min Candles
    I usually use the 15 min chart, wait for the change in trend and place a very tight stop (usually at the high of the 15 min candle).

    Reading 5MAs and 15-min Charts
    For me it is more experience than anything. I personally don’t believe in any indicators (MACD, RSI..) as I believe they just follow price and are a reflection of what happened. I used to have dozens of indicators on my charts, now I only have a couple MA’s. I use candles as well. On daily and weekly charts, I like to use 5MA for trend direction, nothing more. If price is above 5MA and 5MA’s slope is going up, then the trend is up and I always trade with the trend. I the use trailing stops based on volatility (ATR), MA’s and candles. On 15 min charts, I don’t even look at MA’s, I just look at candles, looking for reversals and breaks from ranges and using highs/lows from candles as stops. For this kind of intra day trades, like I said there is a ton of “feeling” and experience, or I should say tape reading, as much as chart reading. Sometimes it is pretty obvious when sentiment has reversed and all of a sudden all your quotes are read and blinking real fast. There is also a tool on power Etrade Pro that I like a lot, showing how many new highs and new lows are being made. But in any case, entry is not that important, I just place the trade when I feel I should, BUT every single time I place a trade, BEFORE I send the order, I know exactly where I will exit if it turns against me (using charts for this), and this is really what matters

  5. k1
    November 10th, 2007 at 6:19 pm | PermalinkIgnore this user

    Specifics of reading 5MAs

    Entries on 5MA
    I was waiting for 5MA’s slope to turn south and price to go below and this where I bought puts.

    Identifying up trends
    On daily and weekly charts, I like to use 5MA for trend direction, nothing more. If price is above 5MA and 5MA’s slope is going up, then the trend is up and I always trade with the trend.

    Identifying a reversal
    For a reversal, I’ll wait for 5MA to turn up and price to get above 5MA. Like I have been saying for more than a week now, it is not the time to buy anything, but to short all bounces. It’s been a very profitable strategy for me lately and I really hope some of you are making some good money in this market as well.

  6. k1
    November 10th, 2007 at 6:19 pm | PermalinkIgnore this user

    Stops

    No one knows anything
    I am sorry, but that shows that no one knows anything and you should just trust your plan. That being said, I said that I was neutral when you asked, and that I would only enter when the bounce would reverse on the 15 min, which has NOT happened, and that I would have my stop at the new intraday high. If you did so, then you should be completely fine. Not having stops in this markets is extremely dangerous. I am keeping my bias to the downside, but is just a bias, no one knows where the market is going.

    Give stops time
    Stops-Something VERY important about stops also: I always give it a little bit of time. When I post stops here, don’t take it as a hard stop. Everyone is looking at the same numbers and you don’t want them to just run the stock to take your stops: most of the time I will wait at least a couple minutes, see what is going on, sometimes wait for a retest.

    Never regret a loss
    RIMM-stopped out. I think I should explain here how to manage those, as taking a loss is as much important as making profits. RIMM first dropped below $122 for a minute, and bounced right back up. AS explained yesterday I did not sell at that time, waited for the last kiss goodbye. Then it bounced to $123.50, and I sold 1/2. The strategy here is that if it was a last kiss goodbye I only have 1/2 left at risk, and if it bounces I still have 1/2. Then when it went below $122 again is when I sold.
    Now that I am out, I don’t care if it bounces. It is extremely important to have this attitude or it would prevent you from taking your stop next time. I will just be watching it and if there is an opportunity to go back in I will jump back in.
    But I will NEVER regret taking the loss I just took, even if the stock closes at $140 and I did not get back in. Each trade has its own plan.

  7. k1
    November 10th, 2007 at 6:20 pm | PermalinkIgnore this user

    Playing the QQQQs

    Benefits of QQQQs
    I am very tempted to only trade Qs. It is just amazing how much you can make with those with low risk. Most of the time you can risk no more than $0.03-$0.06, with tight stops. And you can easily make $0.40 if you catch one of these moves. These are just unbelievable odds. You can almost be wrong 10 times and catch one move and you break even.

    More benefits of QQQQs in volatile markets
    I just love this market. Daytrading options has never been so easy. With these huge moves, you can make 30%-40% many times during the day. And the liquidity has been real good. Also, if you want to play market moves, Qs are great with the pennies increments, you can be in and out in a minute, and always use market orders.

    Why market orders
    Spreads are $0.01 on Qs. As well as on WFMI and a couple other ones for now. So, no, they can’t kill you on market orders, and even if you use limit you get filled inside most of the time (except when it moves real fast like lately).

    Note that Phil disagrees with using market orders.

    Tight spreads on QQQQs
    Q options: yes, these are the best! That’s what I have been trading mostly. The best thing about them is that you can set your stop really close to where you buy, and if you are wrong you don’t have to lose a minimum of 10% like you do with other options.

    Deciding on stops
    Stops-I always decide of my stops based on the underlying, but it depends on your own plan. In this market right now, I just decide where my stop is when I enter my trade. If the stop is hit on the underlying then I just place a market order, no questions asked: this is why Qs are so much better, as a market order on options can cost you a lot of money.

    Spreads vs. IV
    I was not looking at IV, but at the spread. I don’t mind buying options with high IV in this market. I don’t think it will drop in a couple hours, it is way too volatile and is not going to calm down instantly. But I’d rather play options with small spreads and that are very liquid. Qs are just so easy to trade, why bother with JOYG when the spread is 10% of the value of the option?

    Entry points
    It’s going to be difficult to find a good entry today for puts with the market down already. Yesterday was real easy when market was up 75-80 points: wait for it to turn and set your stop at the daily high. Very low risk.

    Playing breakouts
    Question about adding to Qs if it breaks $52.50: this is not my favorite stategy, and I would tend to do the opposite. I don’t like to sell breakdowns, but I am looking closely to see if it bounces.
    Like I said in a market like this I prefer to sell the bounces. The main reason being that once we have a new intraday high, we have a very easy stop at that high. Where do you put your stop on a breakdown? Look at my trade yesterday afternoon on the Qs for a good example of selling a bounce with an easy stop at 54.20.
    I did it again a couple minutes ago at 52.75 with a stop just above 52.80. But that was AFTER we had touched 52.79 and it acted as resistance. Now I can see what happens (we are obviously on a bear flag on the 15 min chart) with very low risk. The most important thing in trading is to define your risk. Also, when you buy breakups/breakdowns, you always take the chance that it is a false breakout, just to take the stops.
    I do play breakouts, but on the daily charts, after periods of consolidation, a little bit like the Daravas boxes.

    False breakouts
    Also, I could be stopped-out by a false breakout with my strategy as well: if it goes just above 52.80 and then pulls back. But I don’t really care: this is an exit. I will take a small loss and I can re-enter later. Being “faked” on an entry is much more dangerous.

    Confirmation of breakouts
    One last comment, as it is happening while I am writing: I am still in the trade. Like I said many times, you need a confirmation of a breakout and it did not happen above 52.80 yet. How do you decide exactly when to take the stop? You need to have your own rules about how much leeway you are willing to give, how much time you let it stay above your stop etc…To me, this is where trading is more of an art: I decide by looking at the 15 min chart, on momemtum, speed, etc..it would be ridiculous to exit right now when it just went to 52.82, with no momemtum and in a bear flag, but what is extremely important is to never let it go against you no matter what. A stop can be flexible but it is still a stop.

  8. k1
    November 10th, 2007 at 6:21 pm | PermalinkIgnore this user

    The August 07 Correction

    A few choice comments out of the stream of activity during those big drops. As a newbie, I found this insight into the trend to be almost magical. Looking back, it was well-founded and solid analysis. Now after a few more months on PSW, I’ve watched Phil, Sage, Optrader (and in the case of GOOG and AAPL, our beloved AppleFlamCake aka FilmFlam) call major moves regularly, enough to know it’s experience, not luck. This is what led me to pay more attention to the trend in my own trading, and leads me to study the archives more deeply to develop some of that experience myself.

    Don’t try to guess bottoms
    I would love to trade a counter-rally as well today, but please be careful. Do not try to guess where the bottom is! Like I have been saying many times, we are in a downtrend, and until it changes the strategy is to sell the bounces, not to buy the dips. The market ALWAYS go further in one direction than everyone thinks. If you think that this correction is overdone, it means that there is more to come. Let it reverse first, there is no rush, then you can buy calls.

    Playing to the trend
    I am sorry if I was not clear. Of course it is fine to buy calls, as long as you have some good stops. I was just saying that it has been much easier to play puts, and that it is very important to keep in our head that the trend is down. Now, you can play whatever you want in any kind of market, as long as you have a plan, good money management, and good exit strategy.

    This is the quote that got my attention. It came in a calm spot in the middle of the big down move.
    Identifying the trend
    Let me repeat it one more time: the trend is DOWN. Please trade accordingly.

    Confirming the trend
    Just looked at all charts on my watch list, and I don’t see much of anything I like . Not a very good sign. We breaking down out of bear flags on almost all indices. Not saying that we are going to drop big fast from here, but the downtrend is definitely confirmed now.

    This is Optrader seeing the bottom, but holding to strategy, taking profits, and preparing to reload on a bounce. We only know this is the bottom in hindsight, so Optrader’s discipline is admirable in the heat of the market.
    End of a trendline
    I just have sold almost all my puts here. I think we are due for a bounce at this point and these were HUGE profits. These have been huge drops and I am willing to keep some of my Leaps naked at this level. BUT I will cover them later if we bounce from here.

    Others on PSW see the previous comment and think Optrader is calling a bottom, which leads to this:
    I am not bullish!
    Please everyone, me saying that I sold almost all my puts does not mean that I am turning bullish. I just had to take profits here as it would have been stupid not too, and you never know what can happen in the market.
    But I am not bullish! The trend is obviously still down and I am not trying to guess a bottom. I am just temporarily naked on my Leaps, but those are long-term plays anyway. AND I will cover them later. In fact I will probably cover them even if we don’t bounce back.

    Watching sentiment
    Capitulation usually marks the end of a trend, and this is how it feels today, with everything just being sold for no other reason than panic.
    But trends do not reverse in a minute! V bottoms are very rare. Sentiment has to change first, people don’t get bullish all of a sudden after having sold like this. So if the trend changes, and there is absolutely no indication that it will for now, there will plenty of time to buy anything you want. No need to rush and be the first one, the market will still be here next week.

    This is what capitulation feels like
    This is ugly. I was talking about capitulation earlier today, and this is what it feels like. Selling everything across the board. Amazing how sentiment can change from a month ago when they were buying everything.

    Printing hammers
    On a pure technical standpoint, it would be extremely bullish to print these hammers at the bottom of downtrends. That would be an early sign of reversal, but the trend has not changed yet, and we need to be prudent.

    Hate to make predictions
    I don’t know if markets are ready to bounce. I hate making predictions and guessing where the market is going. Me being right about direction has been pure luck lately. The best I can do is make the best bet I can and have some good stops and good money management. All I am saying is that charts are looking really good tonight. You could not ask for more when looking for a reversal pattern. But now we need confirmation and the trend to turn on 5MA before being bullish. But I am feeling much better about the markets than I have been in the last month or so. So my bias is neutral/ bullish. But the next 2 days are going to be extremely important, especially Monday.
    If by Monday we are still here or higher, then I will turn bullish. If we reverse by Monday then this would have just been a dead cat bounce.

    After market close and further analysis, Optrader discusses the indications of a change in trend:
    Seeing the reversal
    Just looked at charts, and if I was not prudent and it was not expiration week, I would be very bullish here. This reversal is very significant because:

    - It happens after a textbook 10% correction.
    - It happens on record volume.
    - It happens at key support levels (200 MA on indices, 1580 on S&S, which is a key EW pivot etc..
    - We printed a lot of hammers, which are the most reliable indicators of a change of trend when they happen in this kind of situation and with this kind of volume.

    I talked earlier today about capitulation, and it really felt like it earlier. We need capitulation before reversals.
    Now, what do we do? Of course, the trend is still down (we barely finished up for the day). We will need confirmation tomorrow, but especially Monday. If we don’t get a meltdown on Monday, after options expire, then it might be time to look at calls again, as 5MA’s might start turning up. Until then, let’s stay prudent and keep our hedges. I am fully protected going into tomorrow. I even bought back some Q puts at the close, a small position but enough to be safe, and if we rally tomorrow I will add to them going into the weekend. Good luck to everyone, that was a great day with some amazing opportunities.

    Discussing confirmation of the reversal the next day with dragon:
    Hammers
    Dragon, not surprising so big hammers. In all the years I have been trading I don’t think I have seen us recover from a 350 points drop. Now, as I said yesterday, we need confirmation on Monday. I have not bought anything this morning except for some Q puts. Show me the trend first, then I will jump in. No need to rush. But my LT portfolio is looking much better today
    Greg, I see the line on the 15 mn chart. But I would not put weight on any kind of trend lines you can draw on intraday charts.

  9. k1
    November 10th, 2007 at 6:26 pm | PermalinkIgnore this user

    The November 8-9 Correction

    Wherein we follow Optrader’s actions through a day of shorting the bounces. Focus is on Friday, November 9:

    15-minute Candle Chart for QQQQ on Nov. 9, 2007
    BigCharts QQQQ 15min Nov9

    A Great Day in the Life – Optrader and QQQQ Puts

    I’ve pulled Optrader’s comments from Friday, Nov. 9, pertaining to trading QQQQ puts, pulled them together into “buckets” aligned with the 15-minute chart for the day. Each “bucket” of comments ties to the number on the chart, so you can trace between them. Since Optrader often posts entry points with stops, you should be able to study this chart closely to get a good idea what levels are in play.

    1
    9:37 am | Permalink Taking profit on 1/2 puts from yesterday. Mainly Qs and BIDU.

    2
    10:19 am | Permalink I am pretty much flat right now, waiting to see what happens. Keeping the bearish bias though, so would love to be able to short a nice bounce. DIA much stronger than Qs today.

    3
    10:34 am | Permalink Looks like market is calming down a bit.
    10:40 am | Permalink Qs-back in puts at 50.83, because there is an easy stop at 50.95-51 area.

    4
    10:50 am | Permalink Qs puts-1/2 out at 50.43. 4XR is good enough to make sure I make good money on the whole trade.

    5
    11:00 am | Permalink What is great about this, is that we just need to keep making some money on the drop, and then there will be some really good opportunities to be long and initiate some very good longer-term positions. Especially some nice spreads that will take advantage of the high IV. But, and I know I have been repeating this over and over again but I don’t want people to get burned: now is not the time to bottom-fish, except for some quick daytrades like yesterday afternoon (and still, I’d rather play those on the downside, but that’s just me, I don’t like going against the trend). I repeat this very often too, but the downside is like the upside. First we need to get to the point where everyone thinks : “this is way overdone, we have to bounce now, it’s just insane!”, then it keeps going down, then the last bulls give up, and only then we start going back up. This is exactly what happened on the way up, don’t forget it! We need at least to go back above the 5MAs or to take the previous day highs for a trend to change.?Sorry to be pounding the table like this, I know it must get old by now, but I don’t like it when I see people here get burned when we are making very good money.

    11:12 am | Permalink Qs-Testing $50.30. be careful out there. If we bounce I am out. If we break I might add.

    11:13 am | Permalink 50.23-took another 1/4 out.

    6
    11:20 am | Permalink See, what I was talking about yesterday? How they took the stops at $50.30? This is exactly why I don’t play the breakouts, and took the opportunity to sell more puts. Now I can look for re-entry once there is a nice new intraday high, like we got earlier at 50.92. If everyone followed this trade from the beginning, then I don’t need to be posting anymore. Please, if you want to daytrade indices, study carefully what happened. From the start of this trade. This is real easy money, but most importantly, it is very low risk for very high reward. And it is not done yet.
    11:26 am | Permalink Sold last 1/4 of puts. Flat again.

    7
    12:16 pm | Permalink By the way, I’ve been slowly getting back in Q puts.

    8
    12:39 pm | Permalink Film: Q’s are at that point, right Optrader?

    Optrader misses Film’s comment at first, then realizes what was meant and the thread continues:

    1:03 pm | Permalink Oh, were you saying that they had just printed a new high? I was not following at that time, but yes, absolutely! If you entered at that time with a stop at 50.90, then you make me really happy, as I am done posting about this here. (wink)
    1:03 pm | Permalink Film responds: When I posted that, the Q’s were at 50.82, the perfect time to buy puts with a small stop, and I didn’t pull the trigger. Gave back a good portion of yesterdays trading gains, so getting gun-shy as I want to hold a good weekly gain.
    1:14 pm | Permalink Optrader: Film, yes, you got it. That would have been a great trade, especially because of the low risk. You could then sell 1/2 now for 3XR and move your stop to 50.66 (high of the 15 min candle). Everytime you take 3R, that pays for 3 times where you get stopped-out. Sometimes I enter a trade ONLY because there is an easy stop. I have no idea where it is going, but if I can manage my risk, then I can take the chance.?The day you know where you stop is EVERYTIME you enter a trade, and before you enter it, you have made a great step towards being a successful trader.

    9
    12:45 pm |Permalink Well, this market does not know where it is going. Back to flat.

    10
    2:27 pm | Permalink There might be a nice trade setting-up here on the Qs. Patience though.
    2:31 pm | Permalink Ok, I could not resist. Back in Q puts at 50.95, stop just above 51.

    11
    2:38 pm | Permalink Qs-1/2 out at $50.70.

    12
    2:49 pm | Permalink Q puts- Bought back the 1/2 at 50.95. Keeping same stop on total position.

    13
    3:22 pm | Permalink Qs-51 is the great wall of China. Watch your puts if it goes higher.
    3:26 pm | Permalink Fake breakout?
    3:28 pm | Permalink Sold my puts. Flat for now.
    3:30 pm | Permalink If that was a fake breakout, then we will probably get a big selloff by close.
    3:30 pm | Permalink Back in puts, just incase. Stop at 51.13.

    14
    3:37 pm | Permalink Q puts-1/2 out at $50.70 again.
    3:43 pm | Permalink Q puts- Another 1/4 out.

    15
    3:54 pm | Permalink Q puts-Taking more out, but keeping some for the weekend. I truly hope I am not the only playing puts here.

  10. TGH
    November 11th, 2007 at 2:59 am | PermalinkIgnore this user

    Hiya K1 — once again Kudos! and thanks for the hard work … I tried to find the presumed “Trend Following I” section but no luck in the Trading Education section. Am I missing something re the reference after your intial post ala “This entry was posted on Saturday, November 10th, 2007 at 6:16 pm and is filed under Education.” ??

  11. TGH
    November 11th, 2007 at 3:19 am | PermalinkIgnore this user

    Never mind, k1 — I hadn’t looked far enough down the home page. I’m still confused re the statement that your posts being filed “under Education” though — they certainly should be, as they are so valuable.

  12. Anonymous
    November 11th, 2007 at 8:09 am | PermalinkIgnore this user

    I agree. Your compilation is certainly deserving of its own tab. As DM mentioned in another thread, your work is rounding a lot of member’s learning curves.

  13. Optrader
    November 11th, 2007 at 11:10 am | PermalinkIgnore this user

    K1, I am very flattered by all this, even if it is not really deserved, and I thank you for all the work you put into this. I want to insist on the fact that I was very lucky calling most of these moves, and that it really does not matter that I did. I truly believe that losses and bad calls are as important as good calls. Maybe I should go find some of the posts where I was wrong and got stopped-out and add them to these comments, as I am much prouder of those. I can only talk from experience, but I became profitable the day I understood how to manage risk, and became extremely disciplined about taking my losses. I did not become profitable by guessing market direction and you don’t have to make good calls to become profitable. This is a very challenging job, very competitive, and there is no way we could be better at guessing where the market is going than hundreds of market analysts so trying to do so is most of the time a loss of time and energy. All we can do is follow direction and manage our stops in case we are wrong.
    I am insiting about this, because I believe it is way more important than me predicting a reversal for example. In fact, in August I was wrong as I kept my short bias for too long, saying that V botoms very rarely happen.

  14. Optrader
    November 11th, 2007 at 11:11 am | PermalinkIgnore this user

    From the Elliot’s guy:

    November 10
    weekend update
    REVIEW:
    After the NDX/NAZ posted a new bull market high on October 31st, the day of the token 25 bps rate cut, the market has headed lower. Several positive economic reports and FED governor speeches were mostly ignored, as the market concentrated on the negatives and a concerned FED chair Bernanke, as he gave his testimony to Congress. The selling has been concentrated in the financial sector, the largest part of the SPX. The financials, as measured by the XLF, have already lost 23% of their value from their May bull market high. The banking sector, as measured by the DJUSBK, has lost 28% of its value and has already retraced 58% of its entire bull market. Certainly subprime mortgages, and the subsequent credit crisis have impacted the financial sector. And now there is talk of a recession! Meanwhile the global economy is storming ahead with many countries displaying 5% – 10% growth. The recession talk, at this point, is just that … talk. For the week the SPX/DOW lost 3.9%, and the NDX/NAZ lost 7.3%. The NDX has lost 9.1% in just 7 trading days. What was overpriced two weeks ago is now becoming fairly priced.
    LONG TERM: bullish
    Historically, as a bull market nears its conclusion the volatility increases. Large swings in the market become common place, lasting for a couple of years. Then when the eventual top arises, and the market sells off drastically, and it is mostly ignored. The volatility has only just begun this year. Anticipating, as noted much earlier this year, it will last for a couple of more years. With the SPX currently exhibiting a price earnings ratio of 17, it is hardly overvalued. After a five year bull market, one has to consider the SPX closer to being undervalued, than overvalued. Certainly there are some economic problems. However, as mentioned last week; during bull markets the problems are considered solvable, while during bear markets they are not. OEW analysis projects that we are still in a bull market. The required parameters of a bull market top: a completed EW wave pattern, coinciding with a completed OEW momentum pattern, are not present. Therefore, this is only another correction in an ongoing bull market. Since this bull market is Cycle wave 1 of a new multi-decade Super cycle bull market, we had anticipated that Primary wave 5 would be the extended wave. As we have been noting for years, Primary waves 1 – 4 completed in August 2004, and Primary wave 5 has been extending ever since. Primary waves subdivide into Major waves, which further subdivide into waves of a lesser and lesser degree: Intermediate, Minor, Minute, etc. From the August 2004 Primary wave 4 low: Major waves 1 – 2 completed in April 2005; then Intermediate waves 1 – 4, of Major wave 3, completed in March 2007. Since this low the market has been quite tricky, thanks to the action of the Federal Reserve. The preferred count is that Intermediate wave 5, to complete Major wave 3, is still unfolding in the form of a diagonal triangle, or rising wedge. This count is displayed on the various major index charts, with the exception of the DOW weekly. There we have displayed the potential for Major wave 3 having completed at the July high, and the recent rally to new highs being part of Major wave 4. Since Major wave 2 was an irregular zigzag in the DOW, it is unlikely that Major wave 4 would also be an irregular correction. The only other counts we can anticipate are even more bullish longer term. The bull market continues.
    MEDIUM TERM: correction, but may be bottoming
    While we had been anticipating an upside target of 1620 for the SPX, we noticed right after the October 31st rate cut, that the internals for the market were starting to deteriorate. First the TRANsports and the R2K confirmed downtrends, then the Wilshire 5000, while the DOW’s components started to display more downtrending stocks than uptrending. On tuesday morning, while the market was rallying, we posted that reaching the 1620 target was starting to look unlikely, and that some profits in the high flying techs we follow (AAPL/BIDU/GOOG/RIMM) should be taken. Seems many had the same idea as BIDU topped tuesday, and the others topped wednesday. As the week unfolded, more and more of the nine US indices we follow started to confirm downtrends. Now they are all in downtrends and correcting. The SPX did make new highs during the uptrend, but 1576 was as high as it got. If the diagonal triangle scenario is what’s unfolding, the market is getting close to a bottom. We noted that SPX 1438 would provide support under this count, and the SPX traded as low as 1449 on friday, to close at 1454. The DOW, we also noted, should reach about 13,000 to hold the diagonal count. It hit 13,017 on friday and closed at 13,043. So the market is very close to a potential correction low. Supporting this view are several technical factors. First: the last two corrections in the SPX/DOW have lasted four weeks, this one just completed its fourth week. Second: Every correction, in the DOW for nearly three years (Major wave 3) has coincided with a weekly RSI reading just below 30, friday’s reading was 29.15. Third: the diagonal triangle would form nicely right around the 13,000 level, as mentioned earlier. Fourth: many strong weekly selloff’s that end at the low for the week, usually stall or reverse, in the coming weeks, the market closed at its lows. Fifth: our OEW momentum reading (MMI) has already reached the oversold level expected for this downtrend. Sixth: the number of DOW stocks in downtrends is at 83%, the recent correction lows have been between 83% – 93%. Seven: the number of SPX stocks in downtrends is currently nearing 80%, which is also the general oversold level for market bottoms. Ideally, additional selling on monday should take the SPX down to the long term support pivot at 1438, while the techs continue to slide. Many of the tech issues are not yet sufficiently oversold yet. SPX 1438 should provide support, and if the diagonal scenario is correct, the market should then reverse trend and rally to new highs.
    SHORT TERM: looking for a potential monday bottom
    As noted above there is good support for the SPX is at 1438, this is a long term EW pivot and also the level of Minute wave b. Resistance remains at 1462 and then 1484. Short term momentum is around neutral, and a push lower early monday should set up a positive RSI divergence. There is already a short term positive divergence in the DOW. Also of note, as of fridays close there is a daily positive RSI divergence in the SPX/DOW, and an oversold condition in the NDX/NAZ. With additional selling on monday this should at least set up an oversold rally. The financials were starting to display some signs of being oversold on friday as well. If the SPX trades below 1430, the diagonal triangle scenario would be in jeopardy, and a retest of the August lows would be likely. Also supporting a potential medium term bottom is our FED interest rate indicator. It’s displaying that the FED is nearly 50 bps behind the curve as of friday’s close. One problem with lowering rates here would be another potential decline in the USD. The USD has trended lower since the rate cuts started in August. However, the G-7 nations are already complaining about the decline in the USD, while the US until now has had no interest in stopping it. But they do now! The G-7 has not intervened in any currency since the decline in the Euro in 2000. A 50 bps rate cut by the FED, and a concerted effort by the G-7 to support the USD would certainly springboard this market higher. This is all speculation on my part, but the charts appear to be displaying this potential scenario as well. In conclusion, continue to observe SPX/XLF/GS and AAPL/GOOG, during the day. These are the ones that are moving this market. If the SPX 1438 pivot holds during any additional selling, a rally is likely. If the SPX breaks below 1430, it is likely to continue to head lower in the coming weeks. It’s options expiration week, maybe the FED has another surprise up its sleeve.
    FOREIGN MARKETS:
    The Asian markets have held up fairly well during this worldwide selloff in stocks. India’s BSE and Hong Kong’s HSI are still holding their uptrends, and Australia’s ASX and China’s SSEC are still close to their highs while downtrending. Only Japan’s NIKK has been seriously sold off.
    The two European markets were follow are quite mixed as well. England’s FTSE has sold off quite dramatically, yet Germany’s DAX has held firm.
    COMMODITIES:
    The bull market in Bonds continues as long term rates keeping sliding lower during this period of economic uncertainty. The current uptrend continues.
    The Crude market continues to look more like an anti-USD market than an energy market. Nevertheless, its uptrend continues.
    Gold continues to uptrend as well. Making multi-decade highs during the past week, but is appearing quite overextended.
    The Euro continues to uptrend as the USD wanes. Time for the G-7 to start intervening in the currency markets again.
    Commodities, as measured by the CCI, made new highs again this week. Certainly a worldwide economic slowdown is not appearing in this sector.
    Best to your week!

  15. k1
    November 11th, 2007 at 12:28 pm | PermalinkIgnore this user

    Optrader- I know you are not always right, and thought that I had grabbed a number of comments showing where you got stopped out. What I believe is deeply important about your strategy is the fact that you do get stopped out, taking a predictable small loss rather than riding it into a big loss.

    In any case, if you would like to point out places in the comments above to highlight that your strategy dictates taking losses, I will be happy to edit this post to include those points. Also, I am working on a detailed collection of comments from Friday to go with the chart above, and we can work the same magic there.

  16. k1
    November 11th, 2007 at 12:30 pm | PermalinkIgnore this user

    TGH- Thanks for the kudos! I try to name every post with “k1 Project” so you can use the search box, which will point you to the entry page for the whole deal. Also, any comment I post includes a link (under my name) to the entry page.

  17. TGH
    November 11th, 2007 at 11:17 pm | PermalinkIgnore this user

    k1 — I just tried the search as suggested and it does of course will work, but I would hope as others have suggested, that the PSW folks setup a clean link to an index of the topics you have pulled together. Also by the way, have you heard anything more on when PSW is going to roll out the long-awaited member forum? IMHO it would greatly enhance the value-added of your work, and of course you have the instant setup for the topic headings. *s

    Optrader — I also great appreciate your contributions and honesty & since I am limited right now to EOD reading as time permits, besides searching for Phil’s and Sage’s (and now k1′s)comments, I like seeing what you have been doing (both the good and the bad) for a great perspective.

    Thanks again to you both!

    ps – There still isn’t a way to get an email alert for when comments are added to topics I want to follow, right?

  18. Phil
    November 12th, 2007 at 4:45 am | PermalinkIgnore this user

    Tabs – I will see about putting a tab in as an interim solution but this whole project is an intial step towards what will ultimately be a larger educational project that will have it’s own section.

    Although I must say the quality of this work is so exceptional that it stands on its own – fantastic job K1!

  19. TGH
    November 12th, 2007 at 9:47 am | PermalinkIgnore this user

    The tabs would be great,Phil & by the way, k1′s response to a couple of the members questions in the weekly wrapup piece from last night is a perfect example of how much time the forum setup could help you save by making it easier for members to help other members to answer questions, keep track of responses, etc.

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