Mid-Day Update

October 20, 2011

62

Reminder: Harlan is available to chat with Members, comments are found below each post.

Courtesy of David of All About Trends

This is where it gets tricky. Tricky in the sense that we’ve got a pending news driven event out of the EU this weekend or maybe just more extend and pretend. So expect a lot of rumbles into it and of course misinformation and rumors too. What is going to happen is going to happen. We have no clue as to what though with the circus parade over there. I will say this though, at All About Trends we are chartists first and foremost. That said take a look at the two charts below. One is the US dollar and the other the Euro.

Actually these two charts are classic All About Trends FIRST THRUST PATTERNS, one bullish one bearish.

What’s tricky is that in the past when the USD tended to take off stocks took it on the chin to the downside. Whether that is going to be the case this time or not I have no clue, I’m just stating a past trend for the most part.

By the same token one look at the Euro shows that of a bearish pattern so you see there are some opposite correlations actually out there vs the all for one and one for all moves we’ve been seeing.

This all stems from the constant fiasco of the EU’s issues. you know, the ones where they refuse to accept reality? Keep in mind eventually the markets will have had enough of the dancing around and will make the decision for them or force them to make a decision. Remember we are all looking for resolution to the issues. I assure you the markets will react to that, what way I don’t know.

BUT keep in mind just because the market reacts doesn’t mean that you have to. If they slam us? Good because its our chance to buy stocks in the face of fear which has been THE trade of the year around here. Look, if the markets get slammed? Starbucks is still going to serve coffee, General Mills is still going to make cereal, Google is still going to make money from they’re adds , Apple is still going to sell iphones, ipads and itunes. See where i am going with this?

Folks if the markets get slammed? ITS AN OPPORTUNITY do not fear it. You had better be prepared to go long in that POTENTIAL event should it occur.

So what if the markets get popped? Then we stop out of our holdings on the shortside and our gains go away and we place our stops at break-even on LULU,AMZN,BIDU and possibly TZA. So you see? Whatever way the wind blows is fine by us. Even if that happens we still have a great month just not as great as we are currently having.

Moving on to our indexes

Yesterday we talked about the potential Double Top on the DOW and NASDAQ Comp and a back-test of a broken trendline on the SPX and sure enough those change in trend patterns were the ticket. We also highlighted a Head and Shoulders Top in BIDU in the morning and shorted the stock based upon what we saw at that moment in time. What am I getting at? Simple, its all about CHART PATTERN RECOGNITION and it works in all time frames and all frequencies long and short. Learn the patterns and we’re here to help you with that. Folks, practice makes perfect right? Just keep practicing identifying these patterns.

Below are you short term charts that encompass this whole run up off the recent lows.

Talk about TEXTBOOK! Notice we did not short the neckline break but the break of the right shoulder? That’s called alternative entry points. Frame this chart its a hall of fame chart. Ten points worth of gains in one day doesn’t hurt either.

We also touched upon how the theme has been that of if they run stocks up into earnings more often than not they sell em off on earnings and that’s what we’ve been seeing more of lately. We even talked about those who get popped on earnings tend to come right back down after earnings (GOOG). That said take a look at TSCO and ALXN today. Both popped and immediately dropped. For you scalper day traders who’s trading plan is get your 50 cents in an hour and get out?

Those are great trades as long as you short em at the open and get the quick 3-5 minute drop and lock the gains down.

It’s not for everyone but its a trend I’ve seen over the years and is just another one of many ways to make a living trading as long as you are disciplined. Note if anyone out there uses this strategy drop me an email about it.

ALXN

One look at the daily chart below tells you exactly why it dropped.

Can you say double top on ALXN?

TSCO

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For Traders Looking For A Game Plan

Something to think about here may be that of devising a trading plan for between now and year end. One may to look at between now and year end from a hit and run get in get out standpoint and be a trader.

After all $200 a day is $1,000 a week is $4,000 a month and over the next three months between now and year end that’s $12,000 added to the bottom line in a perfect world. All things considered given the way the year has been turning out? There is nothing wrong with that if you ask us. Heck on a $100,000 portfolio that’s a 12% return from here. How’s that for a game plan should one be on the hunt for one. Just a thought.

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SHORT SIDE WATCH LIST

HANS

10-20 Shake And Bake Strikes again!

Well in the spirit of head and shoulders tops? Sorry folks, I didn’t see this one as clear as the BIDU one. Still though it just goes to show you its all about chart pattern recognition.

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LONG SIDE WATCH LIST

"Only The Best And Forget The Rest "

"We Trade What We SEE, NOT What We Think, Hear Or Fear "

NONE — We need to see some sort of Pullback Off Highs (POH) patterns to form before we consider anything.

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FEATURED BUT NOT TRADE TRIGGERED BY US LIST

SDS

GLD

OIH

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CURRENT POSITIONS

Let Your Stocks Tell You What To Do By The Action They Exhibit"

LONG SIDE POSITIONS

TZA (We are now long 200 shares of this at 37.46 as of 10-14-11)

SHORT SIDE POSITIONS

BIDU (We are now short 100 shares of this at 133.28 as of 10-19-11)

AMZN (We are now short 50 shares of this at 242.48 as of 10-14-11)

10-19 EARNINGS ARE DUE THE 25TH OF OCTOBER. Keep in mind this issue is falling and if it continues to fall into earnings we do not want to be short into earnings. hmmm maybe we’d consider buying it into earnings. Its something to think about , we’ve got till Tuesday before the close to make that decision.

Also Keep in mind the EU said they will have a plan by this weekend (supposedly), if you believe that anyway. Gosh this extend and pretend and keep dragging us along is getting pretty old. Why don’t they just except reality and bite the bullet so we can all get it out of the way and start the healing process.

LULU (We are now short 150 shares of this at 51.41 as of 10-6-11)

Speaking of the BIDU double top in a one minute time frequency check out the same time frequency of LULU

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To our NEW SUBSCRIBERS

What we’ve tried to do is break our watch list down into chart pattern recognition structure from a visual standpoint. Learn the patterns and the components of patterns and you’ll blow those Wall Street MBAs away. You don’t need a $3,000 software program either. All you need is a BURNING DESIRE to be the best that you can be and we’re here to help.

We have a lot of new folks here and we thank you! We want you to take it easy, get to know how the routine works around here for awhile and to feel comfortable.

We hope you all aren’t here because you are chasing performance. For us it’s more about educating and making you the best you that you can be first (that’s what we focus upon!). Like many of our long time subscribers they have all found out that they have no use for traditional Wall Street (and we don’t blame them) and it’s our hope that over time you’ll have acquired enough knowledge from us to say the same with conviction.

One of the most important things we want to stress is that of RISK MANAGEMENT via POSITION SIZING. You don’t need to stack your account with just a few big positions as we’ve seen it time and time again that those who get into trouble are the ones who take large positions and do not employ any risk management system IE shoot for the fences. Those are the people who live on the fringes of extremes and yes ultimately get burned.

As a guideline a good initial system is that of the following example.

Let’s say you have a $100,000 portfolio and let’s say that as a guide you never place more than 10% ($10,000) into any one position. Now let’s say that one day a news driven event hits (over which you have no control over anyway) and one of the positions tanks 20%. On its own that position is sporting a $2,000 loss, while that may seem devastating on its own its really no big deal overall.

Why? Simple its all about risk management being properly employed. What is the impact of a $2,000 loss to the TOTAL VALUE of the portfolio in this example.

Answer: A whopping 2% LOSS. Now you know why we say no big deal.

We can also tell you new people here that you will get stopped out of names and you will take hits. There is nobody on the planet living that has ever hit 18 holes in one and there never will be. We’d rather get you grounded in reality right away vs talking about pie in the sky all the time like a lot of other sites. In so doing your head is screwed on straight from the start and when those days happen (and they will) mentally it won’t mean a thing to you. To us that’s what’s most important is YOUR state of mind as it’s your most important asset. We hope you appreciate our honesty.

We have a very good retention rate here at All About Trends and a lot of great outstanding people here. We like to think that a part of that is being upfront about what can happen (in both directions). Verses those up 500%, I turned $50,000 into $3 million or some other absurd number to get you to bite. That’s not who we are.

WELCOME ABOARD!

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Lastly with regards to taking any trade:

Remember the moment you take a trade you are at the mercy of the market and have no control except when to sell. If you are not willing to take the risk and are not willing to pay that price do not take the trade. We are willing to take that risk knowing full well the end result could be a loss. That said make sure that portfolio management trade size is used accordingly. With any position you may take make sure that should something go awry the amount of total impact to your account does not devastate your acct. Try to stick to a 5% position That’s the key to portfolio management, not biting off more than you can chew.

Remember the mechanics of reality with regards to the stock market states a stock can only do one of three things: Up, Down, Nowhere. The moment you hit the enter button you are at the mercy of the market therefore the only control you have is when to sell/cover. You can’t manage your gains as you have none to manage initially. Knowing this in advance it allows you to stay in outcome, that being you will either:

1. Make a gain
2. Wash
3. Get stopped out at a loss

Remember the market IS the boss. IT is going to do what IT wants to do.

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OPTIONS — Your best friend and worst enemy

Let’s talk about options for a moment. First off this is a big universe with a lot of advanced strategies and terms like theta, delta , straddles, butterflies and the whole gambit. For the purposes of this conversation we’ll keep it real simple and not try to get to deep.

We’ll approach it from simple buy puts (short side) buy calls (long side). The first thing I want to mention is that options attract the fast money crowd in hopes of turning 500 into 10,000 overnight. This is also the get rich quick crowd. And more often than not these type of people get broke faster than they get rich. Please don’t be one of them as greed kills.

Time and time again we hear from people who like to trade options, and time and time again we hear the horror stories too. When we hear the horror stories nine times out of ten we can guess as to why their option went to zero. Nine times out of ten it was because they bought out of the money options or at the money options. This is the reason why 80% of those who do options lose money by the way.

Sure there are folks who use out of the monies and at the monies but those are experienced traders that know the ins outs ups and downs.

You see the trick is to NOT pay for time. You want as close to a point for point move as possible with the stock because there is nothing worse than seeing your stock move yet your option does nothing or very little, know the feeling?

So for All About Trends we only want to look at IN THE MONEY CALLS OR PUTS and we DO NOT WANT TO PAY FOR TIME, sure they cost more BUT we want to be as close as possible to being able to see a point for point move with the stock.

We hate paying for time. We want true value without the time. We’re not saying our way is any better than others, we’re just saying it’s what works for us.

Now let’s touch upon how we would build a portfolio dedicated to options and how to make it a piece of your overall portfolio via allocation. Keep in mind this is more geared towards beginners so you advanced people might be bored with it but then again it never hurts to revisit the basics every now and then. At All About Trends Trends we talk a lot about never biting off more than you can chew and trade size position management. We do that for a reason, we do it so as to when Murphy’s law shows up it never devastates us or blows us up. Typically we try to stay within a 5-7% position size when we do a trade. The same thing goes for options. If we were to start a portfolio of options or shall we say allocate a portion of our overall portfolio to options the way we would look at it is the following:

For example, let’s say the total value of your portfolio is $100,000. The most we’d consider allocating towards an options strategy is 10% of the whole portfolio. In this case $10,000. So now you’d have a $10,000 option portfolio to work with. Now let’s say that you are the worst trader on the planet (we doubt that!) and you lose the whole option portfolio, what’s the risk to the total value of the overall portfolio? 10% in which case you live to play another day. Now let’s touch upon that $10,000 you allocated toward options. Let’s reduce the risk even further (and we haven’t even talked about what stocks to trade yet). Let’s take that $10,000 and split it up into no more than 10% ($1,000) can be allocated to anyone position as a guide. (Sometimes 1000 can get you 3-4 contracts you know). Now let’s say that one of those positions goes bust (and they will! and sometimes more than one at the same time we assure you.) What is the total impact to the overall options portfolio? 10% right?

Now let’s take that a step further. What’s the total impact to the overall investment portfolio of 100,000? 1% – that’s right 1 measly percent. When it comes to options you need to employ some sort of portfolio risk management structure parameters as this way you can get in trouble and you don’t lose sleep – you just have a bad day that’s all.

As for getting rich overnight? Forget about it. That’s just a marketing ploy. As for taking 50,000 and turning it into millions? Ain’t happening overnight but it sure sounds good doesn’t it? And that is why people bite on those marketing ploys.

As for time? We never go out months. As a swing trader we’re in positions for only a couple of weeks best case so why pay for the time to go out further in time when you don’t have to. When the stock moves whether it’s right away or not they sure seem to suck that time out of you just as fast anyway right?

Typically we’ll look at the front month (current month) or the next month but not months. When we say front month if options expiration is a week or sometimes even two weeks away we’ll look out to the next month and not the current. While time is our enemy in most cases, in this case it’s your friend. It’s just that you don’t want to pay for it.

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