Fibonacci Rules – Sometimes, the Old Ways Are the Best!
by Phil - February 19th, 2011 9:59 am
Crazy stuff, right?
If you have never before paid attention to Fibonacci Retracement Levels, I would strongly consider paying attention to the S&P chart below. This chart shows, 2 years later, a consolidation and breakout that could have been predicted in March of 2009. That’s right, if you asked a Fibonacci technical guy where the S&P was going to consolidate on March 10th of 2009 – he would have said: "Assuming that yesterday was the bottom and coming off our high of 1,576, then I would say we will consolidate between 1,014 and 1,229."
Leonardo of Pisa (and independent republic at the time) was born in 1,175 and died at the ripe old age of 65. Pisa was a city of about 10,000 people – a mixture of Muslims, Christians and Jews. Construction on the great tower began in 1,173 and was not completed until 1,319 (so don’t complain about modern union jobs!) but they knew that it was listing in 1,178 so the point is: Leonardo was born in a small town that had a huge architectural problem.
Fibonacci’s father was a State customs worker (essentially overseeing floor trading) and encouraged his son to take up studies in mathematics which, at the time, included learning Hindu Vedic math, which was the foundation of modern algebra and which Fibonacci came to greatly respect, saying:
The knowledge of the art very much appealed to me before all others, and for it I realized that all its aspects were studied in Egypt, Syria, Greece, Sicily, and Provence, with their varying methods; and at these places thereafter, while on business. I pursued my study in depth and learned the give-and-take of disputation. But all this even, and the algorism, as well as the art of Pythagoras I considered as almost a mistake in respect to the method of the Hindus.
Thus Fibonacci became the driving force by which Hindu-Arabic numerals came to replace the Roman ones. Fortunately, at the time, the arts and sciences were still supported and he found the favor Emperor Frederick II, who funded his studies – even though they didn’t make him any money (imagine that!). Fibonacci did not invent Fibonacci numbers (it was probably India’s Pingala in 200 BC), he just realized they could be applied to natural growth and regression sequences and, as it turned out,…
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DiggSmart Virtual Portfolio Management – The $25,000 Virtual Portfolio
by Phil - January 22nd, 2011 12:18 pm
Options Sage submits:
“Never risk what you do have and do need on what you don’t have and don’t need”
Smart virtual portfolio management is a world apart from conventional virtual portfolio management. While conventional virtual portfolio management offers generic guidelines to diversify capital, smart virtual portfolio management is tailored to your personal circumstances. We have, in the past had similar articles on managing $10,000, $100,000 and $1M Virtual Portfolios. This article is a variation of the $10,000 article in preparation for our new 2011 Member Virtual Portfolio with the goal of turning $25,000 in into $100,000 over the next 12 months. Phil is, of course, proposing an aggressive stance but, after turning $10,000 into over $30,000 in just 7 months in the prior virtual portfolio – let’s just say we are confident it can be done.
Although this article focuses on prudent strategies for a $25K virtual portfolio, many less conservative investors are likely to find the strategies addressed throughout suitable for their own virtual portfolios – though the % allocations will differ as we will see in Phil’s virtual exercise. No matter what your risk tolerance, a virtual portfolio comprising some relatively conservative trades is always prudent!
Phil once commented that, when trading a $10,000 virtual portfolio, “every $100 counts”!
Capital should be allocated judiciously in a small virtual portfolio. NEVER allocate a majority of your capital to any single trade. Dedicating 20% of your virtual portfolio to relatively conservative trades (shown below) is appropriate but exceeding 30% is far too risky when dealing with limited capital. With a $25K virtual portfolio, it becomes increasingly imperative to be right first time. Financial constraints limit your ability to scale into trades at different threshold levels and that makes timing critical unless….
Unless you figure out how to trade without requiring perfect timing of the market! Those of you trading along with Phil’s earnings spreads have already seen some of the ways we take advantage of stock movement, whether they go up, stay flat or even drop to some degree…
Strategy A: The Covered Call – With a Twist – Making 44% in Just 13 Weeks
Instead of placing the short call out-of-the-money in the conventional format, the short call is actually placed in-the-money.
C closed…
Thrilling Thursday – Comedy or Tragedy?
by Phil - January 6th, 2011 7:29 am
Russell 8-0-0, Russell 8-0-0! Wherefore art thou Russell8-0-0? Deny thy dollar and refuse to fall, or, if thou spike not, be but consolidating at resistance and I’ll happily Capitulate….
If it’s good enough for fair Juliet, it’s going to have to be good enough for us as the Russell finally makes it over our 800 target – the last barrier that was keeping us on the bearish side. Above these lines – it’s time to stop worrying and love the rally as we romanticize the deadly combination of QE2 the Obama tax cuts as: "A pair of star-crossed lovers take their life, whose misadventured piteous overthrows doth with their death bury their parents’ strife."
Of course Willie Shakespeare has nothing on Jimmy Cramer, who’s pearls of wisdom are also sure to be repeated centuries from now. Last night the Bard of Wall Street sang a veritable sonnet in praise of the stock market and foretold a tale of woe for anyone dumb enough to take profits into this rally:
We got the correction this morning, Dow fell 35 points… Today’s action was proof positive that you need to stop worrying and learn to love corrections… What scares me, and what should scare you, is that if you sell your stocks here, you won’t be able to get back in. You should be worried about stocks getting away from you, because I think we can be on the verge of something big – something very positive. FORGET the fact that stocks have run up a lot in the last 6 months. For more than 10 years, this market has done nothing, THAT is the most important frame of reference…
What’s changed? We are finally starting to see big breakouts from a slew of breakouts from several large cap companies including: CAT, UTX, FCX, SWK, CBE, ETN, CSX, UNP and so many other big industrials. Ladies and gentlemen, we have waited over a decade for this move and what do people want to do now that it has arrived? They want to sell! That’s right, they want to sell. That’s right. They want to dump the stocks (sell button sound effect) because they are up way too much short-term or because they think the moves are illusory or driven by short squeezes that will
…
Secret Santa’s Inflation Hedges for 2011
by Phil - December 25th, 2010 4:30 am
Merry Christmas!
I hope you got everything you wanted this holiday season and, most importantly, I hope you had time to spend with your family. I’m waiting for mine to wake up – waiting for my children to come out of their rooms so I can videotape (gosh I’m old, there’s no tape anymore) them in those first moments of Christmas morning – how can I not be of good cheer anticipating that?
It occurred to me, though, that I have something I can give you. Not peace on earth but perhaps peace of mind heading into the New Year – a way to help insure some future prosperity with a few inflation-fighting stock picks that can brighten up your virtual portfolio, which also can be used to help balance the budget against unexpected cost increases.
This isn’t an options seminar or one about risk or leverage – these are just a few practical ideas you can use to hedge against inflation as it may affect your everyday life using basic industry ETFs and some simple hedging strategies to give you an opportunity to stay ahead of the markets if they keep going higher.
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Idea #1 – Hedging for Home Price Inflation
Let’s say you have $20,000 put aside for a deposit on a home but you’re not sure it’s the right time to buy. On the other hand, let’s say you are worried that home prices will take off again (I doubt this but you never know). XHB is the homebuilder’s ETF, currently at $17.46 and they bottomed out at $7.77 in 2009 and were in the $40s back in 2006.
You can sell 20 contracts of the XHB 2013 $14 puts for $1.70 each ($3,400) and that obligates you to buy 2,000 shares of XHB at $14 (20% off the current price) and you can use that money to buy 30 2013 $15/18 bull call spreads for $1.40 ($4,200) so another $800 out of pocket and you have 30 $3 contracts for net $800 that pay back $9,000 if XHB simply gains .54 by Jan 2013. These bull call spreads, however, do not pay off early – the ETF needs to be above $18 at Jan 2013 options expiration day (the 18th).
So you are putting up $800 in cash and the margin requirement on the sale will be roughly $7,000 (1/2 of the potentially…
Friday Already? What Next?
by Phil - December 3rd, 2010 8:28 am
What a wild week!
The Dow is up 400 points since Monday and we are just 150 points away from our November 4th high. Once we get over 11,500, we have no reason at all to be bearish from a technical standpoint and fundamentals are out the window so what else should we be looking at? We ended up too bearish on our $10K-$50K Virtual Portfolio as we hit our double-down targets on a couple of index shorts so I am CLEARLY in the bear camp this morning as we’re still playing this as a double-top, rather than a breakout but what if we do break out? As David Fry said this morning:
Any worries from Europe, China tightening, higher Jobless Claims are mere inconveniences when the light is a bright green. Let’s face it; this is what the Fed stated they wanted with their POMO activities—higher prices overall with higher stock prices emphasized. The Fed prints money and buys bonds from the Primary Dealers and (wink wink) they know what they’re supposed to do with it. Bears just better get out of the way.
Looking at David’s Nasdaq chart, we can see that we are back at 2007 highs. I find this truly amazing as it seems to me things aren’t quite as good in America as we THOUGHT they were in 2007, before we found out that Financial earnings were a scam and before our homes lost 1/3 of their value and when our neighbors used to all have jobs but CNBC is telling us over and over and over and over again how great things are so it must be true because they are on TV and TV doesn’t lie to us.
So there’s our ridiculous rally premise and we’re "very excited" to go bullish if we break over the 2007 market highs. XLF has been a real laggard so we like taking advantage of a run in the banks with trade ideas like the FAS April $20/25 bull call spread at $2.70, selling the April $21 puts for $2.55, which is net .15 on the $5 spread that’s already $4.25 in the money. So, if FAS makes a .75 gain between now and April expiration and holds it, this trade makes a 3,233% profit. That’s pretty good right?
See, that’s why we don’t fear the upside. If…
Monday – Will APPL Earnings Today Keep Bears at Bay?
by Phil - October 18th, 2010 8:21 am
Am I too bullish?
I know I’ve been making a bearish case last week and I know we put out our first bearish list since April this month but, in reviewing October’s Overbought Eight for Members this weekend we reviewed the week’s picks and I realized that, despite all my griping, we had ended up with 21 bullish trade ideas vs. just 10 bearish ones AND, not only that, but half the bearish bets were quickie trades where we played the drops, like Friday’s DIA and QQQQ puts from the morning Alert that didn’t even last an hour (but made 300% and 200% respectively, so worthwhile, nonetheless).
That’s not very bearish. I had said to Members in last Monday’s Morning Alert: "The critical test levels above 7.5% are Dow 10,950, S&P 1,160, Nasdaq 2,400, NYSE 7,450 and Russell 690- all green for day 2 and that does put us technically bullish if we hold it, even though it’s a BS, low-volume day." and we did hold those lines on Tuesday’s dips to we cashed our first set of shorts and ended up flipping more bullish for the ride up to the 10% lines (Dow 11,220, S&P 1,177, Nas 2,420, NYSE 7,500 and Russell 700), despite out misgivings. When the technicals are very strong, you have to switch off the fundamental side of your brain and go with the flow.
It has been ALL about the dollar and, as we mentioned in this week’s Stock World Weekly, Trichet gave us the word we expected on Tuesday that knocked the dollar down to new lows against the Euro, Pound and Yen, with the dollar index bottoming out at 76 which should, in theory be strong technical support.
So, we have strong technical AND fundamental reasons to expect a dollar bounce and we KNOW that a dollar bounce will knock down commodities and we KNOW that a pullback in commodities will knock down the indexes as the energy and metals sector lead us lower. If we KNOW all this, then we MUST be too bullish, right?
Of course we reached that conclusion on Thursday and this is just a recap as 6 of those 10 bearish trade ideas from last week were from Thursday and Friday with EDZ, QID, QQQQ, SQQQ, QID (again), and DIA all picked short as we tested those 10% lines. We like to…
Turning $10K into $50K by Jan 21st – Week 12 Update (Members Only)
by Phil - September 4th, 2010 9:24 am
What an exciting 10 weeks these trades have had!
The most important thing to take away from these hedged play reviews is how important it is NOT TO TOUCH THEM. We orginated this group on June 11th and the Dow was at 10,200 and it ran up to 10,600 and down to 9,600, back to 10,700, down to 9,800 again and is now back to 10,400. We could have made some good adjustments and we could have made some bad adjustments but the best move is to do nothing with long-term, hedged positions while the market gyrates UNLESS something fundamentally changes in your range outlook.
Rather than panic out of positions like these examples, a simple disaster hedge was used in the July 26th update to ride out the dip, while letting time (theta) decay contine to do it’s work on the premiums we sold…
The VIX was at 30 back on June 11th and that, in part, determines the nature of the trade ideas we decide to use. The higher the VIX, the more we want to sell premium as we simply profit from the declining VIX (now 23.5). The idea of these picks was to find $10,000 worth of small plays that we thought could gain 500% by Jan 21st as part of a larger virtual portfolio. If you can do this with just 10% of a $100K virtual portfolio or 5% of a $200K virtual portfolio, that’s plenty of risk for these uncertain times and it’s a nice 25-50% bonus on the entire virtual portfolio if it works out. Risk can be a component of a conservative virtual portfolio if we wall it off safely.
Our first play was a fundamentals play on YRCW, assuming they wouldn’t go bankrupt. 10,000 shares at .21 was the original entry ($2,100) and I called an audible on this one on 7/7 to add 2x at .11 rather than stop out. That brought the net down to 0.143 on 30,000 or $4,290 so a bit more than a DD overall and we took 1/2 off the table this week at .29 ($5,850), turning this one into a free play ($1,560 profits in pocket) with 15,000 shares to ride out but we lost our nerve at .41 because we couldn’t get .10 for the Jan $1s so we gave up (and rightly so it turns out) and cashed out for another $6,150 in profits for a total profit of…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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