Vacation-Proofing Your Virtual Portfolio
by Phil - June 25th, 2011 7:55 am
Option Sage Submits:
When driving a car and some object appears on the road ahead do you usually run right over it or do your best to avoid it?
Don’t we all take action in real-life based on the new information we receive that changes the old paradigm? Take the first two guys in this video: Who would you rather be, the first or the second guy? While the second gentleman reacts and looks ridiculous in so doing, he’s the guy that is more likely to survive when real disaster hits because he’s reacting to new information. In fact he doesn’t even know what’s making everyone else react, he just knows that when 99% are moving one way in panic, it’s best not to fight the crowd or he will be trampled. It’s no different in the market. Pride, ego and old theses have no place when new information directly contradicts an existing trade.
This week, we used DIA and QQQ puts and calls to "react" to quick changes in the market while we waited for better information before making more permanent changes in our positions. This gave us the benefit of the
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DiggImprove Your Market Timing: Channeling Stocks
by markettamer - March 27th, 2010 10:33 pm
Courtesy of MarketTamer.com
- Stocks will typically channel 65-70% of the time.
- There are essentially three types of channels; Ascending, Descending and Sideways.
- The channel is comprised of two parallel trend lines which define support and resistance.
- The trading opportunity is as a result of buying the bounce off the lower trend line and selling the resistance.
- Channeling stocks as a continuation pattern occur as the stock trends and then consolidates for a period of time, only to eventually break out to resume the prior trend.
- Ascending Channels are usually embedded in a broader downtrend and act as a respite to the primary downtrend.
- Accordingly, Descending Channels are a respite in a broader uptrend and will more often than not resume the initial bullish trend after channeling.
- Sideways Channels are considered consolidations before resuming the original trend.
- The investment community recognizes that stocks neither go directly up nor down without pause.
- A majority of trading activity resides in channels as supply and demand play “tug of war”.
- Eventually traders will push the stock out of the range.
- The quality of the breakout/breakdown move should be measured by the investor participation as evidenced by increased volume.
- The opportunity to make money with channeling stocks are as a result of two approaches: 1) buy on the bounce off of the lower trend line and sell at the top of the channel at resistance and 2) Play the breakout/breakdown out of the channel.
Are clouds looming on the horizon?
by markettamer - March 14th, 2010 10:44 am
Courtesy of Market Tamer
S&P 500
Hanging Man on the NASDAQ
Improve Your Market Timing: The Symmetrical Triangle Chart Pattern
- The Symmetrical Triangle is a continuation pattern that is comprised of two symmetrically converging trend lines. The continuation will normally be in the direction of the prior trend, although at times the pattern can reverse the trend.
- The breakout usually occurs prior to the triangle reaching its apex and is strongest if that is the case.
- The target is the trend line breakout/breakdown plus the length of the widest part of the triangle.
- After the stock has moved either up or down relatively quickly and with increased volume, the stock then begins a period of pause as the stock moves sideways or with a slight retrace against the trend.
- The initial trading in the period of pause consists of a wider amplitude and narrows as the upper and lower trend lines converge symmetrically.
- The investment community is telling us that it is indecisive as to the continuing direction of the stock as the trading range narrows and finally breaks out to resume the trend
NASDAQ Video Analysis
by markettamer - February 13th, 2010 6:15 pm
Improve Your Market Timing: The Double Top
- The buyers at the top of the first peak were victims of buying from the “smart money” as they sold to the “not so smart money” at the top of the trading range.
- These unfortunate buyers will usually hold, refusing to take a loss and waiting for the opportunity to unload the stock at a break even.
- When that opportunity presents itself, at the second top, selling pressure increases and drives the stock lower.
- Other knowledgeable traders who know that the “Double Top” will present an opportunity to short, will do so thereby increasing the velocity downward move.
Weekly Charts + The Reverse Cup & Handle Chart Pattern
by markettamer - February 7th, 2010 9:10 pm
Courtesy of Market Tamer
Weekly Charts
Dow Jones
S&P 500
NASDAQ
The Reverse Cup & Handle Chart Pattern
- The inverse of a Cup & Handle Chart Pattern.
-The stock bounces off of a support level and moves higher on unremarkable volume.
- A “Rounded Top” forms and then subsequently moves lower on increasing volume producing “The Cup”.
- The pattern is completed when a Bear Flag forms producing the handle.
- The breakdown occurs when the stock breaks the low of the handle on increasing volume.
How to Make Profits in Your Spare Time
by Phil - February 7th, 2010 8:26 am
Option Sage submits:
I saw an infomercial from Fisher Investments where Ken Fisher mentioned 3 attributes that he believes are keys to successful investing which can be crudely summarized as follows:
[1] Focus on long-term investing
[2] Expect surprises
[3] Stay ahead of the crowd by knowing what others don’t
The first point is certainly critical and weeds out the greedy ‘get-rich-quick’ traders from the patient traders. Our policy here is that of ‘play-to-win’. We like to be aggressive in seeking profits with short-term plays but we also recognize that if those trades don’t work out that we can still rely on longer term plays to end up profitable in the end.
The second point regarding expecting surprises asks the trader the question “Are you managing risk well and do you have contingency plans in mind each time you enter a trade?” While the second part of the sentence is important, the first is paramount! No matter what you do, never violate risk management rules which we have discussed here in the past.
The third point is a luxury in my view. Of course, it would be nice to know what others don’t but it’s not critical. By definition only a small number can have information that the rest of the crowd does not have so if you are not trading full-time you have to find another way of making money without relying on staying ahead of the crowd.
As I was scanning for trades over the weekend, I came across one trade which might in fact fall into the category of offering relatively attractive profits by relying on options rather than additional information. In fact, I know many of our members find it hard to focus on the daily trades and would like to construct virtual portfolios with the longer-term in mind. As Phil mentioned in his classic "James Bond Investing" article, playing short-term positions requires constant vigilance and you need to ready to turn on a dime with small windows of opportunity and this kind of trading is not for everyone. Even Phil has a rule of thumb that 75% of a virtual…
Peter D – Confessions of the PSW Strangler
by Phil - February 3rd, 2010 4:49 am
Peter D has a long-running and very successful system of selling premiums on a regular basis that’s well worth learning.
Investors selling a short strangle are expecting the underlying stock to not move much in either direction. The strategy is accomplished by selling a call option at a higher price than the current stock or ETF price and by selling a put option at a lower price than the current stock or ETF price. Both of the options will have the same expiration month. The investor in a short strangle benefits from the underlying moving within the spread between the call strike and the put strike.
There are two reasons we like this strategy a lot at PSW:
1) It’s boring! Unless the market is MUCH more volatile than normal, taking sensible, NON-GREEDY, out-of-the-money short option positions is a fairly market-neutral way to place our bets. While the risk/reward ratio may seem inverted, statistically it’s a winning play over time.
2) It’s perfect for our "be the house, not the sucker" philosophy of trading. We are always looking to SELL volatility. The idea behind this trade is that front-month volatility is relatively expensive compared to historical long-term volatility and we take advantage of selling a very high cumulative volatility over the course of the year.
We recently ran a collection of comments following through on some trades over time and quite a while ago Sage wrote an article relating about using short strangles on longer-term stock plays, which provides some additional ideas on how to apply this strategy. Peter has been kind enough to provide us with a definitive guide to help set you on the road to a successful career as a strangler. The following is a collection of posts (make sure you use the links) on Short Strangles and the Crazy plays on the indices (SPX, RUT, NDX, etc.):
1- The Crazy play consists of a Short Strangle and a protective long put vertical. These plays are mainly for Virtual Portfolio Margin accounts, with balance greater than $125,000, preferably over $200k as the margin can swing wildly.
2- Very rough comparison among Short Strangle, Iron Condor, Buy/Write and straight stock purchase. Note the rolling tips in the second to last paragraph.
3- VIX, the effects of.
4- Possible adjustments of the Crazy Play.
Additional discussion on doubling down.
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Market Snapshot + Bear Flag Chart Pattern
by markettamer - January 31st, 2010 8:33 pm
Courtesy of Market Tamer
Market Snapshot
ECONOMIC REPORTS
MONDAY 2/1 Personal Income, Personal Spending, Construction Spending, ISM Index
TUESDAY 2/2 Pending Home Sales, Auto Sales, Truck Sales
WEDNESDAY 2/3 Challenger Job Cuts, ADP Employment Change, ISM Services, Crude Inventories
THURSDAY 2/4 Initial Claims, Continuing Claims, Productivity-Prel, Unit Labor Costs-Preliminary, Factory orders
FRIDAY 2/5 Nonfarm Payrolls, Unemployment Rate, Average Workweek, Hourly Earnings, Consumer Credit
EARNINGS OF NOTE
MONDAY 2/1 ACV, APC, GCI, HUM, MNKD, PCL, SOHU, TUP
TUESDAY 2/2 AFL, ADM, CTRP, CMI, DHI, FISV, JDSU, MTW, MAN, MRO, MEE, MET, MYGN, NETL, PBG, SU, DOW, HSY, UPS, UNM, GRA, WHR
WEDNESDAY 2/3 AKAM, AMP, BDK, BRCM, CBG, CSCO, CMCSA, EFX, HMC, INSP, IP, MWW, NOV, NVLS, PFE, RL, BCO, TWX, V, WLT, YUM
THURSDAY 2/4 BEBE, BKC, CME, CI, DB, DO, GSK, HIT, K, MA, MCO, NOC, PENN, PBI, SLE, SNE, HOT, SUN, TM, UIS
FRIDAY 2/5 AET, AON, BZH, PC, TSN, WY
Stock Market Insights: The Cash Flow Statement
Cash is king! Liquidity in the form of cash tells us that the company can meet its obligations. The Cash Flow Statement is the third and last statement that we will touch upon. The statement is filed quarterly and year over year in concert with the Profit and Loss and Balance Sheet. The Cash Flow Statement is a measure of incoming and outgoing cash from its business operations for a specific point in time. The statement further defines the cash flow of the company that is indicated on the Balance Sheet. There are two methods of accounting that are used 1) accrual and 2) cash. Most companies use the accrual method which accounts for goods delivered as sales regardless of whether they have been paid for or not. The outstanding balance is shown on the Profit and Loss Statement under accounts receivable.
The Cash Flow statement typically divides the accounting for cash into…
Market Snapshot + Bull Flag Chart Pattern
by markettamer - January 24th, 2010 7:41 pm
Courtesy of Market Tamer
Market Snapshot
Well, it appears we are getting our pullback as we had expected would happen. We are certainly grateful that we were generously hedged as indicated in last week’s newsletter. This decline may have taken others by surprise but we were ready for it. Our positions are now biased bearish and delta negative. The task is now to determine likely targets for the down move. It is difficult to accurately determine the magnitude and duration of a move such as this one. The place to begin is to identify where a confluence of indicators exists. These are areas where several data points line up to tell us a similar story. While this does not mean that the market is going to cooperate, having a system is important in order to remain disciplined in your decision-making.
It is healthy that the stock market has a pullback. We are long-term bullish, and retracements such as these are crucial to long-term strength. We will simply follow the correction and look to profit from it with bearish strategies, such as bear calls, long puts as well more advanced strategies which we teach at MarketTamer.com. I am reminded of the analogy that the market goes up like an escalator and down like an elevator. The last three trading days certainly support that truism.
As the market approaches target levels noted in the charts, we will begin to take close note of how it reacts at those key levels. Typically, you will see the indexes put in narrower range trading days with less volume at support. Don’t be fooled! The market can do this several times on the way down. If the market begins to stall and trade sideways, it is tempting to remove hedging, only to be surprised by subsequent whipsaws. The safest approach is to wait for upside confirmation before determining that the market has found a bottom. You may miss the exact turn, but don’t let that bother you – safety first is the rule! Do not underestimate the market’s ability to follow through to the downside. Momentum can be a freight train and you don’t want to step in front of it. Just hop on board and ride it to the end of the line.
ECONOMIC REPORTS
MONDAY 1/25
Existing Home Sales
TUESDAY 1/26
Case–Shiller 20 City Index, Consumer Confidence, FHFA Home Price Index
WEDNESDAY 1/27
New Home Sales, Crude Inventories, FOMC Rate Decision
THURSDAY 1/28
Initial Claims, Continuing Claims, Durable Orders
FRIDAY…
Market Snapshot + Descending Wedges
by markettamer - January 17th, 2010 2:37 pm
Charts courtesy of Market Tamer
Dow Jones
S&P 500
NASDAQ
Technical Talk: The Descending Wedge Chart Pattern
· This is a falling and converging channel pattern. It looks like the beginnings of a triangle as both trend lines are falling and converging.
· The lower trend line is putting in lower lows, but not at the pace of the upper trend line. The pattern has bullish implications as the stock will usually break to the upside out of the channel.
· The pattern can be found in both bullish and bearish markets.
· When in a bearish market, the pattern is defined as a reversal pattern.
· When in a bullish market, the pattern is a continuation pattern.
· The stock is putting in lower lows, but at a slower rate than the highs.
· Volume is diminishing indicating a lack of conviction in driving the stock lower.
· When the stock breaks the upper trend line it will usually be on increased volume as the stock breaks out of the channel to the upside.
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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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