Sunday, April 27, 2014

Active-Trader - Lemons into Lemonade

Welcome back Active Traders.

This past week I decided not to renew my subscription to Simpler Options.  I have learned much from John Carter during my 1.5 year association with him and his services.  But unfortunately his success with trading did not directly translate into trading success for me.

At the heart of it, I've been trading and investing for a long time and - in the end - the habits I have established over my 30 plus years of trading are too deeply embedded into my psyche to discard and start again.  That doesn't mean I can't be successful, it just means I have to do so on my own terms.

That said, I have learned many valuable things from my association with Mr Carter and i'll provide a few bullet points here:

1) Hurry up and wait - Most of the time the best trade is no trade at all.  For example Carter takes the entire day off on Monday and does not trade at all.  Unfortunately, I'm not wired this way and fortunately, I still have my regular job to keep me busy on Monday and most days.

2) Trade Option spreads - Options trading is devilishly difficult when all you know how to do is buy put and calls.  It gets orders of magnitude easier when you sell puts spreads (when you are bullish) and sell calls spreads (when you are bearish).   Carter laid it all out in a single screen shot one time and I'm going to try and find that before my subscription expires this Wednesday

3) Watch for the Fib levels.  I have an entire series of posts on this blog about this, so you can refer back to those for more information.

4) Watch for Continuation - This is a classic situation where you wait for the market to reveal itself before you spring into action.  In other words, wait for the daily pattern to setup so you have a good idea whats going to happen the next day.  Then simply position in front of the move and control your risk.

For example, I think that AAPL is going to rally next week due to a fundamental change in perspective on this stock due to the announcement of earnings, stock split and a buy-back.  Accordingly I positioned myself on Friday with long AAPL call positions expiring next Friday.  Stay tuned to see if it works out.

5) Lemons into Lemonade - This is a trait of many successful people - they take failure or situations of adversity and turn them to their advantage.  Carter does this often - when he sells a credit spread that moves against him - what does he do?  Does he take is losses and consider the trade or himself to be a failure?  No, instead he puts on another position, sometimes twice as large to offset the loss in the losing position.  Do you have the guys and confidence in your trading to do that?  Carter does and that's how he can come out on the top when other traders take their losses and walk away in defeat.

Finally, trading is a tough game.  If you are trying to make a living on a day-to-day basis and you have a losing day, do you consider yourself a failure?  What if your portfolio declines 10% from the peak? Do you have the mental stamina to pick yourself up and objectively view the markets with a clear perspective?  It sounds easy, but is far from the case, particularly when you have previously learned to make a living in a profession that provides small, regular reinforcement that you are doing a good job.

So in the end, you must be true to yourself.  Develop a style and approach to the markets that works for you, your risk tolerance and your lifestyle.  While I have learned much from John Carter, I will never be exactly like him because he has a different set of skills and experiences than me.  Conversely, Carter can never be exactly like me and I have a set of skills and experiences than him.  These stills allow me to be successful in cases where he could not.  So while we can learn from each other,  we have to approach the game in our own ways and under our own terms.

I read a great quote from that sums it up perfectly:

Be yourself - everyone else is taken - Oscar Wilde

Enjoy your week ahead.

Sunday, April 20, 2014

Active-Trader - Fiblines in Facebook

Welcome back Active Traders and Wealth Builders.

A few weeks back my friend Franklin from Simpler Options left a comment asking for more examples of how to calculate the Fib lines.  Let's walk through an example using one of my favorites, Facebook.

1) Start with a chart of the weekly or longer time-frame

2) Identify the lowest low just prior to the beginning of a bullish advance.  Note the point at which that advance stops and pulls back.  The pullback must retrace some portion of the bullish formation, but clearly not all of it.

3) Now grab the Fibbonacci Retracements tool and drag from the top of the real body of the highest candle at the top of wave 1 and drag down to the low of the real body of the candle at the bottom of wave 1 and let go.  You will get something like what appears above.

Selection of the top and bottom of wave 1 of the Elliot Wave pattern is the most important part of the process, and its the only part that requires human judgement.  If you get that part wrong, the results will be suspect.  But along the way, you might find certain clues in the price action that show the original observation was correct.

Next bring up the properties of the drawing you just made and set the lines as shown on the right.  These are the most important lines in the sequence and represent 0, 100, 161.8, 2.618 and 4.236 multiples of the initial move.  These values are ripples or harmonic wave patterns in the price action that are all based on multiples of that initial move.

Once you have constructed the red lines are  you are left with a chart with 5 unevenly spaced areas between the red lines. The next step is to simply use the Fibonacci retracement tool to sub-divide each of the remaining sections at the 0.382 and 0.618 lines and color those green.  Those are the tree-lines and represent the 2nd most important areas of support and resistance after the fire lines.

The next step is to further sub-divide each of the remaining sections at the same multiple with white lines.  Those are the white lines and less significant that the tree lines and fire lines.

Bringing Facebook up to date, let's take a look at this weekly chart.  We can see we made a new high at 72.59 about 6 weeks back. Since then we have traded down but found support at the 2.618 fire line and bounced.  This fire line is a well-established point of support and resistance since it was resistance on the way up (not shown) and has been support since. Also, note the 6 weeks down is a move symmetrical in duration to the prior advance which lasted 6 weekly bars.

Bottom line I'm long some Facebook shares here into this weeks coming earnings report. I don't expect we are going to see a new all time high in the shares this time. Instead, I expect we are going to trade up as high as the upper tree lines (or perhaps a big higher) than roll over and head back down and end the week having taken a wild ride, but not much changed.  We'll see.

Happy Spring and enjoy your weekend and the week ahead.

Sunday, April 13, 2014

Active-Trader - Price and PE > 100

Welcome back, Active-Trader and Wealth Builders

As you know we are undergoing a nasty rotation in the stock market out of the recent high flyer stocks into safer assets, dividend paying stocks, Bonds and Gold.

Some of the pullbacks in point values have already been large, for example TSLA is down nearly 30% from its all-time high set back in February of 2014. Are these stocks done going down, or do they have further do go on the downside?

Consider the fact that the PE for the average stock in the SP-500 is 18.  Above is a scan of stocks with prices over $100, and a PE over 100 along with the 5-year earnings growth rate.  Earning growth rate is important because the market will pay up for high growth rates, and if the 5-year earnings growth rate is 50% (for example), it might make good sense to pay up to 100 time earning for a stock.

But what if the 5-year earnings growth rate was negative?  What if the company was actually losing money, or just not making very much to justify the outrageous value of the shares?  Out of this list comes some of my favorite short candidates, stocks which I think have a lot further to go to the downside.  Tops among these are AMZN and NFLX and LNKD.

What about stocks with no earning whatsoever, no PE Ratio? I ran that list and came out with the following. Favorite shorts on this list are ICPT, and of course TSLA.

Be careful trading these markets since they can have sudden, short burst of short covering, usually to the top of the declining price channel.

When that happens, be prepared to sell call credit spreads or buy directional puts, with a delta 7 or higher.

Have a great week ahead.

Saturday, April 5, 2014

Active-Trader - Blood on the Nasdaq

Welcome back Active Traders and Wealth Builders.

This past week we saw some vicious selling in last years's high growth momentum stocks.  The selling started in the biotechs (BIIB, CELG and REGN) and later spread to many of the other big momentum stocks like AMZN, PCLN,  LNKD and TSLA to name just a few.   Nothing tells the story as clearly as this past week's wild price action in Priceline - PCLN.

Fortunately, the Range Band indicators does an excellent job of telling you when to green turns to red.  That happened with Priceline back on 3/21/2014 when the price closed below the lower range band on the daily. For more information how to construct the range bands, see my prior post on the Range Bands indicator Range Bands Indicator.

As to how I traded this one, I bought the bounce off the bottom on a bullish crossover on the 39 minute range bands.  Specifically, I sold the 1997.5/1200 put credit spread for a credit of $1.10.  I did 5 contracts so the max gain was $550 and the max loss was $700.

Almost immediately the trade went completely against me max in the money and traded down and closed at about 1190.  The next day it was off to the races and the stock took off and in the next day or so traded as high as 1265.  At that level, I figured the bottom was in and this position would go out at max profit without too much trouble.

Unfortunately, it didn't turn out that way and the stock came in hard later in the week and was threatening my short strike by trading down to the 1210 area.  Once it broke 1210, I figured I would cover the short side of the spread at a profit and just stay long the 1197.5 puts.  So I bought back the short contracts for $4 taking a considerable paper profit on the trade, but still facing the loss on the long puts.  At this point, I was lost as to how to close this trade at a profit unless the stock tanked well below the level of my long puts at 1197.5. Immediately the stock rallied off the low and trade as high as 1225 and I was facing a complete loss on the puts.  Not wanting them to expire worthless and face the loss, I closed them for $1 each not realizing at the time that I had opened the spread for 1.10 credit, and just closed it for a debit of 3.0 thus locking in a higher than expected loss on this trade.

As if that wasn't annoying enough, PCLN immediately sold down hard and closed the week out at 1178 and had I held onto the puts that I sold for $1 earlier that day could have been sold for 19.5 later that same day for a potential profit of $9,700.  It was a frustrating experience and goes to show how a good trade can go bad due to mismanagement.  In the end I completely misjudged the degree of volatility in PCLN.  I expected it to hold the treeline at 1200, and instead, it sliced right through it to the next level of support.  Everything was not a complete disaster this past week as I had successful  bearish directional and spread trades in LNKD.

All this got me thinking about how I select my trades, and it came clear to me that the best trades are in the direction of the trend on the 39 minute, daily and weekly time frames.  I already have an excellent trend indicator with the range bands.  So all I need to do is put these multi-time frame views together into some type of dashboard.  I started working on getting this going on the Radarscreen in TradeStation, but came up short.

More to follow and enjoy your weekend.  Get some rest, you deserve it.