Active-Trader - Trading Plan 2015

Welcome back Active Traders and Wealth Builders.

The end of the year and beginning of a new one is an excellent time to reflect on what we are doing and why.  Where finance meets human behavior is a very interesting and often overlooked area of the human experience.  And for all the work I do to build and maintain my wealth, I overlook this area myself.  So in this post, I'm going to lay out my trading and investing plan for 2015 so here goes.

Objective

The overall objective of my trading plan is to deliver performance which achieves 75% of the annual return of the SP-500 with 50% or less of the peak-to-trough draw down. I also want to extract between 5% and 10% of the value of my account from the market each year as a result of active trading and opportunistic investing.

Rationale

You might read this and say – aren’t you underachieving? If you don’t want to beat the market why even bother to make a plan? Why not just put 100% of your cash into the SP-500 and let it ride? Isn’t that guaranteed to deliver a better result over time? The answer is yes – but with a higher risk. Recall that the market can and does go down. Back in 2008, the market was down 50% from the top. Back in 1929, the market was down about 90% from the top to the bottom. Since I have been trading and investing for many years – and I am well on the way to financial independence – the last thing I want to do is lose my hard-earned gains. And as a result, I am willing to sacrifice some upside to avoid the chances of a wipe out.

Asset Allocation

Category	Allocation	Key Tickers	Over or Under
Broad US Stocks	40%	DIA, SPY, IWN	-8%
Select US Sectors	20%	XLE, XLU, XLB, USO	-7%
International	10%	EEM, EFA	+3%
Active Trading and Trend Following	20%	AAPL, FB, CME, CBOE	-10%
Cash	20%	10%	+12%

Looking at this, I am underweight in every category except for cash.  Its no wonder my performance is so ho-hum.  So clearly I'm no market wizard, so what about active trading?

Back in my younger days, I believed that I could program my way to financial independence. So I got my hands on SuperCharts (predecessor to today's TradeStation) and tried to program just about every stock trading strategy I could imagine. After a lot of struggle and observation, I discovered this simple truth: The trading system being used doesn't matter nearly as much as the performance of the underlying asset.

Put another way, a buy and hold strategy on a top-performing asset beats just about any given trading system on any given chart. In other words, its doesn't matter so much what system you trade, but what symbol you trade it against. That doesn't mean I don't believe in specific setups, I do and I'll get to those below. What it does mean it that it makes sense to find the best performing stocks and stick with those. And here is how to find them:

• Stocks with excellent fundamentals and a reasonable valuation.  My favorites are those where the 5 year earnings growth rate is greater than the PE.
• Stocks on the right side of a developing and ramping longer story
• Stocks with meet the above criteria and are breaking out to new all-time highs

You can find more on how to identify those stocks in my post New High, Low PE, High Growth. That screen criteria constitutes the bulk of my entries.  Here are some specific setups I use to supplement that core strategy and bring in some extra cash:

Elephant Bar Breakout 

This happens when a stock breaks out to a new all-time high on huge volume and typically along with some underlying fundamental or news development.   Its best to enter these stocks late in the day (say between 3:30 and 4:00) on the day they break out .  Don’t wait until 2-3 days after the break out, instead remember these key words from Jesse Livermore:

I become a buyer when a stock breaks out to a high in price action after having a normal reaction.

In other words, don't buy a stock after it has made 8 straight new all-time highs.  Wait for the stock to clear resistance and move into all-time high territory then go long!  For an example, see Cigna (CI) on 10/30/2014.

Post Earnings Crash and Gap Fill

This happens when a stock with excellent fundamentals and prospects comes out with earnings and gets severely punished for no good reason.  Look at Qualcomm (QCOM) on 7/23/2014 and again on 11/5/2014.  The stock got crushed for 3-5 days after earnings then retraces.  These sell off's can be a good opportunity to buy some stock or sell puts. Take profits as the stock retraces.

Playing Defense

2014 has shown some great trading opportunities where the broad markets setup for a fall and get smashed. As the markets get increasingly traded by algorithms, its seems like the market has gotten more directional. I'm finding that it makes sense to hedge a certain part of the portfolio to extract alpha or minimize losses.  I will buy short ETF’s (in my 401K Rollover) or just go “Short Against the Box” ETF’s in my taxable account. I do so because I don’t want to close out my longs and pay capital gains taxes. Instead, I want to just minimize the pain during the downdraft. I have more work to do on this category of trade and would like to develop some setups which can identified and traded using TradeStation.

Special Situations

These are hard to define and I can’t really quantify exactly what I’m talking about here. But I know them when I see them. What else can I say.

Selling Premium into Earnings

I have been doing these trades for the past 2 years in small (1-2) lots and I find them to be an overall reliable way to make money. For an explanation, see here. I also like these trades because the ones which fail often turn into excellent directional trades in the direction that they failed. You know I have been doing a lot of work on Fib lines. Where to they fit into the larger scheme of things? Recall that Fib Lines – or no other Technical Indicator constitutes a Holy Grail . Instead, they provide clues to where price action may pause at resistance on the way up, at support on the way down. I plan to release the Fib Lines – plus levels on key stocks and ETF’s in early January 2015. So stay tuned for that.

That's all for now, have a great 2015!

Active-Trader - 2014 Wrap-Up

Welcome back and Happy New Year to my loyal blog readers!

Happy Birthday wishes are also in order since as of today, this blog is officially 5 years old!

Five years is a long period of time to do something for which you don't get paid - and probably never will.  But in my case, the work is its own reward.  And I will continue to share the best of what works in trading and finance with the sole purpose of  making you successful.

Looking back over the prior 5 years, my net worth has roughly doubled over that time period.  Much of that success is due to a rising stock market.  If I can continue that performance over the next 10 years,  I will be well positioned to live happily ever after.

As for performance, 2014 was an average year and I put in about 6.6% in my taxable account and about 7.5% in my retirement account.  I didn't do nearly as well in my active trading accounts in both ThinkorSwim and TradeStation.  But I will continue to work on that and more to come on that topic in my 2015 trading plan post which is scheduled for this upcoming weekend.

As for design and analysis, my biggest accomplishment for 2014 was unraveling the Voodoo Lines indicator. Also, I have made excellent progress on the my version of the indicator for TradeStation which I call Fib Lines.  Look for a post on that in the first few weeks of 2015.

Overall, it was an excellent year and (thanks to an incredibly accommodating US Federal Reserve) a great time to be an investor.

So hear is my opportunity to wish you and your family a happy, healthy, productive and profitable 2015!

Active-Trader - Welcome Fib Lines

Welcome back Active Traders.

Since my previous post, I have made some excellent progress on my indicator which I will call Fib Lines.

This screen show shows how the indicator is working on GPRO as of 12/22/2014.  I have been bearish on GPRO for some time, but note how it bounced right off the top of the 100% level on the daily chart and put in a "Close above the Low of the High Bar" formation.  I still remain bearish on GPRO shares which are now down almost 50% from their highs set just shy of the $100 level back on 10/7/2014.

On a side note, check out how the indicator does a very clear job at showing you where wave 1 begins and ends

Another interesting thing about Fib Lines is that its not just purely a mathematical calculation, there is human input required to find the beginning and end of Wave 1.  To see what that can mean over time, consider prior interpretation of Facebook found here,  In that, we show the 423% level (which is the last level in the sequence) at $80.88.  What happens when the price breaks beyond those levels?

The answer if course it is that it depends on the interpretation of the human analyst.  In this case, I expect that Facebook is in the early stages of a long uptrend, so I re-calibrated the beginning and end of Wave 1 and came up with the interpretation shown on the right.  You can clearly see likely support and resistance levels from this chart, so it will be interesting to see how price action plays out against these levels.

As for enhancements to my Fib Lines indicator, here's what it needs before I release it for testing in 2015:

• Add the White lines level - as of now I have the Red and Green lines only
• Rename the Fib levels to relationships from 100%. Once you see that, you realize some other cool symmetries such as the tree lines between 1.618 and 2.618 are actually 2.0 and 2.236 when started from 100.
• Move the labels over to the right side of the chart since they are often out of view when left justified as they are now
• Figure out how to distribute the fib level data over the Internet. As of now, the data is hard coded into DLL component of the indicator.
• Add support for Thinkorswim

Some time in early 2015, I plan to make the indicator free to members of my Yahoo Group.  If you would like to join my Yahoo group, just send an e-mail to fx-mon@yahoogroups.com.

Have a Merry Christmas and a Happy New Year!

Active-Trader - CME

Welcome back, traders and wealth builders.

This past week, I caught a nice breakout in CME group.  The shares recently cleared 2+ year old resistance in the $85 area, stepping out into areas not seen the financial crisis in 2008.

Taking a longer term look at the stock, it had an IPO in early 2005 at about $45 per share.  The stock went on to have a stellar ascent from there, trading as high as $142 at the high set in January of 2007, almost 2 years to the day from the IPO in 2005.

Then along came the financial crisis which hit the stock and hit it hard. The stock traded from the $142 area all the way down to a low of $31 set in January of 2009 almost 2 years to the day from the top set in 2007.  Funny the way this stock tends to move in locks steps of 2 years, and always setting the high and low in January.

From the low set in 2009, the stock has been on a slow and steady ascent. A quick look at the fundamentals in TC2000 show the move in the stock is well supported by expanding fundamentals. While earnings growth has flagged in the past few years, the multiple being paid for the shares seems to be expanding.

As for price levels, the chart above shows the $161% voodoo line at $90.79.  We also have the 1.272% (purple) and 1.1618% (blue) extensions of the recent high to low swing.  All 3 of these levels serve as short-term points of resistance if you are looking to flip out these positions for a short-term gain.

Long term I'm bullish on the shares as well as sister exchange CBOE which has better earnings growth due to explosive growth in trading of listed options.


Have a great week and ahead and as we enter the holiday season let me take this opportunity to thank my loyal blog readers and here's wishing you all new equity highs.

And of course don't forget to put aside some time to enjoy the fruits of your labors.

Active-Trader - PANW Fiblines revisited

Welcome back Active Traders and Wealth Builders.

Recall in my prior post here, I ended up on the wrong end of an Iron Condor trade after PANW reported earnings back in early September

At that point, I put the top of wave 1 (the 100% line) at just under $80 and the $161.5% line at about $102 and change.  Since then, look how beautifully PANW has held up against these levels:

1) Bounced back to the lower treeline at $87.65, almost to the tick.

2) Rallied up from that point and found resistance just above the lower snow line, then got caught in a congestion zone between the 161.5% fire line and the above snow line.

3) Next it rallied up to the upper snow line and got caught in another congestion zone between 2 upper snow lines

4) Finally yesterday (the day before earnings) it broke the upper snow line and tipped through the next upper tree line.

As to how I played it, I have been long the stock since the low $100's.  Going into earnings, I sold the 105/107 119/121 condor for a credit of 0.75.  At this point, my short strike at 119 is underwater, but I'm going to give it until Friday and look for a close below $119 to bring in max profit on the trade.

Now you may look at the above chart and make the point that any arbitrary lines drawn on chart might also show the same relationships.  You may be right about that, however keep in mind these levels were know in advance.  Similarly, the chart shows we have important resistance overhead at $125.6 and $140.11, levels at which the stock has not yet traded.  So (unlike at lot of technical analysis) voodoo is a forward-looking indicator.

Nobody can predict the future, but Voodoo comes about as close as anything I can find.

Happy Thanksgiving to all of my loyal blog readers.  Enjoy the fruits of your labors, you deserve it!

Active-Trader - BABA Fib lines

Welcome back traders.

Here is my first crack at Fib levels for BABA.

It's a bit early in the life cycle of this stock to declare fib levels, after all its been less that 2 months.  But when a stock is as fresh out of the gate and into new all-time high territory, its about all we have to go on.

If we clear this recent high, next resistance is at the 261% red line at 125.63.

Active-Trader - BABA Breakout

Welcome back Active Traders.

Its been an incredible few weeks in the financial markets with new all-time highs in the Dow-30 and SP-500 on an almost daily basis.  It was a great week for earnings as well and none tells the story as well as Alibaba, symbol BABA.

Recall that BABA recently went public in the largest ever tech IPO and covered in my prior post Swallowing BABA  The company reported earnings for the first time this past Wednesday 11/5 after the close.  I approached the trade in my usual fashion, selling an Iron Condor outside the expected move.  Specifically, I sold the 92/94 108/110 condor for a credit of 0.8.

To collect the entire 0.8, all the stock had to do was remain within the short strikes which are the red lines shown on the chart.  The earnings day is shown as the orange candle on the left side of the chart.

Things went well at the outset and the stock moved mildly higher on the day after the report.  But it continued relentlessly higher and was soon beyond my short strike at 108.  I was not too concerned as sometimes the stock can challenge the short strike and even go beyond the long strike, just to give it all back and close within the expected move.

But BABA was different and started to push beyond my long strike at 110.  I was tempted to close out the short 108 call and stay long the 110 call, but experience has shown this is a sure way to lose more than the max loss on the trade which is the difference between the credit received (0.8) and the spread (2.0) or 1.2.  So I closed the 108/110 leg out for a debit of 1.55 which was a loss of 0.75 on the trade.  But I turned around and went long the stock at about 110.40.

From there it was onward and upward and the stock really took off to the upside.  I looked at this chart in the context of many other big winners in the Internet space such as GOOG, LNKD, PCLN and NFLX,  It occurred to me that nearly all of the other stocks had broken charts - in other words they were well off their highs and in the state of repair.  BABA on the other hand was fresh out of the gate, reaching new all-time highs and potentially much earlier in its life cycle and setting up to be the next great Internet stock.

So I did the only logical thing and bought more and went out long on Friday as the stock crossed 114.30.  The shares continued to rally and closed at a new all-time high at even higher in the after hours session.  I am expecting a gap up on Monday before the stock takes a rest in the $120 area.

Have a great week ahead.