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.

Active-Trader - Adverse Excursion

Welcome back,  Active Traders and Wealth Builders.

Within the past 6 weeks, SPY has been up 8.7% for the year (as of mid September), then October's plunge took it to just barely up 1% for the year.  From there we had a fierce bounce back and are now up 6.29% for the year.  What a wild few weeks!

This past week was a huge one for earnings.  BIIB was the trade of the week where I put on the 310/312.5 - 337.5/340 condor for a credit of 0.98, well past my minimum credit of 30% of the width of the spread.   The short strikes are show in red and the long strikes are shown in green on the chart on the left.  I put the trade on just before earnings at the blue bar in the middle of the chart.

After hours BIIB traded down hard, well below my short strike as going as low as 290.  It was not looking good and I was facing a max loss situation with my short strike almost 20 points underwater.

But I stuck with it and BIIB bounced hard off the lows. It bounced so hard (as a matter of fact) that I sold another PCS (the 302.5/305) on the way back up for a credit of 0.81..  All of those trades went out max profit which is clearly a good thing.

Its a case where adverse excursions outside the market maker move will very often retrace due to the forces of the market makers themselves.   We had a very similar situation in AMZN where the stock move against me for a max potential loss in the after hours session, then retraced and closed within the Market Maker Move for a max profit.

All this makes me realize that I'm not at all cut out for day trading.  Day trading is more like a hair-trigger video game where the market is brutal and will seek out every stop and shake out every weak money player.

Weekly and monthly options trading is more like a chess game, and a much more forgiving one at that.  It doesn't matter how hard the price moves against you.  All the matters is the price at expiration and experience has shown that prices will remain within the Market Maker Move the majority of the time.   When prices exceed the Market Maker Move (and do so in an impressive fashion such as ALXN this past week) great directional trades are born.

Also notable this week were new all-time highs in AAPL and Facebook (FB).  Facebook reports earnings this coming Tuesday after the bell and you know I will be trading that one.

Have a great week ahead.

Active Trader - Short against the Box

Welcome back Active Traders.

It was a bruising week for the bulls, with the markets selling off sharply and taking out the recent lows set in mid-August.  Even so, the markets have come back to levels set in mid May of 2014.

Taking the long view, the SP-500 has come a long way from the low set during the financial crisis.  I ran the numbers and SPY bottomed at 67.10 back in March of 2009 and had its highest closing high at 201.85 back on September 19, 2014.  So the SPY is up nearly 200% from that low.  Given Friday's close at 190, we are off only 5% of that total move which is not that much.

Since the year 2000, we have had 2 major sell-offs which cut the market nearly in half.  I don't expect that type of damage given the perpetually low interest rate environment.  However, we clearly could go a lot further to the downside.  How to cope with it?

1) Don't let any open positions exceed your pre-defined stop-loss value.

2) Take it from day to day, Focus on what's happening today and trade it.

3) Wait for a rip-the-shorts-heads-off rally, then put on an offsetting position.  This past Tuesday was a perfect opportunity where the market ripped to the upside then stalled out right at the top of a declining trend channel.

The quickest and easiest move is to short-against-the box or simply sell short an equal amount of what you are long.  This has the following advantages:

• Your position is effectively flattened - minus commissions of course
• You avoid capital gains taxes on your taxable accounts
• In your IRA you can just sell the shares since you don't have the problem with capital gains tax.

But don't overstay on the short side since on a longer term basis the odds are not in your favor.

At most, you are going to catch only part of the down move and that's okay.

Just hearken back to the Average Change by Week of Year chart from my post Evidence of Autumn.  Looking at this chart, you will see that the market tends to sell off during this period, but on average, closes higher by the end of the year.

So don't get too bearish and abandon all your longs, because history shows your losses will recovered and your account will eventually go on to higher highs.

So tread lightly for the remainder of October, it will be November in a few short weeks. Have a great week ahead.

Active-Trader - Fib Lines Improvements

Welcome back Active Traders.

In response to a comment from my friend Franklin, I started to contemplate ways to improve the drawing and calculation of fib levels.  If you have not read my prior posts on the topic, go back and take a look because I have found fib lines to be the single most significant discovery in all my years of watching the markets.

My first idea was to write a script in Thinkorswim - In a language I believe they call it Thinkscript. But then it occurred to me there's a much simpler approach.  Simply configure the settings inside the Fib Extensions tool to draw not just the major (red) lines, but also to draw all the subsequent green and white lines.

To make that happen, I needed to calculate all the subsequent lines as as percentage of the original 100% move.  In other words, instead of drawing the 1 and 1.618 lines, then drawing the lower lines at 38.1 and 61.8, simply calculate the levels for the intermediate (tree) lines and just add those to the Fib Extensions tool in Thinkorswim.

To calculate the levels,  I wrote a recursive algorithm in C# which calculates the levels to an arbitrary level of depth, but stopped at 3,  I figured the levels would work as follows:

Fire Lines
0 - Tree Lines
1 - Snow Lines
2 - Minor Lines (no name for these that I am aware of).

Here is what the output looked like for the lines between 1.0 and 1.618:

Lowerline: 1.2361 Upperline: 1.3819 Level: 0
Lowerline: 1.0902 Upperline: 1.1459 Level: 1
Lowerline: 1.0345 Upperline: 1.0557 Level: 2
Lowerline: 1.1115 Upperline: 1.1246 Level: 2
Lowerline: 1.1804 Upperline: 1.2016 Level: 2
Lowerline: 1.2918 Upperline: 1.3262 Level: 1
Lowerline: 1.2574 Upperline: 1.2705 Level: 2
Lowerline: 1.3049 Upperline: 1.3131 Level: 2
Lowerline: 1.3475 Upperline: 1.3606 Level: 2
Lowerline: 1.4721 Upperline: 1.5278 Level: 1
Lowerline: 1.4164 Upperline: 1.4376 Level: 2
Lowerline: 1.4934 Upperline: 1.5065 Level: 2
Lowerline: 1.5623 Upperline: 1.5835 Level: 2

Then I went to enter all those into the Fib Extensions tool in Thinkorswim  I figure I could make the minor lines lighter lines with dashes, etc so the lines would not overwhelm the chart.  But I quickly learned that the Fib Extensions tool in Thinkorswim was limited to 15 arcs.  Sigh, so much for that plan.

In any event I came up with the following configuration which includes the red and green lines and calculate those automatically when you highlight wave 1.  Using those, I was able to draw the fib lines for IWM.  The red and green lines drew automatically, but I had to draw the snow lines manually due to the 15 arc limit in Thinkorswim.

In the end, it looks like the Thinkscript might be a better solution, but this is somewhat of an improvement.

Have a great weekend and week ahead.

Active-Trader - Fib in GPRO

Welcome back Active-Traders.

Very few companies who have gone public in 2014 have had the spectacular performance of GoPro symbol GPRO.  The shares debuted at $28.65 back on 6/26/2014.  Today, a mere 90-plus days later, the stock closed the day at $82.10 which is an amazing 86% gain from the IPO price.

When and where will the move end?  Read on for my explanation of how fib analysis can answer these very relevant questions.

Recall that Fb levels are simply multiples of the magnitude of Elliot Wave 1 which is basically the move from a bottom to some top which resulted in the first meaningful pullback. Finding the bottom and the top of Elliot Wave 1 is the first and most important thing you need to know to calculate fiv levels.  Let's look at GPRO.

The chart on the left shows my first take at the Wave 1 move for GPRO. Note how the price found a bottom, rallied up, then fell back to the breakout point and found some support once again. This is typical of Wave 1 moves where the bottom is the lowest low on the chart and is not violated to to the downside.

Once you know those numbers, you can project the 3 most important lines beyond wave 1 which are the 161.8%, 261.8% and 423.6% and the associated price levels.  We know the levels are correct when we observe how price reacts to those levels as it rises. Doing so we find that the 161% level at $66.70 was quickly violated to the upside then became an important level of support moving forward.

Since then the stock has been straight up and we find ourselves just a point or 2 below the top of the sequence, the line which represents 423.6% of Elliot Wave 1 move.  So there's our first price target - $83.46 which I expect we will reach not far into the trading day this coming Monday.  But is that it - the top of the top?   Let's look for another interpretation.

Instead of Wave 1 ending at 47.97 on 7/31/2014, lets assume it ends at 56.86 on 9/3/2014.  In this case, note how the 161% line also acted as an area of resistance instead of support as in the prior interpretation.  This adds some extra credence to this second interpretation and based on that we find the 261% line overhead at the $89.42 price level and the 423.6% line up at just under $122 price level.

All that said, I expect higher prices in GPRO with the first target at $83.46 and the second target at $89.42 which I expect we will see by the end of next week.  I went out long the 80-84 Call Debit Spread and some shares.

Have a great week ahead.