I suggest that the faster we accept the nature of the new trend, the faster we can begin to benefit from the new trend. I'd like to remind you all of several important rules of my system that you should use properly in order to make it valid:
1. Always have stop loss orders in place for every trade you have. You may not needed but if they can save you from the denial that sets in when the stock suddenly reverses course. At the end of a trend, many of your positions may unravel unexpectedly. In such cases it is the stop loss that will do the job for you, long before you have the acceptance necessary to close the position.
2. Remember that your short is your safety net, not a device o make additional money. When you buy calls with one to three months to expiration, a simple fluctuation of the market hurt you. Vega, Delta and Theta, they all work against you. The short portion of a CRC or PRC are there simply to moderate the effects of large moves against you. For example, my losses in AMZN and AMLN this week would have been far greater if I had not have the shorts in place. Don't cover the shorts, exit the entire position.
3. Avoid earnings, or reduce your exposure by selling more shorts. When you sell more shorts you are reducing Delta (what makes you money as the stock moves) in favor of Theta (what makes you money if the stock does not move), but also increases your chances to make money as Vega (volatility) decreases right after earnings.
4. Always keep an even number of bullish and bearish trades. This may not be exactly even all the time. In fact, I currently have 2 bearish trades in the challenge account, but I am awaiting for some bullish candidates to appear or some of my old bullish trades to pull back. I seem to be able to keep 6 positions comfortably in my account, so if I have 3 bearish positions and 1/2 in cash, that is OK too.
5. Keep a balanced account in the number of trades: Trade stocks from different sectors, so you are not overexposed in a sector in particular. For example, don't trade AAPL and DELL at the same time, unless one trade is bullish and the other is bearish.
6. Don't take it personally, and learn the lessons. When something does not work the way you expected, the worse thing you can do is blame yourself, your stupidity or your incompetence. Chances are most people would have done the same as you with the same information. Accept that a piece of unexpected news may ruin your strategy. The sooner you accept that, the better your chance of recovery.
What we want is to increase the number of ways in which we can make money and reduce the number of ways in which we can make money.
Now that we are over yesterday's apparent market reversal, does it mean that the trend have changed? Let's take a look at the S&P 500 for some clues:
The oscillators are oversold now, but they may continue to be for sometime. I suspect that we will have a cycle up in a couple of weeks, but this is not likely to result in new highs. Here is why: Notice 3 key points labeled in the chart on Aug. 2004, Apr. 2005 and of course now, Oct. 2005. These are significant penetrations of the 200dMA (or 40 week moving average if you prefer). For those of us who follow the 200dMA (and many do) this is the third attempt at a crossing. I believe that this is the end of the bullish trend of the last couple of years.
Now take a look at the highs of Mar and Aug 2005. These are practically the same highs (1229 and 1245). This may well be a double top, or possibly the left shoulder and head of a head-and-shoulders pattern. We have every indication that a bear market is about to take hold, in my opinion. Then again, I have been bearish for all this period, awaiting a reinitiation of the bear market that began in the year 2000. So as usually take all this with a gain of salt.
So, how do we deal with this bear market, if it materializes? By sticking with individual stories, and using the Sarmiento system to look for both bearish AND, yes, bullish trades. There are always good candidates, they are just harder to find in a bear market, but we should be OK if we look for strong catalysts. We keep our plan, that is what we do, and don't let temporary set backs get us down.
Now, let's take a look at the Elliott wave analysis of the S&P 500, using the RET, OK?
It is important for you to know that I have control over certain aspects of the software, so this is my preferred count, and my view of the market is heavily represented in the following charts.
Since the bottom of 2003, the S&P500 has been making a wave "B" of a zigzag down. At least this is the view of most elliotticians and I could make that case with the software, but let's not get into that, since it is controversial and of very little use to us. The reality is that since Oct. 2003, the S&P500 has been forming a double zigzag which is projected to end between 1400 and 1500 (this is represented by the purple trapezoid at the top right corner of the chart). Once completed, wave "(Y)", currently in progress will mark the end of wave "B" and the beginning of a second bear market.
If you notice the red trapezoid, it projects the end of wave "c" in red. In my estimation, that would either be 1) a premature ending of wave (Y) or; 2) wave "b" is complex and still in progress. To confirm that the zigzag that began in July 2004 completed in late September, I analyze that portion of the chart, looking for an impulse (5 wave) "c" wave:
As you can see, the "c" wave completed in early Aug. and then was confirmed by a double top (B) wave in Sept. It may appear that the recent rally was only an X wave and the pattern may well now be completed (meet the target at 1220). Still, we may experience a sideways motion until the trapezoid is met. We shall see.
So, in conclusion, I find enough justification to be bearish at least in the short term. In the Long-term, I have evidence that the projected top of the "Y" wave may not be reached as the "C" wave of "Y" (last of the last) may now be completed.
I hope you enjoy this writing, but remember that no one has a crystal ball. Although I have been an elliottician since 2005, I am still skeptical as to its validity in most situations. Take it with a grain of salt.
8 comments:
I have been out most of the day today and will be tomorrow.
I realise some mistakes I have made on the money management side. Understand I have done a lot of paper trades, but these Put Raito Calendars and Call Ratio Calendars have been new to me.
There have been times when a PRC or a CRC has made over $200 profit and then I have let it slip. In fact I have sold a trade that could have made $300 for half that value today. I have sold also a trade that could have made $200 for about $70 today as well.
AMLN was a classic example. What ever the trade, what ever the target, I fell personally if I make over $200 on the trade then get out. So if I come in see a trade at $250 and the trade is rising, set a target of $275 and if I don't get it sell the trade that day.
All these figure are based on one or two positions costing about $600-$700.
I throw it open to discussion.
You need to have several trades so that no one in particular hurts you too much, and you don't FEEL too close to a particular trade. If you start with $10K, each trade should be about $2K, so you could have 5 trades. You should aim for 10 trades (max), all depending on how comfortable you are with each trade.
Only PCRCC can really protect you against large losses if a stock fall overnight the way AMZN and AMLN did, but then PCRCC's are hard to select: you may only see 3 candidates for weeks! This is why when I have a good candidate I use fairly large trades. So, how to prevent AMZN and AMLN?
it is a compromise, because they happened as earnings expectations were not met. The again, the opposite could have happened, like it did with AVID, GOOG or even AAPL. Remember, a very important part of trading is to avoid large losses. To do that, simply avoid earnings: trade on the day after earnings, exit on the day before. Don't get griddy, no matter how bullish analysts are before earnings, I have seen all kinds of reactions after earnings. It is very, very hard to predict.
I don't understand what a PCRCC is and when to use it. Do you have something on that?
Also I appreciate the advice not to sell the short position on a CRC, but my question remains. If you addressed it I didn't hear the answer. This is it:
Once the stock retreats so far that the shorts are worth almost nothing, isn't their maximum value realized? So if you close them and the stock rises you can sell those shorts again, bringing in some more cash. If the stock doesn't rise, you wouldn't have gotten more value from them anyway, would you? But if you close them, you have a larger long position which is available to generate money from hedging them again.
It seemss to me this is similar to people writing calls on their shares. They can cover those calls and then sell them again. If you wait for them expire then you might lose opportunities to sell them again, OR they may not be worthless at expiration and then you have to pay money to deal with them anyway.
I don't know if I'm making the question clear. I hope so!
accountholder
PCRCC is Put/Call Ratio calendar combination. This would be a Put Ratio Calendar and a Call Ratio calendar on the same stock, simultaneously. I have this type of position on AAPL, GOOG and UNH. The AAPL example is shown here:
http://stockoftheday.blogspot.com/2005/10/pccrc-on-aapl.html
This is a hedged position that would only be profitable under certain conditions:
1. The stock moves strongly in either direction (large Delta change). In this case, the PCRCC worst like a long-term straddle.
2. The Volatility increases. The long portions of the positions appreciate, you take profits by selling short-term options, or closing the position.
3. Time passes by and the stock does not budge, Theta consumes the front month options, you take profit buy rolling over the shorts.
You MUST have a software such as Optionetics platinum to locate good opportunities to select stocks with low volatility, and follow the position as volatility increases. This is a low risk position, unless of course, you pick a stock with high volatility which then begins to decline without a significant change inthe price of the stock.
If you'd like to receive a PDF describing this strategy, just send me an e-mail asking for the PCRCC strategy for high fliers.
Juan,
RE: "PCRCC strategy for high fliers."
Please send me the pdf describing this strategy. Thanks.
CRC's, Bull-Call-spreds and Covered calls have one thing in common: You SELL calls to offset the cost of your long position.
Suppose you have 100 share on AAPL at $55, and you believe the stock will go down for the next week or two. You can sell 1 Nov. $55 calls to offset the loss. The stock goes down, makes a bottom at $50 and the stock and the calls now are worth $0.15. Now the call serves no great purpose. If the stock price continues to decline, you can sell Nov 50 calls and so on until you are convinced that the stock will rebound. You can cover the short as the stock begins to rise. You have all the time of the world to see that stock recover.
With a bull call spread, you buy one $55 Jan call and sell one $60 call. As we approach Jan, AAPL hits $59, the shorts expire worthless and the longs appreciate to $4/share. If the stock drops below $55, the short call will serve no purpose other than to limit your loss to some extent. Still: YOU MAY LOSE ALL your investment. At that point, covering the short call would serve no purpose, it will expire worthless anyway. IF the stock recovers, that would be fine, but the fact is that you are losing precious time value if AAPL does not recover above $55 by Jan. In fact, even if it did, you may not make much money if the stock does not exceed the time premium you paid, above $55. In a way, shorting calls reduces your cost, but you still but all of the cost at risk, and you may stilll lose it all.
The CRC is similar to the positions above in that I am selling calls to reduce my cost, and moderate the effects of Vega (Volatility that increases the cost of options in a hot stock), and the effect of Theta (the decline in option value over time). I am bullish on AAPL so I buy 2 Jan 50 calls, I the sell 1 Nov 50 call.
1. AAPL rallies to $55 — I have more longs than shorts, so I should have a good profit.
2. AAPL stays around $50 until Nov. expiration, and the short call expires worthless while the long lose value only moderately.
If the stock falls below $50 buying back the calls back is besides the point, you are already losing value and premium on your long call. The only advantage of selling calls in a CRC is to MODERATE the effects of Vega and Theta. If AAPL falls to $45, you have now 30 days for it to recover. What you'd need to do is to close the entire position, and perhaps open a new one at $45 when AAPL begins to reverse course back up. This is why is so critical to maintain fibonacci stop loss contingency orders.
Do you have anything new on AMZN, AAPL or CMI? Looks like CMI did bottom, so maybe you can project the wave at this point? AMZN seems to be bottoming, but hasn't really turned. I was thinking if it broke 40 it would go up but it seems stuck at 40. AAPL had a surprising recovery yesterday. Then sold off a bit end day and more in AH, but only ended down a point from the high, even at the end of After Hours. Made a really good new high for intraday and also for closing, so it seems to be very strong. If you have any thoughts, let me know!
Hey Juan Sarmiento. Nice blog. You may want to check out forex day trading. It's got lots of info on forex day trading.
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