Book Review: Sway: The Irresistible Pull of Irrational Behavior

Sway: The Irresistible Pull of Irrational Behavior [Deckle Edge] [Hardcover]

Ori Brafman

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Just finished reading my first book for September. The book was an easy read when considering a majority of it I was reading through noisy bus commutes. Anyone can probably read through the book in a day or two, but I kind of got bored between certain chapters so ended taking longer for me to read.

Now to the nuts and bolts of the book. The brothers Brafmans really dives into human behaviors in relation to many daily life situations and decision making in specific occupations. What I found interesting is how the social environment one lives under effects their social behaviors. It sounds straightforward to believe that one encompasses their beliefs' based on life experiences, therefore the environment where he/she lives will have associations with their experiences. Yet Brafmans do not go through these associations as I had hope. It was near the end of the book examples that really caught my attention.

In one example they talk about a situation of placing nuclear waste based on a European community's popular vote the results of the example was very striking. In the instance when the community was asked to receive nuclear waste without compensation more than half of the community approved. (Of course it was not blunt to say they were given no compensation.) Yet when the same situation was again placed on the community's vote, and compensation was given less than a quarter of the community approved. The thinking behind was initially the population believe by holding the waste illustrated a sign of dedication and love to their country. A sacrifice that many seemed willing to take for the sake of their country's prosperity.

When compensation was put on the table, the community second guess themselves because they had a view of being taken advantage off by believing the compensation as being a bribe. Brafmans concluded that by telling the people who were willing to accept the offer and attach it with a compensation would hurt the chances of the community accepting the nuclear waste. I would imagine if this was done in China the results would be somewhat different. A country where so many individuals are poor, their willingness to sell themselves has a higher probability than in the European countries. This all comes back to where people's social standards are at.

Overall the book was good based on Brafman brothers supporting evidence for human's irrational behaviors under certain circumstances. I would recommend people who are interested in how the human brain makes decisions to read the book. Yet in the book the Brafmans lack identifying how to avoid making the wrong and sometimes deadly decisions, but still knowing that they exist can help one to at least try to anticipate their occurrence.

I was on the opposite end, sh*t!

I blew up my account today, with a better than expected jobs report. There is nothing more to say than me unwilling to admit wrong until it was too late. I regret it. I am again negative for the year. The NDX put trade I have lost is around -15000. Sh*t.

wicked losses every where for me...

Again I hold my shorts on NDX but am at hold a tremendous unrealized loss. I figure a bounce was in store but did not want to wait. I now wished I had purchased Oct. puts instead, but tomorrow and Friday will have employment data effecting the market, so we will see. The push upward today was broad, and volume better than a lot of other summer days. The bulls have control, but for how long, not sure. Hopefully not longer than third week of September where options expire. I will take the lose if Friday is another up or consolidation day.

I took a hit on SPX longs today...

Title of post says it all. I went short puts yesterday and closed out the trade today for a loss of around -$700. I had the put spread at 1025/1075 but market sank is continues to do so today. Out of emotions for wanting revenge on the market I immediately flip sides and went long NDX September puts. As of now I am at a lost on the NDX position due to my aggressive purchase price, but will be happy to hold through it in the next few sessions.

Reasons for shorting:

1) the $NAMO index is not yet bottomed to previous lows. -60 is what I am looking for, until oversold condition reemerges, and probably within the next two/three trading sessions.

2) Sentiment is negative, and with good data out today and stocks still did not rally leads one to think market is headed lower.

3) The ADP employment data will come out tomorrow. Everyone expects a terrible number, and Friday is big job's number.

I anticipate a fight around SPX between 1040 and 1060 but soon 1040 will fail. I give it a week, therefore I am long NDX September puts.

dumb trade with ok ending

About an hour ago I sold a vertical 18/19 call on FAS at $0.35. I thought I was selling 19/20 for a premium but the stock was at $18.32. SH*T man, why so stupid I do not know. Market is shooting up and I set myself up for a short? What a mistake, I went with the trade without review and click ok on order. The order went through in a blink of an eye. Funny how the top of FAS stalled and I bought back the call spread for $0.25. After comissions I got $3 gain. Dumb trade indeed when I was fighting a trend. Wasted a day trade too. Now down to two day trades for the week.

Market bottom maybe in for now...

Market fluctuated in first 30 minutes of trading. INTC lower 3rd Quarter expectations and Ben Bernanke spoke at 10am. All the pessimism seems to be priced in for the day. The market is up presently but not by much, SPX about +4 and Nasdaq about +5. There is something to take a note upon with respect to TLT.It looks that TLT is fighting a support that held two days ago. Yet it has not made a higher high in the previous two sessions while the market has been very much stuck in a range. A crack in TLT around 106.75 support will be a indication for markets to go higher.

Also to note the 1040 on the SPX was defended today and therefore a bottom may have been in place for intraday. With all the negative news out and the market is still up, it gives me the support to go long the market today.

Disclosure: Short a couple of 105 SPY weekly puts.

You win some, you lose some

Reading twits on stocktwits I see a lot of people say they are getting stopped out today. This is good on the part that a lot of the guys on that site know what they are doing and being truthful with their results. I am grateful I was on the other side of the trade today. Yet yesterday was not an easy night for me to sleep through.

Even today in the morning after the 8:30AM weekly jobs numbers coming out -473k, which is a lot lower than consensus. I thought, sh*t. Everyone is optimistic in the morning, yesterday could have been a bottom. It is never easy when one goes all in with a trade. I was short but others went long. Trends were still for more downside but a lot of people bought into the market yesterday. I feel the market has been more at a range than going in a trending direction. (I have been lucky enough to manage a small gain through it. There were trades I made this month that I knew I should not have made and got lucky with small losses. Best example is two weeks ago on my OEX trade. I twitted it on stocktwits. I went all in with selling a vertical call spread with the OEX weekly and got a small loss.) These experiences shape people into being good traders if they remember not to make the same mistakes. That is very hard to do.

For the year to date I am slightly positive, but since my very first trading loss of 2008 to date I am still very deep in the red. Taxes and commissions has wiped out a lot of my gains for this year, but getting green makes me happy. I know how much others feel when they lose, but its apart of the game. You win some and you lose some. Just make sure you do not lose more than you can afford to. Its very difficult to dig yourself back out of a deep hole.

Learn to blog or record all your trades no matter if its a win or a loss. I did not post much in 2008 and 2009 because most of those days I was losing and wanted to forget about my losses. Yet it is not the right thing to do. Not learning from mistakes is a cardinal sin in the trading world. I to this day still have trouble following with that, but that is apart of the job if I want to "succeed" in trading.

Best of luck to all who are trading.

My view on the market:

The market still seems to be in a range. From mid May of this year to date the SPX range has been between 1020 and 1120. There could be a possibility for the SPX to test 1020, but since it held 1040 yesterday I do not think 1020 will be hit in August. I could be wrong with revised 2nd quarter GDP number tomorrow coming out, but Mr. Bernake's speech will be key. If we do test 1020, it will not be a good side for long term traders.

No supports?

The 1050 on the SPX was breached this morning after the horrible housing data, but came off the lows. No real reason to buy though do to no real good news. There is a saying that when people are fearful, I should be very greedy and buy and when people are greedy, I should sell. The bond market is soaring with 2 and 10 year yields continue to fall. Marco economic data are horrible.
As for predicting the market. We are in a downtrend and will continue until the MACD and RSI downward slope is subdued. This will probably not happen due to poor outlook with GDP and unemployment data. I look forward to making money on the down side with expectation of the SPX to reach 1020 and NDX to 1750.

Third Strike, I missed!

I have learned it is better to wish I was in the right side of the trade than to wish to get out of a losing trade. I did not short the market yesterday, so I miss the morning collapse. I missed a PCLN gap down. I miss making probably the largest profit I could make for the year. Yet I an fine considering I am not losing money, excluding retirement account.

Housing data has not come out yet, but negative sentiment is too heavy to make me bullish. Hopefully the housing data can turn the market. Yet the market does not care about hope.

Why did I not short the market?

I have several reasons why I did not end the day shorting the S&P. First and foremost my marked price for 1075/1100 SPX weekly puts were not triggered, therefore the trade was out of my risk/reward range. I had no control over that, my instincts just told me not trade it. The premium for puts in all indices seemed to high for my taste. That leads me to the second reason of not shorting the market, to much negativity.

Second, the trend is pretty much negative, too negative that is. Everyone I am hearing expects a bad housing number tomorrow and is shorting the market. From what I have seen last Tuesday when a bad number did not come in as expected the market rallied more than 1%! The lack of trade volume effects the market significantly due to lack of conviction both in bulls and bears. The bears have a slight advantage over the bulls tomorrow, but I am afraid any positive outcome from tomorrow's housing number will only raise the market.

Technically the SPY should continue to go down, but something did not jive with me. The chart above shows that the $tick rating has been towards +1000 more often than -1000 near the end of the day, illustrating institutions are buying even on the end of the day drop. For support on the SPX there is the 1064, last Friday's low, 1060, and the 1050.

For types of trade I am looking going into tomorrow. If the market drops significantly I will look to sell weekly puts. For the SPX the 1000 and 1025 and for the NDX 1700. The market would have to be crushed in order for the ranges I just listed to be hit, not saying it is impossible. If the market rallies then selling calls 1100 on the SPX and 1880 on the NDX. For the week I am concentrated in collecting premiums on options, because I am getting set to go short once September rolls around. I will be trying to save some capital for a big short and expect to position myself before labor day weekend due to jobs report the first Friday of September.

SPX levels

So market opened down and for the entire day the market stayed in the red except the Nasdaq got barely in the green. Interesting the low for the SPX today came in at 1063. It clearly is not a solid support so I am positioning to short the index. The SPX ended at slightly above 1071, and I hope Monday will go up.
As always looking at at a fix range for the SPX between 1060 and 1100. Presently it is at the lower range so a bounce maybe imminent. If 1089 can not be breach, where the 50ma is, then a short is in order. Both the 50ma and the 200ma is flatting, and have become resistance.

I want to add a twist onto my analysis with past prices as some traders say there is history with prices. I wanted to note that the first day of trading in August the market was up pretty significantly. From the great folks at Bespoke Investments a chart record of performance in the SPX after a rally on the first day of August trading and for the rest of the month of August is shown below.

http://www.bespokeinvest.com/thinkbig/2010/8/2/best-starts-to-august.html


Only in 67 and 85 did the SPX end the month in the red. Presently the SPX is around -2.7% from its high of August 2. We have 7 trade sessions left in the month. Recent marco economic data has been mostly negative, however technical data is on the sides of the bulls. I will wait until Monday to see how the market plays out.

Fundamental, Technical, Structural, Psychological

Yesterday Stanley Druckenmiller, awesome last name, called it quits to his hedge fund. A speaker on Bloomberg yesterday around 5pm talked about Mr. Druckenmiller's abilities that set him apart from other traders. The speaker broken down four specific categories that made Druckenmiller very profitable trader.

1) Fundamentals

2) Technical

3) Structural?

4) Psychological

1) Fundamentals would cover the macro environment. Today is a simple example of how the fundamentals affected the equities market. When jobs and Phillie numbers came below expectation the market sold off. Factoring how economic data is part of fundamentals of the market. In conjunction the company one plans to invest in has many fundamental data to consider before investing. Those data include P/E ratio, revenue, profits, and so forth.

2) Technical covers charts analysis. One can derived trends in the stock price to determine best point of entry and exit. The analysis covers many tools such as time interval, MACD, VWAP, Vol, CCI, RSI, and so forth.

3) Not sure if I heard it incorrectly but structural was another category. I need to think about this a little longer because I am not sure what it really means. If I have to make a guess I would think it means the type of trade to make in a stock. Whether one goes with trading common shares, preferred shares, and/or options and the quantities with respect to each type of trading vehicle. In options one has to consider the greek letters and spread values when making a trade. Common shares would not make as much profit as options if trader correctly predicted outcome, however common shares do not have an expiration date that decays it value as time passes.

4) The human mind is what makes one trade a certain way. Although computers may rule in trading today and the future, it is the human the has the final say in trade executions. They are the operators of the computers. If they turn off the computers then there are no automated trades. Going off in a tangent. Emotions can effect the types of trade one makes, and understanding those emotions can benefit his/her trading.

I only generalized the four categories and more can be elaborated within each. At least this is a start.

Day Trading

Timing a day trade is very crucial. For the past two weeks I have missed to big drops in the indices and I just cannot get over it. Knowing how fragile the market is right now I came really close to scoring big but due to bad timing in trades I missed out on most of the downward drops. On August 10 I was unable to participate on the short side of the SPX due to going all in on a PCLN short. I made a decent profit and will leave it at that. Just two days ago I went short the NDX via purchase of put spreads but sold them on the same day of purchase because I did not want to lose a four figure profit. Of course if I had held them all to the end of today I would have raked in 7 times the four figure profit I took. Man it almost hurts as much as losing money in a trade.

My touch on the markets' moves are getting better. However I should be very cautious now considering I have been unscaved the past two weeks. I guess preseving capital is much better than winning big in the market. Although if the market is ready for a third drop in the next week I hope I will be in it shorting.

From stocktwits commentors and my own technical analysis the market seems to be ready to fall again. The sentiment on Wall Street seems to be very pessemistic which is why I do not want to just go short the market. Yet if I have to put a number in I would expect the SPX to drop to 1060 before a bounce. I hope tomorrow we have an up day so I can plan on shorting it but if we hit 1060 first I have missed the next big drop. 1050 and 1020 are other support lines but I need to do a little more research before diving in with shorts. Pun intended.

To help myself become a better day trader I have linked a stocktwitter by the name of blackmart. I have been reading through blackmarkt's blog and found his entries on day trading very insightful. He lists all his trades at the end of the day and shows his gains and losses. Furthermore he talks about the periods of trading during the day that I think every type of trader should read. It talks about the 9:30 to 4:00 period of day trading.

http://blackmarkt.blogspot.com/2010/03/daytrading-time-zones.html

Short PCLN...

After reading my last Friday's post I realize how far off I was in predicting the market. The SPX is at 1096 as I write this. Yet I am betting the index will not hit 1100 by the end of tomorrow. Crossing my fingers.

Also today I took on an early short vertical spread of PCLN. I sold a Aug 310/320 spread around the open and that was when PCLN went up, way up! It reached over $309 around noon. Yet as time progressed the stock begins dropping and is now below $298. I should be more patient with the price movement but I am comfortable for the option to expire at the end of Friday.

My reasons for believing that the stock would have trouble hitting through $310 are as follows:

1) Sentiment for the day seemed more neutral than directional. Since yesterday's big rally the market I assume would more likely consolidate then to move up again. This would be a bullish sign for the market overall. Hence I assume PCLN would not go up by much for then next 2 trading sessions.


2) The PCLN 50MA crossed over the 200MA. Being contrarian I saw it as bearish and expected more likely that PCLN will stall out.

3) The MACD has been neutral to slightly lower after 2 weeks but prices has moved up at least 20 points since. A sign of over priced in stock value.

Today I feel I got lucky with PCLN's outcome but wished I held my cash a little longer before go short. If I had held from short for about 3hours I would have doubled my unrealized profit today. Then again at noon time the market did not seem to be a good time to go short.

Almost time to go all in...

This past week I missed on a great opportunity to buy puts in SPX weekly. Yet I still manage a profit for the overall week with a short on PCLN. From all the frustration I have been through with the market I am happy with any type of profit. Now to my anticipation of what to look ahead in the markets.

The "flight to safety" has intensify the past week and the first chart shows how bullish the dollar is. As of Friday the sentiment in Europe's ability to pay its debts is again in doubt the dollar is strengthening against the Euro. It is interesting to note that since early July the dollar index UUP has been declining until last week while the SPX 500 index has been stuck in a range since the UUP decline. I would have though with a weaker dollar the equity market would increase, but that is not the case here. I sign that there is weakest in the SPX.


Next chart is the volatility index. There are many very good blogs out there that can go further into the good and bad of volatility indices, but the reason I wanted to post the VIX is because it is becoming very bullish. As shown in chart below the VIX was able to use the 200MA as support at around 23 and it just made contact with the 50MA resistance around 26.7 last Thursday. The sentiment from traders have been more pessimistic than previous weeks. Rightful so to be pessimistic at this point due to the fundametals both on a mirco and marco stand point being negative relative to investors' expectations. For instance Cisco profit estimates for future quarters were lower than expected. First time unemployment claims are going up again and ISM data has been dropping in recent months. The mood on wall street is more uncertain, which can very well lead to VIX spikes. With greater volatility there is better chance for market to move in significant direction, and presently after this week it seems the market wants to move down.


The bond market is just amazing! Yields are at there lowest since pre-Lehman collapse. The yields seem to only want to go down even more and the bond market illustrates that. For instance TLT is rising and it just broke the 102 resistance today. With a flight to safety mentality around the market TLT if can hold above 102 it can go up further. With money going into bonds it would mean then that equity market will have a void. That is another reason to consider why I think the overall equity market will go down further very soon.

The final chart of this post shows how SPX for the week fail to break through 1130 and fail to hold support at 1100. 1100 was just cut through like butter even though there were over 100,000+ calls/puts at that level. I would have assumed that buyers would have at least try to defend the 1100 instead of letting it fail so quickly. This goes to show that SPX is weak at the moment.

I have read through a lot of blogs past few hours and many are anticipating of a quick bounce before further drop in the overall markets. Any bounce here could be significant so rather than playing the short side I will wait for confirmation. My confirmation will come by the end of Monday where if the market stays flat or positive I will sit out, while if it ends in negative territory I would sell vertical OTM calls of the SPX. My values would probably be at 1100. I think there will be a bounce to 1100 but fail to get above it.

Betting the odds...

I went through a SPX daily scan and anticipated today to be a favorable day for SPX to go down. Why? Take note of the 12 orange circles I marked. Since mid February of '10 where there was a red candle with a very small red bar, the following day was a down day 7 out of 12 occurances. What is interesting is that within the 12 occurances all except two the following day had a significant move either upward or downward. More often than not since May it has been a downward move. Of course the day is not over yet, but with Beige book out and no other major news I would consider today the 12 occurance. Odds favor a big red candle finish for the day. However MACD is trending up, and therefore I think the market overall is still on an upward trend. Not sure if I would bet tomorrow being another down day.

Market Indices Overview

Today at 2pm the market indices are slightly in the red except for the Dow which is hovering with about +20. I put in the three major indices: SPX, NDX, DJX as shown above to illustrate what I think is manipulation in the markets.

At 10am the Consumer Confidence Report came out at 50.4 which was below consensus. However with in a minute of the report the market jump on all three indices by more than 0.5%. Although I will add that also at 10am the State Street Investor Confidence Report (SSIC) came out, and that came in at 96. So maybe investors were buying because of the SSIC number. I do not buy that story though. As the day is progressing the market is slowly lower since the 10am sharp price jump.

Another failed entry.

Pessimism I have, but just timed it wrong. Now I go long and I am wrong again. Presently AAPL is falling and if I had not went long and lost over $210 I would have been short the stock. The blue arrow above is where I sold my call spread for a lost. I had entered into the trade three days in advance and believe AAPL could reach new highs due to the introduction of the new G4 iphone. Not only that but the sentiment for the stock was at an all time high. Clearly I was wrong.

I feel awful to not have seen the drop coming. The day I sold my call spread was the day the stock drop over 2%. The main reason for selling my calls was because I could sence the sentiment for the stock was dwindling.

For instance on the day apple dropped +2% on June 29 there was rumors that Verizon would soon be selling the iphone. There was optimism in the stock because it shot up +$3 in a matter of minutes. Yet within less than 2 hours the stock dropped back to its daily low where it ended at the close. I left my position about an 30 minutes into the close. It seemed to me the instant the price shot up in AAPL was because more of shorts covering than investors buying. When the stock gave back the gain as quickly as it was accumulated it seemed there was not all of upward momentum left in AAPL. Two days later the stock is still decending.

Furthermore the stock market is starting to reach down to the reality of the microeconomy. The downward trend in the general market is spreading like a wildfire throughout all industries. With that also weighting down on AAPL I chose to step out of the stock with a significant loss. Fortunately I did not bet a lot on this trade, spent $410 on the spread but sold it below around $195, which is over 50% loss.

The overall market seem to have found support today with the SP500 dramatic fall paused around 1010 today and ended at 1027+. Tomorrow is the jobs report for June 2010. I am assuming today's close around 1027 was most likely due to shorts covering. One reason is the neutrality in the market. Today's 1027 close versus the market's yesterday closed which was just slightly above 1030 is a +/-3 points on the SP500. In today's market activity this shows no bulls are really going in nor bears puting more shorts. One has to wait until tomorrow's jobs report to consider which side to be on. With such a dramatic fall the past few weeks it does not seem the market has reached a bottom. Yet with such dramatic downward pressure on any given day, the market can dramatically turn also. I will stay clear from trading as much as possible, but its hard to do when I have the itchy fingers. Dang it!

Patience is Virtue

I am at a point in my life where the market is controlling me. I lose and lose and keep losing. Main reason is I tend to not wait for the setups and start trading when odds are stacked against me. The challenge is trying to keep myself from trading when I know the outcome is more likely devastating the my previous trade. The market has been more along the lines of neutral the past week. However overall the fundamentals are not fairing well and I am to be on the short side. Unfortunately from a contrarian perspective too many are feeling pessimistic and usually that means stocks go up. Funny how each day for the past week since last Tuesday big up day the market has either ended flat or has fallen. The momentum is on the down side, but without much panic in sell orders it seems I should stay on the side lines.

Why I am such a horrible trader...

I am writing this entry to remind myself why the market has again got the best of me. Clearly after three years of trading I have yet to learn the most fundamental rules I have bestowed upon myself.

Rules:

1) Always set a stop. If I am profiting in a trade I must set a trailing stop. Whether it be a mindset stop or an actual price stop set in my brokerage account I must fully obey by it once I enter a trade. A mindset stop must be executed when price hits level. In short I must know when to get out of a trade before I get in.

2) Do not fight the tape. I can not go against the market if there is a trend. The trend is my friend only if I follow it. Repeat, the trend is your friend only if you follow it period.

3) Never use margins. Any leverage will only amplify my risk of losses. I will only lose the amount that I can afford to lose. (Probably every penny I have, but nothing beyond that.) Any further losses would entitle me to a death sentence. Why a death sentence? Without any capital I can not trade in the market, if I lose beyond the amount that I started with, then I can not make back any of the money I borrow and lost. What else can I do? Do not even set myself in that predicament period.

So the following graph and story is my lesson to myself. (Note I have repeated this to many times to count.)

Two Mondays ago I opened a short on 1100/1105 Calls spreads on the SPX that was set to expire in February '10. At that time the trend was sloping down, however I jumped into the trade too soon. Too soon because the SPX was able to go beyond the 1100 only one day after I made my trade. Hence I was losing in my trade significantly with the SPX peaking around 1105.

My first mistake was not stopping out of the trade when it was going against me. When I first entered the trade the SPX was around 1085, but I did not set a stop. The index shot all the way to 1105 on the following Tuesday with me having an unrealized lose somewhere around $3000.

My main reason for entering the trade was because I saw the 50 MA line trending down and the index broke the upward trend that began in March '09. With the trend turning in my favor by February 8 I was up over $4000. In a matter of four trading days the trade I made fluctuated over a $7000 span.

I should have exited the trade the following week as the trend began to turn upward. Unforgiving the market was I still stubbornly held my position. As the market turned upward gradually I was up about $2500 before entering the third week of February. My final exit point to still make a profit in the trade came around morning of Monday, February 15. My stubbornness and greed got the best of me and I stood with my trade. By the end of Thursday I concede with the largest lost I have this year to date. There is no reason I should have held the trade for this long.

I simply just could not get myself to admit to my mistakes. I wanted to win so badly and had the chance to exit with a profit. Clearly my greed and unwillingness to admit defeat were the cause of my demise. Is there nothing I can do to stop this from happening again? Yes there is, put in a g*d d*mn stop on my trades.

Why can't I get myself to do so is for one reason. I feel option spread prices are always fluctuating and usually it is never in a daily trader's favor. Market makers have the final say and can manipulate the prices to their favor. That type of manipulation does exist but I can not let that blind me from taking such a significant lost. It is my fault for holding out to the bitter end. I can not blame anyone but myself on that trade period. Yet somehow I had the decency to get out of the trade? But why so late?

My greed in trying to retain the unrealized profit was what set me back from exiting the trade. My complacency blinded me from thinking logically. The trend in the market was clearly up and I could have exited the trade Tuesday or Wednesday before the expiration day without significant loses, but I did not. I only conceded when I was totally demoralized.

My losing trade pales in comparison to what happened today in Austin, TX. Joseph Stack's actions today were totally inappropriate but if the suicide note is for real, I have total sympathy toward Jack. I to am unemployed and struggling to scrape by. Life is not as straight forward as I had hoped, but I live another day to do my best. Hurting others because I am going through a struggle is not right nor is it ethically moral.

Update: Talk about being very unlucky. The SPX Feb contracts do not expire until Friday Morning. They stop trading after Thursday, the day I exited my trade. At the end of the trade session the Treasury increases the interest rates and the market starts tanking. The SPX is below the 1100 point again. Just my luck, I lost any profit from the trade and on top of it lost $8600 in capital. Can it get any worse?

Weekly Review of the SPX

I just played around with moving averages today and spotted some interesting concerning support and resistance levels of the SPX. From the graph above I simple set the chart to weekly prices with a 20 and 50 SMA. While I used a 200 EMA for the longer trend in order to have recent closing prices effect the 200 MA value. It is clear the 20 MA line was broken in January '10 where the index was unable to hold above 1140. As half of February has passed the 50 DMA line has also been broken. As of last Friday the SPX closed below the 50 DMA, which has now become a resistance level, around 1078. The next MA support would be around 990 which is the 200 MA line. That is a way for the index to go and anything is possible. Furthermore the MACD has begun a very noticeable decline relative to the start of this rally since March of '09.

With the 20 DMA still in slight decline and the 50 DMA flatting it seems the index is in neutral territory. In April of '09 a similar declining 20 DMA and flatting 50 DMA also occurred as shown in the graph above. On the sides of the bulls it seems the market is posed to replicate the April '09 movement just by comparing the 20 and 50 MAs. Can the bulls continue this rally that began in March of '09?

"Price is King, Volume is Queen"

The title is from Mr. Wang of WangHappyTrading or MyHappyTrading. I give an example that exactly defines the meaning of the title. Today as I scanned through charts I wanted to make a note of what is happening to the S&P 500. The SPY ticker weekly chart is shown below.
As of now I am short the index since last Monday, 2-1-10, but after yesterday's amazing push upward in the final hour of the index I have become a little scare. My goal in this blog entry is to trying to get myself out of that worrying mode and anticipate what next week will bring.

The chart illustrates how much the market has gained in all of '09, but the previous four weeks the index has been trending lower. To confirm the most recent descending trend the volume has ramped upward week after week. Furthermore the gains in '09 were generally increasing in price while volume was decreasing. It looks I am trading in the trend that seems to be going down, but anything is still possible for the few weeks to come.

On the chart I also marked a somewhat similar descending trend that occurred in the beginning of '07. The index actually end up even though the trend was down initially for four weeks while volume also picked up. In a very similar situation we are in now, I think it a similar pattern may shape out again 2-4 months down the road. If next week the volume picks up but the index is flat or rising, I plan to exit my short positions.

Feb 05 Intraday SPX

After reading from a variety of stock traders' blogs and stocktwitters I decided to record today's $TICK symbol data. A value that many traders discussed about the tick, so called extreme levels on the $TICK were at +/-1000. At +1000 institutions with large quantities of cash would be purchasing equities, and vise verse -1000 institutions are heavy salers of equities. Below is the SPX 1min chart and $TICK 1min chart.
Throughout the day from initial open up until about 11:30am the market was fairly neutral. However around that time the $TICK was substantially in the negative. Between that time interval the $TICK had hit -1000 three times as marked as gray circles. As the day progressed there were more -1000 hits. Of course the overall market caved in on itself. Yet if I had identified that the $TICK was so ominously negative, before 11:30am I could have had a huge advantage in a risk/reward short index position. Note the $TICK never even hit 1000 as the day progressed, and with a negative trending day it is hard to believe that there will be any hits above 1000 for the rest of today's session.

As I write this post, just around 2:46pm there is another hit at -1000 but the SPX has gain about 5+ points from its days low. Seeing how negative the $TICK is today, I am predicting the SPX will have to test today's low, 1044, again.

Update: Novice trader I still am. Boy am I glad I did not short anything today, yikes. Market actually ended up today.

How Might Friday's Employment #'s Affect the Market?

With nothing better to do I decided to collect some data on www.BLS.gov on every January employment number for the past nine years. I compared the data with the three major indexes intraday closings and how they fared after the job numbers were announced in each year respectively. The chart is below.


To me the data seems pointless in predicting what will happen tomorrow in the overall markets. I only consider jobs #s affecting the market but there had to be other news factored in as to why the markets responded the way they did. For instance in '09 the job numbers looked awful but the indexes gains in the day session was by far the biggest in any day after the January employment #s came in. In the other direction '01 and '03 had terrific numbers but market got hammered. Maybe future expectations or market sentiments or technicals in the market had to do with gains and losses. So in conclusion I do not know if tomorrow's numbers will effect the markets or if it does effect, how much. Maybe you do?

Update: I took indexes numbers from Google Finance and think they maybe off. (For instance I just noticed in the chart for 2001 the Nasdaq dropped over 122? Maybe its the real deal but again I only took data from what was available to me.)

AAPL Closed Trade...

I closed my vertical spread on AAPL with a profit of $199+change. I think I was lucky to call this trade so perfectly.

AAPL Topped...

AAPL has been hitting record highs in previous weeks, however yesterday price action for the stock was bearish. For instance the peak never reached the resistance of $215. Instead the price went back down to end just below $206.


The chart marked in green are the two occasions where price reached the resistance $215. Yesterday's price was a sign that prices would go lower because it was a lower high. Although Apple will probably announce their latest and greatest product today, the peak in the prices have topped. If we close below $198 in the week to follow then further weaknesses are in store. Presently I sold a vertical call spread in the stock and do not expect stock price to reach $220 by February expiration.

Anything is still possible, but odds are in my favor that prices remain below $220 mainly because of the strong $215 resistance. Even yesterday's significantly higher volume was unable to crack the price level.

BIDU picking the top

Its been a week since BIDU's crash back to near 400s. The initial drop in BIDU began three days after the gap up. There was an immediate gap down on day four and I scalp the trade for a small gain. (A very similar trend happened in AAPL, it was day four after its initial gap up did the stock go up. I find it very interesting.)


I was unable to capitalize on such simple move down on the stock because most of my capital was settled in, Goldman Sachs, GS options. I was on the wrong side of the GS trade and got whack pretty hard. I had 175 Feb10 calls at 5.10 and sold them for about 1.95. I also purchased call vertical spreads that total my lost to nearly $5,000.

I held the GS's calls until they reported their 4th quarter '09 earnings, and as trend was a tall tale sign, the stock dropped like a rock that day. (JPM and INTC both had positive earning reports for the 4th quarter, but their stocks dropped after the announcing their respective reports.) I closed all the calls I had on GS and turned bearish immediately.

My emotions took the best of me in the GS trade. I broke many rules that I tried to enforce. First was to control my lost, which I was unable to do because the day GS open to trade right after earnings the stock price fell within minutes. My asking prices had to be changed every few seconds but I was unable to catch any bids. Out of desperation to get out of the trade I went with market order. I should had set a trail stop on the trade to control my loses. This trade was just dread awful. Still I cannot dwell on the mistake, instead I must repeat to myself to learn from this and move on.

Another reason why I know it was a bad trade was because the day I purchased the GS calls I wanted to recoup loses I had in my GLD strangle spread. Arrogance got the best of me because my calls never got a positive gain after the day I purchased them. After my consecutive loses in YGE and GLD I should have walked away from trading for the week or at least control my amount of capital to trade so that I would not again, yes again, fall off a cliff. (Metaphorically speaking of my capital.) Foolish me.

Furthermore not only did I lose capital in hold the GS options I lost the opportunity to gain some impressive capital if I could have shorted BIDU. One mistake automatically leads to another. A chain of events that clearly were all hurting me.

There is a bright spot to this. I was able to flip bearish right as I left my GS options and used whatever capital I had to shorting the market and have recoup almost 2/3 of all my loses in the GS options. I also felt comfortable with my shorts when I executed them, which I did not have as much as when I purchased the GS options. I should take note of my comfort levels in certain trades. Until next time, G.L.T.A. in trading.

Picking a Top

Today I post a few charts on a trade I am prepared to put a position on. To short the stock BIDU.

Before I just go short the stock I went and did some research. I wanted to avoid as much technical analysis jargon as possible and apply a simple chart pattern. The pattern I am looking for is a daily upward gap followed by a second up day. There were two stocks that had similar upward gaps on a intraday chart that I have followed for quite some time. The charts are AAPL, Apple and AMZN, Amazon.


The day AMZN gaped up was the day they posted earnings. The following day the stock manage to gain even more. Considering the first day gap was a new high for the stock I am betting that the second day rally was due partly by shorts covering. Although there was a sense of optimism in AMZN for blowing out expectations so there were also significant buyers. The days after the stock consolidated AMZN still dropped about $5 in the consolidation. A good time to short the stock was on the third day after the gap day.

In AAPL on October 19, 2009 the stock spiked at the open. It ended the day closing lower but the following day it again increased at the open. The stock ended on the second day at pike high. The third day the stock was neutral and then declined on the fourth day. The decline was pretty dramatic, over $10 drop in a week. Again it looks like a lot of shorts getting squeeze on the second day after the upward gap. What is interesting to note is that Oct. 19 was a Wednesday and option expiration was on the 21st. 21st was actually a neutral day for AAPL, it ended without gaining much.

As I write this post BIDU is at a 52 week high which is dangerous for people who are shorting. The main reason is because when a stock has past its previous highs there are very few traders that can preciously judge how far higher the stock can go. (Trying to pick the top is very difficult.) Furthermore traders who have been shorting the stock at its former high may begin unloading their position to avoid heavy losses. For the past two days a similar pattern has occur in BIDU as in AAPL. The first day BIDU opened with a huge gap on Wednesday of options expiration week. The stock price ended lower than where it gaped at the open. However a continuation upward trend continued on the second day. Presently the stock is up 5%+ at about $463 and change. Over 80 points swing in two days, impressive.

Due to such an impressive run I do not plan to play any Jan10 options. The stock just has to much of a upward momentum. To be safer I am concentrating on deep in the money put options with Feb10 expiration. If chart pattern in BIDU is similar to AAPL than I expect BIDU to consolidate downward in the week to follow. Will check back on this prediction.

Big down day for me....

I should had left my GLD straddle position last Friday but did not. Today gold prices increased in dramatic fashion and I took a major hit. At the close of my Jan10 107 straddle I lost $275.5 including commissions. Talk about not surpassing my stop losses for the month. A major blow, indeed.

I am unable to time the market right presently. The internal market conditions are bullish but stocks that I am in are getting whacked. One note to add today is YGE shooting over $18.00 as shown in graph below. Thank god I did not stick around to see the pop up. That would have tacked on at least another $100 loss if I had stayed in my sold puts.

Another example that trend is your friend when you follow it. Clearly my losses were directly on the opposite side of trends. For now I am long financial stocks due to last week's up trend and will be picking at specific institutions. I am not going against the trend....

First losses of 2010

For the total loss in trade including commission, $176. I had purchased 5 veritcal Jan10 puts @ 17.5/19 at $0.90 each but the stock did not decline enough for me to profit on. I held the options for a couple of days anticipating on a further downward decline after significant gains. Instead today was the day where it shot up slightly over 1% in a matter of minutes. YGE held strong at the $17.85 and went up on strong volume. As shown in the white diagonal line in the volume section below.


It was clear to me yesterday the trade was a big mistake but I held it overnight because of two reasons. Sentiment for the broader market was neutral to bearish and the five day moving average for YGE was flat. I knew I was making a gamble, all choices in life are gambles in my opinion because as long as there is a probability between winning and losing it is gambling, and anticipated on a breakdown today. YGE at first looked weak but the broader market shot up in a matter of moments, especially the Nasdaq. Then YGE gained momentum and it was difficult for me to get out of the trade due probably to the small market cap of the stock. I lost about 39% of my total trade investment.

Next time I will probably watch for moving averages to actually decline before I go bearish. Furthermore I should purchase less option spreads on small cap stocks due to lack of liquidity.
Clearly the market is on a neutral to upward trend right now so any bearishness I have to stocks should be at a minimum.

Patience is key and I remember another trade blogger saying that, cash itself is a position. Rather than holding stocks and options overnight I should also hold more cash overnight to avoid big swings in the market. I have a gut felling that even if the market does not look like it will go down, but when it does it will be a downward cliff. Why? The trade volume for the past week is lighter than usual so bulls do not have conviction in the upward push. Yet, "price is the only thing that matters."- Brian Shannon of Alphatrends.net

I have an aspiration to not loss over $3000 this year, therefore each month not to go over $250. I know its highly impossible and I should not have such an aggressive stance on losses. However with this restriction I force myself psychologically to think twice before I make a trade. In essence scrutinize my trades a lot more than usual in order to give myself better odds in profiting.

I am also in another losing position presently, a sale of a GLD Jan10 straddle 107 and the position presently has a $35 loss including commissions. I plan to buy it back without a lost but will have to wait. Good for me is that the five day moving average has finally turned downward on GLD. Will update on this position.

Timing it Right.... I did not...

I purchased a NDX vertical-(1875/1900) put yesterday at $12.30 and sold it today at $13.85, a little to early. As the chart above shows there was a significant drop after where I sold. Market indicators at the time had techs continue to drop, but because financial companies and airlines were going up so I felt a turn to the upside was around the corner. Indeed the market pulled up around 10:30. Yet I should have let the momentum of the trend push me out of the trade versus my own instincts. The reason is because right after I sold the spread, two minutes later it was marked around $14.80. The spread peak was around $15.50 and that was easy money I did not pick up.

On the other hand it is always better to wish I had more gains than to accept a significant lost. Right now I am getting wacked on my YGE puts spread and feel I need to close them today. Not sure yet.

Mistake after mistake after mistake

I was hoping to start off the new year on a winning streak and at least end the year 2010 in the positive. In any case I went long GOOG options yesterday right before Google was to have their presentation to unveil the Nexus One. A couple of hours after I executed my trade I was already up over 15% but not expecting what would happen next I kept the options as the stock tumbled.


This is not my first trade of the year but I am posting it to remind myself how fortunate I was in this trade. What happened today was GOOG stock tumbling over $15. I had Jan10 630 call options and luckily I sold all of them right at today's open, which GOOG started off up $1. I did not even have the mentality to short GOOG after I exited the trade even though I knew full well the stock was breaking supports left and right. The reason for not shorting was because I was shell shock to have escape my call trade with a profit.

The technical indicators had the stock lower however I kept the call options overnight which was a major mistake. I knew the stock was getting weak but did not anticipate on a $15+ downward day for the stock on a otherwise subdued trading ranging for the overall indexes. Next time I will make sure not to flip back and forth between going short and long on GOOG and instead stick to my original plan. My original plan was to buy Puts which I did but sold one day after for a measly gain and went long on the same day. I had studied the pattern that GOOG's upward short term trend was slowing and anticipated on a drop, just timed it way off.

On a side note around 3pm I bought a NDX vertical put anticipating on accelerated drop in the NASDAQ due to major tech stocks such as AAPL, AMZN, RIMM, IBM, INTC, & GOOG all were looking to accelerate downward. That I am making a profit on and will probably close out the position tomorrow morning to avoid any positive push Friday's unemployment numbers may bring to the market.

Taking it one day at a time because there is nothing better to do than living in the present.