Archive for October, 2009

We spoke last week of the emotion of fear.  This week I want to touch on the other emotion that can decimate your trading account, GREED.  We can look at greed as being at the extreme opposite of fear.  Lack of fear can be described as an absence of anxiety and no sense of impending danger.  Moving even further away from fear we come to the emotion of greed.  Greed resides in a place that not only has no concern for danger, but possesses recklessness and an attitude that disregards potential pitfalls in the pursuit of financial gluttony. 

Fear can destroy your ability to make money in the Market, but greed is the emotion that will empty your trading account.  Fear can keep you out of the Market preventing you from prospering; however, greed will drive you to the poor house.

If you ever want to see greed on display, watch the game show “Deal or No Deal”.  Even when the probabilities are clearly in favor of “The House”, contestants will turn down thousands of dollars for the diminished chances of winning more.  If these folks stopped to really realize that they are saying “No Deal” on more money than most of them make in several years of work, they would maybe rethink the decision to greedily grasp for more.

Greed is why gambling casinos will always be big business.  Casino proprietors know this and cater to the human emotion of greed which is embedded in all of us in various degrees.  Those of us that are afflicted with gambling, which for some is a sickness, almost expect to lose confirming their innermost feelings that they don’t deserve to prosper.

 Some outside observers view trading as gambling, but in actuality, in order to be consistently successful in the Markets, it is just the opposite.  You must be disciplined and have rules and methodologies that are strictly adhered to.  Greed plays no part in the trading plan of a successful trader.

The anecdote for disallowing greed to enter into your trading is to 1) Have a plan 2)  Follow that plan 3)  Learn to take profits when they are presented to you by scaling out 3) Diversify your positions 4)  Strict money management and 5) Don’t force trades.

There is an old saying in the trading business, “You can never go broke taking a profit” Best, Robin.

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 Last week I said that the hammer candlestick pattern at the trendline on 10/2 would likely hold, which is precisely what it did.  The index moved up nicely to challenge the Bull Flag from 9/17-21.  My concern for the continuing strength of the bullish move is that we are in a “Broadening Trendline Channel” on decreasing volume which is somewhat indicative of a tiring move.  We also have a bearish MACD divergence which further confirms a lack of conviction to drive the market higher.  I am still bullish but hedged.

The SPX held at the 10/2 Hammer at the lower trendline as I had predicted that it would.  The index then moved up to settle at 1071, one point higher than my projected target at 1070.  I continue to be bullish but hedged due to the “Broadening Trendline Channel” and the “Bearish MACD Divergence”.

The COMPQ is solidly in a classic “Bullish Channel”.  Last week I projected that the inverted candle from 10/2 would result in a bullish move off of the trendline and that is exactly what happened.  There is a slight reduction in the volume the last few days and we have a “Bearish MACD Divergence” so I remain bullish but hedged. 

My feeling is that we will continue higher into the end of the year and possibly through January with the seasonality of retail season as well as the “January Effect” with small cap and value stocks typically bullish.  After that, it is anyone’s guess.  Come on over to www.markettamer.com  and learn to trade profitably.  Best, Robin
 

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The Put Ratio Backspread is configured with the Short Put either ITM, ATM or slightly OTM.  It is suggested that the Short Put be placed ATM in order to capture the most extrinsic value.  Ratio Long Puts are purchased ususally one strike below the short puts at a ratio of two or three to one.

The strategy is implemented with the expectation of an explosive move to the downside.  The Short Put helps finance the Long Puts.  The trade can be put on for a debit or a credit.  The trade in our example is placed at a credit.  The Short Put totally finances the Long Puts with an additional amount to create a credit.  The maximum risk is the difference between the Long and Short strikes less the credit or plus the debit as the case may be.  The reward is the credit (if placed for a credit) if above the Short Put strike or unlimited reward as the stock moves below the Long Put.  The maximum loss is incurred if the stock finishes at the Long Put strike.  In the example, that would be 30.

This strategy could be considered when one expects a big move around a catalyst like earning.  Obviously, the strategy is bearish to extremely bearish, so even though the trade can be profitable if it goes bullish in the amount of the credit received, it is best if the stock is massively bearish.  This trade can be used instead of a straddle of strangle if one has a bearish bias knowing that if the direction is not right, money can still be made to the upside.

Review the risk graph to gain better understanding of the risk and reward of the position.  Best, Robin

ECONOMIC REPORTS

MONDAY 10/12

None

TUESDAY 10/13

None

WEDNESDAY 10/14

Export Prices ex-ag,  Import Prices ex–oil, Retail Sales, Retail Sales ex-auto, Business Inventories, FOMC Minutes

THURSDAY 10/15

Initial Claims, Continuing Claims, Core CPI, CPI, Philadelphia Fed, Crude Inventories

FRIDAY 10/16

Capacity Utilization, Industrial Production, Michigan Sentiment-Prel

 

 

EARNINGS OF NOTE

MONDAY 10/12

SCHW, FAST

TUESDAY 10/13

DPZ, INTC, JNJ

WEDNESDAY 10/14

 ABT, JPM

THURSDAY 10/15

AMD, C, CY, GS, GOOG, HOG, IBM, NOK, OMTR, SWY, LUV, WGO

FRIDAY 10/16

BAC, GE, HAL, MAT

 

Fear is defined as a feeling agitation and anxiety caused by the presence or imminence of danger.  Fear can be exacerbated by being confronted with an unknown outcome.  When we are unsure of the outcome of a particular situation, fear can take control emotions and lead to hasty decisions.  When the unknown is replaced with the known, fear is eliminated and clear, precise thinking prevails.

Several years ago, I accompanied a friend of mine who operated a White Water rafting company out of Flagstaff, Arizona on a trip on the Colorado River through the Grand Canyon.  I was very excited about the adventure and after a brief orientation, we put into the Colorado for a three day trip through the canyon. 

I was raised on the ocean in Southern California and grew up body surfing and was used to the water and respected its awesome power so I was both excited but somewhat fearful.  In the beginning, our trip was mostly a float but soon we approached our first set of rapids and the roar of the thunderous water was deafening and I could only imagine the picture of being crushed against the rocks and drowning.  My heart was pounding and adrenaline surged through my body as my friend turned to me and said “We’re going to scout the rapid” as we moved the raft over to the riverbank. 

 I have to admit, I was relieved to know that I was going to be given a chance to see what the challenge was ahead of us instead of blindly going over the falls.  As we walked along the edge of the river, my friend was able to determine the danger points and our plan to safely negotiate the Big Water.

We re-entered the river and took the raft skillfully through the treacherous rapid just as we had planned.  It was exhilerating and I was able to execute my job to make it through and emerge on the other side in the calm eddies that followed the rush of water over boulders a large as houses.

So it is with trading.  Fear can prevent you from entering trades as well as shaking you out of trades for fear of losing your portfolio.  The anecdote for fear in trading is “scouting the trade” ahead of time and knowing how you will successfully and safely negotiate the market.  You must know your destination and if you are detoured by the trade, you must know your contingency exit.  With knowledge and a plan, fear fades away because you have removed the unknown and replaced it with known outcomes.  The trade now becomes merely a function of executing the plan which has been outlined well in advance.  Our methodology at www.markettamer.com gives you this skill.  The knowledge of how to trade without fear can last a lifetime and allow you to achieve consistent success in the markets. 

Fear can destroy your career as a trader if you approach the trade without “scouting the trade”.   Just as my friend “scouted the rapid” and planned our path through the roaring rapids, so can you do the same with your trading.  Best, Robin

 If upcoming earnings season confirms that stocks are meeting their numbers and guidance is not too terrible, we should continue to power higher through the end of the year.  After that, it is anybody’s guess.  There are still massive amounts of institutional dollars that have not participated in this amazing run from the March lows and time is running out for them to be a part of the game.  For that reason alone I feel that we will continue the push higher into the end of the year as fund managers try to show some positive results.

Seasonally, we are also coming into retail time.  Not many are expecting retailers to do well with unemployment at record levels and continuing issues in Residential Real Estate.  However, we are a consumer driven society and there may be pent up demand to “buy something”.  It will be interesting to see if we see a “less bad” November and December.  We could have just an average retail season and still have the market finish higher into the end of the year.