Archived Blog

The DOW broke through the bottom side of the flag pattern and pierced back through the 200sma on Monday and Tuesday and traded sideways to allow the index to touch the backside of the 200.  Even though price broke the 200, I still consider this to be a retest of the 200.  If the DOW breaks the swing low of 8461 from this past Wednesday, it will likely challenge the 50sma and the bottom of the shelf from most of May at 8221.  Immediate resistance appears to be at 8778 from the swing high on 6/11.  I don’t perceive this to be anything more than a profit taking pullback and then a resumption of the bullish move for a short while longer.

The SPX broke down out of the Bull Flag to form a Rounded Top and successfully retested the 200sma which was expected.  The 200 and 50sma are converging to form formidable support at 900.  Volume picked up on Friday’s session due mostly to Quad Witching.  We have a bullish stochastics crossover on the bounce off of Wednesday’s low.  This is nothing more than a profit taking pullback and we should rise once again to take another shot at the 956 level.

The COMPQ has led the way and will likely continue to be the leader of the pack.  We currently have an inverted cup and handle.  Key support on the chart pattern is the near lip of the cup at 1785.  We also have the recent gap from 5/29 and 6/1 which should also serve as strong support.  The 50sma resides at 1740 and is rising which should also act as solid support.  The immediate breakout level is at 1880 and then the bottom side of the gap at 1905 from 10/3/2008.  Again, I feel that we will continue to push higher for the short term.

A strip is a non directional bearish bias long option play. It is comprised of one call and two puts with the same strike and expiration. One may actually structure the trade with a greater ratio of puts to calls depending upon how bearish the trader wishes to design the trade. The risk is the debit in the trade and the reward is theoretically unlimited. Study the risk graph and you will gain insight into the risk and reward of this position. Best, Robin

I have recently been working with several traders to help them improve their trading results and it became apparent to me that a vast majority of these traders did not have a trading plan.  I would suspect that this cross section sampling of traders is fairly representative of the larger group of retail traders.  Without a plan, you are destined to be pushed around by the whims of the market.  A lack of direction and continuity in your trading is the result of not having a plan.   Several of the people that I have spoken with have been trading for 20 plus years with spotty, inconsistent profits. 

 So, in an attempt to encourage you to realize the value of a trading plan, I have constructed a Trading Plan Template.  The template is comprised of a series of questions that are designed to make you think about your trading as a business.  Trading is, in fact, a business.  If you enter into business without a business plan you are setting yourself up for failure.  I hope that it gets you started in the right direction.  Best, Robin

Trading Plan Template

General

·     My Trading Day – Outline my typical day and the procedures I follow.

·     What Time Frame(s) Do I trade? – My approach will vary depending upon the timeframe.  Explain.

·     How Much Time Am I Willing To Spend in My Trading Business?

·     What is My Time Horizon – am I trading for monthly income or am I trading for growth and when will I need the money.  Explain.

·     Do I have a thorough understanding of the risks involved with trading?  Explain.

·     Do I have a clear understanding of my risk tolerance?  Explain.

                       My Account

·     How large is my account and what percentage of my account am I willing to put at risk?

·     Is my account qualified or non-qualified.  (IRA or Regular)

·     How will I allocate my capital? (diversification and position sizing)

·     Who is my broker?  Is this the best choice for me?

                     Trading Goals

·     Outline my specific goals and objectives and present justification as to how I am to reach these goals.

·     What strategies and methodologies will I implement in order to achieve my expectations?

·     Do I have the knowledge required to implement the aforementioned strategies?

·     If I am lacking in that knowledge, what is my plan to acquire that knowledge and experience?

                   Account Management

·     What is my plan for capital preservation?

·     When will I make my trading decisions?  (During market hours or end of day)

·     What is my process for performing my due diligence and when will that due diligence be done?

·     Do I have clear and precise entry and exit criteria? Explain.

·     What is the maximum number of positions that I can effectively manage at any given time?

·     Will my time allocation and strategy implementation allow adequate time to monitor my open positions? Explain.

·     Do I keep a daily anecdotal journal to record my trades as well as my emotional response to the trading activity?  Explain.

·     What is my procedure for managing my open positions?

                  Psychology of Trading

·     Is my psychology well balanced regarding the market and how it integrates with the rest of my life?

·     What are my strengths and weaknesses?

·     Have I designed a plan to reduce or eliminate my weaknesses? Explain.

·     Do I have a trading partner(s) to exchange ideas with and to hold each other accountable to our respective trading plan?

·     Have I planned periodic vacations from the trading business?

·     What is my plan for the Market while on vacation?

                       Miscellaneous

·     Do I have a continuing education plan?

·     Who are my resources for assistance?

·     Do those closest to me support my efforts in the Stock Market?

                        Plan Summary

·     Summarize the plan.  The plan must be a “Living, Breathing Document” that will be strictly adhered to.  Include a list of trading rules that must not be violated.

The SPX continues to go sideways right at the 944 swing high from 1/6/2009.  We have a Bull Flag that moved through the 200 SMA on June 1^st and has essentially flattened out since then.  The current breakout high from the flag is yesterday’s high of 956.  A break and close below the 200 SMA and then subsequently the 50 SMA would portend a bearish trend reversal.  930 and 875 are key support levels.  Don’t try and guess direction coming out of a consolidation pattern.  Just wait for the market to commit to a direction and play it accordingly.     

The DOW ended the week with its 9^th narrow range, flat session in a row.  Volume has been decreasing which confirms the lack of short term interest in taking the index higher.   Both the SPX and the DOW are poised to go higher as soon as they poke their heads above the high in the flag with some convincing volume.  The 200 SMA has acted as solid support for the DOW with the next stop on the ‘Bull Train’ at 9088, the swing high from 1/6/2009.   The SPX is targeted for 1007.

The COMPQ looks like it’s forming a rounded top just shy of resistance at the gap at 1905 from 10/6/2008.  This index has been the leader since the March lows and I don’t anticipate that changing.  Look for the index to challenge 1905 soon.

Week over week, the DOW was up 36, the SPX better by 6 and the COMPQ increased by 10.  

The Covered Short Strangle is the ‘Kissin Cousin’ to last week’s strategy, the Covered Short Straddle.The Covered Short Strangle is also a high risk limited reward strategy.  However it is somewhat less risky than its counterpart.  The difference between the two is that the Covered Short Strangle’s long options are placed OTM at different strikes.  In a bullish move, the position will allow for more stock appreciation than the Covered Short Straddle and the short put is further away from price so it is more likely to expire worthless.  The risk graph is almost identical to the Covered Short Straddle.  One could think of the position as an OTM Covered Call with an added OTM naked short put.

Review the risk graph and you should gain understanding of the risk and reward of the position.  Best, Robin

ECONOMIC REPORTS

MONDAY 6/15

NY Empire Manufacturing Index, Net Long Term TIC Flows

TUESDAY 6/16

Building Permits, Core PPI, Housing Starts, PPI, Capacity Utilization, Industrial Production

WEDNESDAY 6/17

Current Account Balance, Crude Inventories

THURSDAY 6/18

Initial Claims, Leading Indicators, Philadelphia Fed

FRIDAY 6/19

None

EARNINGS OF NOTE

MONDAY 6/15

CPST, CASY

TUESDAY 6/16

ADBE, BBY

WEDNESDAY 6/17

FDX

THURSDAY 6/18

SJM, PIR, RIMM, WGO

FRIDAY 6/19

KMX

It is critical to do your Due Diligence.  There is no question about it!  You need to know the fundamentals of a stock prior to trading.  You also need to know that the technical’s are favorable for entry.  However, after your homework is completed, do you still have difficulty ‘pulling the trigger’?  You may be suffering from ‘Paralysis of Analysis’.  At some point, you will need to put money at risk if you want to make money in the market. 

Your reluctance is due to fear that can actually be exacerbated by an avalanche of data.  Much of that aforementioned data can be conflicting and confusing.  The preponderance of due diligence should lead you to make a trading decision, but sometimes that decision may prove to be a bad decision.  That is what creates ‘Paralysis of Analysis’; which is really just a synonym for fear.  Fear is only half of the dastardly duo known as ‘Fear and Greed’.  Fear comes into play due to uncertainty.  There is only one metric that is for certain in the stock market and that is, time will pass.  As a stock and options trader, I can leverage that by selling premium.  But even as a premium seller, there can be uncertainty which can deter the timid trader from entering the market. 

Knowing how to adjust trades is the anecdote for ‘Paralysis of Analysis’. That knowledge removes uncertainty which allows the trader to enter a position without the crippling effects of the emotion of fear.  Fear is the byproduct of uncertainty and because you know how to change the trade to optimize a change in trend, you have nothing to fear.

       Best, Robin

The market continues its journey higher, although we have recently been bouncing off of the 994 swing high on the SPX from 1/6/2009.  In order to continue the run, we need greater market participation as evidence by increasing volume. 

It’s good to be back.   Take a look at the charts and my comments as well as my commentary on ‘Trend Following’.  

We came out of the gate quickly in June posting a 221 point gain in the DOW.  Personal Income numbers contributed to the bullish sentiment along with positive ISM figures.

Tuesday saw the NAR report the third consecutive month of increased existing home sales.  Ford’s drop in car sales was not as severe in May as predicted which was a surprise.  The DOW notched a nominal 19 point gain.

Wednesday, ADP numbers disappointed with more than 500,000 lost jobs.  Although improving month over month, the number was larger than expected.  The DOW retraced 66 points.

Thursday, unemployment claims improved, retailers posted spotty ‘Same Store Sales’ and bank stocks pushed higher.  The DOW finished 75 points higher.

Friday, the DOW eked out a small 13 point gain.  Non-Farm payrolls posted better than expected numbers but was offset by a 9.4% unemployment rate.  The dollar rose amidst concerns of inflation.  Speculation surfaced that the Fed might consider raising interest rates in order to stem the tide of future inflation.

Week over week the DOW was up 263, the SPX better by 21 and the COMPQ increased by 75.

This is a high risk, limited reward strategy. The position incorporates three trading instruments 1) a short call 2) a short put and 3) long stock. The short call and short put are sold to open at the same strike and expiration month, usually with 30 days or less to expiration. The long stock covers the short call obligation but the short put is naked. The position is less risky than the short straddle (see April 11th article) because of the addition of long stock.
The expectation is for the stock to remain stagnant or move bullish. Another way to think of the position is an ATM covered call with a naked short put in order to enhance the short option premium. The naked short put is the synthetic equivalent of a covered call, so the risk graph is identical to the covered call. Study the risk graph and you should gain understanding of the risk and reward associated with the position. Best, Robin