Anatomy Of A Missed Opportunity

Alright, ladies and leeches – we have a lot of material to go through tonight, so let’s dig right in:

Before we cover what’s ahead of us, let’s take a stroll down memory lane: to when the SPX was still trading around 1,280 and the VIX was hovering slightly above 20 – aaah, the good ole’ days. The date is July 23rd 2008 – EvilSpeculator doesn’t exist yet but I was already churning out hard core EWT analysis like a mad monkey. The image above is one of the charts I posted on OptionAddict that day – which incidentally caused a bunch of people to complain and I was eventually told to take my sorry ass and my charts elsewhere (btw, I’m not blaming Jeff here – he actually offered me to post in a separate section).

So, let’s see what actually transpired in the weeks and months after. Well, I hate to rub it in, but I was spot on, even nailed the target of (2) by about a ten point margin. Also was right about the abyss scenario I kept pimping back then. Now, I’m not posting this to gloat (maybe a little) but rather to make an important observation, and thus I expect that all of you glu sniffing steel rats pay full attention just this once. Because what I am proposing tonight is that we need to change the way we approach the market for the foreseeable future.

Fact is, we all didn’t see the forest for the trees. Why you ask?

Because had I grabbed only $4000 worth of Dec 110 SPY puts that day it would have been worth $66,650.- on November 20th. Now, remember that the VIX was pretty low back then and we weren’t at the top of wave (2) just yet. Therefore, it gets a lot worse. How about if I would have bought those same options three weeks later when wave (2) actually peaked?

Had I grabbed $4000.- worth of Dec 110 SPY puts that day I would be sitting on roughly $102,000 right now. And had I bought $20,000 worth I’d be half a Millionaire right now.

I know – coulda – woulda – shoulda. But the sad fact is that the market did exactly what I expected it to do. And although I made fine profits in the last few months it was emotionally taxing and a boatload of work, especiall considering all the interventionals, the drama, the sharp counter rallies, etc. I got into literally hundreds of trades and also paid a nice chunk of commissions.

Now, something tells me that I wasn’t alone in screwing this up. I actually would wager that everyone reading this has been in the same camp – jumping in and out of the crazy tape of the past few months and having relatively modest profits to show for.

BTW, for the record – I doubled my account in the last six months, which is okay. At some point I was up 300% but then came that notorious short sale ban on September 18th, which got me back to where I started. Doubled my account again since then, so I should be satisifed with my trading performance. Maybe, but when I look at those numbers above I just want to puke.

There’s this thing about me – I’m might not be a genius, but I always learn from my mistakes. And knowing what I know now, and also knowing that the PPT is basically out of bullets, except maybe for their relentless use of their printing presses, I would like propose the following.

Screw the daily drama and let’s focus on the big picture!

Now, let’s talk about the future and how I see it:

I’m going to spare you the usual market overview – not going to talk about the NYMO, the Bullish Percent, the TNX, and all that other jazz. We all know this market is heavily overbought and that the breadth was super bullish last week. We had five consecutive up days and this has not happened for a quite a while. We are all salivating at the chance of shorting this market, but I’m not going to touch on that. This is what I’d like to reserve for the intra-day updates which we’ll post in the coming days.

If you look at the chart above you’ll see type of tape I am expecting for the coming months. When it comes to corrective waves there are two primary elements that need to be satisfied:

  1. Price correction
  2. Time correction

The price correction is something Elliotticians usually nail pretty accurately because the rules are well defined. I’m not saying we always get it right but we usually get close enough. What’s important to understand right now is that a wave 4 typically ends within the price range of subwave four of 3. I know you’re all scratching your greasy skulls right now, so I’ll just throw it out there: Our price target for intermediate wave (4) is between 1000 and 1040 on the SPX. Could overshoot – yeah – but if we breach 1060 I’d have to re-assess the entire wave pattern.

Now the time correction gets a bit more complicated, after all there are eleven different corrective patterns and combinations in Elliott wave analysis. But we do know that wave (2) was what we call a sharp correction. I mean, it was not complicated at all – went straight up and was done without much of a fuss. I’d call that a sharp correction. The guidelines of wave formation in EWT tell us that we often find alternations within an impulse wave. If wave two of an impulse is a sharp correction, expect four to be a sideways correction, and vice versa.

So, let’s think about this: We already pushed up like crazy last week and are more than half way through our price correction. I frankly have doubts that we’ll now just paint a nice b wave and be done with (4) just in time to unpack our X-Mas presents. Probably not – what we’ll see most likely is a complex sideways pattern not dissimilar to what I’ve draw on the chart. There are dozens of scenarios that could play out, and I’m sure everyone has their favorite. But let’s settle on the fact that it won’t be a quick one and it it’ll probably drive us nuts all the way through winter.

The Evil Plan

Hence, what I’m suggesting is two-fold.

  1. Let’s play the swings of course as they are probably large enough to make it worth our while. After all the VIX has settled down a bit and with some good luck we get it into the 40 range once we hit 950 on the SPX. So we could pop into calls as well and hopefully not get squashed by the dropping shoe of vega. And perhaps our brand spanking zero indicator can help us call the turning points. More about this further below.
  2. Most of you are aware what will follow wave (4) – a nasty last drop to the downside which should put us closer to 600 on the SPX. That would be a 400 point drop and the profit potential boggles the mind. Thus, I propose that we start bulking up on July or August puts once we start approaching the 1000 range (wave c of (4) to the upside). The risk at this point is very manageable and even if we overshoot we will sit on about six months of time value and will be able to shrug off any monkey business. I plan on plunking 20% to 40% of my assets into those long term options. Then I’ll just forget about them and expect to be smiling big time come July. If you think 2008 was bad – 2009 is going to be brutal for the economy and we need to position ourselves properly ahead of time.

The Zero

Now, before I return to my pillow fight against the Swedish Mud Wrestling Team I would like to point everyone to a new market trend indicator I posted last week while most of you were passing out on tryptophan. I call it the zero and it’s my very own evil creation.

It’s alliiiiivvee!!!! Allliiiiivvvee!!! Mmmwuuaahaaaaahaaaaa!!!

There’s also a handy little widget on the right sidebar which should get you there from any of our daily posts. The page reloads itself every five minutes, which is more than enough to keep you up to date (it’s a medium term trend indicator and it’s configured for a hourly chart). There’s also a handy tutorial, which I strongly recommend you take a look at before you send silly questions my way. I think I’ve covered the gist of it but if have left anything out please let me know.

The zero is going to be freely available until early January. Call it a large scale acid test – if it can continue calling the trend reversals as it has in the past few weeks, then I will be available on a monthly subscription basis after the free test period. The fee will be fairly modest and should pay for itself within a single trade, so even you bum leeches should be able to afford it.

Of course I don’t have to to explain what it could mean for us if the indicator continues to nail those trend reversals. Could be the antidote to many whipsaws we had to trade through – and we all know that volatility is not going to subside much in the months to come.

Well, for now it’s all yours, so kick the tires while you can.

Cheers!

1932 – A Swell Year for the Markets

Sharpest bull rallies happen during bear markets – there, I had to spell it out for you leeches. Seriously, do they actually read their own headlines or has the U.S. educational system been eroded down to the point when even people in the industry have lost all sense of history?

If I was long right now, or would have somehow clung to my stocks during the October crash, this headline would be the straw that broke my camel’s back. Seriously, whoever sees this and does not take advantage of this lovely Christmas present they’ve just been handed needs to check themselves in for a frontal lobotomy (which incidentally instantly qualifies you for a gig as an MSNBC anchor person – bring your own suit).

I spoke with someone at the gym today, who’s pretty loaded and has a few hundred grant running in the market. Three months ago I told that guy to get out of the market as it was about to get pretty ugly. Of course he didn’t. A month ago I told him that the market would drop to about 7200 and then rally like crazy. Guess what he did – he waited all the way to the bottom and then sold his equities last week. Lost over 50% of what he had just a few months ago. Was this guy listening to anything I was saying?

Now, I asked him today, how something like this can actually happen. How do you see your portfolio go down by 5%, 10%, 15%, and even 20% and still hang on to what you are holding? What is the underlying thought process? I can tell you what it is – it’s one of those cognitive biases – in particular the notorious disposition effect. Traders and investors alike have a tendency to ride out their losses and to cut their winners short – pretty much the opposite of what you should be doing. Well, this reconfirms my general outlook that the majority of investors out there are sheep waiting for a shearing.

When it really comes down to it – it’s a reptilian brain ego thing. Hey, I just lost 30% in GOOG, I can’t cut it now. It’ll come back – I know it – after all, how low can this thing go? This is exactly the kind of shit that those fucking brokers tell their clients when panic sets in and they call in to close out. Well, pal – guess what – it can go all the way baby – all the way!!

This is something people just don’t seem to get into their greedy hapless little pea brains. Something moves against you 5% – 10% – you dump the damn thing. Spit on it while you do. Why not take your perfectly good leftover money and put it into something that actually is going up? It’s not like winning and losing is some kind of ‘taking turns’ game. Your lovely FNM shares you’ve held for a decade just dropped 10%? Kick them to the curb without any further thought or compunction.

But nooooo, those wankers don’t just want to make their money back with some other high flying stock. It’s got to be this one – now it’s personal after all. How dare this damn thing dare to go against my superior stock market analysis? Impossible – well, I’ll show this fucking stock who’s boss!

Unbelievable… some people really need a trip to the cleaners and back before they learn. Some never do – those are the ones who wind up losing it all. And then go on blaming the market for it. Guess what – the market does what it does – it goes up and down. Just because it’s been going up for a few years doesn’t mean it’ll continue to do so. Life’s short – grow a brain.

Cheers!

Intra-Day Update: Ready to Roll!

UPDATE 10:01am EST: Morning my evil rats & leeches – as you can see I have been keeping myself busy during Turkey Day – no tryptophan poisoning for me. Alright, first order of business are the retracement levels. No, the widget has not been removed or broken – it’s smart enought to figure out that 2sweeties didn’t post an update as he’s on vacation. So, I guess I’ll have to jump in here. Remember, we didn’t have a down day for 4 days, which means the short RLs remains the same. I have added the new long RLs – just in case we actually get a drop today.

Here are the calculations – feel free to double check (as if anyone ever does – lazy butts!!).

To go long:

To go short:


There you have it. I will follow up soon with some additional info about our brand new zero indicator. If you haven’t seen it in action yet, take a peek to your right – I have added a new widget. Let me know what you guys think – but be gentle, it’s just a start of us spearheading an extension of our trading system.

UPDATE 10:48am EST: Crude just tanked by $2.-. Berk and I love C and JPM, but are too chicken to grab it on a day like this – I know we’ll live to regret that.

Otherwise, sluggish day…

But be careful, sluggish days can turn into rockers ;-)

UPDATE 11:21am EST: I have to admit I’m a bit disappointed right now. The TNX has been tanking in the past few days while equities were rallying. But none of your damn leeches have been asking the key question which is why ?

Well, just so happens that Bernanke and pals over the last two days clandestinely rolled out some $1.3 trillion in new so-called alphabet soup ‘facilities’, including buying agencies and consumer debt. BTW, is that even legal? AFAIK, they can lend against it but not purchase it. Red – if you’re around – can you clear that up? Anyway, the smashing of the TNX along with agency spreads came of this as there are massive amounts of new treasury being issues. Nothing like selling the future of your children and grandchildren during Thanksgiving – how appropriate!

Well, just another example of why you need to understand the reasons for these types of correlations. When they break there usually is a reason why.

UPDATE 11:35am EST: Wow, crude now down 3 bucks today. Guess all correlations are off the table now – LOL :-) Yen moving with market now, crude now dropping while we rally, and TNX completely shot to hell. Ladies and leeches – be careful out there – don’t think the market cannot continue rallying here.

UPDATE 12:45pm EST: Real quick before the close – I’m thinking of playing a 60-day short turtle soup on DLTR. Here are the rules:

LONG

  1. The contract must make a new 20-day high (we also use the 60 day for a 2nd signal if we missed the 20).
  2. The previous 20-day high must have occurred at least four trading sessions earlier.
  3. After the market raises above the previous 20-day high, place an entry buy stop 5-10 ticks below the prior 20-day high. This buy stop will be good for today only.
  4. If the trade is triggered, place an initial good-until-cancelled sell stop one tick aove today’s high.

SHORT

  1. The contract must make a new 20-day low (we also use the 60 day for a 2nd signal if we missed the 20).
  2. The previous 20-day low must have occurred at least four trading sessions earlier.
  3. After the market falls below the previous 20-day low, place an entry buy stop 5-10 ticks above the prior 20-day low. This buy stop will be good for today only.
  4. If the trade is triggered, place an initial good-until-cancelled sell stop one tick under today’s low.

Berk and I will post in more depth about trend trading in the months to come. This is an example of a ‘failed’ trend trade – which means we expect the trend signal to fail.




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