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What Would Livermore Do?
54

What Would Livermore Do?

by The MoleAugust 5, 2011

When facing various setups in the tape I often ask myself: What would Livermore do? Believe it or not – quite often the spirit embodied by his work does point me in the right direction. Volar’s apt choice of the prior post’s title ‘Cover Short On Panic Days‘ is yet another popular mantra among seasoned traders credited to good ole’ Jesse. And nothing visualizes the concept of panic and fear like today’s VIX spike:

The spike to 32 yesterday was already way outside both my 25-day and 100-day Bollingers. Now both of them are set to a 2.0 standard deviation – I use this combination as it works very well for me. Of course there are other ways to stack your Bollingers – you could for instance use an increase in deviation from a standard 20-day moving average:

What we have here is a stacked 2.0/3.0/4.0 deviation from a 20-day SMA. And that push to 39.25 today breached the 4.0 mark. So, I ask you this – what are the odds for a push higher from here? I’m no math genius but I’d safely bet that it’s very low. The only issue that remains of course is what has driven the past few sessions: Yes, the odds are low but we still ride lower.

One aspect actually enabling that drop lower was the ‘bearish bullish candle‘ on Wednesday which I was (rightly) worried about. A push higher in an ongoing downtrend needs to catch a continued bid or it will fail and only serve as a ‘sell the rip’ opportunity.

The weekly SPX shows us that its 100-day SMA was touched and instantly repelled. The 1169.24 mark is now the line in the sand which must not be breached – if we do the expectation would be a visit of the 1000 mark.

Before I run – here’s the short term spoos chart. As you can see today’s NLBL didn’t have a snowball’s chance in hell to be touched. Monday it’ll descend down to 1258, still quite far up but closer in reach for next week. If you are more speculative then watch the hourly cluster around 1217 – 1219. Didn’t think we’ll see those numbers last week, did ya? 😉

Bottom Line:

Rome wasn’t build in a day – but I concede it burned to the ground rather quickly. It’s quite possible that we drop further from here but we are not crap shooters – we are traders. The odds just do not support a short trade here and if you are mathematically inclined I strongly encourage to peruse Volar’s pertinent post (what is this – Batman?). I’m keeping my eye on those Net-Lines on the buy side but thus far we are still far off any type of confirmation.

The take away message here is one painful lesson fledgling traders hopefully learn before they get wiped out in emotional markets. Although the odds can be sometimes clear the cost of being on the wrong side of the trade can often outweigh the feasibility of a trade. For instance yesterday is a good example: Had you put on a long trade in the futures hoping that a 19:1 D/A ratio was reason to go long right away then you had been right on statistically but paid a steep price this morning (by now we snapped back).

As an anecdote of how strange and risky trading can be during volatile times take this: Had you been long call options last night you may actually have been fine, even during the drop this morning. Why? Simple – vega, which boosts your premiums when volatility spikes – like for instance this morning’s push to VIX 39.25. We are still above yesterday’s close of 32.07 and if you are holding naked long calls then I strongly recommend you take profits or leg into some type of vertical spread.

Yes, the trials and tribulations of trading the markets. But you got to admit – it’s a heck of fun if you get it right, and especially once you learn how to avoid those nasty cattle prods those market makers employ on a regular basis. On that happy note I part with you for the weekend.

Cheers,

Mole


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • raised_by_wolves

    One could cover most of position by close but then buy cheap lottery tickets intended to expire worthless (or make bank on crash).

  • Anonymous

    Great post Mole!

  • http://evilspeculator.com molecool

    Nothing wrong with that if you only devote a small amount of coin to it.

  • http://evilspeculator.com molecool

    And it was free! 😉

    Wanted the leeches to get a taste of what they are missing this week. This was very tough tape and I think we handled it very well.

  • bshah

    indeed

  • Anonymous

    Before you crack open that Hefeweisen for the weekend Mole, please give us a Daily Zero update on close.

  • Anonymous

    Much more freebies and you’ll need to change your name to “The GOOD Speculator”

  • Schwerepunkt

    Seems a bit contrived that SPX will hold 1200 at the close.

    Edit: I guess I spoke too soon1 Closes under 1200. You may not think that’s important, but it is.

  • Anonymous

    Probably due to weekly options expiration.

  • Anonymous

    What time does the market close these days?

  • Schwerepunkt

    Cash closes at 4pm as usual –of course it takes a few minutes to tally it up for the official closing number. Futures til 4:15, then we wait until Sunday night. 

  • http://evilspeculator.com molecool

    That would be the day…

  • http://evilspeculator.com molecool

    Nothing comes in between Mole and his Hefeweizen! Alright, alright…

  • http://twitter.com/Sutali88 Sutali

    very true, I didn’t realize my speculator (weeklies crapshoot) account had gotten to 20% of my portfolio. Anyway, just wiped that out on a put RIGHT at the reversal. On my /YM chart, I had thought the Dow retested its support level and broke it (around 11250) and that it was to 11000 from there, but then epic squeeze happened. It was so epic that even a strangle would have been really profitable. For irony: The TWO unhedged trades I’ve taken this month have been losers, all my strangles have done great.

  • Anonymous

    What a crazy day.  Yesterday was the highest SPY Volume of the year at over 520 Million Shares Traded. For perspective, (Average Daily Shares Traded are just under 203 Million Shares).  

    Then today’s volume came in at just under 653 Million Shares Traded. WOW!

    I can’t help but wonder if the HFT Computers had a hell of a work out today?  

    I had a decent week but regarding today’s activity, it seems having free trades to work off can be dangerous for me.  However, to put a proper spin on my performance, at least I didn’t do anything that was incredibly stupid. But I did manage to burn up 7 trades for net gain of 0  by the end of the day.  

    Today’s movements were unbelievable.  The changes in size from one direction to another was absolutely fucking mind boggling.  

    And from the Never Say Never Department, I sold a credit spread to get my Delta back close to Neutral.  I have no idea what kind of Bullshit is in store for the markets come Monday Morning so I will acquiesce to caution.   

    But in any event TGIF, and have a great weekend everybody.   

  • Anonymous
  • Anonymous

    Two government spokespeople talking to ABC news for a story that is released at the end of the day on Friday is news that they know is going to come out but are trying to bury/do damage control.

  • Schwerepunkt

    I still have my doubts. Insubordination will not be tolerated. Uncle Sam carries a big stick . . . 

  • Anonymous

    The best things in life are free, for everything else there’s FedReserveCard

    Anyway, we seem to have made a round trip back to where we started, Monday will be intersesting
    UK banks took a hammering today, but bit of a snap back rally, like spx

  • volar

    Well I hope you all have a great weekend. I *certainly * will :)

    *I would like to thank CONVICT on your last trade*

    Drinks are on me mate- just did the math on this week’s coin.

    Your trade made me my largest single win this year!

    YES! Even more than my Feeder Cattle Trade. (tho not in terms of R)

    I love this place. ES is the Best.

    Every time I think I know something SCOTT or MOLE come out with something that just inspires me to do something new.

    Best of weekend,

    Cheers

    -Volar

  • Anonymous

    Thanks boss. When I look back at previous DZ readings at this level, circa flash crash, it took some time but we went down some more. About 10 – 12% over the course of a month or so.

  • http://practicalt.blogspot.com/ Gold_Gerb

    You’ve got to be kidding me!
    lower on the BPSPX?  we broke even today 1199.38 – huh?

    http://stockcharts.com/h-sc/ui?s=$BPSPX&p=D&yr=3&mn=0&dy=0&id=p31222171515

    Risk is now at 30.  70% of the SnP stocks are under the 50day MA (someone please correct me if i’m in left field)
    ok, so start that shopping list kiddies.. BUT WAIT!  THERE’s MORE!
    The BP was much lower in the lows of 2008 & 2009, and it’s up to you – to decide, when and where big money moves.

    -GG

  • Schwerepunkt

    Maybe another Zig up for BPSPX then a big Zag down into single digits for the sticky bottom?

  • http://practicalt.blogspot.com/ Gold_Gerb

    sure.
    I fully expect some kind of blip, break reverse, head-fake, can’t figure it out, mess you up kind of thing.
    that’s why I come here.
    ;-D

  • raised_by_wolves

    At its intraday low, $INDU:$GOLD went below the level of the financial crisis. Yes, that means the DOW priced in gold is as low it was in March 2009.

    http://content.screencast.com/users/raised_by_wolves/folders/Jing/media/e71ea9c4-a88d-42b0-a269-e698484abba5/00003596.png

    (By the way, did I borrow those settings from you Gerb, or is that how it charts by default?)

    Besides the fact that markets always retrace (maybe we get a real retrace Monday or maybe today counts as the retrace and Monday continues the trip into the abyss?), the gleamer of hope for any bulls drowning underwater would be that $SPXA200R increased from 22 to 23 so that only 77 percent of stocks are below their 200 day moving averages.

    http://content.screencast.com/users/raised_by_wolves/folders/Jing/media/fc9f5a20-cefc-4a14-ba4c-1cf9a3da95d8/00003597.png

  • http://practicalt.blogspot.com/ Gold_Gerb

    scary dude, we are on the same vibe.

    I prepared the $SPX:$GOLD just now!!!

    http://stockcharts.com/h-sc/ui?s=$SPX:$GOLD&p=D&yr=2&mn=8&dy=0&id=p37230561667

  • raised_by_wolves

    Thanks Gerb. Looks like the new low didn’t hold through close there. Of course, that’s the ratio. If one were trading futures and only had one contract of each, one would chart /GC-/ES, which has fucked the fuck out its 2009 high. Check this out, my gold-furred friend:

    http://content.screencast.com/users/raised_by_wolves/folders/Jing/media/3469d4f0-2bd4-4a1b-b802-10921077a1d5/00003598.png

    Now squint those cute-but-not-so-innocent eyes of yours to see that RSI(2,OHLC/4) indicator. It’s pinned to the ceiling above the 99 level. Monday may be good for it to come off. Then again, 11/27/09 was very similar to today and RSI stayed pinned for 4 more days so history tells us that it is possible for gold to continue beating the shit out of equities through Thursday.

    http://content.screencast.com/users/raised_by_wolves/folders/Jing/media/6066874d-7d5c-4156-a1e6-a9028df12e62/00003599.png

    Big picture, I think what these spread charts are telling us is that the secular bear market is coming out of hibernation (unless this is a double bottom). However, you will recall that these spreads were downtrending well before equities last time so maybe that will be the case again.

  • Anonymous

    Ahem. When doing a mashup with futures or stocks, its not a simple 1:1. You have to consider price differential, leverage per point, and if you are truly evil, volatilities. This book I have here says so.

  • raised_by_wolves

    Do you know how to type in TOS Charts something more complex (and correct) like what you are describing?

  • Anonymous

    yes. Are you asking me to taint this blog with the dirty stain of code?

  • Schwerepunkt

    Downgrade announced. AA+ and negative watch.

  • Anonymous

    Do your rules make use of RSI and BB, or do you just like the aesthetic?
    Oh, here’s my attempt at the scaled GC-ES using 21 day volatility. I don’t have time to double check it though:
    http://screencast.com/t/6SUTj2rYL

  • Anonymous

    I love how the Treasury Dept is claiming that there is a math error in S&P’s deficit projections.
    http://www.washingtonpost.com/business/economy/sandp-considering-first-downgrade-of-us-credit-rating/2011/08/05/gIQAqKeIxI_print.html

  • Anonymous

    “Had S&P done the deficit projections in TurboTax, they would have seen that we actually have a long-term surplus” said U.S. Treasury Secretary Timothy Geithner.

  • Schwerepunkt

    Actually, I think S&P probably was sloppy and their timing is piss-poor. Even Roubini is trashing their decision as a mistake. They should have given the deficit commission and congress time to increase the cuts. Besides, France is AAA?  LOL; Hahahaha, I can’t stop myself from laughing . . . 

  • Anonymous

    Maybe so, but the government’s projections are flimsy, too especially when you look at Medicare and Social Security. If this is the fire that needs to be lit under their chairs, then so be it. I really don’t have much faith in the commission, unless the recommendations are binding (not sure if they are in this case, but they rarely make them so).

  • Schwerepunkt

    In a technically worded press release, Fed basically just told the world S&P analysts are smoking weed. 

  • Anonymous

    If you can’t dazzle them with brilliance, baffle them with bullshit.

    It’s going to be interesting to see how this shakes out Sunday night/Monday morning. I’m all cash except for a free spread on AAPL that I legged into. Probably ought to make a shopping list.

    Edit: Interesting. Disqus treated my quotes as a tag. Won’t use those symbols again.

  • Schwerepunkt

    I say FAQ S&P for their premature ejaculation. Ewww. Did I say that? Seriously though, S&P made a mistake today and they will pay for it. US Treasuries will have a lower rate come close on Monday. Equities around the world will take it up the you know what. USD will rise [I hope].

  • Schwerepunkt

    yeah, I was wondering about those. 

  • Anonymous

    Looks like S&P will have more releases coming out Monday. Possibly related to downgrades of some of the GSEs and states? Monday will be exciting.

  • Anonymous

    Yea. Looks like a $2 trillion error. Apparently, after the error was revealed to them, S&P changed the rationale for the downgrade to reflect Washington’s political climate.

  • Anonymous

    I know that this is probably way overshadowed by what just took place, but i want to thank everybody for their comments yesterday. I know no one here is looking to baby sit, so thanks for taking the time to provide a little guidance to me. All the points were well considered and understood. 

    I do have one question though. In light of the recent spikes in volatility, is it safe to say that Larger Derivative payouts are driving the market? and if so, is there a regular cycle (Seasonal maybe?) between Volatility and Derivative Exposure? maybe Volar could help me with this one 

  • Zero % forever

    $BPENER in single digits from 82 only in 4-5 trading days!
     ^DJT should get some love ? since oil is down quite a bit last week !

  • Zero % forever

    $BPENER in single digits from 82 only in 4-5 trading days!
     ^DJT should get some love ? since oil is down quite a bit last week !

  • Zero % forever

    Volar
    Your 5 day MA on $VIX seasonality spike up to mid Aug was a great statistic.
    Now I nibbled in to XIV @12:disqus . ish(opp to VXX) . But lost when I nibbled at 15.93 stopped @15:disqus .45 on wed
    Even if the indices beat around the bush at the lower levels with out a big recovery, $ViX could slowly melt down to 20day average $spx his volatility .
    Boyz are gaming the $vix ,Mutual funds and rats like us (with Ben’s blessing)and also to show the Tea Party who is in charge. 
    If they want ,they can open the spigot and rally 500 DJIA points just like that.
    Or they can make us beg for a QE3,QE4 by crashing the market which they did during Feb-march 2009.

  • Anonymous

    Yea timing is poor but they should have cut the rating long ago. What deficit commission are you talking about. We have had multiple commissions and nothing happens. Congress will not increase the cuts. First of all there have been NO cuts.  ZERO. When they say 1 trillion cut they mean instead of increasing debt by 10 trillion they will only increase it by 9 trillion. That is the Washington definition of a cut. They dont mean cut like next years budget will be smaller then this years budget. Who here believes we will be able to sustain our debt payment for the next 30 yrs? Definitely the 30yr does not deserve a AAA rating.

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  • Schwerepunkt

    Wow. That is one sector to keep an eye on when the bottom is reached for a long term buy. 

  • Anonymous

    I’m not sure about energy or commodities in general in QE3?- As I see it the FED has to figure out how to pump money into stocks without having it
    go into commodities. The trick might  be to get the dollar to rally, which
    would keep commodities down.

  • Schwerepunkt

    Hard to know; my wet dream would be a commodity crash, equities rise along with the dollar and the resuscitation of the economy. Back to fundamentals instead of money flows and manipulation. Not a likely scenario however as we got billions of humans coming online in the modern, global, energy-dependent economy. Commodites might correct a bit, but no crash there. Oil will never go below $50 again, some might say $75. We’re at $85 or so now. 

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