Archive for the ‘Bear Market’ Category
“Plans are plans until they aren’t. Don’t confuse trading ideas with prophecy. You don’t know the future. Unless you cause it.”
This morning I went in very biased about buying Apple long, my mind was clouded with the support level of the 50 week moving average holding up perfectly yesterday and in the pre-market. Looked like a perfect play off the last support level that held up for years. My love for the products did not help me think more clearly. I came in biased. I even wrote a special morning blog to explain my set up. One of the best professional money managers and a great prop trader commented on my blog post in the morning on facebook, and pretty much said I was wrong, dead wrong on that support holding. As the stock opened for trading I became flexible and aware of what happened in the past when I traded against those guys. Yes, Apple was oversold, yes it was far extended from the 5 day ema and due to return, yes it was holding at the 50 week ema, yes it has $100 per share in cash and the most innovative products in the world and a ridiculous P/E ratio of 12. But with a clear, cautious, and flexible mind ready to go long instead I shorted when it failed to make new highs of the day after opening and losing the 50 week line, then when it rallied back above it and failed again I doubled up. I used weekly in the money puts and ended up with very nice gains almost doubling my capital at risk in one hour. One thing that new traders have trouble with that seasoned traders do not is flexibility to change with the market. We have to identify a place the market can move that tells us that we are dead wrong no matter what our beliefs are.
Charts are my best mentors and moving averages are my best teachers.
Entering into Monday Morning I am long Apple with an in the money $610 strike weekly call option but I am hedged with an out of the money $620 weekly put. Like me many traders see indecision with that doji candlestick laying right on the 100 day ema support line. This is the first time all year I have implemented a hedge and not been in a purely directional trade. But, with this option play structure I will capture the full upside of a possible bounce and run with Apple into earnings but my losses are capped to only a few hundred dollars if Apple does rollover under the 100 day ema and 100 day sma and falls towards the 200 day sma at $575 next week. From looking at the chart my belief is that the lowest we will go is the 100 day sma at about $622 that is the probable support area. The resistance level on the upside is at the 5 day ema of $636.55, if we have trouble getting over that line intra-day then it is a good place to take profits on bounces. If we break and close above the 5 day ema then that is my sign to get long with a possible change in trend into earnings. From chart history it looks like this is now a dangerous place to be short and a short covering rally could happen at any moment along with positions being taken by funds for longer term investments at this attractive price point for a value play with a 15 P/E ratio. In the long term time frame this stock is still in an uptrend and at its support level. This is the crossroads, the bottom of the uptrend or the top of a new downtrend. My bet is slanted to the upside.
I will be long with no hedge with a close above the 5 day ema $636ish currently but this target moves fast.I will ride the long until earnings if it stays above the 5 day ema.
I will hold my put option and go solely short by selling my call option with a close below the 100 day ema targeting the 200 day as the next chance to get long.
Here is a great article that appeared in Investor’s Business Daily discussing the historical limits Apple can get above the 200 day moving average before a correction. Interesting reading but it may or may not help with your specific trading style, for information purposes only.
CLICK ON YELLOW HIGHLIGHTS IN ARTICLE SO IT POPS OUT BIGGER FOR EASY READING. Also be sure to view below chart.
The market is at a cross roads, we are either at the bottom of a bull market or the beginning of a bear market. The up trend is still technically in place but the bears are fighting to bring us into an official down trend. Below or five key price levels to watch, we either bounce or we will wrestle with maintaining these levels. If they are lost we may struggle and get back to them but it is possible that they become resistance in a down trend. Government interference is beginning to lose its ability to stabilize the markets. It is becoming decision time, buy the dip or short the downside break out?I believe the following levels will be the key, either we bounce strongly and the up trend resumes or we lose these levels and plunge into a down trend to cleanse all the market of weak hands.
For bulls to stay in control they can not give up the 50 day SMA line to the bears.
The bulls must hold the 50 day sma for the bulls to stay in the leadership role for the S&P 500.
The QQQ has its last bull stand at the 100 day ema.
Google the markets recent big cap momentum stock must regain and hold the 5 day ema from the bears.
#1 Trader Know Thyself.
The first step the trader must under go is know about themselves.
Do you love the action of day trading or would you prefer holding positions for long period of times letting a trade play out? You must pick a style that fits your personality, position trading, trend following, option plays.,day trading, growth investing, CAN SLIM, momentum trading, break out trading, chart pattern recognition, or the Darvas method.
#2 Pick a market
Will you trade stocks, options, futures, commodities, bonds, or currencies?
#3 How aggressive will you be?
Understanding your level of risk correlates to your level of returns how much will you risk per trade? Do you have a large portfolio and want to risk a conservative 1% of capital pr trade? 2%? Will you be aggressive and risk 3% or more per trade? Are you willing to go all in on trades with some speculative money and understand that big bets can cause you to lose your whole account? Do you want to make 15%, 25%, or 50% a year? Are you willing to take the draw downs associated with that level of risk?
#4 Doing the work
Do you understand that trading is a profession like any other and requires the same level of reading, studying, and learning as any other. Like other professions you will not make money at the beginning you will instead pay in time, education, and losses of capital. Trading is the hardest easy money you will ever make. If you want to trade you will be required to study charts, read books, maybe get coaching, have a mentor, do research, and maybe attend some educational seminars.
#5 Learn to lose
In trading you have to get use to being wrong about half the time. While traders will have streaks when they are right 10 or 20 times in a row they will also be wrong 10 times in a row on many occasions. Very few other fields have successful professionals that are wrong as much except entrepreneurs and professional gamblers. Trading is sort of like baseball batting averages where your runs batted in and home runs off set your strike outs.
#6 Master YOUR method
In trading it is more important to be a master of your method than a jack of all trades and master of none. You need a winning method that you believe in that you can trade with faith.
#7 Trading environment
Half of your success will be determined by knowing what kind of trading environment you are in. Bull market, bear market, volatile, or range bound. Also the instruments you use to execute your trading will determine your success. Your market has to fit your style. Trend traders can’t trade a flat blue chip stock and most swing traders can’t successfully trade a strongly trending currency.
“Bear markets have no supports and bull markets have no resistance.” -William EngTwo big mistakes new traders make is to short a monster stock at all time highs believing it has to go down or going long a stock in a death spiral because it just can’t go any lower. Unfortunately for them stocks at all time highs are the ones that historically tend to go higher and stocks at all time lows tend to go lower.
This is simply because over the long term capital flows into the stocks with growing earnings expectations and out of the stocks with declining earnings expectations. The big money is in the big move, it is in trading in the right direction. Buying into a stock in an uptrend either on break outs to new highs or after corrections or pull backs puts the odds in your favor. It difficult to make money on the short side of monster stocks because you are swimming against the river, why not ride a boat with the water’s current? Stocks in death spirals do have dead cat bounces and rallies on news but that is generally a place to go short not buy. Bottom fishing at lows is also bad odds because you are buying something no one else wants. Buying at all time highs after a break out of a trading range or continuation chart pattern is good odds because buyers have over come all sellers at that moment.
“Stock trading is rocket science, you find a rocket and ride it.” -Steve Burns
“Monster stocks have no long term resistance and stocks in a death spiral have no long term support.” -Steve Burns
This is what a monster stock looks like.
This is what a death spiral looks like.
“I think it was a long step forward in my trading education when I realized at last that when old Mr Partridge kept on telling other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements-that is, not in reading the tape but in sizing up the entire market and its trend.” -Reminiscences of a Stock Market Operator
What the above quote is saying is that the big money is not in day trading, scalping, predicting, or trying to short at tops and buy at bottoms. No, the real money is figuring out if the market environment is bullish or bearish, if your stock, index, or market is being bought at support or sold at resistance levels. The money is in understanding if the market is trending up after each correction, falling down lower after each rally, or just trading in a range.
The big money is in trading the biggest monster stocks with huge earnings growth expectations on the long side in bull markets, that is the single best way to make the big money. And you do not need to trade and watch 20, I personally only need 2 or 3 to be very profitable. Look for the biggest winners in every market cycle and trade those. Big money is also to be found in shorting former leading stocks that make huge missteps with investors or customers, while this is more difficult to play the short side the right entry early can give you room to let your winner run to the downside.
If you want to be a successful trader play the right side of the market and quit trying to be a hero by buying the plunge and selling short the top. I do not look for $1 gains in a day I look for $100 trends over weeks. When I am wrong I get out quickly, when I am right a little I get a $10 move as a consolation, when I am right big I get the $20, $50, and even $100 moves in the big stocks.
In bull markets buy support (5 day ema, 10day sma, 21day ema, and 50 day sma) in bear markets short resistance.(50 day sma, 200 day sma)
At the beginning of bull markets buy the break outs of old resistance. (200day sma) At the end of bull markets sell the loss of support (21 day ema, 50day sma)
Trade on the right side of the markets my friends, that is half the battle.
If you are a longer term trend follower and there is a long term trend, then you make money.
If you are a shorter term trend follower and their is a trend in your trade you make money.
Swing traders make money in range bound markets.
Value investors make money when buyers agree and move in to scoop up the value play bidding it up.
Day traders tend to do well when their is volatility and a wide daily range to trade.
Momentum traders make money when break outs follow through and run.
Growth stock investors are winners when growth stocks are in favor.
Can Slim investors are winners in bull markets.
Short option plays generally make money in non-trending markets.
Long option plays need a trend to unlock profits.
When the market acts in correlation to technical analysis the practitioner of technical analysis wins.
A bull in a bull market makes money and a bear in a bear market makes money if their entries and exits are robust.
Profits are a function of the market’s actions not under the power of the trader and investor. When you realize your job is to trade your edge and let the market decide if you win or lose things get a lot more simple than when you are trying to ‘beat’ the market. You do not want to beat the market, you want to be on the same team as the market doing exactly what it is telling you to do based on your own proven system.
All of the above trading and investing styles make money if they manage risk per trade and trade their style with discipline and focus so that in the long run they generate big wins and small losses.
Ultimately the market is the judge, jury, and executioner, all we can do is plead or case with every entry and take or punishment with every stop loss exit.
What were the greatest trades of all time? Who made them? Here is a list of the who, what, when, where, and how of the greatest trades that were ever made.
While the risk management of executing many of these trades is not what many traders would want, we can see many of these as trend trades and the dangers of fighting the trends becomes apparent along with the profits that can be made by going with the flow with no price target. These trades were not all entered into at one time, most of them were built slowly and grew by adding as profits accrued. Most were also watched closely with and eye on the exit button when a true reversal began. Livermore made many probing shorts that he had to stop out of as the bull market reversed off support and continued upwards after appearing to roll over. Some of these traders had the sell button ready to push at a seconds notice in case a reversal knocked them out. Some could have been ruined with a little blind sided government intervention that modern day traders are faced with now. But you can not argue with the profits and many of these traders have very long proven records, these were not random trades and they did not just get lucky, most of these were the great play that they landed after decades of research, study, and a life time of great trading.
1. John Paulson’s bet against sub-prime mortgages made his hedge fund a cool $15 billion in 2007, that is billion with a ‘B’. he is only one of a very exclusive club that was able to make this call and win with it. Most went short too early and lost money and were stopped out. That most was the call of a lifetime that most everyone else was blind to even deep into the crises.
2. Jesse Livermore’s call on the Crash of 1929, Jesse Livermore did not need any computer models, technical indicators, or derivatives to make $100 million dollars ($1.2 billion in today’s dollars) for his own personal account during a time when everyone was bullish and then almost everyone lost their shirts. It was an amazing day when Jesse came home and his wife thought they were ruined and instead he had the second best trading day of anyone in history.
3. John Templeton invested heavily into Japan during the 1960s, when Japan was beginning its three-decade long economic miracle, Templeton was one of the country’s first outside investors. At one point, he boldly put more than 60 percent of his fund in Japanese assets.
From its founding in 1954, his Templeton Growth Fund grew at an astonishing rate of nearly 16 per cent a year until Templeton’s retirement in 1992, making it the top performing growth fund in the second half of the 20th century.
A $100,000 stake invested in 1954, with distributions reinvested, would have grown to $55 million in 1999.
4. George Soros’ breaking of the bank of England by shorting 10 billion worth of pound sterling and forcing the U.K. to withdraw from the European Exchange Rate Mechanism (ERM)(September 16, 1992). Soros made $1 billion in the process, which was an unimaginable sum back then.
5. Paul Tudor Jones’ shorting of Black Monday. Paul Tudor Jones correctly predicted on his documentary in 1986 based on chart patterns that the market was on the path to an crash at an epic level. He profited handsomely from the Black Monday crash of 1987, the largest single-day U.S. stock market decline (by percentage) ever. Jones reportedly tripled his money, making as much as $100 million on that trade as the Dow Jones Industrial Average plunged 22 percent. Another amazing trade to walk away from with a fortune when so many others were ruined in the aftermath. He played it to perfection.
6. Andrew Hall’s Back in 2003, when oil was trading at $30 barrel and the economy had just recovered from the dot-com crash, Andrew Hall wagered that prices would top $100 per barrel within five years. When oil prices blew past $100 five years later in 2008, Hall’s employer Citigroup made a bundle and Hall took home $100 million as a part of his compensation for this and other successful trades. He predicted the amount of the trade and the time frame and structured futures contracts to profit greatly from the move to $100 or expire worthless. He did what is suppose to be impossible, predict a price and execute a trade perfectly far in advance for maximum profit.
7. David Tepper’s bought severely depressed shares of big banks early in 2009, Bank of America and quadrupled in value and Citigroup tripled in value from their bottoms earlier in the year. That was good enough to earn Tepper’s hedge fund $7 billion. His personal cut was $4 billion. His bet was that they would be bailed out and not nationalized. He was correct.
8. Jim Chanos’ prescient shorts correctly predicted, and profited enormously, from the demise of Enron. Other examples of his successful shorts include Baldwin-United, Tyco International (NYSE: TYC), Worldcom and recently homebuilders like KB Home (NYSE: KBH)
9. Jim Rogers’ spotted the secular bull market for commodities way back in the 1990s. In 1996, he created the Rogers International Commodity Index. Subsequently, he worked on ways to make that index invest-able. Since 1998, the index has returned 290 percent through the end of 2010. This compares to the 10 percent return of the S&P 500 Index during the same period.
10. Louis Bacon’s made a killing in 1990 by anticipating that Saddam Hussein would invade Kuwait. Bacon went long on oil, short on stocks, and helped his new hedge fund return 86 percent that year. In the following year, he also correctly bet that the U.S. would quickly defeat Iraq and the oil market would recover.
We must all be ready for that once in a lifetime trade. Keep our eyes open. Trade with option contracts or futures contracts to manage risk carefully. Let our winner run. Do not set a target but instead let the price take us out of the trade. One day we might make that epic trade, the short that falls to $0, the stock that goes up ten times the buy price. Do you know how to manage such a trade? If not, it is time to do the homework.
Here are principles from Dana Glante from the Stock Market Wizards book by Jack Schwager on how she made double digit returns year after year from her short only trading strategies even in bull markets. Steve Watson in the same book contributed the last one.
- High receivables (large outstanding billings for goods and services).
- Change of accountants.
- High turnover in chief financial officers.
- A company blaming short sellers for their stock’s decline.
- A company completely changing their core business to take advantage of a prevailing hot trend.
- A VERY high P/E ratio
- A catalyst that will make a stock vulnerable over the near term.
- An up trend that has stalled or reversed.
- Stocks breaking below their 50 day moving average.
- A high priced one product company with low barriers for competitors to enter and compete.
In addition I would also say to cap the unlimited risk to the up side by using long put options instead of out right selling the stock short as long as options have enough liquidity for a tight bid/ask spread. Former leading stocks that have disappointed make the best short plays they have the most potential down side.