WhipItAround.com

Close of Trading Update: I executed another long trade around 106.50 on SPY, which resulted in a nice profit, however I did have to take 25 cents of heat before the ultimate breakout.  I ended the day with about $600 of profits.

Does technical analysis work?  You tell me after looking at the chart below.  What do you see there?  I saw some excellent breakout trades on the long side.  Note, I made money shorting stocks the last few days but I was flexible enough to adjust my attitude and bank coin on the long side.  I wasn’t as aggressive as I should have been but that’s OK.  My mid-day profits are approx $450 (see below) and they would be at least double that amount if I wasn’t peeling off half my trade so quickly.  It doesn’t matter why the market is going up- it could be controlled by short covering, real buying- it doesn’t matter cause offers are getting lifted.  Many times, the most powerful moves higher are after several days of weakness.  When so many people have sold the market, good news end up catapulting the market higher, creating an excellent opportunity to take advantage of shorts that may be trapped.

Closing Profits

Mid-Day Profits

If you were reading my posts lately, I’ve been warning of a significant correction in the market and here she is.  It was another easy day of trading for me.  I executed one trade- short 2 S&P e-mini contracts and just watched them work to the tune of $1k while eating tacos and cleaning my apartment.  God I love the lifestyle of this job!  Below is my daily P&L and a chart of the day.  FYI, I am not posting my P&L to brag; I am posting it for credibility and accountability.  I find that I trade better knowing that my daily P&L will be made public at the day’s end.

Profit Statement

Today was a classic “range” day in the market where the range was set in the first couple hours of trading.  During range days, the only high reward to risk trades are at the range extremities and the vwap.  I was about breakeven today, generating only $100 of profits, however, I made several emotional trading errors today that prevented me from having a pretty good day.  It was one of those days where I got out of things too early and didn’t take good trades.  These days can be mentally exhausting as you kick yourself for being too timid. 

Tomorrow, it is my goal to take all juicy trade setups with size and identify exit levels and criteria beforehand.  Basically, I will trade like an algorithm. 

As far as the macro picture goes, today was another day that was dictated by the direction of the dollar.  I felt like I was trading the dollar rather than S&P futures. 

Hopefully, you studied my lesson on trading “Bermuda Triangles”.  I can’t stress how reliable and profitable these patterns are.  It takes experience and an understanding of the profile and structure of the market to have the confidence to trade this pattern, but anybody with common sense, objectivity, and a competitive drive can learn how to trade this pattern.    I made approximately $1,300 in one hour without risking much of my capital (see P&L attachment below).

The move lower was mostly driven by a strong rally in the U.S. dollar, which is why it is important to always follow the larger macro picture.  In the first triangle (Triangle 1), I shorted 500 shares once the price broke the lower trendline of the triangle, taking half of the position off at VWAP (volume weighted avg. price: the yellow line).  I was stopped out of the other half break-even as the mkt tried to retest its high, which was nothing but short covering.  When price broke below the lower trendline of Triangle 2, I confidently shorted 2 e-mini S&P futures contracts (equivalent to 1000 SPY).  I had a high amount of confidence in this trade because I knew a lot of longs were trapped after buying near VWAP and from earlier strength.  I also had confirmation when the sellers pushed prices below VWAP and the TICK registered several -1000 readings.  I took profits on 1/3 of my short at Friday’s closing price, 1/3 of profits at Friday’s low, and another third near the low of last week.  Prior lows tend to act as major levels of support, which is why I like to take profits around these areas.  Note, I am trading the e-mini futures but refer to price levels on SPY.

Hopefully you read my post from last week where I indicated buyers would be spooked after such violent sell-offs near resistance.

The “Bermuda Triangle” is one of my favorite trades, as breakouts and breakdowns out of the triangle tend to be fierce.  However, if you are impatient, you can get trapped in the Bermuda Triangle.  I find this set up to work approximately 9 out of 10 times, however, there is usually a false move to fake-out impatient traders.  The instructions below should allow you to make thousands of dollars trading the triangle. 

How to Execute and Time the Bermuda Triangle Trade

1) Wait for the 2 minute candle to print outside of the triangle and then execute your trade
2) Place a stop in the middle of the triangle, in case the trade doesn’t work. 
3) If you do get stopped out but the candle prints outside the triangle again and holds, execute the trade again.
4) If you get stopped out and the candle prints on the other side of the triangle, take the opposite trade.
Note: When the candle prints outside the triangle and makes higher highs or lower lows, the probability of a juicy trade is high.

The chart below is an excellent example of a successful triangle breakout.  It is easy to get excited and execute your trade when the price pops out of the triangle for a few seconds, but the key is that the price holds outside the triangle and the candle prints.

A) Dick Bove’s downgrade on Wells Fargo
B) Galyon (sp?) liquidating its positions
C) The realization that things aren’t good, banks are no good w/o govt support and oil is not good at $82
D) The United States’ transition to socialism
E) All of the above

A nostalgic flashback like this will likely make the bulls think twice about chasing this market at such lofty levels. Unfortunately, I did not participate much in this glorious move down. I had such a great trading day that I covered my small short position near the vwap. This is why it is important to continue trading normal size when you are in the zone. I was in the zone today with a 100% success rate and out of fear of messing up such a good day, I hesitated to short the mkt at the end of the day. The move lower came out of one of my favorite patterns- the “Bermuda Triangle”. Once the market broke below the lower trendline of the triangle, I should have been short in size. This is very disturbing for me because I love to short the market. I don’t know what this says about my personality, but I enjoy making money shorting stocks much more than i do buying stocks. Surprisingly, half of my daily p&l was on the long side today.

Answer: E: All of the above

Today could have been a decent day, but i trapped myself with negative thinking.  Last night I went out for a bit and had only a couple hours of sleep (mistake #1).  As a result, I woke up 10 min before the market opened.  Yesterday evening after Apple’s blowout earnings and strong earnings from Texas Instrument, the NASCRACK exploded higher while the s&p couldn’t breakout of its intraday range.  This was when I first considered shorting the market.  By time I sat down at my trade station, SPY was down 60 cents and I missed about a $500 trade– I hate missing opportunities for stupid reasons.  Some of my worst trading days occur after missing something I felt I should have participated in under the right conditions.  I tend to screw myself by getting angry and feeling like I need to make up for the lost opportunity.  Realizing this, I played it cautiously and patiently waited for another good setup.  I ended up shorting 1,000 shares of SPY at an average price of 109.3, exiting between 108.8 and 108.9.  After observing lower lows with dojis and exhaustion readings on the TICK, I sensed it was a tradable bottom, as we could not break below a major level of support on the NASDAQ and s&p futures. I bought 1,000 SPY at 108.83 and exited half after making ten cents.  I was a bit anxious about this trade, as I thought there could be another possible breakdown in the market, which brings me to another trading lesson: TRUST THYSELF AND DO NOT LISTEN TO ANYONE ELSE.  I respect Dr J’s opinions on cnbc, as he is usually right.  He expected further downside in the mkt and I sold my remaining 500 shares seconds before it exploded higher and hit the level I would have sold at for a $150 profit.  This frustrated me and I became a bit anxious.  I hesitated to take two other scalp trades that ended up working and represented another $400 of missed profits.  This really messed with my head and I was determined to make the money I felt I should have made– HUGE MISTAKE!  I lost all my profits by over-trading, chasing trades, and setting stops that were too tight.  It was basically death by a thousand papercuts.  It was very frustrating because prior to that, I felt I was trading in the zone with a good edge, but selling based on somebody elses opinion and hesitating to take a couple good trades mind-FUCKED me. 

The takeaway here is to trust yourself, be prepared and don’t listen to anybody else.  If you know you are a good trader, you must not let your emotions jeopardize your success.  If you know certain conditions trigger a particular type of behavior, it is best to take a break or significantly reduce trading size.  Instead, I increased trading size and broke all sorts of trading rules.

In addition, there will be plenty of trading opportunities.  Everyday, there are several opportunities to make hundreds of dollars per trade.  Do not force trades or bend your rules out of frustration of missing good trades.  Trying to force trades will only result in bad things.

Tomorrow I will trade objectively and take whatever the market gives me.  Several of the regional banks report earnings tomorrow morning, therefore I am short the S&P overnight– hopefully I do not get raped in my sleep as I have a stop above the after market range.

Well, we are experiencing the exact opposite in the stock market.  After major institutions failed, investors repriced risk and everybody was “hitting the bid”.  The decline was exacerbated by over-leveraged investors that were investing borrowed money.  As prices declined, the lenders liquidated or foreclosed on portfolios of assets (similar to what is happening in real estate right now).  I remember the countless morons that attempted to “nail” the bottom on the way down.  The same thing is happening on the way up.  I do not know where the top is, but I can say with certainty that the market cannot go higher than 12,000 on the Dow.  You might as well play Russian Roulette with your money if you continue to stay short in this environment.  The government has provided $11 trillion of stimulus over the past couple years– that’s almost equal to the total income of every person in the United States.  It’s similar to a 70 year old man taking 20 pills of Viagra and Cialis.  Once that old man stops taking his pills, the party is over.  The market can continue to rise and the economy can continue to grow as long as the government continues to feed the market Viagra.  During the Great Depression, the economy increased 17% in 1934, 11% in 1935 and 14.3% in 1936, all due to government stimulus programs.  You know what happened after the stimulus was pulled?  We double dipped into a second recession.  The market ultimately fell 89% from top to bottom, however, in between there were several massive rallies in the stock market (after the initial 50% plunge in 1929, the market rallied back 50% over about 5 months. After that rally, the market dropped 86% between April-1930 and July-1932 and rallied 100% over 2-months, only to drop 40%, however that was actually “the bottom” and a 123% rally ensued: please see “8 Large Rallies and Declines” for further detail) so i don’t know why anybody is surprised the market is up 60% from the bottom (however, it is still down 30% from the top).  Use some common sense and take some chips off the table as the mkt continues to rise, because there will be another day of reckoning, however, this time the financial crisis may be governments that can’t refinance their debt.  I encourage you to read Einhorn’s recent speech titled “Liquor Before Beer…In the Clear” (Einhorn predicted the demise of Lehman Bros)

The actions of our government are strikingly similar to the actions of American consumers that borrowed too much on their homes and credit cards.  There are consequences to such actions, however our political system is structured to favor short term solutions.  I think political offices should be a minimum of 10 year terms to prevent short-term decision making.  Often times, inaction is the best form of action.  The same people that created this mess are now creating solutions to the mess that are very perilous in the long term.  Taxpayers should be outraged at the joke that was played on them by Wall Street and D.C.  We and our children will ultimately foot the bill for all these bailouts.  The best solution to the financial crisis would have been for the government to guarantee all bank deposits and let all the insolvent banks restructure.  Instead, the government changed the rules every week and made “Too Big to Fail”  Way Too Big to Fail.  Let’s see, is JP Morgan too big after it was given WaMu and Bear?  Is BofA too big to fail after it was given Merrill Lynch?  The governments answer was to make these firms even bigger- WTF!? 

Investing requires due diligence, hence the investors in these financial firms deserve to lose money on their investments.  Our government tried to scare us into bailing out the financial firms like Armageddon was upon us.  Let me tell you something, the banking system would be in much better shape right now if Citi, BofA, Merrill and Goldman were all allowed to fail.  You know why?  Because the companies would continue doing business, but their capital structures would have been restructured to fair market values and risk would have been repriced.  In addition, “Too Big to Fail” would have ended as companies were split into separate pieces (banking, i-banking, hedge funds, etc) and new rules would have been created to prevent excessive risk taking.  Look at GM.  They failed, but you can still buy GM cars, right?  The government simply stole from the population of 300mm Americans to bail out investors in financial institutions– you should be outraged at this scam.

If you are in the market, I would consider taking profits on a portion of your portfolio as the market goes higher.  Adding to your 401k is risky right now, as I do not see the mkt going much higher than the 10-11,000 range.  12,000 is possible but highly unlikely.  I see two scenarios: a) the mkt trades within a range between 9-11k or b) the mkt trades within that range and then turns over to the 6-7k area.  I’m using history and fundamentals as a guide for this forecast.  All recessions that were the result of debt and real estate bubbles experienced massive declines in the stock mkt followed by massive 50%+ rallies.  During the 1930s, the market rallied 72% and 120% in separate years, only to fall 89% once it finally hit bottom.  The similarities between this crisis and Japan are uncanny, except the fundamentals in Japan were much better.  Japan experienced a similar real estate bubble that peaked in 1990.  Since 1990, their stock mkt is down 75%, but in between, there were 6 rallies of 60% or more.  The market will soon go sideways and eventually correct to the downside once people realize the recovery will be feeble at best.  
 
There’s more downside risk than upside risk at this point in the market.  It sounds unrealistic but I could see the mkt retesting the 7000 area on the dow over the next few years.  the govt is trying to fool people into believing things will be good again.  There will be strong growth in 09/10 but only because the comparison is to ugly numbers from last year and the growth is the result of $11 trillion of govt stimulus.  That money is not free– we borrowed it by selling treasury bonds that our kids will have to repay.  it’s like the govt did a 190% loan to value mortgage on the country.  they are doing everything to make things appear good again but the best way to figure things out is to look at history and the fundamentals.  Japan is the classic case. 
 
Check out the attached chart.

Source: “8 Large Rallies and Declines”: www.alphatrends.blogspot.com