The Trend is Your Friend (and most likely a demi-god, so be nice)

Odds of 58.2% with equal downside and upside is a bet you would want to take, especially if you could take it again and again. Although the edge may look insubstantial, no casino you go to or lotto you participate in is going to give you such an edge. If you're relatively patient, I'm certain you'll be somewhat pleased over time (unless you were looking for a rush).

The screenshot clip is from a new game at Wall St Survivor that allows you to bet 50 "loyalty points" on the next tick on a random stock. What I did for 122 times (I had to get to class, but I did this last week too, with similar positive results) was place my bet on whatever direction the stock was heading at the time. Basically, I was following an extremely short range trend. If the line chart was heading up, I bet up; and, vice versa. Not bad for little effort (albeit, you need 50,000 loyalty points to trade for $5...if only I could develop a cmoputer program to do it for me).

You may be thinking: hey this is cool, but I don't think it will work on a larger scale. Well, I beg to disagree, and so do many influential and successful economists, traders, and investors. Here is my theory--derived and distilled from such brilliant minds as Robert J. Shiller, Charles Kirkpatrick, and Michael Covel, among many, many others:

Trend following works on the large scale because when companies are successful (or percieved to be successful) people will continue to invest in them, pushing stock prices up. Most people are not going to put their entire savings into a stock and never invest in it again. Many people are going to put some money into a stock, wait for their next paycheck and put more money into it as long as the stock continues in a positive direction. They may also tell others about their success, increasing the demand for the shares, further strengthening price. This is what Shiller refers to as a postive feedback loop. As money experiences success, more dollars will follow.

The same works for the downtrend. If people are panicking around you, you (maybe not you but the statistically average person) are also going to panick. The process feeds on itself driving prices further downwards. People will probably tell their friends about their lack of success in the stock market and warn them to stay away. People may also feel sick to their stomach continuing the optimistic investment process they had performed up until then, further reducing demand.

So, why does this work in the short term? Well, in order for the line chart to be driven upwards, greater demand than supply must be present, meaning more buyers than sellers (i.e. a greater chance for an uptick). When there is a greater supply than demand, you will have the opposite.

Put your bet where you have the greatest odds.

Seven Important Candlestick Reversal Pattern Pairs

Candlestick reversal patterns can be a boon to any trader's repertoire. Combining them with support/resistance lines and other indicators can increase a trader's edge substantially. Each set below contains both the bearish and bullish counterparts. These are ideal setups that require directional movement (i.e. nothing range bound). The more volume at the given point, the more strength each of these patterns portend.

Bearish and Bullish Harami - Identified by a long bar followed by a very short one. Harami signal a loss of momentum and a possible reversal.

Dark Cloud Cover and Bullish Piercing Pattern - The dark cloud cover and bullish piercing patterns reveal weakness in the current trend and emerging strength in the opposition.

Shooting Star and Inverse Hammer - Both the shooting star and the inverse hammer have a small body with long upper wicks. THe shooting star shows the failed attempt of the bulls at maintaining control over higher price levels, while the inverted hammer is like a spring ready to pop.

Bearish and Bullish Engulfing Patterns - In the bearish and bullish engulfing patterns, the opposing side's strength overwhelms previous advancement. These tend to be stronger than the dark cloud cover and the bullish piercing patterns. Make a note of the difference: in the engulfing pattern the second candle completely overtakes the first.

Hanging Man and Bullish Hammer - Both the hanging man and bullish hammer resemble the shooting star and inverted hammer, however they are flipped. The hanging man and bullish hammer display a struggle between the bears and the bulls. In the first, the bears are beginning to gain traction against prior bullish strength. In the second, any movement downward has been stalled, signalling a possible bullish reversion.

Southern and Northern Dojis - The southern and nothern dojis are some of the most watched patterns in the candlestick charting world. The both signal a parity between the bears and the bulls. At the moment a doji forms, and as with all these signals increased volume strengthens the pattern, momentum has been prevented from continuing. Sometimes this signals confusion, sometimes this signals a stronger opposition with increasing attrition of the side previously in control.

Morning and Evening Stars - The morning star and the evening star do not necessarily have a doji as pictured here. The top candlestick will be shorter and if it is a doji, signals increasing odds that a reversal will take place. These two patterns, though rare, give the highest odds of reversal. Strength goes in, it faces stiff resistance, after which control shifts hands.

2.50 Feb SOL Calls @ 2.55

I like that burst of volume just a few days ago. As long as SOL can hold above its 20 day EMA, I'm happy. I may have gotten in a little early. Looks like it may pull all the way back to 4.21, its 20day EMA. Still love the price/volume action.

PS: Got out of my COST Puts @ .60 for a loss.

42.50 Feb COST Puts @ .85

Bought some puts for Costco. Read the Buy on the Dip post and agree with him. If it can break 50 there's a good chance it will hit 43 or lower.

Been posting on Twitter and messing around. I can't believe how tired I am at the moment. Been doing some workouts to get into some sort of physical shape. Hoping it will help keep my mind and emotions in shape as well. Trying to think of ways to make a little money on this site, which rarely pan out. Few people, very few people, click on the ads which is understandable--I don't get that many hits. I am going to increase my participation in other sites. I know I how rewarding it is to get a comment on a post; I'll try to do that for others. I've been looking at some of the twitter ad services, and seeing what type of deals they offer. Twittad and Magpie seem to be the way to go. Not sure if you can really make any decent money, but every dollar builds confidence levels.

Take care everyone.

PS: Might head off to see a movie later in the afternoon. Milk looks like an interesting flick. Gus van Sant is a veritable indie god, and while some may poke fun at his movie Last Days, Elephant and his main stream Good Will Hunting certainly make up for any of his more experimental films (to those who do not like the experimental).

SPY Puts

Scalped some Jan 80 SPY Puts for a +2.3% gain. 1.29-1.32.

SPX Resistance, Financial Increases

The 915/920 level is important. Tomorrow we're looking to see if the market can push through this level on solid volume. Today's volume on the SPY was below average, but significantly better than yesterday's. We broke through the 50-day moving average, which will probably serve as some sort of support tomorrow. It's at 90.43.

XLF had good volume. I put on a strangle yesterday for 1.85 that is now worth about 2.05 or so. I'm hoping for a little more, but will be watching the price action tomorrow, exiting if necessary. Even if the SPX remains stagnant, I think that financials have a chance to continue their rally. Just look at the volume on the XLF, GS, or MS; the fed lowering the rate to a near 0% rate sparked the spike, helped by the less than expected losses from GS (obviously, still horrible). Watch MS for earnings tomorrow. I'd look for resistance at 13.50 on the XLF, which is its 50 day.

PS: No more for today. I have two final papers that I have to work on due over the next two days. Take care.

Update: Got scared out of my strangle. Sold for 1.88, gained a small +1.6% gain.

AZO Jan 100 Puts @ 2.15

Bought 3 Jan 100 Puts for AZO at 2.15; hoping to see it fall to its 200day, at least, or even better, its 50day. It's been strong, but I can't imagine it will be able to hold onto such a high RSI for too long in this environment. Its earnings were good, but not good enough to push it above its 52week high. Basically, I'm looking for a pullback and strong resistance at 130.

SPY DEC 75 Puts @ 1.78

Purchased 3 DEC 75 Puts @ 1.78. Looking for the SPX to break 820.

Update: Sold 3 DEC 75 Puts @ 1.76 for a ~1.2% loss. I should've taken the fucking $60 profit. I still think the SPY is going to break 82. But I have fears the bulls will rally in anticipation of auto bailout news released this weekend (I'm guessing this weekend). My indecision maimed me again.

PS: Glad I sold them this morning before I left. Only brought my average option gain down to ~+18%. I would've been massively hurt considering the S&P went to 876 at the end of the day. On Monday, watch for resistance at 88 on the SPY. If it manages to break through that level we might get decent bear market rally. The weekly stochastics could definitely use a respite from their oversold positions.

DEC 80 SPY Puts

3 contracts @ $1.88

Sold all @ 1.98 for a +5.3% gain (-$12 for commissions). I have to shower and go to school, and I'd prefer not to leave them on. Be careful tomorrow, I have a feeling the news released will cause some unpleasant (if you are unaware) volatility.

Sold Too Early

I sold my puts and calls before going to school around 8:00PST this morning. I sold the put first because it looked like XLF was rising, then I waited for a while (making about 10-15dollars) and then sold the call. If I held it until the end of the day I would have made another 40 on top of that, but I did not want to have to worry throughout the day. I lost $6 on the trade, plus commission, but it could have been $10-15 worse if I sold the put and the call at the same time. I really should have looked into the whole Citi thing a little more. That would have given me more confidence to hold the call (I think it will still increase in price, especially with the nice volume it received today).

Take care.

XLF Strangle

After I placed the order the strangle was down quite a bit; sometimes the spreads on options can be god awful. At most it was down was 10%, but it slowly gained ground, and is now as shown above. Anyway, I have some errands to do. Take care.

Could the US be Downgraded?

"Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds." (link)

Thanks to Dinosaur Trader for the heads up.

PS: I'm up a little more, however, I think I chose one of the more stable stocks...damn. Perhaps after earnings people will freak out.

Good luck.

Update: Sold both the put and the call for a 16.35% gain.

DELL Strangle

Dell is reporting earnings tomorrow (information brought to you by the lovely people at Option Slam--added to the "Important Technicals" section), and I figured I would give my new option purchasing abilities a try and do my first ever real strangle. I bought 1 DELL Dec 11 call @ 1.10 and 1 DELL Dec 10 put @ .98 for a total strangle price of 2.08 plus the expensive fees.

Note: Puts up 4%, Calls are unchanged.

Update: last update before I go to school. Up $17 on the puts and down $9 on the calls for an overall gain of $8, or +3.85%.

Free Trades at Zecco

I have been signing into my unfunded Zecco account recently. I submitted another option application on Monday and figure maybe someone forgot to tell me they updated my access level. That hasn't happened. But, I did stumble upon something that must be nice for those with accounts above $25k: commission-free trades during the month of October for stocks and options. That could add up, at least for the options trades.

Then again, with sogo, trades cost 1.50 on the premium plan. If you are trading 25k, you probably wouldn't notice that...

PS: I broke even today (well, up ~$4). I'm somewhat frustrated about it because there were times when all four of my stocks were up enough to make me want to sell them. But, alas, nanny-state day trading rules. I'm going to have to hit up my grandparents for some cash. They'll understand...

Good trading. Take care.

During times of turbulence, Options are a good Option

Update on yesterday's strangle/straddle experiment:

LEH - sept strangle; cost = 1.6; today = 2.31; gain = ~44.4%
- sept straddle; cost = 2.9; today = 3.82; gain = ~31.7%
- oct strangle; cost = 1.89; today = 2.32; gain = ~22.6%
- oct straddle; cost = 3.06; today = 3.86; gain = ~26%

WM - sept straddle; cost = 1.06; today = 1.25; gain = ~17.9%
- oct strangle; cost = 1.54; today = 1.42; loss = ~7.8%
- oct straddle; cost = 2.03; today = 1.8; loss = ~11.3%

Average gain = ~17.6%

Note: I covered my position in PCH for a ~5.3% gain this morning.

Good trading. Good luck. Take responsibility.

Strangle LEH/WM?

I have been doing some non-post updates--adding more blog links, gathering links to more of my favorite technical indicators, and fixing a few formating errors in past posts. I was pretty tired out this weekend, but I got to thinking about the LEH/WM/Etc debacle; and, I wanted to see how well a strangle or a straddle on LEH and WM would do (assuming the options were purchased at the close on Friday). Once I begin to do decently in stocks, I would like to begin some option trading. This will be one of my first experiments. Anyway:

LEH - strangle; sept 2.5 put @ .70; sept 5 call @ .90
- straddle; sept 4 call @ 1.36; sept 4 put @ 1.54
- strangle; oct 2.5 put @ .75; oct 5 call @ 1.14
- straddle; oct 4 call @ 1.43; oct 4 put @ 1.63

WM - straddle; sept 3 call @ .41; sept 3 put @ .65
- strangle; oct 2.5 put @ .69; oct 4 call @ .85
- straddle; oct 2.5 call @ 1.18; oct 2.5 put @ .85

I'll post results after tomorrow's close (and possibly throughout the day if things get interesting). Wish the best of luck to anyone who may be in either of these stocks.

Good trading. Good luck. And don't listen to me for anything important. I don't want to be the scapegoat for your own idiocy.

Offbalance

I read a snippet about the benefits of being contrarian when it comes to put call ratios. If it leans in the put direction, expect the stock to rise. If it leans in the call direction, expect the opposite. I've added the maxpain calculator link to the side, which helps determine where most institutions would benefit from the put and calls they have written. From what I have heard, and the little I have seen, stocks tend to move towards the Max Pain area. In any case, Max Pain for AnF is around 52.50 (it closed near there) and the put/call ratio is extremely low, meaning there are far more calls than puts. Because of that, hedge funds may push it down (there was a lot of decline on low volume). However, I think the stock is severely oversold on the weekly chart. I'm looking for a rebound. But I also have my stops in.

Update: $60 maxpain for November. Can't get October to work. 52.50 for Sept. Still believing there will be a run up before then. As always, prepare for different scenarios.