Trader’s Narrative

Here’s a short video from Adam Hewison going over the intra-day 15 minute chart of the S&P 500 Index (SPX). Watch it, then read my comments below:

As Adam mentions this is a very common pattern. The way I would trade it would be to go short as price comes back up from below to the resistance level (the level which used to be support but was broken to the downside).

The all important stop loss - never forget it! - would be placed in the middle of the two extremes, say around 835. And the target, as mentioned in the video would be 812.

My logic is that a breakdown rarely happens without a retracement. So I’m trying to enter into this shallow retracement, which may even take price above the new resistance line. But if the double top is valid, then price will break down anew. As well, I would be short because of all the myriad reasons I’ve outlined in the past few days on where the market is right now. I’m assuming you’ve kept up with the required reading

How would you play this? where would you enter, long or short? and where would your stop loss and targets be?

If you’re interested in patterns, then check out “The Great New Pattern“. And GNP with another specific example (VNT).

Trading is basically about finding and exploiting patterns which don’t change. Why don’t they change? Because we humans, as participants and creators of the market, don’t change.

Book Giveaway
If you haven’t already, throw your name into the hat for a giveaway of:
Hedge Fund Operational Due Diligence (follow link and submit comment)

While you were watching the news about the AIG bonus dustup, hope you didn’t miss on AIG the ticker symbol. It is still kicking around on the NYSE and as a penny stock, it put in an impressive wide range day:

I have no idea why it jumped on Monday since there wasn’t really any news (other than the bonus fiasco). But a 66% jump (from last week’s close) is juicy and as a daytrader, even if you can catch a fraction of it, you’re set.

Even if we ignore Friday’s close and only take it from the gap up open on Monday to the close, it was a 36%. Not too shabby. The intraday high at the magical, round number $1.00 - something really special about round numbers that acts almost like a magnet. The more you watch it, the more you see this stuff.

You don’t want to chase a runaway train so watching for an entry point is crucial. A great, low risk entry point was available at around 10:20 AM (green arrow). Price action paused and then retraced slightly with volume dropping off. If you notice, there was some resistance at $0.60, which was then broken to the upside. This then would have acted as support. So placing a stop under it would have allowed you to define your risk levels intelligently.

No one really knew, of course, that this would turn out to be a huge wide range, trending day. But the tip-off was the incredible volume, as well as the large gap up open. AIG had already put in a bottom last week and rallied impressively already from its low of $0.33 so there was something afoot.

If you would like to receive a free copy of Tim Syke’s book, An American Hedge Fund, leave a brief comment below (making sure you leave your correct email). I have TWO copies to send to two of my randomly chosen readers as a Christmas [slash] Hannukah [slash] New Year’s gift.

Timothy Sykes’ book An American Hedge Fund takes you through a conversational, breezy account of how he took $12,000 of Bar Mitzva money and traded it to $1 million. Although Tim peppers his book with specific trades, the book doesn’t have any charts. This is disappointing because it would have been so enriching. Maybe for the second printing

While I respect and admire Tim’s drive as a trader, I can’t help but think it was sheer luck that he didn’t completely blow up before he made serious money. Although the story takes place during the tech bubble of the late 1990’s, when turkeys flew like hawks, his complete disregard for risk is breathtaking.

The string of luck catches up to him when he sinks 33% of the capital under his management into Cygnus (now Accesso) a private company that later in the story goes public on the pink sheets. This is not only a continuation of his disregard for risk management, it is a colossal style drift, taking him from trading short term price patterns to long term investment into an illiquid holding.

I don’t recall every reading about any thought of capital allocation or money management. That is, measuring trades using R to standardize the risk that was taken to provide the resulting return.

To Prop or Not to Prop
After his initial success, while considering the options available to move him away from casual trading to a more serious undertaking, Tim decides against joining a proprietary trading firm because it “would only serve to increase [his] risk, not reduce it.”
Continue reading ‘An American Hedge Fund: Book Review & Giveaway’

Yesterday I wrote about utility stocks being on sale. Today most of them gapped up in a technical snap back but finished the day poorly.

Still for nimble traders there was ample opportunity to take advantage of the short term oversold condition in this sector. Here are two charts from FPL Group (FPL) and Entergy (ETR) which are representative of what happened in this sector today:

We still have quite a ways to go to fully work out this oversold condition. Eventhough it won’t be straight up to new highs, this sector bears watching. Especially the high prices stocks which present good low risk opportunities when they contract in range and volatility.

Oops! You mistyped and made a fat finger trade