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stop loss

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:

trading pattern video screengrab Apr 2009

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.

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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:

AIG intraday chart daytrade

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.

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Although this is a bit painful, (how the heck was I sooo wrong?) in the interest of accountability, here is a review of a call on housing and home-builders stocks from last summer.

Beazer (BZH) which I featured sitting right at support at $27.50, sliced through it without any hesitation. This is what stop losses were made for! Obviously not every trade will make you money. If you value discipline over conviction, you'll live to play another day.

Since I mentioned the National Association of Home Builders (NAHB) Housing Market Index, I thought I'd take a look at a long term chart of this indicator and put it into an interactive chart for you (see below).

If you aren't familiar with this metric, every month the NAHB surveys over 300 individual home building companies in the US to maintain the Housing Market Index. The index reflects the demand that builders see for housing.

The 3 components are the present demand for single family detached, future (6 months) projected demand for single family detached and the level of traffic of prospective buyers. Not surprisingly, this index along with almost every other index, has reached never before seen levels:

The chart is interactive so mouse over, zoom into shorter time frames by moving the triangles on the horizontal axis, and explore for more. The line in the sand is 50 - any level above that is interpreted as home builders viewing their market as "good". We are far, far from that.

I'm curious if there is any relationship between this and say the Fed Funds rate or unemployment or the bond market yields. Any other ideas on what to compare this to in order to get a handle on what may be a leading indicator for it?

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The Chinese say, May you live in interesting times. This year the market started out the year with a few truly interesting backdrops. Among them a colossal trading loss that shook Société Générale to its core.

Did you know that Jerome Kerviel's was the largest trading loss in history?

At least so far!

To provide some context about loss, here are the top 10 trading losses ever. At least, it can provide you with some perspective about yours ;-)

Notice how all, except for one, were a result of trading in derivatives? The only equity loss big enough to make it on the board was $0.8 (by Friedhelm Breuers from WestLB, Germany) which ties for the last position.

Lesson? Trading derivatives is like juggling running chainsaws which also happen to be on fire. Unless you know what you're doing, it will get messy.

Sure, these losses look unreal but each and every one of them started out as a small loss. The only reason why they are up on the board is they were allowed to balloon into grotesque proportions. So it is with the losses of us mere mortals. If we allow our convictions to overrule our discipline, we're headed towards the same fate.

If anything, such gigantic losses should, for once and for all, put a damper on conspiracy theories of market manipulation. After all, if someone can't bully a market with a few billion, then the market is indeed bigger than anyone and everyone.

NameLoss $BillionInstitutionMarketYear

Jérôme Kerviel

$7.1Société GénéraleEuropean index futures2008

Brian Hunter

$6.5Amaranth AdvisorsGas futures2006

John Meriwether

$4.6Long Term Capital ManagementInterest rate and equity derivatives1998

Yasuo Hamanaka

$2.6Sumitomo CorporationCopper futures1996

Wolfgang Flöttl and Helmut Elsner

$2.5BAWAGCurrency and interest swaps2006

Robert Citron

$1.7Orange CountyInterest rate derivatives1994

Nick Leeson

$1.4Barings BankNikkei futures1995

Heinz Schimmelbusch

$1.3MetallgesellschaftOil futures1993

Toshihide Iguchi

$1.1Daiwa BankBonds1995

David Lee

$0.8Bank of MontrealNatural Gas Options2007

Source: Wikipedia

What lessons do you draw from this?

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dont trade when you are sick.pngYou're sick or away and can't monitoring your position

protective stop loss barbed wire.pngIt hit your stop loss - you do have a stop loss, right?

praying hands.pngYou don't have a stop loss and you find yourself hoping-n-praying

confusion which way is up.pngThe rationale for trade is not there anymore

fat finger trade oops.pngOops! You mistyped and made a fat finger trade

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