What Is The 20 Day Hi-Lo Telling Us?

Above a chart of the SPY (in blue) vs the # of stocks making 20 Day High less those making 20 Day low (in pink)

Note since the sell-off on 16 Aug where SPY recorded a new low yet 20 day high - low made a higher low (bullish divergence), we have had 4 occasions (highlighted in yellow dotted lines) where the 20 day high - low pulls back near zero and then the market continues its climb up. The last pullback occurred on 25 Sep.

I last mentioned here that we'll expect to see some pullback or sideways movement this week and indeed we saw this in the early week. We now have some room to move ahead and this chart is pointing to upside bias. As we approach month end and also the end of Q3, watch out for the bulls to come window dressing. But take note that any adverse economic data on the heavily loaded Fri could easily derail us from this path.

Tags: simplyoptionstrader, market internals

What To Expect This Week

After the explosive action last Tue when the rate cut was announced, the market was boring and pretty much drifted sideways on Thurs and Fri

The above S&P 500 chart shows we are in uptrend with higher highs and higher lows since Sep. Technically, we are now at the top end of the channel with resistance at 1530 and the chart points to potential pullback or sideways movement. But be it to the upside or downside, the index needs to break the Thurs-Fri range to see some real movement. Meanwhile, homebuilders LEN and KBH are announcing earnings this week. Let's see what they say.

Tue: Consumer Confidence, Existing Home Sales
Notable earnings: LEN

Wed: Durable Orders
Notable earnings: BBBY, PAYX

Thurs: GDP, New Home Sales
Notable earnings: KBH

Fri: Personal Income and Personal Spending, Core PCE Index, Chicago PMI, Michigan Sentiment

Tags: simplyoptionstrader, technical analysis, economic calendar, earnings

What You Can Learn From 8 Trading Experts

Hey folks,
In case you are not aware, the 2007 Options Intensive Workshop is here! Join 8 world-class stock and options experts for a 3 day exclusive event on October 12-14th 2007 in San Francisco, CA that can turn your trading around. The experts line-up as follows:

• Larry McMillan, the 'Experts' Expert on options and
author of 'Options as a Strategic Investment' (THE book on options)

* Tom Sosnoff, Founder of Thinkorswim, a leading options
broker.

* Price Headley, "Top 10" Stock Market Timer and Options
Trader, and founder of Big Trends.

* Stephen Bigalow, Advanced Candlesticks Expert, Author,
Speaker, and Founder of Candlestick Forum.

* Ron Ianieri, Professional Options Floor Trader, Market
Maker And Chief Options Strategist at Options University.

* David "FirstWave" Elliott, Technical Analysis Wizard,
and Twice Voted World's #1 Market Timer

* Bill Johnson, Charles Schwab's "Expert For The Experts",
Speaker, Author, and Director of Education at Options U.

* And more...

And here's what you can expect out of this workshop:

* How to find the best trading opportunities, and then how to apply the best strategies

* How/when to exit a trade...or rollover into another strategy when the "pattern" fails

* Choosing the right option strike price and expiration month without worrying about large changes in implied volatility

* Understand risk graphs, the Greeks, synthetics, and other advanced topics

* What time frame to watch, determine the trend, and where to set stops

* Find the "sweet spot" for options entry, exit, and pricing

* And more...

This is solid stuff and the last I checked, there is only 38 seats remaining. If you want to have proper options trading education, this is it. Find out more here: 2007 Options Intensive Workshop

Tags: simplyoptionstrader, trading experts, workshop

Rate Cut, So What's Next?

I have to admit I didn't expect the Fed to be so aggressive and lower the Fed rate by 50bp in one cut. The immediate reaction from the market is a broad-based super rally. Here's the press release from Federal Reserve:

---

"The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent.

Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.

Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth."

---

What to expect after the rate cut?

1) Dollar will continue to weaken
Intraday action of USD/EUR

2) Metals will continue to rally

It should not be hard for the XAU to hit 170, the previous high in May'06

3)Is the US economy weaker than we think?
By taking a drastic cut of 50bp in the Fed rate, the Fed has fears that the "fundamentally strong" economy may not be able to withstand the housing slump and credit crisis and be eventually lead to recession. If so, then the economy is really not THAT strong isn't it?

Now, take a look at this:
The S&P 500 landed positive 6 months after rate cuts in the last 7 out of 11 times. That is a 63.6% probability.

Schaeffer Research also takes a historic look of the last 4 Fed interest-rate cuts

"In 1989, 1995, and 1998, the market either bottomed or was close to a bottom, which was followed by bullish price action in the subsequent three months. In 2001, the market initially rallied for the first month before reverting back to the primary bear trend."

All this seems to point to the positive, although the last rate cut was not. I hope the Fed cut will really help the economy and prevent a recession.

Finally, in a dated article "Clues to the Fed's rate cut cycles" written during the 2001 rate cuts, it examines the impact of Fed cuts on mortgages, certificates of deposit, auto loans and other products.

Tags:simplyoptionstrader, fed rate

Volatility Plummet

The VIX started easing at the start of the trading day prior to the Fed announcement, but stayed in a tight range shortly after 11.00am ET. Right after the announcement, the VIX plummet down 5 points to end the day at 20.35%. It is not easy to trade the straddles or strangles in anticipation of a large move because it is hard to estimate the drop in IV as well as the index move and how much of the move has already been baked in. Adam talks about this in Pre-Fed Earnings play

As you can see from the daily chart above, the VIX is now sitting at the base of the Bollinger Bands and 19%-20% seems to be a support zone for the VIX. I'll leave you to think about where the VIX will head to after this...

Tags:simplyoptionstrader, VIX

Most Anticipated Week Of The Year

All eyes are on the FED rate decision this Tue. This is one of the most "controversial" Fed meeting in my opinion because I'm hearing a diverse group of camps out there. Some feel that Fed should keep rate @ 5.25%; some think 5.0% is expected; others are more aggressive and hope for 4.75%. Me thinks it doesn't matter. We as traders, are not here to speculate, but to trade along side the market. I would advise you to set a tight trail stop for swing positions or close them out prior to 2pm ET on Tue. I won't consider initiating any new swing positions until after mid week for the dust to settle. Yes, I'm risk adverse. Oh and by the way, there is a whole lot of speeches again by VIPs and did I tell you this Fri is also Options Expiration Day? One more thing: The big investment banks are also reporting earnings this week. Can it get any more exciting than that?

Mon: NY Empire State Index, Alan Greenspan Speaks (note: Greenspan will be making several public appearances to promote his recently published book), Treasury Sec Paulson speaks
Notable Earnings: ADBE

Tue: PPI, FOMC Policy Statement, Japan interest rate annoucement (tentative)
Notable Earnings: AZO, BBY, DRI, LEH

Wed: Building Permits, Housing Starts, CPI, BOE Monetary Policy Committee (MPC) Meeting Minutes
Notable Earnings: MS, DBRN

Thurs: Fed Chairman Speaks (about Subprime problems), Leading Indicators, Phil Fed
Notable Earnings: BSC, CC, GS, NKE, ORCL, TEK

Fri: Options Expiration Day

Tags:simplyoptionstrader, earnings, economic calendar, Fed rate

5km Run Challenge

Last Sunday, my cousin and I participated in the women only competitive run- Shape Run 2007. Our goal was just to complete the race and have fun. Competition was the last thing on our mind.

Co-presented by Nike Women, the turnout was great, with about 6,000 participants. We ran the 5km route and completed it in about 40 mins. Timing is not impressive, but it is considered a milestone for me personally because the last time I took part in a run was for my 2.5km fitness test in school :)

Running has never been my forte, in fact, it is a sports I loathe because I always find it a pain to complete my run. However, this time, I decided to take up the 5km run (double the distance of my run in school) as a personal challenge to myself. I woke up at 6am for weekly runs to prepare for this race. While training, my goal is to pace myself and run consistently without stopping in between. Timing is not a big concern.

2 lessons I've learnt from this experience:

(1) It reinforce the importance of goal setting
Be it for trading, sports or other areas, having a goal means you will work towards it and definitely achieve more than if you were to be without a target.

(2) Consistency is more important than Speed
On the day of Shape Run, I see many runners sprinting ahead of us at the start of the race. However, by the half way mark, I noticed many runners were stopping to walk. Likewise, this can be applied to trading. It is not those who made big bucks when they just started trading that will learn most and last in this trade. In fact,they are likely to burn and crash as they fall into the trap of thinking that trading is easy money and do not exercise proper risk management. It is the traders who can be consistently profitable that will stay on course.


I'm happy to complete this race and achieve the goal I've set for myself. 7096 is my biib number. I'm keeping it to remind myself that I CAN DO IT!

(First 2 pictures courtesy of Nike Women Singapore).

Tags: simplyoptionstrader, personal achievement

Watchlist and The Fed

No, I'm not showcasing any of my watchlist here because I see quite a number of overlaps between mine and Trader Jamie, and Option Addict (1) & (2). They have done a great job on creating a comprehensive watchlist and I see no need to duplicate that effort. Go check them out if you want to fish for some leads.

Next, on to The Fed. There are some very good articles on the Fed I've collected at MY DEL.ICIO.US In case you missed it, I want to highlight these 2 very insightful readings:

-Do Investors Really Want The FED To Lower Rates?
Hans Wagner discussed about the theory of interest rate and stock market movement relations, the reality and a chart that looks back since 1990 how the market moves when Fed fund rate changes.

I am very much in agreement with him on this quote:

"Investors need to be careful as they might get what they wish, a lower Fed Funds rate. While many believe it is good for the stock market, it is also a sign that the economy is weaker than expected, possibly indicating a recession is near. As long as the Fed believes the economy is not slowing too much, then I expect the Fed funds rate to remain at 5.25% until there are clear signs that inflation is under control. Beside the market is already factoring in an interest rate cut. If they get one, it is unlikely to move the markets very much, unless the Fed changes its focus. For now investors need to be very careful as there is more down side risk in the market."

-Gold is a Bull Market...Silver should be right behind it.
Ira Epstein discussed two scenarios -(1)Fed cuts the Fed Fund Rate; (2)Fed holds steady and does not cut the Fed Fund Rate - and the impact on Gold/Silver. He also has a very nice chart demonstrating the seasonality of Gold.

Note these two articles were written prior to the release of Jobs Data on 7/9. Regardless of whether you feel the Jobs Data has any impact on Fed's decision, I feel these articles offer educational insight and are worth a read

Tags:simplyoptionstrader, Fed rate

Dissecting The OEX Intraday

I've always liked trading options on the indices because they are less volatile than stocks and are not subjected to upgrades/downgrades and earnings. And once you are familiar with the index, you know the pulse and how they behave without having to re-learn the thousands of stocks out there and their price movements. The only complain is that some indices have wide bid/ask spread and executing the order is another skill on its own.

The above is 15min chart of OEX from 29/8 - 10/9. Basically, I just want to highlight the importance of simple support and resistance and trend lines.

From 29/8 to 4/9, the index was contained in a nice diagonal uptrend channel. But on 5/9, the gapped down big time, breaking out of the channel and also the 5, 20 and 50 moving average on 15 min chart before finding support at 200 moving average.

Yesterday (10/9), the market gapped up on INTC upwards revision of guidance, but that bullish move was short lived. The market started to slide and did not stop until after 11.30am ET where it found support at the lower end of the downward channel. The market reversed course and made its move up until it hit the upper end of the channel and also the day's opening range high. The resistance proved too strong and we see another round of heavy selling towards the close.

If you look more closely, you will realise there are two similarities between last Friday's move and yesterday. Both bounced off the trend line at around 11.30am ET. At around 3.30pm ET, it made another reversal.

Meanwhile, I'll be watching this trend line closely. It is still valid until it is broken.

Tags:simplyoptionstrader, options trading, technical analysis

Watch for VIP Speeches This Week

I'm back. The past 2 weeks have been busy and I didn't have much time online. This week should be better. There is no much economic data to be released until the end of the week. While the market is waiting for Fed announcement on 18/9, there are however, a few speeches by VIPs this week which could potentially be market moving.

Mon: Atlanta Fed President Lockhart to speak (on US economic outlook)

Tue: Trade Balance, ECB President Trichet speaks, Fed Chairman Bernanke speaks

Wed: -

Thurs: Treasury Budget

Fri: Retail Sales, Capacity Utilization, Industrial Production, Business Inventories, Michigan Sentiment

I'll try to post a few charts if I have time later. Stay tune.

Tags: simplyoptionstrader, economic calendar

Quotable Quotes

Some very good quotes that I’ve come across in Techniques of Tape Reading which I completed reading recently:

-“This (Trading) is not a job where you get paid by the hour. You get paid for doing the right thing”

-“Forget that your money is at stake. Money in trading account is just a tool for making money. Preserve your tool. You need it to make money”

-“Don’t let the outcome of one trade alter your trading discipline. One trade doesn’t make a system…”

-“Trading is a game of probabilities. You don’t have to be right every time. You just have to follow your rules”

-“You decide your fate; the market doesn’t”

-“Pure followers of stock pickers will never be around…Learn or you are bankrupt”

-“Be aggressive in trending market and conservative in choppy market”

“Take home runs when you can, but don’t beat yourself up about missing a few. One trade should never make or break your account”

Tags:simplyoptionstrader, trading quotes

Techniques of Tape Reading

Due to family commitments, I’ve been busy traveling to & fro daily. Having less time on hand, I wanted to make full use of my traveling time. I completed my reading of Techniques of Tape Reading (by Vadym Graifer & Christopher Schumacher) on the train rides. This is a day trading book recommended by Trader Jamie (a seasoned stock day trader) and I thought that with such volatile markets where triple digit swings from day to day is becoming a norm, day trading is the way to go in such a difficult market.

This book is divided into three parts:

1) A Trader’s Journey – The initial part of this is a story telling section. It talks about how author Vadym, who fled the former USSR settled down in Canada, chose stock trading as a profession in a new society, how he lost most of his trading capital before becoming a successful trader. The authors placed much emphasis on trading psychology in the later part of this section.

2) Trading System – Part Two is all about the different trade set-ups such as Jump-Base-Explosion, Drop-Base-Implosion, Open-High Break & Open-Low Break, Cup-and-Handle, Capitulation. Methods of Entry, Stop Loss Placement and Trailing Stops are covered as well.

3) Practical Examples – This is the section that makes this book stands out from the rest. There are 33 trade examples which are discussed extensively. Each trade example is covered in details in about 2-3 pages, and I enjoyed reading it because it is like a trade journal. Trade journals can help to improve one’s trading by leaps and bounds. I’ll talk more about trade journals next time. Back to this book. The authors share what went through their mind during those trades, the trade setup, entry point, stop loss, trail stop, exit, position sizing, missed trades etc. I have not read a trading book that devotes an entire section to trade examples with write-ups like this.

What I like about this book is the simplicity of technical analysis tools it utilizes. If you are looking for complex technical indicators in this book to help your trading, then this book is not for you. Other than the occasional mention of Moving Average and Fibonacci, the authors look mainly at price, volume and support & resistance. I am also a firm believer of keeping things simple and use only basic technical indicators like moving average, Fibonacci, trend lines, support & resistance and basic candlestick patterns in my trading. Why? Because many technical indicators out there are merely derivatives of price and/or volume. MACD and Stochastics are the most complicated ones I’ve used and I use them only at times to identify divergence.

Grade: A

Tags: simplyoptionstrader, day trading, trading book, tape reading