Thursday, May 7, 2009

New BGZ Trade

Today's reversal after the gap up looks serious. When yesterday closes at a 3 month high then today gaps up like it did today, the returns are solidly negative over the next week historically.

Also, the market broke the first hour low and the advances, decliners, and TICK are confirming the break to new lows, indicating that the market may continue lower today.

Since we may be able to get in at a major top here with low risk, I am going to suggest a trade today with a stop loss above the day's highs.

New Trade Recommendation

Buy BGZ today with a market order. After entry place a sell stop order at 36.40 and use that to determine position size if necessary. 38.30 is the current price and the price I will use for blog entry.



  1. I didn't have time for more during the post, but today looks like it will form a bearish engulfing pattern in DIA and SPY if the market closes near these levels or lower.

    Again energy stocks like NE, DO, COG, etc are showing potential bearish engulfing patterns which at this point look very imposing due to the size of the gap and wide range today relative to recent days.

    Also the VIX closed below the lower bollinger band yesterday which has typically lead to at least short-term pullbacks.

    60 min stochastics is divergent and coming down off it. Also the short-term model is showing bearish divergence which doesn't always pan out, but when it does, it can often end up being a larger scale reversal.

  2. The engulfing pattern on OIH (oil holders ETF) looks ridiculous. I would say today's high in the energy stocks will most likely hold for a nice short-term move down.

    The Nasdaq short-term model is oversold right now. It has bounced immediately (by the next day) everytime it has become oversold in this rally. Typically at trend changes, the market will continue in the direction of the new trend for a little while despite oversold conditions, so that will be something to watch for today and tomorrow.

  3. BGZ stopped out for me today... ah well, hard to fight this tide :)

  4. right or wrong, i'm still in.

  5. I should have added I stopped out at the blog stop point, yeah, maybe I should have put it down a little lower but it seems there is just too much short-term "irrational exuberance" going on.

  6. Hey guys

    On Thursday morning when I posted the blog trade I entered some put options. The 2 ways I think are most sensible to trade options are to go pretty far ITM (like 0.90 delta) and set a stop based off of the option greeks and your stop loss point for the pattern. The second way is to go out of the money, with how far depending on the outlook. In these cases you basically risk 100% of the capital devoted to the trade, so you should only get maybe 2-5% of account value in a trade like this. In these cases the stop is un-necessary because you have limited your risk up front by the amount you are devoting to the trade. The plus side is that the returns can be well in excess of 100% so losing 100% on some trades really isn't that bad if your win % is decent.

    My personal position is that we are approaching or have reached the top prior to what could be the largest (or close to it) decline most may ever see in a lifetime before this bear bottoms out.

    For that reason I have mainly focused on OTM options with some ITM as well which have a lower reward but higher chance of success.

    I will go into more detail in the next day or two, but the reward is so high relative to the risk that simply put, I think you have to keep firing away when good opportunities present themselves right now even if you get stopped out 2,3,4,5,6 times or whatever.

    I don't really like using stop losses for the blog or for personal trading off statistical models because it hurts performance in the long run, but trading patterns like candlesticks or elliot wave, then that is different because you are trading a pattern more so than strictly statisitics.

    My biggest concern for blog followers right now is that they may get scared out of the next trade by a few recent stop outs or losses. This is why money management strategies like risking only 1-2% per trade or devoting maybe 10-25% of the account to any current trade are important, because you can lose several in a row, and then easily regain all that and more when you get the big trade.

    For instance I made a SPY option trade late last Sept before "the crash" that was 10 dollars OTM at purchase. I sold it on a limit order for 1000% gain about a week and a half later. In retrospect holding till expiration would have been 2400% gain. The point being that just the one 1000% winner made up for 10 100% losers if devoting equal capital. But if I was too scared to make the trade because of recent losses, then I would miss "the big one."

    So if you got stopped out, CONGRATULATIONS, because you controlled risk and followed a plan. But my advice is to keep swinging.

    B, I really think you will be OK on this one, but make sure your capital allocation is not too big and understand how the 2X and 3X ETFs move before making it a habit to not use a stop if it is suggested. Since they are derivatives really (futures contracts basically) they can devalue so much after a large move against you, that even if the market does eventually do what you expect, the leveraged ETF's may not get back to the levels they once were at. If you don't already know what I mean, then study the FAZ chart of recent months and makes some pretend trading scenarios at different points from the past to see what I mean.

  7. right now, i'm trying to really listen to the market trend of the moment, and not get too committed to what i 'think' will happen. at times, i've been quick to bail on a trade. but what i always say to myself is: if a trade is going bad and i bail, i can always rebuy.

    overall, my strategy right now has been to really shorten up my trade hold time, especially considering i'm using only 2x and 3x etfs. i know i have missed some upside because of this, but i have also missed some downside. and i'm fine with this as it is the risk (reward) i'm comfortable with. i've been watching the fas/faz etfs, almost incredulously, and they are the perfect example of why you need to be careful with 2x-3x etfs and consistently execute your money management exit strategy for every trade.

    regarding the shorter trade time frame i'm using, here is a quick example of how i've mixed my strategy/comfort level with this blog:
    5/7 blog buy @ $38.30
    5/8 i buy @ $37.90
    5/8 i sell @ $38.50
    5/8 i buy @ 37.40
    5/8 blog sell @ $36.40
    5/11 plan: monitor for my max stop loss % for the trade size, and/or bail if short term continues to look against the trade; or do use a stop loss if i have to step away from my desk

    please know that i am not suggesting the same strategy for any blog watcher, but just showing how i trade within my comfort zone and manage money with 3x etfs.

    all of this is to really just reiterate pete's important point about money management on 2x-3x etfs. plan the trade and execute the plan.