Thursday, July 9, 2009

Back-test of Head and Shoulders Top?

Yesterday the market made a nice afternoon reversal. The candlestick pattern looked very nice, so we may see the market rebound further, but in the context of the head and shoulders pattern, this may be a simple back test up to the neckline area. The S&P 500 fell below the important 878 level which was the first major support from the prior rally. As discussed in the past, there were likely lots of stop orders below that level. So we saw those stops cleaned out yesterday and then some buying interest come into the close. I expected to see a gap up this morning, and we got that, but the strength since the open has been only modest.

Right now the 20 day MA on SPY is pointed down and the bollinger bands are channeling with a downward angle. That is generally a sign that the safest trades will be bearish ones. Until we get more signs of intermediate term capitulation, it is probably wise to focus on bearish trades.

Despite only modest strength today so far, it is possible that we get an overbought signal from the short-term model before the close. Since volatility is still low, but the 10 day average is pointed sharply down, it will not take too much to get overbought. So you may want to check back before the close for any new trade possibility.


Pete

3 comments:

  1. hi pete,

    i tried to post to the options alchemy blog, but i don't have any of those accounts listed. so i hope you don't mind me posting here.

    if you remember, i'm not quite at the level of an options trader yet; but i am very interested in learning about options. would you mind poiting out some decent books or websites that can get me started thinking smartly about how to trade options?

    thanks.
    -b

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  2. hey b

    I think before you get too much time and energy into it, you need to really make sure you have a clear mind going into options trading about what suits you and your goals because unlike stocks where you pretty much just want ones that will go up or down, in options there are several strategies and components to divert your attention.

    Do you prefer short-term trading like I do with the blog? or do you like longer term trading? Are you a perfectionist by nature? Do you need a high win rate to feel successful?

    What are your strengths when it comes to analyzing stocks? short-term mean reversion? pattern identification? longer term growth? breakouts or reversals, etc?

    Are you wanting the excitement of occassionally making huge trades, or do you just want to make money bit by bit?

    How big is your account? What options trading level can you get approved for? Will you be able to perform spreads like straddles, strangles, condors, etc? Will you be able to sell naked options?

    It is tough to become an expert and profitable on several different strategies, so you probably should do the thinking ahead of time and pick a couple to focus on.

    For me, my strengths are in identifying major reversal patterns in the market and equities and in indentifying high probability short-term mean reversion trades. So I basically trade those 2 methods. One similar to the ETF trades on this blog, and another focused on a few reversal patterns which are going for big gains.

    For educational purposes I would start by reading some commentary each day from SchaeffersResearch.com until you feel very comfortable with terminology and how to find information etc. If you want to put a small amount of money into something, rather than a book, I would get Schaeffers Option Advisor for 6 months or a year. That will help you see real trades of several methods (long puts and calls, straddles and strangles, put selling). It has been profitable year after year (though not wildily), and its cheap - I think about $10/month or so.

    Also, try to paper trade options now to get aquainted with the volatility, etc.

    ReplyDelete
  3. hey pete,

    your comments and advice are reinforcing my caution in jumping into options without taking my time, learning a lot, and thinking it through.

    and i completely identify with your comment about being how difficult it can be to be profitable on several different strategies. when i first moved from holding mf's to trading etf's, i struggled a bit until i figured that one out. get good at one method first! you learn about yourself and your preferred style. and then try some other methods.

    thanks for pointing me to the reading.

    as always, thanks for the blog and excellent work.

    take care, -b

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