Wednesday, July 8, 2009

Possible Pattern Expectations

Click on Chart to Enlarge

The market has not responded well to short-term oversold indications the last few days. There should be no doubt now that the intermediate trend is down. As more time and price action unfold, I can begin to propose possible scenarios that may unfold from this point.

The chart above is my best approximation of what may occur over the next 5 or 6 weeks. I think a move down toward the target area for a head and shoulders top may occur as we approach options expiration, followed by a rebound into the end of the month. Assuming that the S&P falls below 855ish on this move down (this week or next), then I think that the next leg down will be even worse, with a mini "crash" in mid August being a distinct possibility.

If/as we approach that head and shoulders target, it will probably be wise to lock in profit on BGZ and exit if/when the target area is reached. So the next trade modification for the blog will probably be a stop placement on BGZ. If the target zone I posted a few days ago is reached with several signs of short-term exhaustion, then I will be willing to try a counter trend (bullish) trade on short-term oversold indications.

Also, I have had a link up for a week or so to the options blog I started, So for those interested in options, you are welcome for the time being to follow along with that blog. For anyone still "new" to trading in general or inexperienced with options, it would be a good learning experience to set up (or your broker may have one) a paper/virtual trading account to perform and track the trades for practice. I am not going to go into a whole bunch of detail here, but that blog will be handled very "aggressively", certainly not suitable for one's entire account. If anyone wants any ideas about money management for options trading (which is the most important thing for long-term success), please leave a comment with specific questions and we can exchange some ideas.

I decided on an aggressive "challenge" type format to make it maybe more interesting to follow. As a rule of thumb, the maximum of a trading account anyone should devote to options trading would be about 20%. And that number should be 0% until you have good understanding of basic options strategies and conviction in the profitability of the strategies used. Sticking to equity/ETF trades will probably be the best choice for most people, but if anyone wants to copy those trades, you should probably devote only about 1-2% of your account to any out of the money trades, and about 4% to in the money trades. If you don't understand what is "out of" or "in the" money, please don't trade options (yet).

While this is already more than I planned for this post, understand that trading is about risk vs. reward. In options your risk and your reward will both be greater. So why trade options? About the only real good reason is because you can devote a very small amount of your trading account, to potentially get the same $ gain as you would with a much larger amount of money in equities. In that sense you have "limited risk" due to less capital exposure. However, statistics show that most option buyers lose money in the long run, so unless you know from experience that your methods should be profitable, then you probably shouldn't buy them at all.

Option selling is a whole different game, but that is not my area of expertise, and no sell to open trades will be done on my blog.



  1. Hey Pete, on July 6 you had mentioned that traders should exit out of SDS. I understand that ETFs works for short term. Any thoughts on what you were thinking?

    Looks like you are pretty bearish. Is there room in SDS at this point? .. DB

  2. Well most of what I am thinking goes into the blog posts. So if you are new to the blog, you may want to go through some recent posts.

    As for the most recent SDS trade, it was entered June 25 and then exited July 2 late in the day. Since it was near the end of the day last Thursday and was a holiday weekend, I didn't know if everyone would have been able to get the post and get out before the close, so I re-iterated the exit this Monday. Basically every trade, (especially the 2x ETFs like SDS SSO, etc) are entered and exited with an objective indicator. So many times there will be more upside or down side when the trade is exited, and that is fine. My goal with those trades is to follow the signals objectively, not to get too into what "might" happen even if I think there is more profit potential.

    The leveraged ETF's are best used as short-term trading instruments. The reason is they are largely composed of futures contracts. Futures contracts decay with time to some extent due to "carrying charges" etc. So the leveraged ETF's will tend to lose value over time as those contracts decay and get rolled into new contracts.

    Yes I think the market has further to go down, but I won't be suggesting another trade on SDS until the market moves up enough to give an objective "overbought" signal.

    You may want to read through the comments in the following post/link and the posts prior to and after it

    Hopefully that helps, but if not, let me know.


  3. Pete, thank you very much for your time and patience. Much appreciated. .. DB