SSO Trade Update

I entered SSO today for an average price of 33 dollars and change on a limit order. The market blew past that a ways.

The only real consolation for this large intra-trade drawdown is that the upthrust after comparable historical periods tends to be very strong (about 10-15% on the SPY ETF) over the next week or two. There still exists a reasonable chance that the SSO trade will be profitable at the next overbought signal.

For someone who is not in the trade yet, I would still get into it. The model dipped back to oversold today. Despite palpable fear and perceived risk, these types of market moves have led to the biggest short-term gains historically.

I put about 25% of my account funds into SSO today. I would not advise putting a whole lot more than that. The time to starting increasing exposure is when the market has clearly turned, and then you get an oversold signal at a much higher bottom than is occurring now.

Doji Candlestick on SPY

Click the Chart to Enlarge

I have been waiting for a classic bottoming candle stick pattern to appear before starting to enter any bullish trades (expecting the market to rise). Finally today we got a truly classic candle pattern. The pattern is called a doji when the opening and closing price are the same or very close. This appears like a long line with a small cross hash mark on it.

The Japanese rice market traders who first discovered these patterns talked about how the market is in perfect balance when a doji is formed.

Stop and think about this..........the market moved wildly on almost the heaviest volume (most shares exchanged) in the history of the market. If you study price history you will know that huge volume days tend to have BIG price movements from open to close. Whenever a high volume, wide range doji happens something very rare is occuring.

I like to think of the Doji candle as an analogy to the apex point of a ball thrown high in the air. No matter with what force you launch that ball, at some time, at its highest point, the instantaneous velocity will be ZERO....momentary perfect balance. Then the ball will quickly change direction and fall down. The doji is the same. It is a point of momentary balance (no change from open to close) right at the apex, or turning point in the market.

Now it is certainly possible that today will not prove to be the lowest point before a major price advance, but I would heed the warning of the doji. I believe that based on many different factors, we are within hours to days of beginning a large advance in the market.

Pete

New Trade - SSO short-term Oversold

With the market in shambles it may seem crazy to recommend a trade that expects the market to rise. But that is the nature of the markets and the model I use for these trades. Most times I focus on buying low points in an uptrend. But ridiculously strong upthrust can form after the bottom of a down-trend, especially the expanding type that has been forming.

The short-term model for the S&P 500 is now both over sold and it is divergent with the prior oversold signal. Divergence is a term used in technical analysis that describes a situation where the indicator you are using is not following the same trend as price is. Divergence often happens before trend shifts.

Without further ado here is the recommendation:

Buy SSO with a market order today Oct 8th. or at the open tomorrow.

The current price is 35.25 which I will use to track the trade.

Pete

Thoughts on How to Use this Blog

My goal with this blog is to give any regular reader a way to take control of their investments and to be able to have steady growth with minimal drawdowns (periods of declining portfolio value), all despite the market going up or down.

In my opinion you should expect to have about $2500 or more to devote to trading/investing. If you have $2500 or greater and open a Zecco.com account you can trade with no commission for up to 10 trades a month. That is more than enough for following the trades on this blog. Since April I have averaged 2 recommendations a month (totaling 2 buys and 2 sells). I am not including any option trades or other more exotic stuff. I am just referencing the "short-term model" trades that I post.

I calculated the cumulative return on the recommended trades I've made since April. Assuming no commission, the return is about 77% since April on an initial investment.

Based off of a lot of information and historical comparison that I look at, I think that the markets will perform poorly for a the next few years (maybe 2-4 years) if holding typical stock investments or mutual funds. The positive side to this, is the in "bad" markets volatility is usually quite high, and the trades I recommend will be more frequent and more profitable in volatile environments. I truly think the next couple years will offer a far better profit opportunity than most typical investors could expect in very strong markets.

Always take some time to follow a methodology in theory before using real money. Also, do your best to educate yourself on concepts and terminology used so that you can be somewhat comfortable in using that methodology.

Please post any questions or ideas in the comment section.

Pete

SDS Trade Exit

With today's big decline the short-term model is within a hair's width of oversold. It could get worse, but I am able to post now, so my suggestion is to exit the trade. The current price is 87.30 up from 66.66 for a whopping 31% gain!!

With each passing day things are getting more volatile and more extreme. History tells us that a buying opportunity/market bottom is close at hand. The bigger question is how violently the market will move in a few days time. That will affect the risk-reward ratio of a trade and how good or bad of a price you get in retrospect.

I will wait on recommending a new trade till some of the smoke clears.

Pete

New Options Trade on CL

Click on the Chart to Enlarge

The chart above is CL which is Colgate-Palmolive. I have had a put option on this for a couple weeks now and it is somewhat profitable currently though far from its maximum gain.

The pattern here is that the stock broke down sharply from its early September high pretty much signaling that a larger corrective/decline is occurring. Now the stock has made a choppy advance back up to the 20 day moving average and formed a bearish engulfing pattern yesterday. Based off this pattern I think that another sharp decline is likely, and will take the stock below 72.00.

My recommendation is to buy an Oct. 75 Put on CL at a limit of 1.60.

The current price of the option is 1.50. If the stock gets to 72.00 before expiration on Oct. 17th, then that would be 100% gain or better because the option would be worth a little more than 3.00. In this case I would not suggest using a stop loss on the trade, so the risk is 100%. but the reward should also be 100% or better.

The exit strategy I would suggest is placing a limit order for 100% gain after entry or exit on expiration day if 100% is not achieved.

Pete

SDS Update

Today the House votes on the revised "bailout" plan. While speculation on these types of things isn't the norm for me, my guess is that it will not pass, or that the market will respond unfavorably to all the baggage in the bill.

There are a couple scenarios I think could play out here. As far as exiting the SDS trade from last week, the short-term model is not oversold yet. If today is a huge down day after all the news comes out, I would suggest exiting right before the close today. I'm sure the model will be oversold or very near it if that happens. I can't always immediately post when the model hits an extreme, so that is my suggestion. Also, because the potential exists of news sparking a positive market days of large proportions, I would suggest putting a breakeven stop loss order in on the trade early today for protection.

Looking ahead to the next few days, think a significant shift is going to occur in the market trend for at least several weeks. This is based off of past "post crash" market scenarios. Typically it results in upward biased choppy price movement, which should be great for the methodology of the trades I post on this blog.

Pete