Let’s Go Long – November 15, 2011

[Billy]

11412

After weeks of neutrality, the IWM robot has finally found a high probability trade on the long side.

From a reward-risk perspective, the logical reward could be a test of the 200-day moving average (77.58), at the top of the second cluster resistance. The actual selling pressure strength is quite light between the limit entry of 73.28 and the 200 dma: excluding daily levels, only weekly pivot (73.88) and weekly R1 (76.14) could act as potential speed bumps. At least, this is the theory in a news-neutral environment.

On the risk side, I feel quite comfortable with the setup. Not only do we have a fail-safe stop and reverse signal pending if the 20 DMF turns short, but we can also enter the trade very near a massive support cluster with a total strength of 27. Yearly pivot (71.84) and quarterly pivot (71.25) have acted as a successful support confluence many times in the trading range and the initial stop (68.69) will be further protected by the very symbolic 50-day moving average (69.89). If the robot can enter today below the limit price of 73.28, he will adjust his stop 6.26% below the actual entry execution price.

Tuesday is also a potential turnaround day in opex week and that scenario will be helped by a rather important POMO and Twist operation from the FED. The usual pattern would be weakness early in the day followed by a strong intraday reversal. All in all, a pretty satisfactory setup for an opportunistic trade objectively confirmed by the robot.
Billy

11410

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[Neil Stoloff]

11412

If the robot can enter today below the limit price of 73.28, he will adjust his stop 6.26% below the actual entry execution price.


Billy

[/ATTACH]

I must ask, Billy: How did you determine that the robot is a male? (Until now, in my mind's eye she had been a curvaceous woman.)

Cheers,

Neil

[Billy]

I must ask, Billy: How did you determine that the robot is a male? (Until now, in my mind's eye she had been a curvaceous woman.)

Cheers,

Neil

Neil,
The robot is actually God! Now, how do you determine if God is a male?
Billy

[Neil Stoloff]

Neil,
The robot is actually God! Now, how do you determine if God is a male?
Billy

Funny -- At the poker table when a player is all in they sometimes pray to God to win the pot; I can't resist saying, "She's too busy to listen to your prayers."

I've got women on the brain, I guess....

Neil

[nickola.pazderic]

At least according to Frank Sinatra

Don't like the song much, but it is an American song and an American market.

In any case, may She be with you.

Question: (Can someone post a max pain chart?)

Also, TVIX can serve as an excellent hedge when necessary. A little goes a long way.

[Andrei]

Question: (Can someone post a max pain chart?)



http://leavittbrothers.com/blog/?p=5033

[nickola.pazderic]

From Andrei's link:

Overall Conclusion: The bears again placed bets to profit from a sell-off, and again, barring solid selling pressure the rest of the week, they will lose. Flat trading between now and Friday’s close would cause lots of pain. However, a slight move up would cause even more pain.

Luck be a Lady (http://www.youtube.com/watch?v=foyLJ3GJAAw&feature=related)

[nickola.pazderic]

for what it is worth, a chart:


114211142011420

[hgsfan]

Please excuse my ignorance but what does DPP stand for? thanks in advance

[hgsfan]

I take that DPP means Daily Pivot Point? Thanks in advance




for what it is worth, a chart:


114211142011420

[Billy]

I take that DPP means Daily Pivot Point? Thanks in advance

Yes, that's correct.
Billy

[nickola.pazderic]

11422

Again, in the for what it is worth department.

[nickola.pazderic]

11423

Resistance at DR2

[Billy]

11423

Resistance at DR2

Most important for the trading plan is the easy passing at the first speed bump, weekly pivot (73.28). We now have gained one more support and can relax as long as it holds.
Billy

[nickola.pazderic]

I spent a pretty good sum on TVIX insurance, but it has made the ride more relaxing. Nothing like watching the market move in your favor.

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[Rembert]

Hi Nickola,

May I ask why you hedge trades ? I don't see the benifit of hedging for individual traders like us. My understanding of hedging is it's something funds do because they can't get in or out of positions as easy as we do. I find that if a trade is position sized objectivly then the trade is as relaxing as possible without the need for adding complexity by hedging.

[nickola.pazderic]

Hi Rembert,

With the high violatility of late, I have found that hedging eases the pain of down days, hours, minutes. Call this a response to the human factor in robotic and discretionary trading or insurance.

I concluded from this experience that when the market demands it, I will trade against my core positions.

Please correct me if I'm wrong, but such thinking is at the heart of options trading. Covered calls, verticals, and complex delta neutral strategies are all hedged. Thus, individual traders hedge their positions with regularity.

Best,

[Rembert]

Putting on short term discretionary hedges would make sense to me if they are good trade setups on their own, (perhaps on a smaller timeframe compared to the main trade) not just as a hedge for insurance reasons. I'm also hedged from time to time but as a result of different systems/trade setups taking an opposite direction at some point in time, not for insurance.

True about the option traders. I don't trade options tough. I like to keep things as simple as possible. My goal is to make trading as relax as possible. That's also why I try to avoid looking at the market while it's open as much as possible.

[nickola.pazderic]

Rembert,

You sound mature enough to know your strengths and weaknesses.

One year in, I remain an explorer. It is not what I'm trained to do. And I've considered the possibility of taking robot positions and carrying on with some research projects that interest me. But, I remind myself one thing: I started with this investment trek when I came to the conclusion that I could not trust mutual funds or other professionals with our hard-earned money. So, I continue to babysit. And as I watch, I experiment and learn. I find this enjoyable.

I post some findings for entertainment and pedigogical purposes only.

My hedges over night look good this morning: TVIX, TZA, and ZSL.

Best

[Pierre Brodeur]

Hi Nickola,

May I ask why you hedge trades ? I don't see the benifit of hedging for individual traders like us. My understanding of hedging is it's something funds do because they can't get in or out of positions as easy as we do. I find that if a trade is position sized objectivly then the trade is as relaxing as possible without the need for adding complexity by hedging.

Hedging is really a function of your trading style and of what the market offers you at a specific point in time. I am a swing trader with a trading/investment horizon of several weeks or more. Given that I am generally bullish ( which is not the prevalent "opinion" in this forum currently), from time to time, as a swing trader, I need to hedge my income producing and more speculative long positions with double beta inverse positions in order to preserve the hard earned profits from these long positions on downswings. Generally if and when I calculate the right hedge proportion required to protect and enhance my portfolio I actually generate a nice excess profit on the downswing as well.

Pierre Brodeur

[nickola.pazderic]

Pierre,

Finely put. Thanks.

Regarding enteries, with IWM heading back toward DS1 (at least to the south of its DPP), TVIX is showing a possible opening about now:

11443

[Rembert]

While not my intention I am actually hedged at the moment, long IWM with the robot, short SPY with another system.
Usually when there is such a conflicting situation, one system will get stopped out in short order while the other continues on.

@Pierre and Nickola : What you say makes sense. Great if you can make it work. I can say it's not for me tough.
It requires great skill and experience to time these short term hedges ... as well as intraday following.

[nickola.pazderic]

If there is one phrase that expresses the spur to active hedging it is this.

I've driven thousands of miles across the northwestern United States. My dad was a truck driver, long haul.

11446

Deer and elk (and they can be taller than your SUV) really do stare stupidly into head lights. I've had friends who have hit ungulates and totaled their vehicles. I stopped a couple yards short of a giant bull elk on Highway 200 near Roger's pass last summer.

As a trader, I've felt like the deer many times. As reckless as I might be, I have decided to protect and profit from the market, I must take active counter measures.

11445

[Rembert]

Oh believe me, in my first few years of trading I've had many 'deer in headlight' moments. It's a horrible feeling. The moment I asked myself while in a trade : I didn't expect this ... what should I do now ? That's the moment I was lost. Now I prevent these situations from happening by employing rules for position sizing and exit management. Active hedging might be another way to go but like I said it doesn't suit me.

[nickola.pazderic]

With volatility over 30, options prices are rich. (I'd like Ernst to chime in here).

In any case, an easy hedge in these conditions is to sell premium against robotic holdings.

Using this calcuation:

[k/(S1-C)-1](100%) (please let me know if this equation is not accurately transcribed)

K=strike price
C=call price
S1= beginning stock price



I find that I can sell premium for 10% gains going into Friday!

[ernsttanaka]

With volatility over 30, options prices are rich. (I'd like Ernst to chime in here).




It is only rich if the Historic Volatility for the next 20 days (or so) is below an annualized 30% volatility.

IV is forward looking while HV is looking back in time.IV is the expected, while HV is the realized.

To find out if IV was correct you will need to slide the HV graph back (20 to 30 days)

check this for a read on how the vix is calculated. http://www.cboe.com/micro/vix/vixwhite.pdf

[nickola.pazderic]

Thanks Ernst. I'll read this, and (based on my experience) I'll understand it in about a year!