Eichler - I will reply and the reply goes to BB as well.
I have made ENORMOUS mistakes staying stuck in a single point of view, that although correct, has actually led me NOWHERE but sideways (better than staying bullish but pretty pathetic as a trader).
This response is to a post on SI about the "trendless" market. Here goes. Hopefully some ideas can come from this.
I have made HUGE mistakes this years in both directions.
Been struggling to find something suitable for me.
Here goes. Response to the first comment in italics.
boards.fool.com
I'm convinced that this market is designed to whipsaw short term traders to death. Only the very skilled, or lucky, will come out ahead. I'm neither.
I mentioned trading this choppiness based on stochastic, put/call ratios, COTs, taking small positions and other factors. I have just recently come up with a method that I think might deal with this.
This method will be detailed below. It might not be the best method for other markets so perhaps back testing too far back would not be that successful. But as long as the market remains choppy this seems to be a superior method. With some minor adjustments (recognizing what kind of market we are in, and recognizing the extremes, I believe it can be used in almost ANY market).
The method works best with QQQ's or heavily optioned stocks or at least heavily traded stocks. I have said this before and will say it again, I am not skilled at daytrading either (but getting a tad better). In general, I need more patience on my entries, and less patience on my exits. That is what the method is all about.
Trading small blocks of shares and if something gets away from me, ride it out as I did with VRSN earlier, or just say screw it and double up if it feels absurd. I did this with MU this week. MU was in the 36-41 channel when the old channel was 40-45 or so. Shorted a block at 40.6 and was not happy about it at all when it kept running above 44. I doubled up at 44.6 with a hard entered S/L at 45.10. It closed at 49.90. I was positive I was toast Friday Morning BUT it opened down! MU opens down about 1 day out of 10. For the record, I would not have been in a bad position in MU or VRSN in the first place had I followed the trading rules below! I had a clear exit signal on an MU short that I had and let a profit turn into a loss. Same with VRSN, I missed a great short entry, and chased on the first bounce up. Well it continued bouncing to the moon on me and I got out flat after it reversed and I did not double up. A poor trade (but had I stayed in I would have found myself another 7 points in the hole once again).
So....
With that introduction and fanfare,
Here goes........
When the FAST stochastic on stocks approach or get over 80 start to think SELL (safest entries are above 80). Many are there right now. If the OVERALL equity PUT/CALL ratio is .6 or below stocks in general are probably a huge sell. If the equity P/C ratio is close to .5 then you should be in a screaming sell position. Exit the short when Fast stochastic is about 30, unless put call ratios are so extreme to merit staying in longer. In general to be safe and take the profit, or at least take half of the profit sooner rather than later.
Note: Stocks can stay overbought for long periods of time or oversold for long periods of time. But looking back a bit, at least 3/4 of the move was over if you sold above 80 (barring a surprise rate cut and effects thereof).
To time buys, wait for fast stochastic to get below 20. Wait for a small rebound and do not buy into a hugely falling knife. Then hop in. I think this would have caught a nice move in IRF (a company I actually like). On the long side I doubt I would hold waiting for stochastic to get back to 80. Perhaps 50 or 60 is a better target. Stay away from totally out of favor sectors or stocks.
If one is convinced we are headed up rather than down then, these stochastic could be revised appropriately (perhaps getting in at 30 and exiting at 80, and on the sell side waiting for 85 and exiting at 50).
Additional notes: This method does not apply to "story stocks", earnings BS, thinly traded garbage, and like everything else is subject to the "Spin of the Day". News always wins over TA, FA or anything else. On sectors out of favor (like storage and optical) one would have gotten hammered trying to get in with buys. So pay attention to sectors that are totally out of favor.
In a nutshell:
1) Wait for the Fast stochastic to be in your favor. The reason I am proposing Fast Stochastic is this market is so damn whippy and the 1/2-3/4 of the move is over by the time the Slow stochastic catches up.
2) Money management is important. Trade small positions that will allow you to double up if insanity prevails. If you double up - IMMEDIATELY take any reasonable profits when offered. Immediately exit the second trade if it goes against you. S/L on second entry MUST be much tighter than first.
3) Take into account P/C ratios. Watch the averages as well as the spikes for indications. Averages around .7 seem neutral, below .65 or below are bearish. Averages above .75 are bullish. Spikes seem to indicate the end of the move, but lately we are spiking all over the place and reverse spiking.
4) Pay attention to what the COTs are doing. If they are reducing net short position in gold for example, then one has to wonder why. If they get net long the SPOOS you sure as hell do not want to be short.
5) Be attentive to 13/50 EMA crossovers. That might keep you in a winning position a bit longer, or give you an entry that one can consider on its own merits. Waiting for the actual crossover would often leave you with nothing (as in IBM several times on the shown in an example below), if one entered and exited strictly on that basis. But when in a perceived clear trend, playing staying long or short until the crossover could be superior. Especially if the P/C ratios justify staying in the position longer.
6) Do not be short the last 3-5 days of the month or the first day of the month, ESPECIALLY at end of Quarter.
7) Extremes: After PANIC like we saw in the S&P earlier (stocks can stay overbought for a long time). Also there was STRONG sentiment that the DOW would not get back above 11,000. With such strong sentiment it was perhaps inevitable that it would climb back above 11,000. Shorting the first overbought snapback after that plunge was a huge mistake I made earlier this year. So..... One must pay attention to EXTREMES. The huge call buying in Jan suggested that Feb would be a disaster. The huge PUT buying in March suggested that once we turned it would be violent.
8) Tick/Trin is another indicator of extremes but is a shorter term signal. It can be used as a fine tune mechanism for overall sentiment. Several days in a row of extreme ticks such as -1000 on the Nas could be an indication of the end of an extreme drop.
9) Fine tune entries using support/resistance points.
10) Patience. Wait for good entries.
What I am trying to do is come up with a relatively safe method of swing trading without worrying too much about the day to day gyrations.
The above seems to be as good a method as I have seen and it does not seem that complicated. It takes into account 10 ideas, none of which is very complicated. Playing this with QQQ's and S&P 500 index would probably be about as safe a trading method one could find. One could probably reduce this to (Stochastics, P/C ratios, Money Management, Extremes, Patience).
Here is a good chart for P/C ratios.
stockcharts.com[w,a]daclyymy[pc13!b10!c20][vc60][iUb14!La12,26,9]
Note the prolonged period in January where people were convinced the rate cut would be the answer to all our prayers. Notice what happened on the peak spikes above .9, when everyone assumed we would drop forever. Averages seem to be more important than short spikes, except at the extremes. Averages still suggest complacency but there was a nice spike in PUTs on Friday or so it seems. If we keep spiking perhaps this rally has more legs but we seem to be quite overbought with moderate to low P/C ratios.
One example of this method going back to Jan of this year:
stockcharts.com[w,a]daclyymy[pc13!c200!c50][vc60][iUh14,3!La12,26,9!Li14,3]
I have been bearish on this sucker for a long time but all it has done is gyrate. Let’s try IBM, use the above 10 rules and see how good the entries are.
Start Jan 2001. Note the big spike to above 110 with fast stochastic at 80. Even if one shorted there, and even though IBM stayed overbought for a month, it never got more than 5% against you. One would have exited the trade when IBM was about 100 or so (for a 10% gain). One makes note of the impending 13/50 EMA crossover and hopefully was not silly enough to go long, or even better yet went long at 100 and sold on the nasty candle prints at 105(with fast stochastic topping at 50). Noting a pending 13/50 crossover (or if more patient, the actual crossover), one went short somewhere between 100 and 105 (even though IBM did not get back to overbought on the fast stochastic). One would have exited the IBM short for a 10% gain or so, gone long IBM at 90 at the end of March (even though the 13EMA would have been way below the 50) and even though it stayed oversold for a month that would have been a great entry. If one was brilliant, one could easily have sold at 100 (taking a 10% move on that spike from 90 to 100), and managed to get back in at 90 for the ride to 115, shorted and stayed short for a month waiting for the inevitable drop and closed it out at 102-103. Ignoring the additional 20% for being brilliant on IBM and assume one only got in one play with IBM at 90, one would have made another 25% on IBM, 45% if brilliant. At the most recent top one would have another 10% in and if one went long at the recent 102, another 5%. All on a "safe" trendless stock that went nowhere this year.
Someone add this up for me and see if I am correct. 50% gain on something as silly as IBM, with the stock almost exactly where it was at the start of the year. 70% gain or better if played to perfection. Obviously gains would be far bigger on any of the high flying tech stuff, but I would think that even a 30% gain on IBM this year would be a great effort. Iffa, woulda, coulda, shoulda does not count and unfortunately we can no go back and replay April and Feb where 500% gains were possible on the high flying tech.
This method probably works best with big name stocks, and it assumes we will stay reasonably choppy for some time (or that one can spot a change from bear to bull or at least the extremes). If the bias is up (and you can correctly figure that out) then one could only do the long side. If the Bias is down, perhaps you only want to play the short side. If one is convinced we are headed up rather than down then, these stochastic could be revised appropriately perhaps getting in at 30 and exiting at 80, and on the sell side waiting for 85 and exiting at 50). If one wanted to be enormously safe then waiting until a stock was oversold for a longer period of time, or overbought for a longer period of time, one could make this method even safer.
Again this probably does not work with FAD stocks like KKD until they break. Well KKD has now been broken, so if I am correct this should start working with that now as well. However, the bigger and more commonly held the stock I am guessing the better it will work.
Anyone want to try this out on some of their favorites and report back?
This seems to be a far superior method to just waiting for 13/50 EMA crossovers, or any other single indicator. Trying this on a few other stocks has led me to believe that this method has been very reliable for some time.
Now the real question is: how reliable will it be in the future?
If the bias stays down or choppy, it should continue to work, and even if the bias reverses to up it should continue to work if one adjusts the P/C ratios and stochastic entry/exit points accordingly and pays attention to the extremes.
Comments?
Anyone care to come up with trading suggestions based on the above.
Bring on the ideas!
M |
