Failed Breakout on all the ETFs I follow

The S&P (SPY) gapped higher today to close the last of the overhead gaps on SPY. Guess what happened next? If you guessed a sharp decline then you are right? Is this the final trap for the bulls, at least over the short-term? The decline that followed (and still going lower as I write this post) has moved below what has been a strong area of overhead resistance at $114.73 and is now testing short-term support at the 1130 level on the /ES (S&P futures) or the $113.80 area on SPY.

Here are a few good charts from my friends Tim Knight and Serge Farra.

I am still holding my SPY puts with the expectation of a close of the 9/14 gap at $111.02 (high from 9/13).

As always, please do not hesitate to email me from if you have anyquestions or comments.

Also, I have started a Facebook page, so if you are a loyal reader please join my page. It is free and just another way to receive my info in a timely manner.

I will be back with another post later this evening. Stay tuned!

Kindest,

-A

Food for thought?

The price action on all of the major ETFs yesterday could be defined as a hanging man. Check this out and see what you think: What is a Hanging Man?

Kindest,

Andy

Where is the patience?

Yes, I am still holding the SPY position in My Options Portfolio. It is called patience. A term that many options traders struggle with at times. I am currently short the SPY at three different strikes and I can tell you that I am in the red in all three positions. Conviction is key as a trader. Believe in your trade throughout the process until, of course, your mental/or hard stop has been met and then you exit the trade accordingly. In the case of my current position, I knew that the 5/14 overhead gap would be my point of max pain (stop-loss) and a sustained push through that level would drive me to exit my trade. However, that hasn’t happened.  Instead, we have seen strong overhead resistance at the $115 level. Furthermore, we remain in a short-term overbought state.

Check out Serge’s chart as he has similar thoughts on what the SPY could look like in the near future.

I have to remember that only a few trading days ago my SPY position was in the black, so why would I panic. People, forget that this is a marathon and not a sprint. If you think every month you are going to make money then you probably should not be investing in the stock market and definitely not in an options strategy. It is the long-term that matters and with a track record (up 72%) as seen on the Options Portfolio (and verified through my TOS (brokerage) statements) page of the website, I intend to reap the benefits of this long-term approach through my options strategy. If quick profit and day trading is your intention then my strategy is certainly not for you. Of course, I will have some day trades mixed in, but I mostly swing trade.

As I state right on my website:

Patience is the key ingredient to the success of my strategies and forcing a trade is, in most cases, detrimental to any strategy. My strategies requires patience coupled with a disciplined approach. Waiting for the appropriate scenario to recommend trades with a high probability of success is what makes my options strategies successful.

Losing trades are a definite. It is how they are managed over the long-term that proves the success of a strategy and I think I have shown over the past few years that I have managed the strategy appropriately. The performance speaks for itself. Capital preservation is one of the key elements of my strategies and I insist on a disciplined, risk-management approach so that the my strategies will have the best chance at long-term success.

I am a realist. I realize there is no holy grail in trading. However, one thing I do know for certain is that I have found several unique, and concrete strategies that make the world of sense to me and I trade them to make serious money over the long-term. Furthermore, I realize that the less I trade, the better my strategies will perform over the long run: and the long run is what matters. This is what makes my strategies unique and so far, successful.

Anyway, I hope this clarifies a few things.

Enjoy the night!!!

Kindest,

Andy

Capital Preservation is Key

Money management, capital preservation, stop-losses, and position-sizing are (in my opinion) the keys to options trading success. Trying to be a hero when a position moves uncomfortably away from you can (and often) leads to disaster. All traders at some point have experienced this at some point. Almost every trading text out there decribes, in great detail, the authors great epiphany after a disastrous, account depleting journey in trading. These one or two failing experiences seem to create that “ahhhh” moment where, as a trader, you ”get it”.  The reason I mention this is that so many times in a market like we have experienced over the past week traders that are long, continue to be long, in the face of a sharply declining market. Why? Losses are going to happen. It is what you do to avoid taking large losses that keeps you in it for the long-term.

Options trading seems to create a “get rick quick mentality” that attracts the “speculative gamblers” out there. To me this approach seems short-sighted, unless that is your goal and you are willing to take the risk. I prefer to take the “long-term” approach that attempts to beat the market over an extended period of time. Admittingly, I “swing for the fences” sometimes and place a highly speculative trade but those are few and far between and I would never allocate a large portion of my portfolio to a trade like this. It is just too risky for my blood after what I have experienced as a trader. Take the loss and move on. Think in terms of probablities. Use a scientific approach. Losses are a cost of doing business. It is how your account compares to the benchmarks after a long-period of time that defines your success. Any Joe options trader can make a bundle on a trade. It is how Joe performs over the long-term that defines his success.

April 13th Gap Closes in SPY

The month of September has certainly not lived up to its historical billing as “the most bearish month for the market”. Since the gap up on 9/1 SPY has advanced 7.52%. However, the gains have been on the backs of very low volume. Couple this with what I have been stating over the past few trading days and you can see just how the probability of a short-term decline has increased dramatically.

Seasonal weakness, extreme overbought readings and today’s close of the 5/13 gap at $114.73 had pushed the high-beta QQQQ to an RSI (2) reading to over 99.5. At the close the RSI (2) had moved to 79.6, but the RSI (3) and (5) remain in an overbought state with an 84.2 and 83.3, respectively.

The close of the 5/13 gap was almost picture perfect as the SPY faded almost immediately after the gap closed.

I now plan to use the $114.73 area as my of max pain or stop-loss. If the underlying SPY pushes through $115 with no problem given the recent short-term bearish indicators that have moved into the market then I will just have to concede to the bulls and move onto the next trade. As I always say, trading is a marathon and not a sprint.

Extreme Overbought Territory

I stated in the last trade alert today (subscribers only) that as a high probability, mean-reversion trader I thrive on situations where the std. deviation has pushed to extremes. Well, almost every ETF I follow has moved into a short-term extreme after today’s rally. The tech-heavy QQQQ’s have pushed to 99.9 on the RSi (2). As you can probably guess, a short-term reading this extreme does not occur often.

Admittedly, my current position is nearing the max pain area, so I could potentially close out the position (most likely the prior two trades with lower deltas) for a loss if the indice keeps pushing violently high. When exiting a trade I typically look for a  fade of the current direction to a critical area of support/resistance and then I look for a continuation of the fade. If we see a bounce instead, I will  look to exit the trade.

However, even though I am near the max pain area, I really like the probability that a short-term reversal is  close (1-4 days) which could bring the current SPY position into a profitable trade. I will probably take a loss on the first trade of the position, but I expect a decline will allow today’s trade, Dec10 114 puts, and possibly the Nov10 113 puts to move into a profitable state. I would actually expect the Nov10 113 puts to move back to a  break-even state, but I would certainl take some profits if they were around.

I increased my contract size slightly due to the extreme readings in all of the indicators I follow. Bearish seasonal tendencies are also still upon us. The next four trading days are historically weak which increases the probability slightly for a short-term reprieve. Typically, when we see a short-term ‘very overbought’ reading in every major benchmark coupled with historically weak seasonal conditions the market takes a break. The gap at the $111.61 should also weigh on the market over the short-term particularly given the extreme readings and should give me a nice area to take a bit, if not all, of my position off the table.

Again, all of the aforementioned led to the increase in my position-size, which is roughly 75% of my overall options portfolio. I can’t emphasize this enough. You must always consider the size of your position and how much risk you are undertaking with each trade. Position-size is VERY IMPORTANT and should never be taken for granted.

Moreoever, the actual options that I chose have delta around $.50 which means that for every $1.00 the underlying ETF goes up/down the option price goes up/down by roughly $.50. Of course, other greeks must be considered, but this is typically a decent indication of how the option price will move. Anyway, I mention this because, by choosing the delta I can gauge what my gain/loss will be before I place the trade. This is just another way (among others) that I use  to control risk on each and every trade.

As I always state, trading is a marathon and not a sprint.

Kindest,

Andy

Patience, Patience, Patience

As we all know patience is a virtue and the market is certainly testing the bears patience right now. All of the short-term indicators are pointing towards a short-term reprieve, yet the bulls have been able to keep the market afloat amid extreme overbought levels.

The last three days have seen the market basically move sideways. This can be frustrating as a swing trader particularly when the Mr. Probability is leaning so heavily towards a move lower. I am still holding my position(s) and will do so until a either see a sustained move to the upside or a move that takes the S&P (SPY) down to a level that closes the gap from Monday which is around the $111.60 area.

I just wanted all of you to know that I have a few remaining spots left so if you are interested in joining my newsletter please let me know. I want to keep this as a sort of boutique style newsletter so I can easily manage emails and remain focused on my trading. As always, if you have any questions, comments, or feedback please do not hesitate to email me.

Kindest,

Andy

Adding to My Position

As a high probability, mean-reversion trader I thrive on situations where the std. deviation in the indicators I follow closely push into an extreme state.

I increased my contract size slightly due to the extreme readings in all of the indicators I follow. Bearish seasonal tendencies are also upon us. The next eight trading days are historically weak which increases the probability slightly for a short-term reprieve. Typically, when we see a short-term ‘very overbought’ reading in every major bemchmark coupled with historically weak seasonal conditions the market takes a break. The most recent gap should also weigh on the market over the short-term particularly given the extreme readings and should give me a nice area to take a bit, if not all, of my position off the table.

All of the aforementioned led to the increase in my position-size, which is roughly 30% of my overall portfolio. I can’t emphasize this enough. You must always consider the size of your position and how much risk you are undertaking with each trade.

Moreoever, the actual options that I chose have delta around $.50 which means that for every $1.00 the underlying ETF goes up/down the option price goes up/down by roughly $.50. Of course, other greeks must be considered, but this is typically a decent indication of how the option price will move. Anyway, I mention this because, by choosing the delta I can gauge what my gain/loss will be before I place the trade. This is just another way (among others) that I use  to control risk on each and every trade. As I always state, trading is a marathon and not a sprint.

I will post the details of my current trades once the position is closed.

Kindest,

Andy

Short-Term Bearish Move Increases

The last of the major indices, the Dow (DIA), closed its 8/11 gap today and now all of the major benchmarks plus the ETFs (20+) that I follow (mentioned weekly in my subscribers only report) have moved into a short-term overbought to very overbought state. Couple this with seasonal weakness ahead (the next eight trading days are historically very weak on a seasonal basis) and another unclosed gap and I think we could see another short-term reprieve right around the corner.

I am currently looking at a few potential trades that have come across my radar which could come to fruition as early as tomorrow, so suscbribers be aware of a real-time trade alert coming your way.

I might have more on the current state of the market later this evening (if time permits).

I hope all of you are having a wonderful start to your week.

Kindest,

Andy

8/11 Gap Fill in the S&P

The holiday shortened week and lack of volume (due to the Jewish New Year) has the market in a bit of a stand still this week. Yes, the market has continued the push higher, but overhead resistance coupled with short-term overbought levels in all of the major indices seems to have put a damper on the bulls latest attempts to push he market higher.

Yesterday, was wonderful (in my opinion) and telling if you are a bear. The gap fill (8/11) in the S&P (SPY) seems to have happened at the perfect time. Couple all of the aforementioned with a move into one of the seasonally weakest times of the year for the market and a move down to close the 9/1 gap in the S&P seems plausible. Remember, I am a high-probability, mean-reversion trader so when I see a rally on weak volume into overhead resistance that leads to a short-term overbought state right before one of the weakest times of the year I tend to get excited (boy that was a mouthful).

However, just because the probability of a trade looks inviting doesn’t mean that it is a guarantee for success. Remember, it is only a probability. There are no guarantees in trading.

As for my current trade, so far so good. I could have taken a 5% -7% profit yesterday on the trade, but I have decided to wait until the short-term overbought state has worn off before I begin to think of closing out the position.

Also, I just wanted to let all of you know that I will not be posting my trades (directly from my ThinkorSwim account) on the blog until after I have closed the trade. This would not be fair for all of my loyal paying subscribers. However, once the trade is closed I will post the trade. Furthermore, I will continue to post my trades at the end of each month on the My Options Portfolio page just like I have in the past. Transparency is king and I hope this is what separates me from all of the other newsletters out there touting outlandish gains with no proof to back up their claims. I post everything!

Please do no hesitate to email me if you have any questions or comments about options, my service, etc..

Kindest,

Andy [Read more]

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