Another successful trade in the ETF Extremes strategy!

Trade closed May 8, 2007 

A trade was signaled in our ETF Extremes strategy on Friday (5/4). The quick rise in the S&P brought the indicators we follow into an “extreme” state. As a result, a signal was triggered in the ETF Extremes strategy. We decided to buy 10 Jul07 SPY 151 puts (SYHSU) for $3.10. 

Today, with the futures down early, we sold the Jul07 151 puts (SYHSU) for $3.30, resulting in a 6.5% gain on the trade. We did not want to risk losing our profits ahead of the fed minutes that are scheduled to come out at 2 PM EST tomorrow. Furthermore, in this current market where every dip is quickly bought we decided that it was best to lock in a small profit. I say small, but this one trade alone is close to what the market has achieved YTD. 

on our site for further details). I would also like to point out that our returns are based on a fixed number of contracts per trade (10). Many of you have written in to tell us about your compounded returns that exceed 200%. Yes, it is true, but we tend to take a more conservative approach to our position sizing, which is why our performance is not as high as it would be if we reinvested our gains. 

Back to the trade, SPY was in an overbought state and our stochastic indicators were at an extreme state. There were also strong bearish seasonal conditions scheduled for Friday and Monday. Typically, when all of these indicators are in this type of state the probability of a short-term move lower is high. 

The short-term bearish seasonal conditions that typically occur in the S&P on the 4th and 5th trading day of May did not live up to the historical billing. This is why I have stated repeatedly that seasonality alone is (in almost every case) not a reason to place a trade.  

However, the S&P struggled to advance Friday and Monday and more of the technical indicators that we follow reached extremes. The intra-day range on Monday was one of the tightest that we have witnessed in quite some time and led to extreme readings in the “Average True Range” of the S&P (SPY). Typically, this type of extreme precedes weakness in the market.  In general, tight intra-day ranges while in an overbought state lead to short-term weakness. 

The short-term concern was the upcoming Fed meeting on Wednesday afternoon (2 PM EST). The problem with establishing a position before a market-moving event like the fed announcement is the chance of a quick, sharp move that goes against our position. In this case, a move to the upside. This is why I intended on taking off the position beforehand as the risk was just too high for my taste. 

Obviously we are pleased with the win ratio, but we are realists. We realize there is no holy grail in trading. One thing we do know for certain is that we have found a rare, unique, and concrete opportunity that makes the world of sense to us and we trade it to hopefully make money over the long-term. Furthermore, we realize that the less we trade, the better the strategy will do in the long run. And the long run is what matters. This is what makes our ETF Extremes strategy unique and so far, successful. Hopefully, we can continue our winning ways and extend the gains going forward.

Patience is the key ingredient to the success of this strategy and forcing a trade is, in most cases, detrimental to any strategy. Our exact words on the site are as follows: “This strategy requires patience coupled with a disciplined approach. The strategy will make approximately, on average 1 to 3 recommendations a month with holding periods of 1 to 15 days, however; there will be some months when no recommendations are made. The key to this strategy is patience. Waiting for the appropriate scenario to recommend trades with a high probability of success is what makes this strategy a success.”

Believe me, we would love to have potentially profitable signals on a daily basis, but that just isn’t reasonable with this strategy. We will never make any apologies for our system and why should we, with a win ratio of 92.9% YTD (13 out of 14) and gains of 48.7% since inception (1/06), we feel confident in the strategy and its ability to produce long-term returns. 

As always, please do not hesitate to email us with any questions or comments that you might have.