Saturday, October 30, 2010

Bad News, Good Action

The basic Idea of bad news good action goes against all life principles.  I got off the phone with a broker friend of mine the other day and realized how well my education as a speculator has developed.  I mentioned how I got out of my short treasury trade feeling that it was not the right time for the big sell off.  It was a profitable trade 10% in two weeks but time to take profits.

He started to say something about how the federal reserve is pushing bond prices up/yields down which is very clear but has been very clear for too long in my opinion.  My opinion does not matter, price does.  The market is logical until it is not and most of the time it acts illogical.

Our thought processes were defined in 5th grade science classes and this is why 95% of people are terrible investors/traders/speculators.

We think like this:

I'll never forget talking to one of my friends not long ago who is a smart guy, the accountant type.  He mentioned if he had a good some of money he would do a ton of research and figure out a good investment/stock.  By the time he goes through all of the above, the institutions would be selling or he would of missed at least half of the move.

My point is, be careful what you learned in 5th grade science class, it won't make you money playing this game.

"You see that all the time. If there is a solid bull foundation, for instance,
whether or not what the papers call bull manipulation is going
on at the same time, certain news items fail to have the effect
they would have if the Street was bearish. It is all in the
state of sentiment at the time. In this case the Street did
not appraise the extent of the catastrophe because it didn't
wish to."


So, let's look at Friday were there not bombs targeting the U.S.?  The market closed flat.  A pure example of bad news, good action.  These examples happen all the time and are in fact a great way to get a temperature of the market.  

I'm positioned for a 5-8% drop in Crude Oil Prices since $83/barrel.  Fridays action further convinced me, we saw the dollar drop and oil prices drop.  From the perspective of Texas Tea that was good news/bad action which is a good way to gauge the temperature of Crude.  82.00 looked like strong resistance for WTIC.  (please note there have been times where the inverse relationship between the dollar and crude does not exist.)

Ask yourself the question pertaining to this $83-84 level in crude from and investors/trading perspective.  How good of a trade could this be if everyone and their cousin can purchase this commodity at this price?  We have been sitting here way too long, if it were going to break to the upside it would of already.  My target is $78 and I would be willing to get long at $76.

Thursday, October 28, 2010

Further Explanation of The Opening Range

Supply and demand move stocks.  If there is more demand for a stock than the supply then the stock goes up.  So how can you tell if there is more demand vs. supply.  If the security/commodity that you are trading trades above the opening range and holds for half the time that you define as the opening range then there is more demand than supply. 

Have a look at an example, MolyCorp.

 Green lines defined todays opening range.  Blue lines denote support based on yesterdays price action. 

First thing you have to pay attention to is the opening range, this concept/indicator takes major precedence over the support or resistance determined by the prior day (blue lines) always.

So what happened today?  Market defined an opening range, broke below the range (down day).  Now, it can be dangerous to bet against the blue lines (support) BUT, if it goes through the blue lines then that is extremely bearish.

Summary:  Not only are the green lines denoting a bearish outlook for the day (more supply) but the fact that the market sliced so quickly through resistance shows extremely heavy supply. 

Wednesday, October 27, 2010

What happens when you trade well?

Took my treasury short off with an 8% profit over 2 weeks, added to my oil short.  From what I see, it looks like the QE2 trade unraveling or am I seeing just a natural reaction to a longer term trend?  The global macro trade right now is short dollar long commodities.  Of course I am being an idiot getting short oil at this point, but I am seeing some strength in the dollar.  I trade on what I see not on what I think because markets react before the news and it looks like we will have a pull back in the next few days.  I am looking to get long oil at 76.50-77.50 (this is where I would cover as well, perhaps at 78.50 or so I would cover).  I am also looking to get long Citi at 4.06 and short again long treasuries.

The one thing I do know, when I trade well which is what I have been doing I tend to want to trade more.  This is what gets every trader in trouble.  It is seeking that next win, essentially a gamblers ruin.

From what I have heard risk management at Goldman Sachs proprietary unit encourages, if not mandates that traders that have great winning streaks are forced to take 72 hours off.  This is exactly what I am going to do for the rest of the week.

"The lesson here again is that speculation itself is a business and should be so viewed by all.  Do not permit yourself to be influenced by excitement, flattery or temptation." 
 -Mark Douglas

Here is what I am looking at next:

Notice the uptrend denoted by blue line which is underneath the market (support).  Also notice it broke through the months opening range (denoted by the green lines).

In my next post I will hopefully discuss in more detail as to how I purchase stocks and commodities.  As far as how I determine where and when to purchase that is defined by the opening range and the markets reaction to the opening range and whether the market is below resistance or above support.  In the case above, the market price of Citi is above what I would define as resistance (3.90).  This was determined by the prior months action and a forumla that I use.  Now the market held above the opening range (denoted by the green lines) for enough time to show that the market has stronger demand than supply that is the basis of the opening range trading strategy.

The more important question is, where would I get out of this trade?  If the market price of Citi holds below the opening range for an amount of time that is equal to half of the defined range of time of the opening range.  (opening range 5 days, therefore half that period of time).

Briefly, how I get in a particular trade is purchasing half of the entire position I am willing to take.  Once you have some skin in the game then you have to watch and see how the market acts.  If the market reacts in the direction you thought it would then you add to the position, or place your second half of capital into the trade.

Losers average Losers.  The concept is simple, in essence you want to add to something that is working, not losing.  Why would someone want to add to a losing business model?  If your uncle decides to start a business with some of your seed capital and a year later the business is falling apart and he asks to borrow more money for the business would you give it to him?  This is by far the most fundamental idea behind investing capital in markets.

Mr Bernanke, I hope you know what you are doing?  Mike Tyson went Bankrupt and I hope we don't.

"Everyone has a Strategy until I hit them" -Mike Tyson

GDP numbers out of England came out yesterday twice as good as expected.  The question now is Ben Bernanke's strategy going to have to be put out a little further in time?  Is there way too much quantitative easing reflected in the market?

Did Ben Bernanke just get hit?

Have a look at the dollar:

Have a look at the 30 year bond:

Are higher rates to come as well has a stronger dollar?  It is not wise to fight the fed and the fed wants inflation, but that is what everyone is talking about.  Markets react before people know what is coming and so does Mike Tyson.

Monday, October 25, 2010

Understanding The Opening Range

Understanding my method is simple.  No matter what market you trade as long as it has some volatility you will find this strategy of value.  Although I am not the only person who views markets the way I do I chose to write this blog to keep myself in check.  

It’s amazing how easy your mind can wonder in an environment where there are very few rules.  This blog will hopefully hold myself accountable for my actions and keep me in line with what I have learned.  I plan on posting my trades here and help show people how my methods works.

The game of price discovery is by far the most interesting endeavor I have ever tried to play.  I continue to learn something new every day and strive to build trading mind.  After reading hundreds of books and spending thousands of hours watching markets I have come to realize there is no holy grail to investing. 
Rules that have been created by various professional investors work well until they don’t.  Fundamentals are logical but markets are not.  Technical analysis works often but not that often.  Do prices affect fundamentals or do fundamentals affect prices?

As you read this blog please note that the green lines represent the opening range.  For simplicity I will be trading on a monthly time frame where the opening range is defined as the first 4-5 days of the month.  The blue band of lines represents an area where there is support or resistance depending upon what side of the market you are on. 

Although not a science the strategy works well and aims to keep the trader on the winning side of the market.  If the blue band is below you then that is support, if it is above that is resistance.  The opening range is statistically significant because once you break that range and the market you are trading is able to hold above or below that opening range for half the defined opening range (2 days or so), the market will usually trend in the direction of the break.  (remember this is not an exact science)
As you continue to read this blog, you will see exactly what I am talking about.

Here we are getting close to the end of October.  Below is the S and P 500 in the month of October in a clear uptrend.

As you can see towards the bottom of the chart there is that blue line/band, now that is the top of the resistance band that I defined from the prior months price action (second line is band is below the definitions of the chart so therefore could not be shown).  Coming into the month of October can tell that the the market is quite bullish because the market had closed above the blue band.  As we watch the market gain its footing the opening range is defined and then broken in the direction that is of least resistance which is up.


Treasuries and the opening range theory applied

Unfortunately I don't have a futures account and I'm not sure the best way to trade treasuries.  Currently I am long TBT, which translates to myself shorting the long term Treasury.  In essence I believe that rates will gradually rise.

Please note that the green lines represent the opening range defined by the activity of the market based on the beginning of the month (current month).  Blue lines represent resistance based on activity of the previous month.  The blue lines in this case represented resistance, and now represent support.  The concept is simple if the market breaks through the opening range in the beginning of the month, the direction it breaks will define further direction in the market if above resistance (blue lines) or through resistance (blue lines).  In this case below, the break is in the up direction and the fact that it broker prior months positions this is bullish.  Where does one get out of this trade, the answer is a strong break below the the bottom of the opening range.

 If you look at the above chart you see October through today of TBT, which aims itself in taking advantage of long term treasuries declining in value.  I have been long since 31.50 and I am looking to add to this position.  I have a limit order in to purchase at 32.15 and I hope it gets hit.

This is my first post, and I have not explained what is meant by the title of the blog, The Opening Range, I do intend to explain how it works and how two indicators keep you on the right side of the market consistently and help you look at the market with a view that is consistent with the markets.

Above is the 30 year bond futures.