PCAR Update

I thought this example on PCAR would be a good exercise. I think overall this trade would be determined by taste, style, and preference. PCAR is a channeling stock obviously and it didn't quite retrace all the way down to support before bouncing. So what! Does this change the trend or the fact that the price continues to rise? If you look at this as a support bounce and are tyring to determine how much it will move, notice how much it has moved on the last three bounces. Measuring from top to bottom each bounce was $8 in value. Pretty strong for a $60 stock. If it normally moves $8 points, wouldn't that put our target at $71? After all, as technicians we endorse the fact that trends tend to persist and history repeats itself.

Getting back to preference, some might not the look of this trade, or might see something the matter with it. For example I have received a ton of e-mails about CROX lately. Even though it looks very similar, I didn't like the "look" of the trade and didn't take it. This is our "preferential bias" I wrote about a month or two ago. We all see things differently based on our preferences. Nothing wrong with this, but my preference was to take this trade yesterday. Jan 60's. The last trade I took on this in early Nov left me warm and fuzzy and now I am grooming this horse for another race. Hopefully it works out well. If not, a close below about $63.5 will take me out. As soon as it breaks it's prior high around $67 I will tighten the stop.

Thoughts? Let your preferences shine! As for Jeff and his "Charitable Trust," it owns PCAR.

Master Talk Follow Up

If you missed last nights session, I won't hold it against you. We did a full blown Market Analysis from top to bottom. What blew me away is that I got higher satisfaction scores from this simple presentation compared to the presentations I thought were great (trade entries, trader interviews, Implied Volatility analysis, etc).

Anyhow, here were the four trades I threw out to the group for consideration.

VIP- Yesterday a breakout establishing a new 52 week high. Looking at the movements this stock has made in the past few months, these are the high flyers you want a piece of!

LAMR- Another breakout stock, new 52-week high.

SRE- Potential support bounce.

MVSN- Potential support bounce.

Other than that, what should we discuss today? I plan on reviewing PCAR in a little bit...but post a few suggestions on some topics you'd like to see in the works.


Did anyone take this trade today?! Unbelieveable!!!


Better Late Than Never...

As predicted, Wednesday is my heavy workload day, and therefore it does take me away from getting to the blog to provide the usual useless insight, trades, and educational posts. I must reiterate what a glorious advance the market made today. I am also impressed with all the trades that you have thrown out in the comments section. What's funny is that we all have so much in common. We are all watching the same stocks!

I imagine that the market continues to drift higher tomorrow and with that hopefully we will see more continuation out of our bullish trades and breakouts. Since I am in a pinch for time, take a look at this chart and tell me what you see...

A couple questions I would like to see answered are....where is this stock going (target price) and how long do you think it would take to get there? Next...would you trade this and why? I'll ship my opinion on this priority mail first thing tomorrow. Until then, stop by and pay me a visit at Master Talk tonight. Session 1.

What a Pleasant Surprise!

I guess I can say I am a happy camper this morning. That's why I decided to take the morning off and write this post from my office at home. I think it is safe to say that GDP was positive this morning and the market has rallied nicely. What has really made my day is ATI (I say this in hoping that I won't jinx it before days end). I took a trade at the base of the handle of the cup and handle that was forming, to ride it up to resistance and see if it would break. Apparently it broke this morning and at the moment has it's head above resistance. If this stock was not on your radar...place it there. If it closes above resistance this confirms the pattern and carries a 30 point price target over the next 7 months. That is, if it the company isn't bought out first.

Keep an eye on metals, materials and oil today. These will be the big bread winners today. I am going to go back to bed :) I will be back in the office in a couple hours.

What else do you guys have on the radar. Someone throw me an awesome trade. Let's see how many piles of money we can pick up today.


Too Early To Tell...

Continue to play defensively. What I mean by that is to be careful taking directional positions in these market conditions. I am not bearish on the market yet. Like I said earlier, in order for the market to gain, it needed to get that drop off it's chest. It's good to see the averages up despite that crappy durable goods report and yet another advance in the price of oil. With Bernanke settling the minds of millions today about inflation, I still remain optimistic...but it's too early to tell.

Tomorrow brings forth the Fed's Beige Book, GDP, New Home Sales and Crude Inventories. Plenty of data that will influence how the market trades tomorrow. Until then, I will update you as I receive the inspiration.

PS- What's up with the lack of posts on the volatility article? Did I dig us a deeper hole?

Credit Spreads & Volatility

It has been about a month or so since I last touched on the topic of Implied Volatility. Last week we talked about credit spreads, and today I am in the mood to merge the two topics together. I have heard many traders say that they pick a trade based on the implied volatility of the underlying. Touché. At the same time I hear others try to generalize strategies saying that if Implied Volatility is high (options are expensive) then you want to be an option seller (credit spreads). If Implied Volatility is low (options are cheap) then you want to be a buyer (debit spreads). Let's go through an example. Assume I was going to sell a bull put spread on Apple Computers: AAPL. Let's really examine this trade closely. Keep in mind Apple was at 91.00 at the time of this post.

AAPL DEC 85 PUT ASK .65 D -.16 G .04 T .04 V .05 IV 32.72%

AAPL DEC 90 PUT BID 2.00 D .43 G -.06 T .06 V -.08 IV 31.55%

Both of these options are out-the-money. No intrinsic value involved here, which makes these premiums 100% time value. Assume we have successfully sold this spread, and we are short this position. Let's look at it as a whole....

AAPL DEC 85/90 Vertical CR 1.35 D .25 G -.02 T .10 V -.03 IV 32.13%

This might be confusing, but I am giving you the net position from the offsetting greeks (D=Delta G= Gamma T=Theta V= Vega IV= Implied Volatility). For example the negative delta on the long put offset by the positive delta on the short put equals a small, but positive delta position. Almost the equivalent sensitivity of an OTM option. You are also in a negative gamma position, since you are short a higher gamma than you have purchased. You are long theta, which is the most important piece of this trade. Now going back to my correlation with Implied Volatility...the reason the new IV is different is because I am using the average implied volatility of the two strikes. Notice how we have a neutral/negative vega though! For every 1% increase in IV...we lose three cents. Hardly sensitive to change in volatility right! You can take over priced or under priced options and typically they offset the impact of implied volatility. Going back to the foundation of this trade, you are not sensitive to IV since you have bought an expensive/cheap option and you've sold one as well.

I hope this sheds light, rather than casts a shadow. If you have questions I will montior the chat. Throw some chatter out there.


Weekly Price Patterns

Trader indecision has resulted in a mass of patterns this week. Most of the list is made up of Symmetrical Triangles. A few of these were submitted to me through e-mail and thought I could add them in here also. Have fun.

CNQ- Symmetrical Triangle

ATW- Symmetrical Triangle

WTR- Symmetrical Triangle

GVHR- Symmetrical Triangle

LUFK- Symmetrical Triangle

RESP- Symmetrical Triangle

OXY- Symmetrical Triangle

EAT- Symmetrical Triangle

CNQR- Symmetrical Triangle

SYK- Symmetrical Triangle

BEN - H&S Top

BER- H&S Top

TDY- H&S Top

IYE- Rectangle/Potential Triple Top


I am curious on how many are interpreting today's market action. An excuse to take profits? A total change in market direction? Not sure, too early to tell! What is on your mind?

Personally, I am not totally sold on the fact that the market has up and changed direction. Yes, today's price has violated a trendline or two, but as I am trying to figure out what will happen tomorrow, I'm not entirely sure that this is going to continue. I figure if we are going to have some type of year-end rally, this had to occur before we can make an advance. Anyone agree? How about disagree?

Earlier today I let loose a few bearish trades to look at for short term moves. A few breakdowns versus breakouts. If the bears persist, then there are a few winners in there to make the most out of it.

I will try to get the remainder of my price patterns list out right after the open. This week might be the longest list yet. You can see a lot of hesitation in trends recently. Perhaps that served as a warning?

See you in the morning.


As I ran through my watchlist I found a ginormous amount of symmetrical triangles. Since I can't release the official price pattern list until tomorrow morning, I will release a few pattern breakouts that are heating up this morning. As always, I would suggest waiting towards the close to place any trades on breakouts. This will confirm price has sustained it's breakout point and adequate volume has accumulated.

AMED- H&S Breakdown. Right now breaking a nice ascending neckline.

WTR- Symmetrical Triangle Breakdown. Getting real close to breaking support this morning.

DNR- Descending Triangle Breakdown. At the moment it is below support at $27.

EAT- Symmetrical Triangle Breakdown. Good Follow through today.

BEN- H&S breakdown. Well below it's ascending neckline today. Strong volume thus far.

BER- H&S Breakdown. Broke it's $34.5 neckline today.

GVA- H& S Breakdown. Broke the $50 neckline this morning.

PFCB- Symmetrical Triangle Breakdown. Broke it's apex today.

Add to this list as you see fit. Hopefully this gives a few things to watch on such a down day. Stick around, I will be back.

Case Of The Mondays

Looks like the "Santa Claus" rally wasn't followed up by promising results in the retail sector. It has been a long time since I saw the Dow retrace triple digits and as of now we are down an even 100 points. Anyone smell a bear? The only reason I say this...my ascending trendline has been violated for the first time in a long time. Even though we have not closed below it, I am still thinking forward a little bit. However, it looks like prior highs might be acting as new lows. What a dilemma.

I am still in the process of completing my weekly watchlist review. I am dragging tail this morning. It was so nice to be away for the last four days and finding it hard to get back in my rhythm. As soon as I get my list together, we'll talk trades.


Credit Spreads

I know I rant to an audience of mixed experience. Some know how this trade works, while others might not. In any event, let's discuss Credit Spreads.

A credit spread is created when you buy and sell calls or buy and sell puts within the same month of expiration. This is also called a vertical spread. Let's use the Google trade I mentioned a minute ago as an example...

Sell December 500 Put @ $8.70

Buy December 490 Put @ $5.70
If you had entered this trade where you are buying a put for 5.70, and selling a put for 8.70 you would be left with $3.00 in your account. This is why it is called a credit spread. You are paid for this trade upfront. You won't get to use this money at first, but as the trade expires or as you close out the funds then become yours.

For basic option students it is complicated to think of puts as being bullish. This is due to us not seeing the other side of the put trade. Here is why we are bullish...

Upon selling a 500 put, you are entering an obligation to buy this stock (have it put to us) for 500. Since we don't like the unlimited risk this trade would carry, we are also buying a 490 put, giving us the right to sell the stock at 490. If you think about it, we have locked in a transaction here. We are obligated to buy for 500, and have the right to sell at 490.

As the seller of the 500...we are in a bet with the put buyer. A bet that basically bets on whether or not the stock will end up above or below 500. Since we are the seller, we are betting it will remain above 500. This is why the trade is bullish. If the stock closes at 510 (example) the buyer of this option, having the right to sell the stock to us for 500 would not exercise. Why would they sell us the stock at 500, when they could sell it to the market at 510? Our incentive here is that juicy $8.70 premium. If the stock remains above 500, we keep that premium. But what if the stock price falls?

This is why we trade a spread rather than just selling the naked option. Sometimes we are wrong, and we don't want to carry unlimited risk. Since we are also buying the 490, if the stock plummets to 480, we can sell the shares put to us for $500 back to the seller at $490. This means we would lose $10 on the trade, but that is offset by the $3 credit we receive. Max loss is $7.

I know this is a lot of numbers being thrown out. Sorry if that was hard to read. In this particular trade, we would enter this trade under the assumption that Google won't break 500. If it doesn't we collect $3. If it falls, we could lose up to $7 worst case scenario.

Why would you trade this?

Income. Pure and simple. You can also create very conservative high probability trades here. What if you entered the 460/450 spread. You could collect $.50 cents and as long as Google does not fall below 460, you keep this premium. Sounds like free money doesn't it? Do you anticipate Google falling that much? Me neither.

Why would you not trade this?

Limited upside potential. The $3 premium received is the most you will make. What if the stock makes a run at $550? You are limited to a $3 profit. Also, without exit strategies in place you could lose a lot more than you make. Risk 7 Reward 3. Not so good, right?

In closing, I only trade spreads in situations like this. To be brutally honest I hate spreads. Don't tell the company this since they have me teaching this strategy in our advanced options trading rooms. The reason why I do teach them is because I want the people that want to trade this strategy to have all the facts and to know when it is appropriate to trade them, and when it is not. I think I am one of the best suited for this job. Since I only trade them in certain situations, wouldn't you want to know when these situations are?

I am not wildly bullish on Google, but I am relatively certain that 500 will hold. I am willing to risk that by taking this trade. Options are expensive, and time decay is starting to heat up on the Dec options. Jeff says:

I would like to take an advanced look at this trade next week. We will analyze the greeks in spreads and talk about the sensitivity these have to time, price, and volatility. Until then, have a great holiday. I will post on Friday so stay tuned. If you are real bored, join Master Talk tonight...session 1.

Google Follow Up

Let's get back to the trade on Google. Like I mentioned in the original post, I am not interested in whether or not you would trade it. I enforced the trade, but wanted to know how you would go about this trade.

Let's examine the evidence. It recently broke $500. Where is it going? Can you say we have a target price on this one? If you were trading the recent flag, this would give you a target of about $525...and I don't see an option that will surrender a decent enough profit for the risk involved. Based on the price of these options you need to swing short & fast, meaning a front month or second month out option along with an aggressive strike. The problem I have with this is that I think Google will test 500 again before moving too much higher. You will then get stuck with melting time (expensive melting time I meant).

What can we do in an event like this? If there are expensive options, a reason to be bullish, but not a enormous movement expected....trade a credit spread.

Personally I would endorse a Bull Put Spread on this stock. Something like a 490/500. If I am convinced that Google stays above $500, then both options would expire worthless and I keep the credit to the account. Right now a $3 dollar credit is offered. Bid on the 500 is $8.70 and ask on the 490 is $5.70.

I will follow this up with a post on credit spreads. This might be a good teaching moment.

Give Thanks

I am starting off the day on a topic other than trading...we will get back to trading as soon as the market closes. For this post I want to know how you are going to cook your turkey this year? What is the special receipe you are willing to share? I have been talking with a few people on how they are going to prep their turkey this year and am looking to see what the masses approve of when roasting their bird.

If you have any decent tasting approaches, I'd be interested to hear.

Be back soon with an eval on Google.


Trading the Thanksgiving Market

Trading tomorrow and on Friday are historically generous days in market history. I am sure most know that the market is closed Thursday and half of Friday. Make sure that you volume traders take this into consideration on your breakouts and or trading signals. Light volume this week will be a given, so don't skip too many trades over it.

After we make it through the holiday week we will head into December where opportunities typically present themselves. Get it while it lasts since January will probably correct all the recent madness we have witnessed in this market for the last few months.

With this I would like to present a chart to discuss. I am not interested in whether you would trade it or not, since on this one you must make some type of trade. The stock is Google. Look at the chart below, and what is the best trade to make on this one. The stock is catching on fire and what trade could you place to take advantage of it? Yes, there are expensive options here...yes, it has moved a lot already, so what would you do if you had to trade it?

Price Pattern Watchlist

Here is the weekly Price Pattern Watchlist. I encorporated a few reversal patterns for this week (just in case). Feel free to add to this if you feel the need. Thanks for your participation, I will be back after a few painkillers.

UPL- Falling Wedge
GILD- Ascending Triangle
SLAB- Symmetrical Triangle
ATW- Pennant
GVA- Head & Shoulders
GYMB- Double Top
BRLI- Ascending Triangle
AMX- Symmetrical Triangle


Leaving Early

I have to go meet with a specialist about a recent knee injury. Therefore I won't be around to post for the remainder of the day. However, the Price Pattern watchlist is ready to go. As soon as I present the trades tomorrow, I will throw them up on the blog for all to enjoy.

Have a good-night....and post a couple topics below that you'd like to read about this week.

Back To Business

Realtors and Materials are on fire this morning. Out of most things I see doing well, these two groups are house-holding the majority of them. I put together a ton of symbols to watch this week for support bounce opportuinities or stocks making a quick turnaround. Here is a short-list if you'd like...


As I was running through the watchlists this morning, these were some I jotted down as "interesting." Feel free to add to this list if you'd like. In fact, if you take a symbol, try and leave one in return.


Can't make it happen...

Sorry to end on a short note folks, but I am going home for the weekend. I would love to stay late and post....actually, no I wouldn't. It has been a long day. Hope you understand.

What a week it was in the market! Definitely one to remember. I hope that all your trading has been doing well at the same time. Next week I will hit the watchlist early and provide a few things to take forward with the week. I had started to write another brain buster on options, but figured I will leave that for next week. Until then have a great weekend everyone!


Next Week's Watchlist

Since I don't go shopping for next weeks victims until Monday mornings, do any of you have some interesting things to add to an existing watchlist? If so leave a comment and let's take a look!

I will work up a better post after I record the marketcast.

The Mysterious CTSH Volume

I have received tons of questions about why CTSH had such huge volume on little price movement. The answer is quite simple. We know that CTSH is moving into the S&P 500. Think of all the S&P 500 mutual funds, ETF's, etc that need to update. All these funds need to add CTSH to their fund to create balance between the actual index and the fund. This is why so many shares were traded with not a ton of price movement. Hopefully this makes sense. I will be back in a flash...is anyone in NMX?!?! What a morning!



Is this stock on anyones radar? If not I am using this on my credit spreads class tonight. I see a breakout today on strong volume (obviously)...did anyone catch this? Leave me a comment or two about what you see and whether or not you would consider trading this. Who knows...could be the next big winner!

What is "Weakness?"

Sorry folks, computer problems and blogger being down for maintenance delayed this amazingly insightful post. My sincere apologies...

For those who have taken trades without a concrete exit I am sure your exit was to "wait for a sign of weakness." As we looked at LVS the other day, we know now what weakness is not. So exactly, what is it?

I am going to throw a few things at you to determine in a bullish trending stock what a sign of weakness is. Candlesticks are the best way to determine weakness and here are some of the most common signals.

The Hanging Man
Hanging Man candlesticks form when a security moves significantly lower after the open, but rallies to close well above the intraday low. The resulting candlestick looks like a square lollipop with a long stick. If this candlestick forms during a decline, then it is called a Hammer.

The Engulfing Pattern
The Engulfing Pattern is a reversal pattern that can be bearish or bullish depending upon whether it is in an uptrend or downtrend. The first day is characterized by a small body, followed by a day whose body completely engulfs the previous day's body.

The Shooting Star
Shooting Star A single day pattern that can appear in an uptrend. It opens higher, trades much higher, then closes near its open. It looks just like the Inverted Hammer except that it is bearish.
The Harami
A Harami is a two day pattern that has a small body day completely contained within the range of the previous body, and is the opposite color.

The Evening Star
An Evening Star is a bearish reversal pattern that continues an uptrend with a long white body day followed by a gapped up small body day, then a down close with the close below the midpoint of the first day.

The Dark Cloud Cover
The Dark Cloud Cover is a bearish reversal pattern that continues the uptrend with a long white body. The next day opens at a new high then closes below the midpoint of the body of the first day.

There are plenty more to discuss, but this is all I had time for. Hoefully this reinforces the reasons candlesticks are valuable and supplements what you have studied through technical analysis. Who wants to pick the next topic of discussion?


LVS Follow-Up

I hate to admit, but yes I did close out on LVS today. Since I was not near my computer I had a stop in at $8.00 and I was stopped out. It was unfortunate to see this one end, but this was all I wanted to risk on this trade. Luck would have it that it will likely rally strong tomorrow on a good CPI report. Ah well... a 8.00 on a 1.50 investment is not bad. I hope you all enjoyed this gem we discovered last week. Nice work!

What I am really wondering is what will happen to WYNN tomorrow. Since it was up $4 in the morning, I walked away thinking I didn't need a stop in there. Whoa! Is that what they call a gravestone doji?


In regards to the comments, I love the fact that we have so many comments from all the readers. Your participation illustrates to the group the different levels of traders we have. As you continue to contribute, I would like to ask that you leave your name with comments. At least a first name below your comment will give an entity to address if I or others would like to respond. So let's set a new "Blog Law" today. No more anonymity? Is that a word?

Don't feel embarrassed to say what is on your mind. Ask questions, leave opinions, call me out, put someone on the spot, whatever! I like to think of this as a "group" and if I have something on my mind, I am going to speak it. I hope you will do the same. You can continue to stay anonymous if you want, but i'd like to see all of your names personally. Anyways...

One more post coming shortly.


Now that I have finished my live class, the MarketCast, etc... let's get back to business. The first response I had to my post was a suggestion to talk about the DMI. Thanks for the suggestion Michael. Does anyone out there use the DMI?

Me neither.

However, it is one of many technical indicators, so we will define what it is and what it does. It has been a long time since I have discussed/studies this indicator, so excuse me for being rusty.

Encyclopedia Kohler says...


Welles Wilder, one of the greatest contributors to the field of technical analysis created the DMI, which stands for the Directional Movement Index. As many might state this indicator gives the trader the idea of whether or not the particular issue is trending or not trending. Here is a glimpse of what the study looks like.

Isn't it pretty? Does it look confusing? Do not be intimidated. Once you know what is going on here, it becomes easier to digest. Typically a DMI is calculated using two lines, but as you can see the interactive chart offers three lines...

The ADX (Average Directional Index)

+DI (Positive Directional Indicator)

-DI (Negative Directional Indicator)

The ADX is simply a moving average of the DMI, so your many use it as opposed to the DMI. For those that use the DMI, they are giving more credence to the +DI and -DI lines. Like I mentioned, the +DI is measuring positive movement, and -DI measures negative movement. In a situation like you see in my graphic, where the positive crossed the negative last month, this indicates a buy signal and when negative crosses over the positive this creates a sell signal. By the way this indicator is used on a scale of 0-100. When you take these buy and sell signals in conjunction with the ADX, as the ADX is heading higher this means the market is in an uptrend mode and this amplifies the buy and sell signals. If the ADX is low or flat, this means the buy signals would be dampened because the market is not trending.

When I first studied the DMI I found the premise to be fascinating. Since stocks are considered to trend only about 30% of the time, and 70% they are non-trending, most system traders need to know when to switch from a trending system to an oscillating system. For example, years ago when I thought system trading was "IT" I traded a moving average crossover system. Works great when things trend and is annoying as hell when things do not trend. Had I been applying a DMI back then I might have seen signals that trends might possibly cease and eliminate trading through the sideways times.

There are too many indicators out there to name, but they all try to do the same thing. They try to calculate price movements. As I have realized this over the last years, I have started to try and accomplish the same thing. Try to study price movements.

I hope this was helpful. Like I said, I had 20 minutes to put this together. As always Wednesdays are tough for me, but I hope I have kept you entertained. Tomorrow is Thursday "Blog" Day and I have lots of things we can do. See you then.

Using a Lifeline...

Since Wednesdays are my busy day, and I am in a meeting for the next hour and a half, I am going to use my lifeline and poll the audience. What would you like to discuss or talk about today? I feel this is a great way to answer lingering questions that some of you may have, and talk about strategies that are on the minds of many. First response to this question will get to pick a topic for today. Thanks everyone!


Don't Get Emotional On Me!

This post will be the follow up to yesterdays discussion on who would exit LVS with only a 285% gain. Have you seen the stock today? Of course you have. An even better question would be...Did you see it yesterday? What did you see that made you decide to sell? Weakness? Hardly! Emotion is the driver of this decision, is it not? Of course, we are happy with the trade (a 385% gain thus far!), but why not give it the chance to go higher? The higher it goes, the more losses it absorbs! I placed this same trade last Wednesday, and I saw the same price bar each of you did yesterday and yo want to know what I did.......I did nothing.

This is an everyday decision that you will encounter, and you need to decide right here and now how you will make this decision. If you responded to this post yesterday that you would sell, then this means you have a tendency to cut winners short (sorry to point out the reality). This decision is typically made out of the fear that you will lose the profits you have made. This same personality type tends to want to let losers run at the same time. This emotional action is made out of hope that the loss will go away and that the stock "might come back."

You need to change the way you think, and leave "feelings" at the door when you trade. Instead of being fearful of your winners and hopeful for your losses....


That is the magic antidote right there! You have just heard what it takes to be a successful trader. However...it is easier said than done. If you look at LVS today it is up another buck and a half. Let's say you owned 10 contracts @ $1.50 and yesterday they were @ $5.50. On a $1500 investment your position was worth $5500. If you had sold half, you realized $2750. The 5 contracts you have left that are now trading at $7.30 worth a total of $3900. However, if you were holding on to all 10 contracts...$7800. I don't subscribe to the "sell half" mentality. I just let it ride.

I am not suggesting you risk a lot to let profits run. Nobody wants to do this. However, those who would have sit tight and tightened a stop to lock in profits would be doing very well at this point. Try to implement unemotional exit strategies. Try and use a disciplined approach like the few that mentioned tightening stops.

My plan was to exit if we had closed lower than we closed the prior day, which was rather tight.

I hope this was a helpful exercise.

Price Pattern Stocks

Here were a few stocks we discussed in this mornings price patterns class. Enjoy!

ICE- Ascending Triangle

JOYG- Symmetrical Triangle

POOL- Symmetrical Triangle

KNX- Symmetrical Triangle

NKE- Ascending Triangle

VCLK- Flag

OO- H & S Top

Marketcast Difficulties

Yesterday's Marketcast didn't update on the toolbox. Since I received a ton of e-mails over night about this, and our main tech guy that fixes our server when this happens in on vavation. Until we get that corrected, click here if you want to listen to our Marketcast as of yesterdays close. I still hope to add my own commentary to this site, but until I get the appropriate software and tools it is on hold.


Let's try an assignment on exits today. Here is a look at none other than LVS. Take a look at the price action over the last few days and where we are today....

Assume that you took this trade on the breakout Wednesday. Also assume that you bought the December 85 calls at $1.50 per contract, and as of right now they are trading at $5.80 per contract. What would you do here?

Actually, I know exactly what you would do here, but I want all of you to send comments about what action you would take and why? Exits are the best conversation piece.


We All Have Weekends To Attend To...

For some reason this seemed like a never-ending week. I hope those of you in LVS are still doing the happy dance we talked about yesterday. If it were not for that trade I might be in a bad mood today. Of course when you see these feelings coming, it is time to create balance. If anyone else is feeling worn out after this weekend. Find a way to participate in something you like to do and focus on something else other than trading and money. For example, I am likely to go blow off steam on the basketball court in the morning and take the kids on some type of an excursion over the weekend. We'll see how that goes. Anyhow, have a great weekend and thanks for all that you do. I know trading is a mentally and emotionally taxing career. I am right there with you. We need to make sure we are making decisions that generate the least amount of these stresses in our lives. Perhaps a smaller trade size and more conservative plays?

Anyhow, we'll pick up where we left off on Monday. As always, if something is on your mind...speak it here or send me an e-mail.



To hedge or not to hedge, that is the question. To hedge is to take an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract, option, or stock position.

Brett was the first response to the post earlier, so as usual "first post wins." All the suggestions were great, and a few I have jotted down for future posts. I liked the weekly idea of a WWJD- post. I would need some help on specifics though.

Back to hedging. Brett asked how do I do this in my account. To give a simple response I diversify. As an option trader this means to not only take a bullish stance on the market, but to take a bearish stance as well. I never trade 100% with the market. I always look for a few trades I can take on weak stocks. In case I am wrong on the direction of the market, it is nice to have positions that will benefit in this instance. As usual, if the market were bullish, I would find weak groups, weak stocks and pick up a few puts.

Occasionally at times when I am not 100% sure on the direction of the market I will take an offsetting position in an index or index tracking investment. Such as we sit right now where the market could eventually top, I have a few OTM puts that I picked up as we turned down from our last top to protect me if the market decides to go bearish. This way, as I lose value on the calls, the puts offset this a little.

Hedging is a personal decision one must make. This means you are essentially betting against yourself and placing this bet with your money. As your accounts get larger, this could be a cheap way to protect yourself.

Back to the post suggestion...In response to all the personal questions about how I allocate my funds....I don't think it is relevant to everyone reading. Keep in mind that my goals, risk tolerance, and age is different than most investors. I am not interested in generating income, I am interested in generating aggressive growth.

However, in order not to disappoint, I will give a few generalities. I am not so thorough that I actually calculate the percentages of what I do and when I do it. I find reasons to do whatever I want whenever I want. To try and illustrate how I do things, here are some GENERALITIES.

Normally I have 40-50% as a cash position.

I would say on average that I am using 40% trading options. (Sometimes more, sometimes less)

I would say on average that I am using 10-15% trading stock positions.

Like I said, I don't want to get more specific than that because this is an aggressive way to do things. Please do not construe this as a method of how you should treat your own portfolio.

I will be back to post after I record the Market Cast.

Let's Get the Party Started

Good Morning! I have a major deadline to catch up on today. I would love for someone to start me off this morning by suggesting a topic. This will get me out of my coma over here, and get me into my zone.

First response to this post...You pick the topic. If you have a question on anything, a trade to analyze with the group, a concept to illustrate, a strategy to review...whatever. Throw it out there and let's light a fire.


LVS and the "Happy Dance"

Apparently LVS had a little more gas in it's tank. I have received only a handful of e-mails that expressed appreciation or excitement about the profits being made, while as of now I have probably received at least 100 e-mails asking things like...

"Is it too late?"

"Would you trade this?"

"Has it moved too much?"

"Any Comments?"

Of course I do not have any problems with questions like this, but I hope the individuals asking them realize that as you ask these questions, you want to try and develop more specific rules to your repertoire that answer these questions for you.

An interesting comment came out on the Q&A last night. As we looked at LVS, which broke it's resistance at $78, and was trading at $79 and some change. The "Is it too late" question surfaced, and I had the opportunity to talk about breakouts, and how typically the stock will retrace to old support. With the price sitting about a buck and a half away from support would you have risked a buck and a half on this trade to see it move higher? Essentially this is what your risk is. If the stock closed below support today, I would have taken the beating and went about my business.

The risk involved was well worth the reward. Now with the stock sitting at $83 and knowing it could possibly come down to $78, your risk is now $5. Depending on how much higher you think LVS will go, would it be worth taking this risk?

Odds are it will eventually revisit $78, and just like the CTSH trade, if you are interested in the longer term trend this stock will make, you have to be willing to sacrifice this potential pull back. Let me reiterate Van Tharps quote I used last night...

"the ironic part of system design is if you want to maximize profits, you must be willing to give back a great deal of the profits you have already accumulated. You can't make money if you're not willing to lose. "


Master Talk Follow Up

If you missed last nights presentation, I conducted a trader interview with Eric Utley, who is one of our content writers/developers here at INVESTools, and a phenom of a trader. I always enjoy his perspectives and insight, hopefully you got something from this as well.
If you were present for this presentation, could you pretty-please leave a comment about it? What did you think? Honestly. I need to know what traders find beneficial. It is tough trying to keep this session new, so I would love your thoughts.
Last but not least, here is the watchlist. Good Night.
LVS: Breakout on huge volume
AZO: Potential bounce play
PVH: Potential bounce play
JCP: Breakout on light volume
SRE: Potential bounce play
FNM: Democratic play (if that's the case look at a short on PPH as well)

Master Talk

Tonight I will be competing against the Trading Psychology Open House. I should have been teaching this open house, but there was an obvious conflict with my obligations as a Master Talk instructor. However, I hope tonights class rivals the opposition. I have another interactive presentation planned for tonight. I hope to see those of you with access to this class later tonight. I will be teaching Session 2 again.

FFIV Analysis

I think this stock provides a good example. Depending on your trading rules, some might have taken this trade. I think we are looking at the pre-mature stages of a bull flag formation. Here is what Bull Flags will typically grow up to look like when they finally confirm.

The angle of the flag will either be horizontal or a downward sloping diagonal angle. Similar to looking at a flag outside. On normal instances, the flag outside my building here will look like the example on the right. On very windy days, it will look like the example on the left. But I have never seen it look anything different than these two examples. I think FFIV is attempting to follow the outline on the left. This just means we need a close above $68 with volume to confirm this pattern.

The biggest red flag (no pun intended) on this example was the lack of volume on yesterdays price movement. It alone should have provided reason to not take this trade. Keep this on the watchlist and I will follow up as soon as we see a signal. One way or another. Thanks for everyone's participation on this. Great comments and analysis.

Trade in the Moment...

Is that moment at the open, mid-day, or close? I saw a great comment roll in yesterday about this question. Not to mention one of the most active contributors to this blog, "Brett" wrote a piece around this a couple weeks ago. If you have not read this, click here.

In my own personal trading I primarily trade two different "classifications" of trades. I love to trade breakouts and I like to trade support/resistance bounces. Depending on which of the two set-ups I am trading depends on when I take the trade.

As "OptionAddicts" we need to understand the reality that is amateur hour. I love the term amateur hour. In fact, I normally use this phrase about a dozen times here in the office throughout the course of the day. But what are the implications from buying options in the first hour or two of trading?

I'll tell you the problem. Generally, (on stocks of interest) options are over-priced in the mornings, and relatively fairly valued towards the end of the day. Under most circumstances, volatility in hyper active in the mornings, and settles down by the end of the session. All things being equal, this means that you would get a better deal on the option by waiting for the end of the day...


The problem is that prices move throughout the day. The longer you wait to take the trade, the more price action you miss. This is the dilemma most traders debate. Should I trade in the morning, or towards the close of the day.

Let me ask a question to illustrate some further reasoning. Do you place more weight on closing prices or intra-day price movements. For instance...if I have a stock trading at $49, with monster resistance at $50...The stock reaches a high of the day of $52, but closes at $50...would you call this a breakout?

No you wouldn't. When it was all said and done, the price did not exceed resistance. It tried to, but couldn't sustain itself. What if you had bought calls in the morning when the stock was up at $51 or so. Did you really have proof it was a breakout? Could you really know for sure it would sustain this price move? Could you tell that volume would be huge on the day?

You can't. Bottom line is that since I can't make this distinction, I wait for better confirmation. Plus (on a typical bullish day) prices typically spike in the mornings, retrace in the afternoons, and advance at the close. I try and wait for that last advance, which is normally 1-2 hours before the close, and enter the trades here. This way I can see where price is, check volume, and have a much better idea on how things will close.

Like I said, this strategy is what I use for my breakout trades. What if I am trading a support bounce? I will trade those whenever. Since I don't need volume on these, and my exits are well defined (a close beyond support/resistance), I enter these at any given time in the day. I basically trade them as I find them.

I hope this helps to clarify what my reasoning is behind this strategy, and provide you insights as you choose your path in options trading. I will post a follow up to yesterdays trade in a few minutes.


Audio Commentary

UPDATE: Audio Commentary is still in the works. My software is in the process of being updated. Please be patient. I promise we will have some fun toys on this page eventually.

100,000 Hits? You must be joking...

I looked at my hit counter today, and it looks like this blog has surpassed the 100,000 hit mark over the weekend. That is HUGE! Thank you to all of you for making this a site that you check regularly.

Enough of that...let's trade. Take a look at this chart and tell me what you see....

Sorry this took forever. I have been having computer problems today. Submit your analysis on whether or not you would trade this and why.

Mmmm.....Price Patterns

In this mornings presentation we looked through a pretty good list of flag patterns. I also noticed in the "comments" of prior posts that there were other patterns out there that some of you have been watching. If there are any others you would like to add, please post them here.

These are just a handful of random flags. Some have confirmed, some are awaiting confirmation. If you are unsure on how to handle flag patterns, click here.








Post Trades Here

I have a load of things to watch for this week. I will add them to the blog tomorrow morning after I present a majority of them in my Price Patterns class. Until then, if you have things you are watching, post them here. This can be a catch all for things to watch for the week. I had a project dumped on me today, this is why I have only contributed twice today. Tomorrow looks much better for contributions.

Until then...
Is anyone out there bearish on the market?


All good traders need to have a routine that they follow. Have you created your daily/weekly routine yet? Have you chiseled down to a 20 minute per day workout? Is that even possible?

Let's talk about what a routine should address. Here are the main objectives:

Market Analysis

Find new trades

Manage existing trades


Update/Purge List

Revisit Stops & Position Size

Market Review

I am sure most of you already have a certain outline you follow each day, but are you efficient with it? Are you spending more time than you need to? Some spend hours per day, which is fine if you are willing, but I spend very little time in my actual routine, the rest of the time is just watching the market.

Let me give you an outline of what my week looks like. Monday morning I stagger into work for an a.m. presentation. Before I begin I read the headlines of what will affect the market today as well as take a look at futures pricing to get an idea of how the market will open and how bull/bear things look. After I get my feel for market direction, I search. I look through my watchlist (which contains around 1700-1800 stocks) to find patterns. Before you send an e-mail asking about why I watch so many, what kind of stocks are they, etc... let me explain that they are totally random stocks, and I watch this many just to look for patterns (triangles, flags, pennants, etc). I like being able to look at thumbnails (lots of them) since I can get through them quickly. As a short term trader, most of you know I can care less about the fundamentals, industry groups, etc since I am so short term minded.

Back to the routine, I search through these lists which takes about 25 minutes. I write down the symbols that contain potential patterns to watch for breakouts. Since these stocks could take forever to break out, I go run a few of my favorite searches to find things to trade asap. Here are the searches I run...

Anticipating the Bounce
Bullish trending stocks that might be bouncing off support

Anticipating the Bounce II
Bearish trending stocks that might be bouncing off resistance

Downtrending Stocks with a High MACD
Bearish trending stocks that might be bouncing off resistance

Searching for a Bullish Breakout
Bullish trending stocks that might be breaking out into new highs

This is where I generate most of my trades for the week. The list of patterns I found from my watchlist are the ones I actually "watch" for breakouts and trade those as soon as I get the signals.

When the market opens, I watch my existing positions to see what their reaction is. Mostly out of curiosity since I don't place very many trades until the market is nearing the closing bell. I can see what the movements are to check exits and revise my positions if need be.

If I see any opportunities after the open that I need to be a part of, I will enter them as I see fit, but after this, all is quiet until after lunch. I have everything up on the computer, but I just watch the tides roll in and out until later in the day.

Lunch comes next. I would normally talk in lengthy and specific detail on this topic alone for all those who submitted on my poll that they would prefer to read less of my personal stuff (such as lunch), and just get more trades. However, since I have plenty of things to do today, I will reserve the effort.

As the end of the day rolls around, 2:30 - 4:00 Eastern specifically, this is when I am pretty busy. Having watched the tides over and over throughout the day, I am like Tom Hanks in the movie Cast Away....just waiting for the right wave and I take the trade. I get into everything I am going to get into for the day, close any positions that need a close, and watch the market go to sleep.

After the close, I will review the news, price action, or anything that might cause the ship to steer off course. I revisit all my exits to see what I need to pay attention to, or movements that need to have an exit tightened to lock in a few profits. If I do tighten up any exits, this is when I normally add to a position and buy more contracts while still risking the proper position size.

This is what the routine will look like for each day of the week. The watchlists only get reviewed once a week, and searches might only be run once, maybe twice a week depending on how many trades I am watching. As the week goes on, I am also subtracting stocks off my list for breakouts. Many will fail before giving a signal, so these get crossed off when applicable.

That is what my routine looks like. It does not take a whole lot of time, and for me it feels very efficient. It offers plenty of time to walk away for extended periods of time, answer e-mails, post to this blog, etc. I had a few questions on this topic over the weekend, so here is a look at how I get things done. I will be back in a while.


Have a Great Weekend

Blogger is still giving me troubles today. Hopefully after a reboot, Monday will get me back to where I need to be. As always, if you have any topics you would like to discuss send me an e-mail this weekend. Otherwise, be safe and we meet back here on Monday!

Today's Watchlist

Blogger is not letting me add charts/images to my posts today. I won't be able to illustrate these few examples until this gets corrected. In the meantime, take a look at a these few stocks.

GME- Successful Flag Breakout (Unlike FAST which I am still going to talk about today)

UPS- Nice channel, right at support

PX- Reached it's target price today from that Triangle breakout. Likely to re-test from here.

PCU- Nice curl upward, and could break a 52 week high today.

I only took a few minutes to come up with these, so if you have anything of interest, please post them in the comments. Thanks!

FAST Failure

Let's follow up on FAST. Going back to flag patterns, or any pattern for that matter...what is important for you to realize is that what you think might be a pattern is not a pattern until the moment of confirmation. Since FAST never broke above our resistance line, this means it never really was a Flag. It was a real good immitation, but only an immitation would have failed before giving a trading signal. Real Flags breakout. Here is another look at FAST as of today...

Insert Chart Here...

The moment it broke support of this pattern is the moment you take it off your watchlist. No, you do not buy puts since there is no way of knowing where it is going. It was interesting to watch this pattern start to evolve and fail, however...Jeff says:

Techincal Difficulties...I Guess

Blogger is having issues this morning. I have some things I am trying to submit, but not having much luck. As soon as I get this fixed, we'll get down to business.


Prophet Patterns

A big thanks to Tim Knight and his team over at Prophet.Net for creating some of the web's top charting software available. Duane offered the first response to the post asking for topics. He said...

"Jeff, Do you use Profit Patterns to screen stocks and if so, have you been successful with those trades?"

I am sure there are individuals out there that are not familiar with Prophet Patterns, so let me provide some background. Prophet was rated by Barrons as the #1 Site for Technical AnalysisBest Websites for Investors 2001, 2002, 2003, 2004. They are also an INVESTools company.

They offer a highly regarded tool for technicians called "Prophet Patterns." Here is a snapshot of what it looks like.

This image is a commodity, since the only people who can get access to this tool is through the Active Investor program. This means you would need to come to Utah for the 4-day live class, and then you are given access to this tool. You cannot purchase this tool from prophet individually, even if you pay for their platinum package. It is reserved for only the elite students!

Anyhow, if you look at this page it is a search engine designed to look specifically look for patterns. If you want to find triangles, wedges, channels, topping or bottoming formations, this is your ticket to easy pattern recognition!

You can classify which pattern you want to find, how recent the breakout was, or if it has not happened yet. You can set the timeframe in which it took to form, specify continuation or reversal, and the patterns are ranked on different strength indicators...basically meaning you can sift through many to find the more dynamic patterns. The target prices they establish are amazingly accurate. They have a proprietary algorithm to set their target and you would be surprised how many reach this destination.

Going back to the question..."do I use this, and have I been successful with these trades"... yes, and yes. I must be honest though. My preference is to use watchlists to look for patterns. This way I can control the type and quality of stocks that I find patterns in. When I first used this tool I had made the comment that "this is as close a computer can get to performing magic." I was blown away by the capabilities and results. I still am blown away by it, but my preferences and pickiness has led me back to my watchlists more often...but since I teach the Price Patterns class each week, and some weeks there are not any patterns I can find, I go back to this old reliable tool to help me do the work.

In your position, look at it this way. Obviously I have trained my eyes to find these a lot quicker than the norm. It literally takes me 30 minutes to look through 1800 thumbnail charts each week. It might take someone just learning patterns a full week to do this. At this point I would recommend it to users who want to find things quickly. Then you can sort through all the patterns to find the quality and types of stocks you want to find patterns in.

This was probably longer than it needed to be, but a good question nonetheless. Thanks!

Looking for a topic...

The first response I get that offers a question or topic to discuss wins. My mind is in outerspace today, so if you have a trade, question, or topic you want an answer to...the first person to respond via the comments page wins! Thanks for your help!

What Should You Be Looking For?

Did you know I love retail stocks right now? I have been touting these for the last two months or more. Many had nice trends that offered great profits. Many have been stopped out recently. Take a look at the S&P Retail Index $RLX or RLX.X. You can see today that we are moving below our prior low. What do lower lows represent? Thats right...panic.

I still feel there are good trades to be made in this arena and there still will be going forward. You have a lot of these companies announcing earnings soon, and depending on the reactions, there will still be a few plays heading into the holidays. Keep JWN, KSS, and JCP on your list for the next few weeks, just to name a few. BTW- Add to these as you feel necessary.

What other areas should we be looking for opportunities in? I am still watching financials (XBD.X)...GS, MS, BSC, etc. I am also watching internet stocks (INX.X) such as AKAM, EBAY, GOOG, WBSN and FFIV.

So for all those wondering which groups to watch, here are a few I am involved with. I hope this adds to the watchlist a little. I will be back shortly to offer a few more posts before the day is over. Thursdays are when I get a lot of things off my chest. Be ready!



I am super busy with work today. I have a presentation I need to spend time on and prepare for tonights Master Talk. I will be in Session 2 by the way. For the lack of time I have at the moment, we are going to analyze another potential trade. Take a look at this chart...

If the chart does not pull up when you click on it, type in symbol KSS. Are there any takers on this trade? What do you see and what would you do with this stock? If I get a minute later this evening, I will try to put in some more effort. Even though money never sleeps, life has a way of getting in the way of things.

See you later???


About me

  • I'm Option Addict
  • From Saratoga Springs, Utah, United States
  • I am a professional trader and an instructor for Investools. I've had relations with the markets for 9 years. Born in Concord, CA, but reside in Saratoga Springs, Utah. Father of THREE, Husband of one.
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