So sorry for slacking on my promised MAY RUT Iron Condor as mentioned in the previous post.  I’ve been sort of swamped and even went without my computer for a whole week while it was in the shop.  Talk about a HORRIBLE feeling.  Me no likey!

One annoying thing about my erratic life recently is that I didn’t manage to get on that RUT trade I so nicely planned out in the last post.  So far, it’s still looking good.  Pressure is on the call side, of course, but currently the Delta on the June 590 call is about .07, so as for the moment it still looks good.  The index will have to move about 40 points or so higher to get toward the Delta of .25 that warrants defensive action.  Meanwhile, the clock continues to tick, which helps by the day.

So here’s the quick and dirty on the MAY trade I made.  On April 9, I sold the May 550/560 call spread for $.82.

At the time, it had made a strong rally up to a likely resistance area and the MACD and Stochastics were flat-ish after the strong bullishness.  The options chain showed the May 550 with a delta of .10 or so, which is the top end of where you want to sell for this type of WAY out-of-the-money Iron Condor strategy.  On the chart, I saw three potential resistance lines in addition to the downtrending 200 MA over head, so it seemed a pretty reasonable choice.

For the put side, given the fast and steep rally from the March bottom, I was not comfortable putting on that side until waiting for a downdraft of some sort, particularly with five weeks left before expiration.  Even without a major downdraft, I figured I could get a put side on at a better price in the coming week with a new higher low. Alas, that didn’t quite present itself. As the index continued to climb, it became too late to put a bottom side on as the time premium had decayed further as well as the downside risk seeming more and more.  So I never got the put side on, unfortunately.

As for closing out the trade, the relentless climb seemed unstoppable. So with the time decay having done its thing, I decided to close it out early before some complete crazy surge took place. The delta was still okay, as I recall, but I was content to take it off and rid myself off the stress. I bought back half on 5/11 and the other half on 5/12 for a combined average price of $.13 per trade. A profit of $.69 is hardly an exciting gain, but its much preferred to seeing the potentially small profit turn into an even smaller one or even a loss.

I never got on the bottom side of the Iron Condor and took off the top side early when, of course, the next day the index was down would have made it easy to coast out the rest of the trade.  I could kick myself, but hindsight is always easy.
Let me emphasize, however, as I mentioned in the previous post, that I don’t rely on iron condors or spread selling for this account’s gains. This kind of half-application of the strategy would not make for a good year, I’m sure. At least, not a consistent one. But as I said, for some extra profits when it looks more than highly probable, I’m okay with a little bite here or there every now and again.
At the moment, I’m not all that eager to sell volatility. The VIX has come down quite an amazing amount. I figure a pop is inevitable sometime soon, even if it isn’t prolonged. As a result, I would think put Calendar spreads a more appealing strategy, as they benefit from a rise in volatility as well as the time decay. I think a Double diagonal could be a decent substitution for an Iron Condor for the same basic reason, but I don’t know if the experts would agree.

SO, after that long winded into, I’m looking to do a nice, simple far out of the money iron condor for June. One of the reasons I don’t like credit spreads is that you just have to wait and let the time decay do its thing. I’m a little too jumpy while watching the day to day fluctuations of stocks for spread trading stocks. But doing smaller positions on way OTM spreads on the indexes is a nice way to pick up some “easy” money. (Famous last words!)
I tend to stick to options on the Russell 2000, RUT, because it trades electronically and you are not subject to the guess work and luck involved with getting fills in the SPX pit with the open out cry that goes on there. Of course, we can always trade the SPY, QQQQ, IWM, etc., but then you have to trade many more contracts to equal the same money at work with the actual index options and that means more commissions. I know there are reasons that the TOS guys prefer those products anyway….better fills, tighter spreads, whatever. But this is just me.
I’m no Iron Condor expert, but one quick an dirty rule of thumb I’ve learned for the far out of the money IC approach is to sell the short strikes with a delta of around .10 or lower. When and if the delta on those strikes gets to .25 defensive action is needed. Either close out, roll further away, or add something like a calendar spread to balance out your deltas to a more comfortable level.

Here’s what I’ve come up with for RUT June contracts.

As a $10 wide spread, the margin requirement is $1000 for the trade. For every lot, the profit potential is $147 and the max loss potential is $853, not including commissions. Of course, this is using the data after the close on Friday, so it will surely change a bit on Monday morning.

Here’s the Risk Profile using TOS’s snazzy analyze page.
The Green line shows the p/l potential for the trade at expiration in June. The white line shows the theoretical value of the trade at any given price at the current date. As time goes one, it inches toward the green line. I have set price slices at the current price in the center, plus and minus 15% from the current price, and the break-even prices for the position. By adding the probability numbers in red toward the top, we can see that the probability is a bit over 60% that the RUT will be within the range of plus or minus 15% from the current price at June expiration. There is only a 19% chance that the RUT will be on either side of our break even points at expiration. As long as it stays between those two levels, in that big window of just over 210 points, we make money.

High Probability of success, which comes with a lower profit/loss potential. Makes sense.

Now for a look at the chart. We’re right now between the down-trending 200 MA and the 50 day which is turning upward. The 20 MA is below us and firmly headed upward. Considering the action in this area back in the fall, I don’t expect us to surge through here very easily, particularly after the strong run we’re had. Some consolidation or a reasonable pullback would be healthy. The MACD and Stochastic show potential for a bit of a pullback, but also no overwhelming signal for such. I would expect a pullback to no further than the 50 MA, currently at around 425.

Pretty cool how the strikes found with delta around .10 put our spread just outside of the high and low ends of the range from the panic in the fall.
Looks like a pretty good trade. And if you’re really feeling randy, one might try to put on the call spread now and give the index a few days or a week or so to come down some to put on the low side a little further away just for extra safety. This is probably what I will do in actuality.
Next time, I’ll show what I did for May on the RUT using this same basic approach.
Ciao for now.

Meanwhile, for those of you interested in the day trading side of things, I trade the /ES with some frequency.  It’s pretty tough, but I think it’s more about patience and discipline than anything else.  One thing I find very interesting and useful about it is that it shows you the very principles that you should apply to normal daily charts for your investing, but in very fast time.  So there’s lots of information to learn from in a much shorter time.  I can definitely say that it has brought my weaknesses and bad habits into focus and very quickly.

In any case, I don’t use anything fancy.  Same stuff as normal for daily charts.  The normal assortment of MAs, sometimes look at the MACD and Stochastics, but more than anything, Price action in terms of trend and support and resistance.  Patterns are just as useful here as on daily charts too, I find.

Here’s a nice setup from today’s midday action.  After trading down to slightly below yesterday’s lows, a sideways range was established and then it was broken to the upside.  Since it wasn’t on huge volume and in the snoozey noontime hour, I wasn’t all that convinced.  So I waited for a retest and took it.  VERY NICE!  I’m going to try to let it ride as long as it goes, but the absolute sell will be on two closes of the price below the 8 EMA on the 2 minute chart.

(Sorry, the sizing is a bit odd on this capture.  Click it to see it larger.)

Update:  Sold with a Stop sell order dragged up because of the double close below the 8 EMA on the 2 minute chart.

Gold.  Long term chart shows a big flag pattern of sorts.  After pulling back above the 30 week MA some weeks ago, this past week marked what seems a quite significant break of the most pressing downtrending resistance.

Even on the daily chart, gold is uptrending for three months and recently gave three fresh green arrows for those who like that system. Volume on Friday’s break above horizontal and diagonal resistance was on very high volume.

The XAU does have long term resistance in the form of the underside of the old support from back in ’06/’07 and the support line from its bottom in October 2000. Nevertheless, like gold itself, the group shows three green arrows and a three month uptrend.

The Gold Market Vectors ETF, GDX, shows a very similar chart.

It is interesting to note that the Gold stocks have drastically underperformed the price of gold over the last year. Obviously, the entire stock market being hammered is a big factor in gold stocks being sold off. Nevertheless, the it would seem logical that if the price of gold moves significantly higher from here, the gold stocks could possibly rise even more so.

Here are a few strong looking stocks, particularly from the 3 green arrow perspective. They are in alphabetical order.

GG seems a favorite among talking heads on TV. Regardless, note the potential resistance here and the less impressive volume on Friday than some others.

KGC is under a significant resistance line that goes back to ’08 as resistance and support. What is interesting to me about this is that it has had very high volume for the entirety of last week. If gold and the group don’t follow through on the breakout higher, this one could be an interesting short.

Not surprisingly, Silver also had a big day on Friday.

Some silver stocks that look good.

AAPL is another symmetrical triangle.  I’m short this, so banking on the downside continuation.

Volatility contracting here with a likely break to the downside.

Rising wedge in a bigger down trend tends to resolve to the downside. A revisit to the rising 50 MA would be a more attractive entry to the long side.

Here’s an ETF of Water Resources. Broke above resistance of a double bottom reversal but without major breakout volume.  Could be a “fakeout” but we’ll see if the line holds as new support.

In any case, just so we keep our eye on the ball, here’s my take on the market posture. Seems we’re creeping sideways to up. Not reason to think that won’t continue in light volume unless something is broken drastically to the downside and the obviously red flag goes off.

I somehow can’t figure out how to imbed the video, but here’s the MARKET POSTURE VIDEO.

I’ll try to get back with some more charts to look at soon.

I have decided NOT to begin taking trades again with the group account for a few reasons.  For starters, it seems that there are only a certain number of people that pay much attention to the project as evidenced by the very few who actively participate even if only with the occasional comment, question or observation about the system and its trades.  So it is my impression that there are very few who actively think about those trades made and the considerations of how they are handled.  It is that process that is the true learning experience to be had from this experiment, understanding the why of it all.  Not just getting the results from someone down the road.

Another reason to discontinue the paper trading is a minor (wink wink) problem that was apparent to us from very early on.  The Investools Method for trading using the “3 Green Arrows” system is a bullish intermediate-term trend following system.  We are in a horrible bear market which began only one month after we started trading this paper account.  An argument can be made for a sustained rally to take place at this point in time, but even if the recent lows were to ultimately be THE bottom, it would still be months before the markets would have worked through the damaging affects and momentum of the longer term down-trend and emerge with a healthy bull market.

Nevertheless, the good news is that despite the ill-timed application of this system, our trading plan has nevertheless far outperformed the market. 

As of yesterday’s close, the market has lost 40% since 9/13/07, the day before our first position was initiated.  Our account, all in cash since October 6,  is down 24% and that is including commissions of $10 per trade, which is on the expensive side of reality.  (At $10 a trade and 45 positions, the 90 orders filled add up to $900 or just under 2% of the originally $50,000 account.  A lesson in the significance of how commissions can add up.)

This system can surely still be used with success in bear market rallies, particularly if tweaked a bit, but there is more likelihood of frustration and churning in the account when and if rallies fail more frequently or quickly.  For my taste, this makes it even less appealing to take on stewardship of the group project while also trying to maintain adequate focus to one’s own personal trading approach.

Was it a success?  Worthwhile?  I think so.  On both counts.  We beat the market, the benchmark for all fund managers.  But still, we did lose money.  Is losing LESS money a really good thing?  In the last year, I think perhaps so.  As fund managers who have lost money this year, we’re in very good company.  It’s been a rough ride and apparently some of the world’s most legendary investors have eaten unfathomable losses.  Our losses, however, were due to a bad market and not a bad system.  Still, we have realized ways we could reduce losses, primarily by some simple rules to keep us out of certain trade situations, like an entry immediately before earnings, to name one that comes to mind.  There were trades triggered that we never would have made with real money.  The Market Posture was often dubious, exposing another crucial and more complex system in need of fine tuning.  But there were good lessons learned from the experience and the questions we wouldn’t have even known to consider going in to it.  In the end, our system took only a measured loss on any trade gone wrong and eventually brought us entirely back into cash.  The whole exercise provided good lessons in discipline, patience, objectivity and most importantly, keeping losses small.

In my opinion, this system is as good as any trend following system out there, but we’ll have to wait till the next actual bull market to test it live.  Of course, it’s not necessarily important which is THE best.  As long as you can manage to get into and capture most of a stock’s longer term trend and not worry about buying THE bottom and selling THE top, the magical powers of compound growth will surely expand your loot to great proportions.

One thing is for sure.  Using the 3 green arrows method along with proper money management is unquestionably superior to what is the more popular trend following system and possibly the most often used investment strategy of all………..”Buy and hold.” 

By the way, if anyone in the group is interested in stepping up and firing up the group paper account to test or practice this strategy or any others, please make yourself known.

Some of these snapshots toward the end are from a few days ago.

Surely it does not, by itself, tell too much or give reason to think that we’re in a whole new market now and all is well.  But it’s certainly not a bad sign.  Big cap, mid cap, small cap and tech, all breaking above the 30 day MA.

Before going on with the normal stuff of the market posture, let’s look at the bond market, shall we?  Yes, I think we shall.

Below is the chart of the yield for the 10 year Treasury Note for as long as the data is available on my charting program.    We are at record lows for this yield since the ’50s.

Then look at chart for the year.  Looks pretty nasty.  The yield has plunged as investors have taken the “flight to safety” in buying bonds.  But perhaps they’ve overshot the market a bit, at least for the time being.  A move back to just above 30 or 3% would still be below the 38% retracement from the last peak in the end of October.

The daily shows a chart that looks to have just fell through the floor.  Notice how extremely extended the MACD is on the down sides and how oversold it has been on the Stochastics.  I don’t mean to say that THIS is the bottom.  But it seems a bottom or reversal pattern of some form may begin to materialize here in the coming stretch.  This potential rising of the yield will be accompanied by the selling of bonds.  You can track that with some ETFs.  TLT for the 20 year bond and the TBT is an inverse of the same thing, so you can play it the other direction without having to short anything.

Now if it is true that investors tend to move money out of stocks and into bonds for safety, what happens if the bond market turns over and bond investors/traders start bailing out of bonds?  Perhaps some or much of that money goes back into stocks, even if with some trepidation.  Who knows?

In any case, here is the long term picture of the DOW.  I don’t mean to sound like a hopeless bull, which maybe I am, but this seems to have been beaten down with every thing in the broom closet.  Reversals are, I believe, said to come in the form of volatile extremes.  I’d say the last couple months would match that description.  We’re far from out of the woods, but it seems that optimism may be making an appearance.

And though it is only just a start and hardly sufficient for the all clear, today the index broke above the 30 MA, the downtrending resistance line from September, and began a short term uptrend with a higher low and now a higher high.  To boot, it is coming off a bullish divergence with the MACD lines.  This is when the Index forms a lower low while the MACD lines form a higher low.

Doesn’t a target of 10,000 or even 10,500 seem pretty reasonable?  We’d still be in the nasty bear market!

Now for the VIX.  It is in the middle of a range which could turn out to be a double top.  Today we have a breach of the uptrend support line which is a first signal we need for a sign of better things to come.  Then a move below the recent closing lows of 55 and then 47.75.  Getting and staying below 48 would be pretty meaningful, I’d think.  For now, I’ll call this neutral/bullish.

A move back above 80 on a closing basis and all bets are off.  The markets would likely be on their way to testing the lows again.

The SPX still has a considerable amount of long term momentum to the downside, most immediately in the form of resistance at the 50MA.  Nevertheless, we must recognize that it has broken through the shorter MAs and now has begun an uptrend with a higher low and now a higher high.

The Market Forecast shows a nicely upward trending green intermediate line.  That with the longer term sentiment line flattening from its dive and almost edging upward makes for what I’d consider a bullish Market Forecast reading.

The one cautionary note I should mention is that I don’t believe V-bottom reversals are very common or quite as stable as other bottoming patterns.  I haven’t read IBD much at all for many months, so I don’t know how well their Big Picture market outlook has been, but I believe they now consider us in a confirmed rally as of at least Thursday.

Anyway, here’s the big grid and resulting posture as I have figured it.

By the way, AFAM was number one on the current Monday IBD 100.  Using the old fashion method searching on Investools for strong sector groups and stocks within those, I found this stock a few months ago and bought it and was then stopped out.  The point?  We don’t need IBD or whoever else to find good stocks.

The stock gave three fresh green arrows yesterday, though its group chart is not exactly bullish.  This may or may not launch for a big run, but the IBD readers will likely continue to load up on this as and if it pushes through the pivot point around 52.50.  If you jump in,  be prepared for a quick failure or “fakeout,” particularly if the market doesn’t continue to rally.

Be aware that while today’s volume spike is certainly legitimate in size, it is still only under 1 million shares and much of that was likely due to buyers chasing IBD stocks as opposed to institutional investors who will sustain the real movement.

If the double bottom on the market in China holds up (FXI), CHL could be a nice one to watch for an entry on a pullback to support.

CHTT with an interesting symmetrical triangle setting up.  82.50 would be a nice initial target.  Beyond that point, it would be entering a Stage 2 bull movement again after basically a year of wide swinging sideways action.

ESRX is in an interesting point in the long term view.  Seems it could go either way. Interesting thing is that while the volume through this recent breakdown has been high relatively high on the selling side, but the overall volume still pales in comparison to the buying volume that brought it up and above the 45 buy point in early ’07.

EZPW is in a strong group and looks to be trying, though it looks a bit dubious.  That sell off in early Oct was nasty!  And now we’re in a rising wedge, which is supposed to break to the down side.  With that resistance at 19 it might even be watched for an aggressive short entry with a well defined stop if the market rally fails.  But don’t forget to look at its earnings growth.  Very nice and steady to date.

MPWR and the semi-conductors aren’t winning any popularity contests.  But this one looks to have put in a capitulation bottom and nice follow through day today.  It is forming a nice, clean double bottom with a distinct entry point just under 10.

WAB, from the relatively strong railroads group, has an inverse head and shoulders pattern forming, if a bit ugly.

CME has a double bottom reversal pattern with a buy trigger today and a projected taret of about 265 in the short term.

Could Gold stocks be ready to come back?  Here’s NEM with a nice Double bottom reversal. ABX is similar

Finally, for an Obama infrastructure play, this one might just applicable.  Double bottom breakout today with a projected target of about 12.  Long term chart is fairly ugly, though.

Well, that’s all for now, folks.  Hope it makes some sense to you. 

P.S.   Can someone explain to me what’s going on with the USD/JPY.  Wasn’t this supposed to have a positive correlation to the stock market?  Is the “carry trade” no longer an issue?