Option Investor
Index Wrap

Trading Amongst Minefields

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       9-26-2001           High     Low     Volume Advance/Decline
DJIA     8567.39 - 92.58  8718.16  8527.05  1.78 bln   1491/1672
NASDAQ   1464.04 - 37.60  1516.12  1458.34  1.76 bln   1447/2419
S&P 100   516.29 -  1.63   522.45   513.29   Totals    2938/4091
S&P 500  1007.04 -  5.23  1020.29  1002.62
RUS 2000  389.79 -  6.39   397.66   389.11
DJ TRANS 2076.79 - 16.01  2118.36  2072.70
VIX        39.26 +  0.39    39.71    37.95
VXN        65.94 -  1.63    68.67    65.65
TRIN        1.59
Put/Call Ratio       .82

Trading Amongst Minefields
Austin Passamonte

Strange as it is to say, hear or read the U.S. is indeed now at war. This leaves us vulnerable to overnight or weekend news having potential to explode market action in either direction while we sleep for many months to follow.

The first reports of bombing or shelling in Afghanistan may cause a euphoric pop in the markets. Why? Beats the heck out of me but that's what emotional creatures do. Traders are human and humans are always driven by emotion. When humans feel good, they buy.

The first report of planes shot down or troops lost in combat could likewise drive markets down as humans feel fear and sell. Heaven help market bulls should any more terrorist acts arise that are even remotely successful, especially during open market hours. Traders would likely sell everything in sight out of total panic for the future. Holding cash gives a sense of comfort and security away from danger and risk.

What does this mean for active traders? Trade lightly! We are in a period of time (starting with me) never experienced before by most existing traders. A majority have never traded such an extended bear market now especially compounded by global uncertainty in the midst of war. Losing sight of that fact and pressing either direction with too much capital can find one trapped in an adverse move that wipes out trading accounts.

I value expiration week so highly due to the incredibly large risk/return leverage it offers skilled traders. Hit a couple of trades for +100% to +500% and a trading account can weather plenty of storms. Avoid poor risk/reward periods like the first week of every expiration cycle where it takes lots of capital to make relatively small gains. That has been my "secret" to success for a long time and looks to continue far into the future.

Warning: Keep Out!
As noted before, almost 100% of my current trading these days is intraday in full reactionary mode. I hate to think about how many hundreds of wasted man-hours I've spent scouring charts for anticipated plays in IS website Gameplans that totally implode the following day. I can only imagine individual traders with longer time frames to trade than intraday must not be having much fun as well.

Two readers emailed this afternoon telling how they bought calls at the open via Position Trade instructions and had taken a severe loss by session lows. What was I thinking to be so bullish, etc, etc.

Well, I was thinking markets were poised (and still may be) for a moderate to significant bounce over the next little while and it's worth risking small amounts of 100% risk-loss capital to test it. I cannot figure out how someone can take SEVERE losses on 100% risk capital otherwise earmarked for a stop-loss event. Can you?

I am not a believer in trade advisory services. I've yet to see one stand the test of time and many are dropping like flies from existence on the web. Three dead trading sites still have classified ads running in industry magazines that arrived in my mail this week! What does that tell us? It tells me that the days of a service actually delivering a high percentage of winning trades canned & ready for the masses are long gone and probably longer before returning. Only those that serve to educate will be around for any length of time ahead.

Current markets are tough to trade and getting tougher. My overall advice is this: if you are not a battle-tested veteran in the trenches, stay out. If you cannot afford to lose capital you have to risk, stay out. If you are not proficient at managing risk, especially proper management of a trading account, stay out. If you cannot watch markets all day to wait for fleeting entry points during extreme whipsaw action, stay out. Stay out until market action finds direction and settles down, simple as that.

No website or person on Earth can shelter the unskilled from fiscal destruction right now. One wrong move or bad decision can easily wipe out several previous correct or lucky ones. Advisory services that tout how easy it is for newbies to simply follow their picks and prosper are leading innocent people to certain slaughter thru the lure of greed. Such traders can readily take four straight winning trades and blow up on the fifth that loses without proper risk management skills. That's the truth!

If this is a crushing reality to new market participants with small accounts and big dreams, it may be the cheapest education they ever receive. Trust me, current violent markets welcome all the new money that dares to enter and its school of hard knocks will be costly lessons indeed.

Fair warning offered in hopes it may save capital and casualties in our profession, but I full-well realize how badly we all need to learn from our own mistakes before the "aha" moment sets in.

On To The Charts...
Now that we've completed our civic duty of trying to save the masses, what might near-term market action hold for those who refuse my ample warning?

(Daily Charts: Dow & NDX)

Daily-chart stochastics are still rising. They did advance quite some distance this morning on such a small pop which warns of weak upward strength, but until they turn bearish reversals ahead it is perilous to trade the downside with any level of comfort. Today's decline posted another higher-low value than last Friday, one sign of bullish strength if that's the proper term in this case.

Not to say indexes won't plunge from here but fading their direction for more than a few hours tops is dangerous indeed.

(60/30 Minute Charts: SPX)

Today was another setup session for the patient. Miracle of miracles, we actually have a bonafide entry setup for Thursday! First we note stochastic values are just turning bullish reversals in harmony with daily charts at the close.

Secondly, look at the clear wedges price action formed today. See those prices pinched towards the end of 30-minute charts? That coupled with rising stochastic values suggest we go higher ahead.

1012 level on the SPX would be a more conservative entry to confirm that bullish pattern, but 1008 is suited for the aggressive trader who dares take higher risk for greater potential gain.

(60/30 Minute Charts: OEX)

Same with the OEX. poised to rally and break wedges as well.

(60/30 Minute Charts: Dow)

Same with the Dow...

(60/30 Minute Charts: QQQ)

... and the NDX, to a lesser extent. This lagging index lacks the clear chart formations that the leading indexes show, quite frankly because it is the weak sister and relatively dead by comparison. All the action remains in other indexes and that will last many months to follow if not longer.

Last Thursday
Which reminds me of last Wednesday night at the close when these exact charts looked this bullish or better. Remember what then happened Thursday morning? Huge gap down move and -384 Dow points at the close. Which is exactly why I didn't buy the close tonight or even dial up my broker in temptation. Actual option prices move very little this week compared to the amount of capital needed to be placed at risk for me to feel great temptation. The first time "Breaking News" flashes across CNBC screens in a scenario laid out above will move markets huge on a moment's notice and stop loss orders are merely a license for market makers to steal in "fast market conditions".

If Thursday opens lower and breaks into the green I expect to buy calls. If it opens or gaps higher like today, I'll watch & wait again. Fading the open move has been productive more often than not this year and promises to continue.

Market action wants to go higher and indeed will if the minefield labyrinth that lays before it can be safely negotiated. Trip one or two of those "Bouncing Bettys" scattered in the bullish pasture and screens will turn decidedly red once more. These are tough, tough days to trade and I believe will get worse before improvement. Use little (if any) risk capital unless experienced and skilled, remain within emotional control and discipline.

Above all, don't fall in love with either market direction because you will most certainly endure both. Often within the same session as well!

Best Trading Wishes,

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