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Daily Newsletter, Monday, 04/15/2002

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The Option Investor Newsletter                   Monday 04-15-2002
Copyright 2001, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
      04-15-2002          High     Low     Volume Advance/Decline
DJIA    10093.67 - 97.15 10225.76 10070.49  1.12 bln   1408/1769
NASDAQ   1753.78 -  2.41  1769.04  1740.61  1.32 bln   1387/1625
S&P 100   547.72 -  6.02   555.14   546.23   Totals    2795/3393
S&P 500  1102.55 -  8.46  1114.86  1099.41             
RUS 2000  512.74 -  2.72   517.39   510.43
DJ TRANS 2802.65 - 72.38  2875.22  2794.42
VIX        22.38 +  0.29    23.00    21.78
VXN        41.87 -  0.94    42.70    41.09
TRIN        1.07
PUT/CALL    0.73
*******************************************************************

WRONG!
By Buzz Lynn
buzz@OptionInvestor.com

I was wrong with a capital "W" last week when I thought the 
markets might go up following last Monday's big gains.  It was 
downhill or flat-land at best from there.  Looking back though, I 
was right in some respects in that the market has remained range-
bound and down in what is still a bear market.  New bull markets 
never begin with values wildly inflated beyond their ability to 
produce a return for their owners.  Nor do they begin with short-
covering on only moderate volume.

But back to being wrong. . .it isn't the first and won't be the 
last.  It is also a stark reminder for me that bar charts and 
stochastics follow price action, not the other way around.  Mia 
Culpa's aside, I have anther opportunity to be wrong again today!

When you get right down to it, nothing really happened today.  
Sure we got the news that the FBI issued a credible warning to 
avoid banks in the Washington D.C. out of fears of another 
potential terrorist attack.  While we might think that was the 
reason for today's selling in the Dow, such was not the case.  The 
markets opened down with the D.C. bank threat only adding perhaps 
another 20 Dow points to the loss.  While there was a mild attempt 
at recovery, it couldn't stick and the Dow fell back to lose 97 
points.

Why?  Blame GE and C.  For GE, they suffered from a weekend 
article (I believe in the New York Times?) that in essence said GE 
was not entirely comfortable with the economic picture going 
forward.  Hello recovery from the largest, best run conglomerate 
in the world?  NOT!  

Then there was C (Citigroup) that just flat blew it on earnings.  
While it was embarrassing to have to admit they missed earnings, 
they still employed the worn out "pro-forma" numbers in an attempt 
at obfuscation, then admitted they still had a loss even after 
one-time, extra, optional, additional, non-recurring, never-to-be-
repeated-again, Argentina-was-a-one-time-charge-last-time-too 
expenses.  "If it weren't our Argentina losses, we would have seen 
double-digit earnings growth" according to Sandy Weill, C's CEO.  
Sure, and if it weren't for my losses at the card tables in Vegas, 
my gambling junket would have been profitable too!  Sheesh!  What 
passes for justification of earnings.  Note to Sandy:  You are a 
smart and capable guy, but your words and evasion are part of the 
problem with Wall Street's credibility.  When you B.S. the owners, 
you do us a disservice - no thanks.  Hit the "sell" button.

Aside form some $1 plus losses in retailers WMT and HD, the volume 
was quiet on both exchanges - NASDAQ 1.34 bln; NYSE 1.23 bln.  
With volume like that, there is no bull market in site.  The 
public is losing interest in the speculative aspects of the market 
and rightfully having second thought about "buy and hold" too.  
Again, this is a bear market (and as much as some will disagree 
with me on this), cheap interest rates, a big year for write-offs, 
sluggish recovery from a recession that never happened (according 
to some), inflating currency, and deflating prices of goods sold 
still cannot keep grossly over valued equity prices up.  Lest you 
think I'm telling people they should sell while I'm buying all I 
can get my hands on, think again.  I'm building an ark.  Other 
than my doggie tech-losers I still own that are worth the price of 
a few baloney sandwiches, I own few equities unless they pay 
stable dividends.

OK enough from the curmudgeonly bear corner.  What do the charts 
say?  At the risk of being wrong again, nothing says "bullish pop" 
like a daily stochastic buried in oversold.  While it may not be a 
spectacular bull move, the indexes are coming up on major levels 
of daily support in conjunction with their oversold condition that 
could cycle us up for the week (though all my thinking and 
judgment says we sink like a stone). 

Here's what we see:

Dow industrial chart - INDU (weekly/daily/60/):


 

From lat week, I noted that 10,100-10,150 was a level of support 
that might hold.  Looking mighty shaky here now that the Dow is 
under the 50-dma (magenta line) of 10,212 while the stochastics 
can't get enough lift to soar into overbought.  On the other hand, 
the lower daily Bollinger band at 10,053, the psychological 10,000 
level and the 200-dma of 9950 could be the level of ultimate 
support for the dailies to pop up for a round of calls.  

NASDAQ chart - COMPX (weekly/daily/60/)


 


Interest in the NASDAQ?  None.  1.3 bln shares and virtually no 
movement bare that out.  This has-been of an index needs a shot of 
adrenaline.  Bearish stochastics abound.  A bearish wedge can be 
seen on the daily chart - 1700 floor with declining highs.  Has it 
bottomed yet?  Will the stochastic reverse soon or will 
oscillators oscillate back up to overbought?  I can't say for 
sure.  But with oversold stochastics near a level of support, a 
short-term bullish move could be in store for the not too distant 
future.

S&P 500 chart - SPX (weekly/daily/60/)


 


Very bearish here too, but perhaps nearing the end of the down 
cycle, though frankly, the 1100 level has me focused.  SPX is 
already under the 50 and the 200-dma; every bullish turn on the 
daily stochastics is met with a lower high - definitely no 
strength.  A close under 1100 would likely set the next level of 
support at 1080 before we see a bullish reversal.

Thus there in all three lies the dilemma.  Stochastics nearing 
oversold as the candles approach support vs. still bearish charts.  
Which way from here?  In this period of earnings with bad news 
already taking its toll on traders (as though a failed recovery is 
a surprise), one little piece of good news (made up or real) could 
give us a tradable rally as long as our expectations have already 
been reduced to "low" over the past two weeks of anticipation.  We 
may be able to take a breath following the blue skin tone as we've 
held our breath and crossed our collective fingers over the past 
two weeks that the "recovery" was real.  It isn't, but now we know 
that.  And that sets the stage for a "the market already now 
anticipates the bad news" rally.

We'll see, but I'll be looking at support and a stochastic 
reversal to go long, but will stick to shorts on an SPX break and 
close under 1100.

INTC reports tomorrow after the bell and is likely to deliver bad 
news with their usual positive spin that things will be better 
next quarter.  Right - when pigs fly, but other barnyard animals 
(sheep) will eat it up anyway.  MSFT reports on Thursday.  Plenty 
of others in between.  Watch for volumes to remain low and news to 
move markets.  With volatility this low, buying cheap straddles on 
high profile earnings reporters might the ticket to profits.

See you at the bell.


********************
INDEX TRADER SUMMARY
********************

Taxing Time
by Leigh Stevens

In more ways than one -- we have to pay up to our Uncle today, GE 
continues to pay the price of a slow economy (hey, you can't 
punish the Fed by selling THEIR stock) and the clown of Venezuela 
is BAAACK!  Unfortunately, the guys that replaced Chavez made his 
same mistake of ignoring the opposition nearby crude oil futures 
rallied a buck and we're back to wondering why we don't control 
our own fate in energy. 

Today was the first day in a long time when I noticed that bad 
news with particular earnings or whatever, didn't automatically 
send the Indexes into a tailspin.  While one day does not a trend 
make, the ability of the market to absorb "bad" news and take it 
in stride is the first hints of a market rebound.  And, of course 
tech is acting better -- the Composite ($COMPX) is rallying from 
the area of its late-Feb/early Mch. lows and from the area of the 
lower envelope band I use, 6% under the 21-day moving average.  

Texas Instruments reported after the close and their results were 
mildly encouraging to analysts.  The Semiconductor Index ($SOX.X) 
is a definite bellwether to the Nas and I highlighted this 
sector's technical underpinnings in my recent Index Sector 
column, and will talk more about it here also. 

As I think that it's time to do some buying in the SOX based on 
the apparent successful test of the bullish support trendline -- 
the chart is shown below -- "proof" is still in the ability of 
the SOX to achieve a decisive upside penetration of 581, 
resistance implied by the down sloping trendline (red dashed 
line). 

I am cautiously bullish on the Nasdaq 100, Nasdaq Composite and 
the QQQ holding stock, at least as far as for a trading turn on 
the upside, assuming that the Semis break out in this fashion on 
the chart.

Semiconductor Sector Index ($SOX.X) Daily chart:


  
  
My suggestion remains basically unchanged, as I look to trade 
both sides of the market (calls & puts) using the support and 
resistance levels implied by the upper and lower boundaries of 
the hourly charts.  There is just recently a greater tendency for 
the Dow type stocks to fall, and tech to rally.    

Dow (DJX) Daily/Hourly charts: 


  

The Dow option playbook would suggest that the 10,300 - 10,330 
area, at the high end of the hourly downtrend channel, is the 
place to sell DJX. 

Support is implied by the low end of the channel (blue) line 
intersecting in the 10,000-10,050 area and is suggested for a 
long side or call play. 

The long side may be higher risk play, with a bunch of earnings 
reports still ahead, even though DXJ is down near the lower 
envelope line 3% under the 21-day moving average, from which we 
have been getting some meaningful rallies i past months.      

S&P 500 (SPX) Daily/Hourly charts: 


 

Looks lower ahead -- buy at the low end of the hourly 
downtrend channel in the 1096-1100 area.  First technical 
resistance is seen in the 1115 area, at the dashed level line. 
Buy puts on a rebound to the 1120-1123 area, at the top of 
channel.  

S&P 100 (OEX) daily/hourly charts: 


 
 
The more oversold S&P 100 (OEX) may achieve a double bottom on 
the daily chart if it doesn't slip much lower, but the hourly 
chart looks like price is headed a bit lower still.  

First resistance is in the 558 area, at the dashed (blue) level 
line. Put purchases in the 560 area are suggested if OEX rebounds 
to the even tougher resistance implied by the upper channel line. 
Higher risk call purchases can be done at signs of price 
stabilization in the 545 area for a trade. 

As with the other indexes, a breakout above the upper channel 
line, that lasted through the close and into the next morning, 
would suggest a possible upside reversal.            

QQQ Daily/hourly charts: 


 

QQQ playbook - 
Shorting and put purchases in the 35 area and buying around 32.00 
area would be playing the current range within the hourly 
downtrend channel. There is still the possibility that we could 
be seeing the formation of a double bottom on the daily chart. 
 
Long/Call Positions:
Long QQQ at 34.30 
Stop: 32.50.  
Objective: 38.00  

My original objective is based on the prospects for a move back 
up to the longer-term Dec.- Feb.- early-March down trendline on 
the daily charts, which would be a typical recovery type bounce.


Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com 


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***********************
INDEX TRADER GAME PLANS
***********************

THE SECTOR BEAT - 4/15
by Leigh Stevens

NEW TRADE PLAYS AND GUIDELINES:


Semiconductors - 

The semiconductors (SOX.X) closed with the 2nd best percent gain 
(+2%)of the day of the popular sector indexes. 

Texas Instruments reported after the close and their results were 
mildly encouraging to analysts.  The Semiconductor Index ($SOX.X) 
is a definite bellwether to the Nas and I highlighted this 
sector's technical underpinnings in my recent Index Sector 
column, and will talk more about it here also. 

I'm going to go ahead and say that it's time to pull the 
"trigger" on the SOX and buy the May 750, or the May 760 SOX 
calls, especially on any price dips over the next 1-2 days -- the 
chart is shown below. 

While the technical action is good, with the intraday lows over 
the last 6 session holding at or near the up trendline with no 
closes below this line, "proof" is still in the pudding -- 
technically, this would be a decisive upside penetration of 581, 
resistance implied by the down sloping trendline (red dashed 
line). 

To refine a suggested SOX strategy, assuming the purchase of a 
few calls, rather than 1-2, I would scale into them, leaving some 
room to buy cheaper on a pullback and to top off with a 
"confirming" trendline breakout.



 


Also in the news:

I have the view that the recent week's advance in the Oil Service 
sector is a retracement and maximum upside is to around 106, at a 
maximum.  I will monitor this sector index for a representative 
stock that may be a put candidate.   



 

Biotech has been rebounding, but a close over 500 is needed to 
suggest any kind of substantial turnaround.  This sector may be a 
short also by playing a put in a "proxy" stock that is in the 
index. Stay tuned also on this one.   



 

Suggested purchase of the Consumer Cyclical Trust iShare (IYC) at 
recent price levels, with an objective to a new high 
above the May 2001 high at 63. Also, Alcoa (AA) is a 
representative play in this sector.  

The cyclical iShares pulled back a bit today and started to 
penetrate its up trendline -- if it falls further, my focus would 
be 1.) on support implied by the 50-day moving average (green 
line) at 565.6 and 2.)On the support zone between the 2 dashed 
green level lines -- pullbacks into this area is suggested as a 
place to accumulate this sector stock.  

The stop out point, where I would exit based on weak technical 
action, is on a close of the stock below 551.50, which would take 
it below the prior (Dec. & Feb.) prior highs.  Prior resistance 
should now offer strong support, if this sector is going to 
continue to perform.  

Cyclical Index ($CYC.X) daily chart: 


 

A higher risk, countertrend trading idea -
The Telecom ($XTC.X)Index should find support around current 
levels, and I like Level 3 Communications (LVLT), as a way to 
play this sector.  LVLT has broken out above its multimonth 
downtrend line and is rebounding from the area of its 50-day 
moving average.  

Upside potential in the stock looks like it is to the 5.5 area or 
higher, but 5.5/6 appears to be a conservative projection over 
the coming few weeks.  The stock is cheap enough to play outright 
or, purchase the June 5 Calls during any periods of price 
weakness this week. Let me be clear, it is a higher risk trade to 
attempt to profit from a minor upswing, when the dominant trend 
is DOWN.

Level 3 (LVLT) hourly chart: 


 

Momentum play - 

The Airline Index ($XAL.X) has had very strong momentum and has 
is rebounding from the area of both its 50-day moving average and 
its up trendline. Friday's upside acceleration took it above it's 
50-day moving average.  One way to participate in the strength of 
this sector is by choosing a representative airline stock and I 
suggested Southwest Airlines (symbol: LUV - chart below), which 
is also a pick on our sister site, Premier Investor.com.

The Sept. 20 calls were suggested, with projected upside 
potential in the stock to back up to the top end of its price 
channel to $22 more near-term, and perhaps to the $24 area over 
time.  


OPEN SHORTS/PUT PLAYS:

RTH (AMEX: Retail sector trust stock)
SHORT at 99.00 
Objective: 90; Stop: 102 
Time frame: 3-6 weeks.


XAU (PHLX Gold & Silver Index)
Bought May 65 puts at 1.80  
Stop: Risk to no value on the option
	Also recommended May 60 Puts
Objective: XAU to 60.50, where it has support

Sector: XLB (Basic Industrial Sector SPDR) at 23.75
Stop: 24.50

Sector: XLP (Consumer Staples SPDR) at 26.00
Stop: 26.25

Sector: IYD (US Chemical Index iShares) at 45.25
Stop: 46.60

Sector: IYE (US Energy Index iShares) at 49.70
Stop: Lower to 50.00, from 52.00 
Objective: 46.50 (new) 

Update: 
Today's rebound back up into the downside price gap area is not 
very impressive, given the close near the intraday low. I 
anticipate that the these iShares will continue lower, but 
suggest lowering our protective liquidating (buy) stop to 50.00.



 

OPEN LONG or CALL POSITIONS:

UTH - Utilities Holders trust (AMEX) 
Long at 95.25 
Stop: 91.00
Objective: 105

RISK to REWARD guidelines:  
Determining an objective is important, even if it is a moving 
target, as this is the reward potential.   Determining reward 
potential is critical to establishing whether a stop that makes 
“sense” (e.g., a sell stop that was placed under a key support 
level) would, if triggered, result in a dollar loss that is in 
proportion to profit potential; e.g., 1/3 of it.  (On occasion, 
when the purchase price of call or put is equal to 1/3 or less of 
the estimated reward potential, there may not be a specific exit 
suggestion, as the cost of the option is equal to the amount that 
is being risked.)   


Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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The Option Investor Newsletter                   Monday 04-15-2002
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


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*****************
STOP-LOSS UPDATES
*****************

ENZN - put
Adjust from $43 down to $42


*************
DROPPED CALLS
*************

HIG $67.53 -1.09 (-1.09) Pressured by weakness in the Financial
sector, HIG finally gave up the high ground and broke down out
of its 6-month ascending channel on Monday.  Volume was robust
throughout the day and despite a valiant effort the bulls were
unable to reclaim support at the $68 level.  That was also the
level of our stop, so clearly, the play is a drop tonight, with
a busted price pattern and a violated stop.

THC $69.70 -0.30 (-0.30) Friday's sharp decline left our THC
play resting precariously above our $69.80 stop and we knew
today's trading would be critical.  Rather than hold the $70
support level, THC fell right through it at the opening bell
and even the afternoon bounce couldn't get it back above that
level.  With daily Stochastics now fully in decline and a
violated stop, we have to drop it tonight.

VRTS $36.01 +0.14 (+0.14) No your eyes aren't deceiving you.
VRTS moves to the drop list tonight.  Recall that we added it
over the weekend in anticipation of a short-covering rally ahead
of the company's earnings report due out tomorrow after the
closing bell.  Well the short-covering didn't appear today, and
in accordance with our policy of not holding a play over
earnings, we're dropping it tonight.  Aggressive bulls could
still trade a strong rally tomorrow if VRTS blasts through the
$37.50 level on strong volume.  Just remember to close any
open positions before the closing bell.


************
DROPPED PUTS
************

None


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*********************
PLAY OF THE DAY - PUT
*********************

GS – Goldman Sachs Group $81.60 -1.40 (-1.40 this week)

The Goldman Sachs Group is a global investment banking and
securities firm that provides a wide range of services worldwide
to a substantial and diversified client base that includes
corporations, financial institutions, governments and high
net-worth individuals. The company provides investment banking,
which includes financial advisory and underwriting, and trading
and principal investments, which includes fixed income, currency
and commodities, equities and principal investments.  GS
recently completed the acquisition of Spear, Leeds & Kellog,
which is engaged in securities clearing, execution and market
making, both floor-based and off-floor.

Most Recent Write-Up

After the severe beating Brokerage stocks took on Thursday (due
to the pending legal action against the analyst community), a bit
of a rebound was to be expected and that is exactly what
transpired on Friday.  Following along with the Brokerage sector
(XBD.X), GS caught a bid right from the open and moved up as high
as $83 on Friday.  Despite the fact that volume was heavy again,
we certainly like the trade setup that the stock is currently
giving us.  That's right, it's an inside day and for those that
like to trade this chart pattern, the entry parameters are easy
to see.  A drop below Thursday's low ($80.35) can be used to
trigger new put plays, while a rally through Thursday's high
($84.10) will be grounds for closing the play.  Accordingly, we
are lowering our stop to $84.10 this weekend.  Alternatively, we
can consider new entries on a rollover from the vicinity of $84,
especially if accompanied by increasing volume and weakness in
the XBD.  Isn't it interesting to note the proximity of Thursday's
high ($84.10) to the 38% retracement of the fall rally ($84.14).
Clearly this has become a pivotal point for GS, and the stock's
behavior near that level will determine the fate of our play.

Comments

While not a true second "inside day", it was rather interesting
to note that the price action on Monday once again remained within
the range of the large red candle from Thursday.  Buyers and
sellers are battling for dominance within a rather narrow range
and when a victor is decided, it could make for a substantial
move.  The Broker/Dealer index (XBD.X) was showing its weaker side
again on Monday, and price action in GS would still seem to favor
the bears.  A solid bearish breakdown from the pattern would come
with a print of $84.23 (just below Thursday's low), but for those
that like to take a position ahead of a breakdown to increase
potential reward and better control risk, a rollover from the
$82.75 intraday resistance level looks attractive.  Keep stops
set at $84.10, as a move above that level would resolve this
"inside day" pattern in favor of the bulls.  With only 4 days
remaining until April contracts expire, only aggressive traders
should be using them.  All others should now focus on May
contracts to protect against the ravages of rapid time decay
while GS consolidates ahead of its next directional move.

*** April contracts expire this week ***

BUY PUT APR-85 GS-PQ OI=10406 at $3.90 SL=2.50
BUY PUT MAY-85 GS-QQ OI=  576 at $5.70 SL=3.75
BUY PUT MAY-80*GS-QP OI=  656 at $3.20 SL=1.50

Average Daily Volume = 3.22 mln



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option or stock
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offers fast option executions

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**************
TRADERS CORNER
**************

What To Do When You Can't Do Anything Right
By Mark Phillips
mphillips@OptionInvestor.com

Let's take a short break from our educational exploits in
Candlestick charting, to cover what I think is perhaps more
timely and definitely more critical to our trading success.

There's no denying that the past 2 years have been tough on
traders of every stripe, especially those that were trained
for the profession during the runaway bull market of the late
1990's.  No matter how accomplished any of us are at our
chosen profession, we will all reach a point where we have made
a series of poor trades.  Human nature compels us to try to "win
it back", which frequently goads us into bending or breaking our
money management rules, and then we are dead set on a course
towards financial destruction.

I've received a number of emails from readers at different levels
along the trading expertise curve, telling me in painfully stark
terms how they won big in 1999 and early 2000, only to give back
the lion's share of those gains in the next 12-18 months.  Now
they are sitting on the sidelines with an account that is a mere
fraction of its original size, afraid to trade because of being
unable to withstand the loss of more losing trades, but at the
same time frustrated by watching one winning trade setup after
another pass them by.  Does that sound at all familiar?

If it does, then perhaps I can help to illuminate the path to
recovery.  It isn't easy and it isn't quick.  On the other hand,
it isn't anything fancy or esoteric either.  It is made up of
many little steps that many of us already know, but somehow we
forget about them when we are in the midst of a losing streak.
But I know it works because I have walked it myself when
profitable trading seemed as far away as the planet Pluto.  If
a workable plan that can return you to success in the trading
trenches sounds like the right prescription, then I invite you
to join me for what I hope will be both an educational and
helpful journey.

Here's an excerpt from one of several emails I have recently
received on the subject.  I think it frames the problem that
many traders may find themselves in at the current time.

"I'm hoping you can give me some direction to help me get moving
again. Two years ago I lost over $65,000 in the market. Last year
I made nothing because I'm afraid to play because I'm afraid I
will lose more. On the other hand I see the potentially winning
trades everyday and have watched 10s of thousands of dollars that
could have been mine, but I always talk myself out of executing
the trade. I'm so frustrated with myself that I'm starting to
question whether or not I can be a day trader, which is exactly
what I want to do.  Do you have any advice for me, that will help
me engage.  Common advice says do smaller amounts to get my
confidence back, but I still can't seem to pull the trigger. It
makes me sick to think about the trades I see just go away from
me while I watch. Instead of living the life I could, I'm living
in total stress."

Does that sound at all familiar?  If so, how about an action plan
to get you back on your feet and trading profitably again?

Please understand that if you are going to become a consistently
profitable trader, you absolutely WILL go through this sort of
introspection and despair.  It is part of the process.  I don't
believe that we can learn the hard lessons that this business
forces upon us without having the sort of experience described
above.  It is different for everyone, but the same process of
recovery (with minor modifications) can work for just about any
trader with a sufficient desire to succeed.  

That's really what it comes down to is desire, in my opinion.  Not
a desire to make buckets of money, as that is putting the cart
before the horse.  No, what we need a burning desire for is to
gain an understanding of how the markets move and gyrate and how
we can competently read them.  Once we achieve that goal, the
making money part will follow in due course.  To learn what each
of us need to in order to be successful, we must remove ourselves
from the emotional Greed/Fear roller-coaster and turn the learning
process into an unemotional one.  Then we can truly learn and
improve.  

Before I delve into the recovery path that I've used in the past,
I want to recommend that you take a short trip over to the
Trader's Corner archives first.  My good friend, Buzz Lynn, wrote
a great article on the subject last year that describes many of
the steps that are necessary to improve in ANY endeavor, and I
highly recommend it!  Here's the direct link to the article
entitled Slump Busting.

With that long preamble (we're already halfway through the second
page!), you'd think that I would have a long and complex solution
to apply.  Sorry to disappoint you, but it is really just a large
dose of discipline and common sense.  Unfortunately common sense
becomes exceedingly rare when we are not trading well and we
"have to" make $xx by the end of the month.  So here goes!

1. Shut down your broker window and focus ONLY on paper trading.
We have got to remove ourselves from the environment where our
trading decisions have the ability to make or lose money.  That
is keeping us balled up in an emotional wreck and having a
devastating effect on our trading decisions.

2. Spend as much time as necessary to decide HOW you will trade.
Will you focus on equities or indices?  What will be your
timeframe for trading?  Day-trades, Swing Trades or Position
Trades?  What tools will you use to initiate and exit trades?
Oscillators, chart patterns, volume-based tools, or a combination
of all three?  Maybe you have an entirely different approach that
you want to employ -- that's great!  This is the time where you
need to decide what it will be.  I highly recommend spending some
time in this educational phase reading new material on the subject
of trading.  It doesn't matter if it focuses on Technical or
Fundamental analysis.  The point is to expand your mind and give
your brain new ideas on which it can feed and grow.

3. Now that we have a methodology in place, we need to search for
trades that fit our parameters and start placing them ON PAPER.
Keep a written log of every paper trade, recording the specifics
of WHY you got in and WHY you got out.  Record as much information
as necessary to justify to yourself why you would want to be in
that trade.  And don't manage your trades like they are just
fictional trades.  You MUST manage each hypothetical trade as
though your ENTIRE ACCOUNT is at risk in each and every trade.

4. Develop a money management system that works for you.  This
should define how much you are willing to risk in any given
trade.  Learn to see trade setups where you can quantify risk and
reward before entering the trade, and stop losses are a must!  The
best tool I have ever found for quantifying risk and reward is
Point and Figure charts.  Jeff Bailey does a great job of showing
how to use them in his end-of-year manual and then touches on
various aspects of managing risk throughout his Bailey's Basics
section of the website.  

5. Continue to refine your strategy by evaluating your results of
EACH AND EVERY trade, learning from both the successful and
unsuccessful ones.  Explain your refined strategy to your
non-trader spouse or friend who is willing to listen.  If they
can understand your strategy as you explain it, then it is very
likely you have a workable strategy.  When you are satisfied with
the simplicity of your strategy and you can see it paying off in
an acceptable percentage of winning trades, then it is time to
start placing SMALL live trades.

6. You'll know you are ready to start placing small trades when
you can no longer stand to see all the money go by that you would
have made if your paper trades were real trades.  But even now, we
need to proceed cautiously.  For the first couple months, keep
your position size no greater than half of what you would normally
be willing to risk.  And make sure to have no more than 3 trades
open at any point in time.  We are still in repair mode, and need
to focus on the process, rather than the profits.

Continue keeping a trading journal, recording all the important
factors of each and every trade along with any pertinent broad
market observations.  Apply the lessons learned to fine-tune
your trading strategy and in time you'll know you are back on the
road to trading success.

I hope that helps!


Mark


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