Four Lessons From a Tough Tape

By Alan Farley
RealMoney.com Contributor
8/17/2006 2:02 PM EDT
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Technical Analysis

    * The jury's still out on whether the current rally is the long-awaited recovery.
    * Until we know for sure, prepare for more tough action and check your holding periods, use instinct and stay patient.
    * This summer, holding profits has been much harder than making them in the first place.

To paraphrase an old expression, traders who forget the past are destined to repeat it. This is especially true after this week's vertical rally. The harsh lessons of the last few months need to be hardwired into our brains so that we act smarter and perform better the next time the market loses its footing.

Realistically, whatever happens as we head into the fourth quarter is unlikely to bring absolute clarity to our trading lives. And whether this is the bottom or not might be the least of our problems. Most of us have to a lot of healing work to do with our profit and loss statements before Dec. 31 rolls around.

Is this really the long-awaited recovery? September and October are rarely kind to the financial markets, especially in down years. And this would be an odd time for the markets to take a final stand. August is the most illiquid month of the year, when big players are working on their tans instead of their trading accounts. So the jury is still out.

In the meantime, enjoy the rally, but take the time to ponder the harsh trading lessons that have been taught so far this year. To help you along, here are four nuggets of wisdom I've taken away from the 2006 selloff.

1. Making money requires superb timing and a very strong stomach.

Don't believe in the magic moment when the market suddenly finds its legs and charges back to new highs. Hopefully we're headed into a more benign environment, but don't count on it. We could be entering a purgatory phase that denies hardcore trend followers for months or years to come.

Hope in the bull market is a one-way ticket to washout city in these turbulent times. No, those broken stocks in your portfolio probably won't bail you out, regardless of what's happened this week. The market just isn't that simple anymore. In other words, we'll have to earn every penny and fight like dogs to keep any gains.

2. Holding period determines profits and losses.

Were you getting burned on intraday plays this summer or the core positions you carried around for weeks at a time? Several times I was forced to stop trading a specific time frame that was hurting me and reassign the majority of my resources into the few plays that were performing well in the volatile tape.

Indeed, the summer market has caused a lot of sleepless nights, even among professionals who have weathered tougher times in the past. Playing a twitchy seller's market can throw off your rhythm and force a lot of revenge trading, especially on days when things aren't going your way. I know that from personal experience.

Not sure if your timing is bad? Step forward to claim your booby prize if you held off buying this week until Wednesday afternoon because you didn't believe the vertical rally. Did you fail to notice that buying high and trying to sell higher has been a loser's game all summer long? That probably didn't change just because the market decided to go up on Tuesday and Wednesday.

3. The profitable traders are making their money through a sense of feel.

Instincts have guided profitability this summer, rather than textbook technical analysis. In fact, TA may be dangerous to your financial health in this twisted environment. The reason: Institutional computer programs are actively trapping retail traders by turning classic breakout and breakdown strategies upside-down.

Making money when predators are on the prowl demands more patience than knowledge. A single strategy has worked well in this endless barrage of contrary institutional capital: Standing aside for days on end until the market reveals its hand, and then taking the first available exit after turning a profit.

4. Pick your fights carefully and let others put their money at risk first.

This is especially true when prices reach or violate key support and resistance levels. There was a time when it made perfect sense to be the first one into the pool, but no longer. These uncertain times require a far more cautious approach because a single error can undo weeks of progress.

Here's a trade I made this week that demanded absolute patience. Boeing (BA - commentary - Cramer's Take) got talked up for weeks but the stock kept falling until it broke the 200-day moving average. I established a line in the sand that price needed to cross before it issued a buy signal. This was a relatively simple process; I just visualized where the bears would fail.

Note the four-bars below the 200-day moving average. All this stock had to do in order to hit the recovery trail was jump back above the resistance line at $77.20. My only job was to watch it closely and sit on my hands until the buy signal went off, which it did Wednesday morning. I then picked up the stock at $77.20 and rode the daylong rally.

We found out this summer that holding on to profits is much harder than making them in the first place. You know what? That's not likely to change anytime soon. So enjoy this summer uptrend, but take the time to learn the valuable lessons of this exceptionally tough tape.

How low can press standards go?
By Marvin Olasky
Thursday, August 17, 2006
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Try on this exciting photo caption: "A Hezbollah PR man poses for dramatic effect in front of a tire fire."

That's what the caption for the cover photo of the July 31 edition of U.S. News and World Report should have read. The caption that actually ran was "A Hezbollah gunman aims his AK 47 at a fire caused by an explosion in Kfarshima, near Beirut." The magazine suggested that the explosion came from a shot-down Israeli aircraft hitting the ground, but bloggers showed that the photo was of tires burning in a garbage dump after a misfired Hezbollah missile hit them.

Now that Israel-Hezbollah War I is over (with War II likely to begin as soon as Hezbollah rearms), we can review in peace an enormous breakdown in already shaky press standards. Big newspapers and magazines have in the past taken a hard line against the staging and doctoring of photos. Last month the Charlotte Observer fired a photographer for changing the color of the sky in a picture of firefighters. Three years ago the Los Angeles Times also terminated an employee for photo manipulation in Iraq. But the response of press lords to massive photographic fraud in Lebanon this month has been astoundingly lackadaisical.

Yes, Reuters fired one photographer for doctoring pictures, but the problem is general, according to photog Brian Denton: "I have been working in Lebanon since all this started, and have been witness to the daily practice of directed shots, one case where a group of wire photogs were choreographing the unearthing of bodies, directing emergency workers here and there, asking them to position bodies just so, even remove bodies that have already been put in graves so that they can photograph them in people's arms."

Denton concluded, "These photographers have come away with powerful shots that required no manipulation digitally, but instead, manipulation on a human level, and this itself is a bigger ethical problem." The manipulation is also not a moot point: When the next war comes, will photographers and editors once again carry Hezbollah's mail?

Here are just three examples of pro-Hezbollah staged photography courtesy of Reuters, the Associated Press and Agence France-Presse:

-- Photos of bombing sites with clean and undamaged toys and stuffed animals perfectly positioned in front of them for maximum poignant impact. It's possible that Mickey Mouse and others merely sprung up at those spots, but it's much more likely that their placement was the product of intelligent design.

-- Photographers moving other objects to more readily jerk tears. For example, many media outlets displayed a photograph of a mannequin with a wedding dress standing near the site of an Israeli air raid -- as if an explosion that knocked down a building a few yards away would leave a mannequin standing but unnoticed by hundreds of rescuers and media members running around earlier in the day.

-- Photos two weeks apart showing the same Lebanese woman bemoaning the destruction of her apartment by Israeli bombs. The photos showed her in front of two different buildings, leading one blogger to write, "Either this woman is the unluckiest multiple home owner in Beirut, or something isn't quite right."

Most major newspapers and magazines have not admitted their complicity, but three cheers for Tim Rutten of the Los Angeles Times, who noted that the stuffed toys poised atop rubble were "miraculously pristinely clean and apparently untouched by the devastation they purportedly survived. (Reuters might want to check its freelancers' expenses for unexplained Toys "R" Us purchases.)"

Of course, the larger question is why those corpses and that rubble are there. So kudos to photographer Daniel Etter, who wrote on one blog, "The real staging happens before the rescue worker shows the dead children to photographers. It happens when Hezbollah builds (a) kindergarten right next to its positions."

The rise of the caliphate
By Oliver North
Friday, August 18, 2006
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LONDON -- Let the recriminations begin! In the aftermath of Israel's abortive, on-again, off-again military campaign against Hezbollah terrorists in Lebanon, there are calls for a no-confidence vote to unseat Israeli Prime Minister Ehud Olmert. In Washington, critics of President Bush cite the latest round of Mideast violence and the discovery of a suicide plot to bomb U.S.-bound aircraft as reasons to spurn Republicans at the polls this November. In Lebanon, Sheikh Hassan Nasrallah claims that Hezbollah's "victory" gives him a new mantle of political authority. His assertion is supported not just by his zealous followers -- but by governments in Tehran, Damascus and less quietly in other Islamic capitals.

All these accounts of recent Mideast hostilities -- and now a U.N.-imposed cease-fire -- have appeared in this week's newspapers, magazines, radio and TV broadcasts. Though such depictions of political consequence may indeed be accurate -- they are woefully shallow and ultimately, misleading to readers and viewers.

With the exception of a small handful of serious journals, few of today's commentators or "reporters" seem able or willing to explain the latest armed confrontation and suicide bomb threats in the stark and perilous terms they deserve. As a consequence, few Americans seem to comprehend the two dangerous -- and perversely synergistic -- themes that predominate in modern radical Islam:

-- The apocalyptic belief of Shia scholars, clerics and political leaders -- like Iranian President Mahmoud Ahmadinejad -- predicting a violent, "final" clash between Muslims and infidels in which Islam triumphs, by wiping "non-believers" from the Earth, and;

-- The predominantly Sunni Muslim goal of an Islamic caliphate that extends from Casablanca, Morocco in the west to Bali, Indonesia in the east.

The vision of a globe-spanning Islamic theocracy is not new. In 632 A.D., following the death of Muhammad, his followers named Abu Bakr as caliph -- or successor. He resolved to spread the Muslim theology, with its message of equality and strict rules of behavior, through force of arms. His goal of Islamic dominance has survived the bloody Sunni-Shia schism, the rise and collapse of the Ottoman Empire, two world wars, communism and the fitful spread of representative democracy through most of the rest of the world.

Thanks to a steady flow of petro-dollars, today's leaders of "the religion of peace" -- both Sunni and Shia -- have been able to launch and sustain well-financed, extremely aggressive campaigns to advance their beliefs. Sheiks, imams, mullahs and ayatollahs routinely expound the virtues of "martyrdom" and vicious treatment for Christians and Jews.

The "common ground" for all Islamic radicals is hatred of the United States and Israel. Shia leaders like Iranian Ayatollah Khameini, Sheikh Nasrallah and "President" Ahmadinijad, routinely proclaim that Israel, the "Little Satan," must be "destroyed," and that the United States, the "Great Satan," must be "driven from the lands of the prophet" -- meaning places where Islam is practiced as a state religion.

Sunni terror leaders -- like al-Qaeda founder Osama bin Laden and his second-in command, Ayman al-Zawahiri, have openly pledged to establish a new global caliphate. They have loudly and proudly proclaimed Islam will rule the world, and that the West and its "infidel" religions and cultures will be destroyed.

Bin Laden has boasted, "the pious caliphate will start from Afghanistan." Al-Zawahiri envisions the reestablishment of the caliphate, writing, "history would make a new turn, God willing, in the opposite direction of the United States and the world's Jewish government." Fazlur Rehman Khalil, an al-Qaeda apologist has written, "due to the blessings of jihad, America's countdown has begun. It will declare defeat soon," and will be followed by a new caliphate.

Western political leaders and media elites appear unwilling to acknowledge the threat posed by these two repetitive themes in modern radical Islam -- an Armageddon-like final battle -- and the call for a new globe-spanning caliphate. The failure of the "international community" to fully support democracy in Afghanistan and Iraq, to insist on disarming Hezbollah in Lebanon or to stand unified against Iranian efforts to acquire nuclear weapons place all of us -- not just Israel -- in great peril.

Instead of confronting radical Islam, the response in the United Nations, most of Europe and much of the United States is to preach "tolerance," "understanding" and "dialogue." The belief that poverty, lack of education or inadequate economic opportunity has incited Muslim rage against the West is totally mistaken.

The terrorists left to re-arm in Lebanon weren't recruited into Hezbollah by the promise of a square meal. Apparently most of the would-be suicide killers apprehended last week here in London had jobs. Like the 19 hijackers who killed nearly 3,000 in the United States on Sept. 11, several had university degrees. And like the seven who blew themselves to pieces here in London on July 7, 2005 -- they all intended to die. Understanding that is going to be important in the days ahead -- particularly so if the Iranians deploy "an Islamic bomb."

Why CNN reminds me of the Democratic Party

By Jon Friedman, MarketWatch
Last Update: 12:01 AM ET Aug 18, 2006

This is the second and final installment in a series about CNN. Part one, a profile of CNN/US President Jonathan Klein, appeared on Wednesday. See previous column.
NEW YORK (MarketWatch) -- CNN reminds me of the Democratic Party.
Just like the Democrats, CNN can sometimes sound more idealistic than realistic. Plus, it comes up with lots of good ideas, boasts many stars and competes ferociously on the national stage -- with visions of past glory and dreams of dominance. But ultimately, CNN is to Fox News as the Democrats are to Republicans: ensconced unhappily in second place. Just as politicians count votes, broadcasters tally ratings points -- often to CNN's chagrin.
"The focus on ratings in general is misplaced," says CNN/US President Jonathan Klein. "This is, first and foremost, a battle for journalistic excellence."
More idealistic than realistic, remember? Yes, the television kingpin uttered those words with a straight face. No, I didn't see him crossing his fingers behind his back.
Seriously, Klein, 48, feels very proud of his colleagues -- and, indeed, he should feel free to stick his chest out. CNN, a unit of Time Warner (TWX :
time warner inc com
TWX16.35, -0.08, -0.5% ) , has invested a lot of its parent's dough to assemble a first-rate global reporting and production staff. It features such reliable and charismatic on-air stars as Nic Robertson and Christiane Amanpour abroad. Peter Bergen is rapidly becoming the most compelling voice when it comes to analyzing the ongoing worldwide terrorism story.
In the U.S., CNN has a very deep bench, too. John King, its long-time top White House reporter (and now a senior national correspondent), stands out in what I've regarded for many years to be television's finest Washington bureau.
Fortune's Andy Serwer, who appears regularly on CNN's breakfast-hour show, is the most analytical business-news commentator around -- and the same goes for the New Yorker writer Jeffrey Toobin, when the topic turns to legal matters.
Further, the lively "Reliable Sources," anchored by Washington Post media critic Howard Kurtz, is an hour-long look at journalism's weekly hits and (mostly) misses. The show stands out for its consistent excellence even though it faces stiff competition on Sunday mornings.
Perhaps only CNN would have the ambition to present a documentary such as "In the Footsteps of bin Laden." It will air on Wednesday evening at 9 p.m., Eastern.
So, with all of this firepower -- and powerful Time Warner bankrolling Klein's ambitious strategy -- where the heck did CNN go wrong in losing ground to Fox? And how can it leapfrog over its chief foe?
I suspect that Fox will remain No. 1 for as long as George W. Bush calls Crawford, Texas, -- I mean the White House -- his home. That's how strong a base Fox has built among supporters of the president. That's how high the mountain is that CNN must climb. Denali might prove easier to navigate.
"CNN has dramatically narrowed the gap in the 25-to-54 gap demo with Fox," said a CNN spokeswoman in New York (although Fox would surely disagree with those findings). CNN noted its progress during the "Anderson Cooper 360" and "The Situation Room" programs last month. Plus, Klein has said, "American Morning" is gaining share steadily this year.
Strategy
Klein's strategy hinges on four points: create momentum at the 10:00 p.m. news hour, gain market share in the morning, win on the weekends and re-assert dominance in the political coverage.
Klein said he is comfortable keeping CNN's headquarters in Atlanta, even though it could be argued that the power base of the network increasingly appears to be shifting to New York.
"In Atlanta, we have a talented, committed group," he said. He noted that it's "cost-efficient and "operationally efficient" to maintain a large staff in the hometown of CNN co-founder and 24-hour news visionary Ted Turner. And Klein pointed out that "the people down there seem happy" and called the morale of the Atlanta team "great."
In addition:

    * When I told Klein I'd been hearing rumblings that Paula Zahn's CNN show might be in trouble, he replied: "I keep reading that, too." Then he stressed: "We're happy with her."
    * On the future of "Larry King Live," Klein was clear that he didn't favor having anyone succeed the ageless talk-show king. "Larry created that niche. I have a feeling it leaves with Larry."
    * Morning co-anchor Soledad O'Brien is doing so well that she "is blowing the doors down."
    * The new CNN arrival, correspondent John Roberts who came over from CBS News, "has just wowed everyone."
    * Miles O'Brien, the network's morning co-anchor, brings "such intelligence and breadth" to the show.
    * Lou Dobbs, who has sparked tremendous controversy with his strident opinions particularly on immigration reform, is "brilliant, well versed, confident. He is the most influential political journalist" on the scene (and you still thought Dobbs anchored a BUSINESS show, eh?)

For all I know, Klein may secretly have concluded a point which most of the media universe treats as a fact of life. For all of his good intentions and tough talk, CNN most likely won't make any dramatic strides until the U.S. acts to have a Democrat living in the White House.

Just the same, it doesn't mean that CNN will go into hibernation and throw its collective hands up in frustration. Klein, no doubt, will continue to do whatever he can to take on Fox. He'll also maintain a measure of proportion about his task.
At one point during my interview with Klein, I asked him a question about MSNBC's (GE :
General Electric Companyprospects.
"I can't put myself in their shoes," he said with an ironic smile. "My job is tough enough."
Time for a change
Finally.
It's no secret that the newsweeklies are widely regarded as an endangered species -- virtual eight-track players flailing away in a world gone digital.
At least Time magazine isn't going out to seed quietly, though. As I suspected in a column last month, Time is bidding for more readers and advertisers by changing its publication date so that subscribers are sure to receive the magazine by Saturday. See my prescient thoughts here.
The new system will begin next January.
The plan coincides with a gameplan crafted by new Managing Editor Rick Stengel, who has pledged to upgrade the performance of Time's Web site.
The magazine's paid circulation figure for the last six months of 2005 was unchanged at 4 million, compared with the year-before figure.
Stengel is serving notice to the publishing industry. Time is primed for a fight.
MEDIA WEB QUESTION OF THE WEEK: Who do you think should take Larry King's place someday on "Larry King Live?"
FRIDAY STORY OF THE WEEK: Former Iraqi hostage Jill Carroll's riveting series in the Christian Science Monitor enabled the publication's Web site to attract 1.5 million page views on Tuesday alone. The paper points out that this figure represented a leap from the site's July average of 121, 2447 page views each day.
A READER RESPONDS about my column about Jonathan Klein: "I wish you'd asked the 'irrepressible' Mr. Klein why he stabbed Aaron Brown in the back. Some of us still think that was a disastrous decision. I like Anderson (Cooper), but Aaron was a credible and objective newsperson. Guess that isn't good enough for Mr. Klein. " Donna L. Halper, instructor, Journalism Dept., Emerson College
(Media Web appears on Mondays, Wednesdays and Fridays)
Jon Friedman is a senior columnist for MarketWatch in New York.

i still thought it was an interesting article Huajian re: the fact that buying indexes at 10perior lows vs. highs outperformed, very interesting.(i didnt say i agree with it beating individual stock picking systems though, just indexes which short term are driven by sentiment and there is no mention about volume for the indexes)

here is a really random data point, just thought was interesting(see below):

Recession Talk and the Markets

While debate over the likelihood of a recession seems to have picked up recently, we did a word search in The Wall Street Journal and The New York Times and found that occurrences of the term in those papers remain stuck near 18 - year lows. Looking at the last two US contractions, we found that occurrences of 'recession' in both papers appear to be coincident with the onset of a recession, implying that they generally appear when most people aren't expecting them.

i thought this a neat site to read quick overview about top traders and their backgrounds/styles

http://www.streetstories.com/

Cramer a long while ago wrote a good column on what happens on options expiration week squeezes.  For any newbies out there who want to know why the market is up 5 days in a row, read on...

Most of the time, options don't matter. Most of the time they exist in their own world. But in expiration week, they matter plenty, which is why I dwell on them.

So, why do they become the tail that wags the dog during expiration week? What makes them so powerful?

First, the only reason I even know this stuff is because I used to do nothing but trade options when I didn't have much money. I took all the money I had saved up for law school and rolled it into options and made a ton of money that I then used to pay my tuition. I got started early on in the game because I loved the leverage and excitement. It is because of years of trading that I now know things like when a squeeze might occur or where a pitched battle might take place.

So many of you write in and ask, "Is there a place in The Wall Street Journal where I can read about the potential squeezes?" Or, "Does CNBC know when the squeezes are going to occur?" Absolutely not! I have never read about any of this stuff in any magazine or newspaper because it is all intuitive and derived from my experience, not because there is some printed list somewhere.

The reason why I know this stuff is because I have learned a critical lesson that I keep enforcing: Options are a zero-sum game. There is a winner and a loser. When you buy a call, there is someone who sells it to you. Sometimes that person is long common stock and wants to pick up income by selling a call.

Sometimes that person is long a call and sells it to you. But often the call is sold by someone who is betting against you. Those who sell calls because they want them to go down are in a pitched battle all week with those who want the calls to go up. And the battle has a conclusion, a bona fide ending that makes the battle get more heated all week.

There are winners and there are losers. There are people who are trying to stop you from making money and there are people who are trying to make money. There are people trying to tag you out, people playing defense. They need to stop you.

Why do they need to stop you? Probably because they are trying to make it up in volume. Let me explain. The people who sell calls for five-eighths of a dollar and three-quarters of a dollar don't make much on each one. But if you sell thousands of them and they go out worthless, you have quite a payday.

Again, you are someone who specializes in selling calls. One of your specialties is that you trade calls on National Gift Wrap, a boring cyclical that hasn't done anything in ages. The stock has been stuck in a range between $25 and $28 all year, and is down substantially from its high. You have been selling calls regularly against this stock because the calls always go out worthless because the stock's been a dog. As you are typically selling a couple of thousand calls each month, and they are all going out worthless, you have been picking up mucho dinero each expiration day. Sometimes, when the stock runs up to its upper end of the range, you think, hmm, maybe it is going to break out, but you see that people are willing to pay really juicy premium for the calls and you sell them. Then the stock recedes and you collect the gains when the calls go out worthless.

This week, on Monday, a broker comes to you and says he has a client who wants to buy 1,000 National Gift March 30 calls with National Gift at $25. You are naturally suspicious because that is an awful lot of calls to buy knowing that a.) they will expire at the end of the week, b.) the stock hasn't gotten above $28 and c.) no news is expected. (It isn't due to report.)

You know that National Gift might be taken over -- anything can be taken over -- but you don't know whether it is happening and you figure that nobody would be dumb enough to buy 1,000 March 30 calls with five days left if there were a bid because that guy will get nabbed by the regulators. (And believe me, you would.)

So you offer the March 30 calls for a buck, 1,000 times. That means, you are offering the buyer the right to buy 100,000 shares of National Gift at $30 for $100,000. With the stock at $25, that seems like a pretty stupid bet to make. The guy, who is not dumb, bids you three-quarters for them. These markets are negotiable. You hold firm. You want to make $100,000 this week and you aren't going to sell them for less. The prospective buyer passes, as they are too rich for him.

But I, Jim Cramer, hear about your offering from a broker. I don't know anything about National Gift, but I think the cyclicals are due for a rally. This offering seems like an interesting speculation, or spec. I am looking for upside insurance against a big blowoff in the traditional stocks. I am thinking that the S&P is too oversold and the NDX is too overbought.

I am willing to take the gamble that this is the week that cyclicals go up, the Dow explodes and I make some money in the Old Economy. I "take," or "lift," your offering. In other words, I buy the 1,000 calls on National Gift, with a week left. I love upside insurance -- this is a "punt," as we call it -- and I want to give it a try. I am thinking the most I lose is $100,000, and when you are running $365 million, that's not too much to pay for an insurance policy against an upside blowoff, even if it goes out worthless in five days. Stranger things have happened.

The next day there is a seismic shift in the market. The paper stocks explode up along with the chemicals and basic industry stocks. Maybe somebody thinks the Fed is done tightening. Maybe these stocks got too cheap. Maybe some price increase is sticking. National Gift jumps $2. The call seller is still oblivious. He is thinking this stock is so far from the $30 strike, that he has nothing to fear. If he wanted to, he could always buy 100,000 shares of National Gift to protect himself. But that's a lot of capital he would have to expend. He could borrow the money and put the trade on but his risk reward is not so good. If National Gift drops $2 back, he will have made $100,000 on the call but lost $200,000 on the common. If it drops three or four bucks, it is an even bigger nightmare. Plus there is the nagging cost of carry. Most of the people who sell calls don't want to borrow money to finance common stocks underneath.

He could buy them back, of course, and take a loss. He could find some firm, some brokerage, that would sell him 1,000 calls, but he might have to pay a buck and a quarter, or $125,000, for them, which is a huge loss. So he does nothing.

Wednesday the whole world changes. Real buyers come in to buy the paper stocks again. In the meantime, National Gift, which has an aggressive buyback, steps up and begins to buy back stock right under the buyers. The stock is at $28 in the morning, up a dollar, and the company is bidding $28 for 300,000 shares. The stock only trades a couple of million shares a day, so the company is a good percentage of the volume.

Making matters worse, National Gift is in the S&P 500. There are lots of people who have sold calls against the S&P 500 future (SPX) and they are being squeezed as the index climbs higher. They keep coming in to buy the calls back forcing the index up ever more. And new money is at last pouring in to buy these Old Economy stocks.

Midday, Bob Pisani flags National Gift as a stock that at last is gaining traction. It jumps another $1.

It's Wednesday at 2 p.m. and National Gift has broken out of the range. You are beginning to think, hmmm, I could be in a spot of trouble on those calls. Two days till expiration and this stock is breaking out.

But still you do nothing, because the calls, with two days left, are still where you sold them to me. What are the odds that this move continues?

At 3 p.m. you get a preliminary view from your brokers about how expiration may turn out. It looks better to buy. National Gift inches up further, to $29.50. You check to see where you could buy the calls back and they are at $1.50 now! They are really pumped. You would lose $50,000 and you don't even know if someone is willing to sell you all 100,000 there.

You do nothing. You gamble that this move can't be sustained. It would be a once-in-a lifetime move. If we could analogize to insurance, this would be the Johnstown Flood for you. Once in a thousand years. You just don't think it is possible. You don't want to hedge against it. You let the short call position ride.

On Thursday, the market simply explodes. The Dow goes up 500 points. Paper stocks are just the rage. Three firms recommend National Gift and it opens up 3 points to $32.75. You are now short a call for $1 that is at $3 and change with one day left. You are down $200,000 on this trade (you picked up $100,000 but now you have to buy them back at $3 and change if you want to, so $300,000 minus $100,000 that you picked up equals $200,000.)

You can't really handle that big a loss and you are beside yourself. You go into buy the common stock to hedge, and next thing you know, there are four other buyers and the company has stepped up its buyback even more.

You check the option market and it is the same as the common. You panic, just panic, and you say to your broker, "Pay anything, anything, for 100,000 shares." You buy the stock at $37.

The pressure is now off. But you just lost $600,000 and you are out of business. All because you tried to make that $100,000 with a week left. You were part of a giant squeeze and you contributed mightily to it. This pitched battle happened millions upon millions of times. It explains how options contribute to the run-up.

That's why expiration plays such a big role -- because these trades all had to end in one week. The seller of the calls couldn't wait any longer. His number was up. He capitulated because he could not come in short 100,000 shares of National Gift on Monday.

Game over. Call-buyer wins, call-seller loses and the stock goes higher!

Rev Shark's Blog: Anticipating vs. Positioning
Originally published on 8/18/2006 at 12:47 p.m.

While I frequently warn against being overly anticipatory in your trading, that doesn't mean you should be oblivious to the concept of positioning yourself in front of future action. It would seem that there really is no big difference between the concepts of anticipating and positioning. However, in my mind there is a big difference. Anticipating is based on the hope that a certain event will occur, while positioning is based on reacting to conditions as they exist now.

For example, someone who is anticipatory will make decisions based on a theory about how macro conditions will impact the market at some future point. What is happening in the market right now isn't that important to someone with an anticipatory style. They are more focused on predicting the future, and don't necessarily believe that technical conditions are that important when considering how things might develop.

Positioning is a much more reactive approach. When the market is acting poorly, you position by cutting exposure. When there is a big upward move, you position by locking in gains and taking steps to protect profits. Positioning has little to do with predicting. It is more about reacting to present circumstances so that you will be in better control of your capital as the market develops.

As I stated in my prior post, I am positioned very defensively right now. That isn't because I am predicting that the market will roll over and go down. It is a reaction to having some good gains, protecting profits and cutting my exposure in long positions that have become technically extended.

The market may very well continue on its upward trek from here, and I will miss out on gains because I'm defensive. I really don't have any idea if that will occur, so instead of making predictions, I focus on what I can control, which are the positions I'm holding now. If they are extended, I sell them, and if I can find some new buys, then I buy them. I'm not finding buys, and many of my longs are extended; therefore, I am positioned defensively.

Quoted from huajian_us

TradingMarkets.com
Do You Buy Breakouts? Think Again
Monday December 8, 10:20 am ET
By Larry Connors

How Could This Be???
Today I’m stunned. No, that’s an understatement. I’m beyond stunned. Why? It looks like we’ve all been sold a bill of goods. Let’s take a short quiz and you’ll soon see why…

Today’s Test Questions:

Question #1

Let’s assume that it’s January 1, 1993, and the S&P 500 is at 435.38. Nearly 11 years later (today) it has risen over 145%, rising to 1061.50. How would you have done if you had been a breakout trader and bought every new 10-period high (as all the breakout traders were piling in, most of the money managers were likely adding to positions and the press was jumping up and down about how great things were), and used a trailing stop of exiting when prices closed under their 10-period average?

a. You made a ton of money and are now a member of the Forbes 400, because if the market more than doubled during that period, you as a breakout trader, made a fortune.

b. You made good money. You paid for your kids’ college, have lots of money to retire on and have a second home adjacent to the Bush compound on the shores of Kennebunkport.

c. You outperformed buy and hold.

d. You lost money…lots of money.


So the answer to Question #1 is that you did not beat buy and hold, you are unfortunately not a neighbor of the Bush family in Kennebunkport and you are also not a member of the Forbes 400. Buying new highs loses money…lots of money.



Have a great week trading (and feel free to email me at larryconnors@tradingmarkets.com if you need any help on the above)!

Larry Connors

I wrote a trading system and try to put author into test.   Here is what I got, I use 5 years data.  Buy when it break 10 day high and 20 day high and cut loss at 7%.  Initial captial is 50000.  Reinvest the profit.

            10 days break        Buy hold  
QQQQ     70306                 50985
RUT         73380                 64501
SPY         43290                  55609                  
VTIV      164963                  148531                

20 days
QQQQ     66610                   50985
RUT        67830                    64501                  
SPY         40251                   55609

So SPY does under perform buy and hold.  But what about QQQQ and RUT, it is way outperform.  One interesting thing is 10 day breakout is outperform 20 day breakout consistently.  So author only tell half story.
          

Excellent work. Once again this is a terrible way to trade the indexes anyway. Anybody that trades it like this is playing a poor system.

Great work, huajian!

Good article by Helene Meisler.

http://www.thestreet.com/p/rmoney/technicalanalysis/10305752.html

If no subscription, I will post this weekend.