Expecting the Worst
Wednesday, November 21, 2007 at 08:36AM Volatility is back, and it couldn't have come any sooner. Yesterday's range was so intense! I love it! Time to break open the option addict guide to day trading. I have to admit, I was expecting a down day yesterday from the gap up, but the rally in the last hour was crazy! This is the kind of crap that makes it tough to trade in this type of market. If you have heard comments recently about how hard it is to trade in this type of market, it's not just someone blowing smoke, it's absolutely true.
In bull markets, everything goes up, and corrections are fairly light, keeping trends fully in tact. Bear markets are different. I know, because I survived one. The market drifts lower, but you will have sharp rallies that frequently come out of nowhere. Sharp enough to violate trendlines, trigger stops, and whipsaw you in and out of positions. There are no easy trends in bear markets, and technical analysis isn't the playskool puzzle it is in a bull market. That's because traders don't trade in repeatable patterns in such a market. A bear market is full of emotion, and price action is erratic, not to mention, with volatility at sky high levels, it makes option trading a complicated task, especially for option buyers. It's not as easy as buying puts and watching stocks slowly drop to reasonable price targets. I only wish it was that easy.
Since I know the majority hasn't actively traded through a bear market, you ought to take some time and study one to prepare yourself. It's like my old basketball playing days. I never challenged an opponent unless I had done some research, watched some film, and studied my opponents characteristics, strengths and weaknesses. I never want to get engaged in a challenge without understanding exactly what I am up against. I hope you don't either. Get out your charts this weekend, travel back 5 years, and get to work.
I don't want to frighten anyone, but I want you to be aware. As the market continues this behavior, for however long it lasts, this will present some significant challenges. I have encouraged everyone to reduce position sizes, number of trades, etc. It is with the intent that it protects you through the random acts of a potential bear market.
You know, I put myself in a tough position each day writing about my thoughts, opinions, ideas, etc on the market and how I make money in it. I'm over here flexing at the market on Monday, bragging about how 100% of my puts are trading in the right direction....then at the same time writing a book about how complicated this market is, or will become. I am trying to keep it real here, and want to sideline my actions for a moment. If you know in the back of your mind that this isn't an easy climate, then you will be pleasantly surprised or better yet; amazed, when you find money in this market. However, to set the record straight: no market intimidates me. I'm still here to share ideas and show you how trading is really done on a day-to-day basis.
Since tomorrow is a holiday, and Friday is irrelevant, not to mention a weekend to follow...I can't advise my clients to buy anything in front of that kind of time decay. Therefore, even though I have spotted a few good ideas, I am not acting on anything. What I can advise you to do is take small profits on some winners, and cut losses quicker. If you still struggle with taking losses, seek some counseling.
Oh yeah, and by the way... Happy Holidays.
I'll be back throughout the day.
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Reader Comments (18)
Jeff -
I well remember the "bear market" you speak of. It was a definite learning experience for for me to say the least. Great advice about digging out the long term charts and start learning the history.
Thank you for doing all that you do and I hope that you and all the OAs have a great Thanksgiving - get away from the markets for a few days. They will be here next week rest assured!!!
EB
Thanks Jeff.
Happy Thanksgiving to you and your family as well as all OA's and their families!
I understand your concern. I'm just happy to have found a groove the past couple of weeks.
Thanks for the warning- any reason not to sell time over the weekend? Selling straight ATM calls or call spreads to garner some downside move and burn a little theta over the (practically) 4-day weekend. As you said, we can have a sharp correction come out of nowhere but some tight upward stops might keep the few bucks we can scalp here and there.
Stan
liz -
thanks for the feedback. fyi- i just got out of it because it broke through resistance at 50 and i was tired of being down on it. i am making a bunch on my other plays so i just cut it off. thanks
ps - i love jcp.
Jeff-
Thanks for continuing your reminders about this market.
And I hope you that you and your family have a wonderful Thanksgiving.
liz
From last thread:
TraderJohn-
Really? That's funny! IT helped me with the basics. Jeff and his blog helped me take it to the next level and that 3DL class really helped me put all the pieces together. And Jeff and this community continue to help me move higher.
liz
Jeff:
Thank you for all the help you have given me through the Marketcast,Mastertalks, Trading Room and especially this Blog. I would have given up trading months ago if not for your guidance.
Wishing you and your family a wonderful Thanksgiving.
Sam H
Jeff,
Happy Thanksgiving to you and your family (including the extended OA family). Thanks for the heads up on the current market, and for letting us know where to start the history lesson.
Your teachings are helping a lot of people and I for one can't say thanks enough!
Clean cups.
Stan,
Price risk is the biggest reason not to use that strategy.
Jeff,
Happy Thanksgiving to you and your family. I will surely give thanks to you and all OAs for your sincere willingness to teach us how to become succesful traders in any market.
I really look forward to learning from you in this upcoming bear market - at least surviving through it with some good pocket change so I can be ready to bag some big bucks in the next bull market.
Have a good rest all OAs!
Hey Jeff,
Missing you and Eric on the cast. The new guys are right from the morgue.
I have been using the Bounce and Bounce II search in investools. I noticed yesterday that the search button is gone on both of these searches. What's up? Is investools systematically removing all the good content? Is this a conspiracy?
Trice
San Diego
Well ... Being the new guy here (or one of at least).
Is there a good method to go about looking at the historic charts? I can go back and look at the charts no problem, but I may not be looking at/for the right things. The GF is getting me the Option Volatility & Pricing book for an early Christmas gift, is there a publication that would help in this area?
Thanks!
Trice- I reported those missing buttons on Jeff's searches last week! Shouldn't be too difficult to put in a couple of buttons.
sniff-sniff- I smell a rat!
Jeff,
Thanks for the warning, I was just starting to get comfortable with the bear market. I just looked at the $SPX daily from a few years back, it was indeed very choppy and that the price patterns don't always confirm. I will spend more time on individual stocks this weekend to see if it's any different. Too bad you can't see the intraday charts anymore.
Happy Thanks giving to you and your family!
Clean Cups!
Jeff,
I appreciate your real world take on what is going on here, and hearing from a person who demonstrates what he talks and walks day in and day out is G0LD! I've only been here a month and the learning curve in HUGE. Your generous sharing of learning and growing skill via your video is priceless. I took a gain from FAF yesterday, your direction and focus helped me make a 22% gain in a few days.I really appreciate and value your expertise. I'm keeping my powder dry for now.
Gracias Jeff and Feliz Holidayzzzzz 2 You,Yours and everyone in this communidad!
Hi OA,
I'm a new reader of your blog and just wanted to express my appreciation for your work. It takes an incredible amount of courage and perseverance to put your thoughts on public paper daily. And for that I thank you.
This is regardless of any negative opinions you may have received (I don't know that this has happened with your blog posts). The fact that you're documenting your trades and more importantly, your thoughts and rationale behind them, in a dispassionate manner is a great testament to you. So, thanks again for that!
dm