Back to the Future
Wednesday, November 28, 2007 at 05:16AM 
The year is 2000. The chart: The Dow Jones Industrial Average. This chart represents roughly a four month period of time, and a 16% decrease off the highs. I am going to force everyone to look at this to see what trading conditions are like in bear markets. At a quick glace, this looks easy, right? "C'mon Jeff, I would just buy puts on these downtrends and make money hand over fist!" I only wish I could teach you what it is like holding positions and taking entries and exits during these times. It is so much harder than it looks.
This was what I wanted everyone to study over the holiday weekend. "Become familiar with your opponent before you engage in battle." While the trend looks easy here, take a look at each daily price bar. Even the smallest ranges of candles here represent triple digit movements. Right after a 1, 2, or 3 day drop in the Dow, it retraces the whole move in half the time it took to form. I can still recall the move in late January. When the Dow finally broke below 11,000 I became shorter than life itself, only to get stopped out two days later.
In hindsight it looks easy, but you can't time these erratic price movements. This is precisely why I have warned you about taking profits quickly. If you get a quick move in a stock, take your profits! Shorten your time frame. Holding trades for weeks on end and adding to positions is a strategy of the past. Moving forward, I will prepare for combat. I will kill bears with my Bear Hands, and invoke fear in my opponents with my Chuck Norris death stare.
Reader Comments (112)
Oh C'mon Jeff. We all know that if you start smacking two hand sized rocks together that the bears will be scared away. I'm going outside for a bit to find the right rocks...
Thanks Jeff, for the lessons!
Since we're all venting about our accounts, here's one for ya: I'm up $15 on the day! HA! Take that, you big stupid Market!
I got out of my MS put yesterday with a teensy weensy profit because I just had a "feeling" about the market. And what does MS do today?... it goes UP over 2 bucks! Phew! Really dodged a bullet there! Per Master Jeff, shorten your time horizons! Amen, brother! Amen!
Thanks for confirming what I am feeling. It is triple fold coming from you. Does this mean take profits in ISRG...heyyyy I couldn't resist, you can slap me later.
Jorge, meet me under the big redwood tree with your picnic basket. I'll bring chicken salad and homemade chocolate chip with walnut cookies. And you and I can chow down while we navigate this choppy market!
Anybody else in KWK? It's behaving so far...
Jorge, meet me under the big redwood tree with your picnic basket. I'll bring chicken salad and homemade chocolate chip with walnut cookies. And you and I can chow down while we navigate this choppy market!
Anybody else in KWK? It's behaving so far...
Jorge, meet me under the big redwood tree with your picnic basket. I'll bring chicken salad and homemade chocolate chip with walnut cookies. And you and I can chow down while we navigate this choppy market!
Anybody else in KWK? It's behaving so far...
Jorge, meet me under the big redwood tree with your picnic basket. I'll bring chicken salad and homemade chocolate chip with walnut cookies. And you and I can chow down while we navigate this choppy market!
Anybody else in KWK? It's behaving so far...
Laney, did you see my response to you in the chit chat forum?...
OMG guys, I'm so sorry about those duplicates! Something is going on with my comments... The time stamp is all goofy and they're showing up in the wrong spot! SORRY!
Jorge, Laney and Krystal,
I wish I would've taken my profits from WHR on Monday's close. I would have been in a much better mood last night!! I will be taking earier profits from now on!
Jorge, I'm glad to see you still with us! I know you were having some trouble a few weeks ago! I've been struggling too, but I can't seem to stay away. I will do some paper trading and some small money trades until I feel more confident. I enjoy this blog very much!!
Krystal, thanks for the kind words last night!
Scott L
Jay C, were you trying to be condescending on purpose?
Kim, you've got mail! :)
Charlie,
Your option gives you the right to buy Google at $800. You can buy Google in the open market for $685. As you can see there is no value in this contract. This is the type of option you want to sell normally. You have no exquity, nor will you until Google trades above $800. Even then, you will have lost most of the premium due to time decay.
If you are bullish on a stock, don't choose your option based on the price. With options, you get whay you pay for.
Barry,
These numbers will obviously change everyday. It is a sentiment indicator. As you learn about the market, you will be able to tell how healthy a rally is by the number of stocks participating...hence the reason I mentioned it yesterday.
I don't know what is going on with the comments today, but they are arranged in a peculiar order. I am looking into it and should have a fix shortly.
Ken,
My post wasn't pointing out direction, it was pointing out similar characteristics that are reminiscent of bear markets. Conditions can forecast price movements...after all, that is why we use technical analysis.
OAs-
30 min's to close and we are bumping up against the 1470 level on the S&P with the 30&200MA's at 1485. Was enough to get me to run with my profits. Have found it's better to miss the gap up in the morning and enter after the first 15 minute bar is closed and we're moving up to enter trades....rather then experience the huge and swift moves down we have had after days like this. Doesn't produce the profits of a buy and hold strategy from earlier this year, but it has me sleeping better at night.
I held one put from yesterday...ouch. The other two hit conservative stops at the open before the stocks flew up with the market...thankfully.
From what everyone has said recently...my experiences sound very much in step with the majority.
Wish I had been on top of ISRG at the open today!!!
Thanks for everyone's contributions to this site, it's helpful having a "community" to lean on.
Warmest Regards
JEFF
Thanks for the perspective. I just took half of a new call off the table as it stalled at 80% of target.
You are a lighthouse in a huricane!
I'm with you Jeff. The Dow moves 500 points in 2 days taking back a weeks worth of downward movement. All because the fed may cut a quarter point in two weeks? Right. That's why I'm sitting on a pile of cash with a couple of toes in the water.
The Wasatch just had it's first good snow last night, I think I'll go skiing instead.
Ok, I am getting hit on everything I own but PAA today. WSO is off in the wrong direction. Looks like I will paying for more education - the bear market kind.
Jeff, you have an amazing ability to point out just what I am faced with. Thanks!
thank you soooo much for the perspective. theses are tough waters to navigate.
I'm barely in the market right now,but am still losing. My timing is way off. At this point just trying to breakenven.
BTW, you were exactly right about the bullish divergence on financials. locked in a nice profit on MER. Thanks again.
P.S. when do you next teach master talk?
Awesome information, as always. Thank you. It really is a tough market to trade. Especially for somebody without much experience to begin with. Thanks for continuing to educate me. I have not yet done my homework on the historical charts (as you instructed!) and really need to go back and do this asap. I'm mostly in cash right now as well. I still haven't quite grasped the concept of "taking profits quickly in this market". Hence going from a 105% return on PSA to 15%, unrealized of course. But still painful.
Hi Jeff,
What works in a bear market?
Trice:
A picnic basket works!
I started taking Jeff's advice. This is the first full week I've been back to trading since switching to TOS. I may be taking profits prematurely, but I went ahead and closed my ESRX call for a 50% profit in two days. Could I have made more? I'm sure... it's a great looking stock. But I'd rather lock something in and sleep better at night than wondering why I didn't take such juicy profits when I had them, especially in a market like this. We can't let things ride the way we did in September. I wish we could though. Be nimble like Jeff states!
Jorge,
I am doing the same thing. I closed out two bullish trades yesterday with 58% and 51% profits. Today they are both up and I'm OK with that because they could just as easliy be down. Do I feel badly that I took profits in this market? No.
Trice,
Take your profits quickly, as if a bear were chasing you, quickly! :-)
Thanks Jeff! You had mentioned that you were looking for the VIX to break out of the triangle that it has been forming recently. It looks like it broke out today to the down side. I'm wondering what you make of this action? I am bearish overall and agree that this rally is BS, but does this change anything for you?? Thanks for all that you do!!
I feel silly throwing this out there on such a bullish day but.... TDW - bear flag
What do you guys think?
I hope you're all making money. I was doing great for November but this last week hit me hard - and just when I thought I was learning how to navigate these choppy markets.
Sorry to post this twice but I wasn't sure if anyone saw it at the end of the last thread.
"I got out of my MS put yesterday with a teensy weensy profit because I just had a "feeling" about the market."
Uh Krystal, that's emotion not a plan :) The other thing Jeff has been saying is you don't have to trade right now ... wait for calmer seas as you study and learn. Oh and cash is a position :)
FWIW,
Jay
hey i just started trading, and (against better judgment) have jumped right into things. I have Jan $800 google option, and even though the stock was up today that gain wasn`t reflected in my option, just wondering what causes for this would be or any info on it
Welcome Back Ramio, The waters have been CHOPPY! Did you bring back any Trophys?
Nice Joel! The snow is not plentiful on Mt Hood yet.
Krystal,
E-mail me, please. k.magruder@cox.net
SPX steadily climbing... VIX holding ground...
I'm into a meeting for the rest of the market. Have fun!
John
Charlie,
You've got an out of the money option, way out of the money and your delta is only .14. This means that for every dollar GOOG moves you're only probably catching .14. Be very careful about your time decay if you continue to hold this option. It will work against you very quickly.
Kim
not arguing with you because you definatley know more then i do, but googles up $12 today and my option is up 10 cents lol, any other factors that could be keeping it down?
Charlie,
When you buy that far OTM options, you need a large move in the underlying to be really profitable. Although $12 seems like a lot, not really on a stock like GOOG. It's less than 2%. Just another spin on what Kim was saying.
Jeff -
Does the flip flop of advances and decliners today mean anything? I ask this to try to understand if yesterday was important because of the number of decliners then does the large numbers of advances today mean anything? Is this a throwaway number/day or is it a sign of things to come? Thanks for helping me understand the mysteries of the market!
If I hear Shadowtrader say "bullish" one more time...
pffft
Charlie,
Do you use TOS to trade?
Charlie,
You are probably experiencing a decrease in Implied Volatility (Vega). This will prevent your option from changing in price, even as the stock moves in your favor. It may even make your option decrease in value, depending on how inflated it was when you bought it.
Top 3 Bloomberg headlines as of 2:15pm
Fed's Kohn Sees Risk of Deeper Credit Crunch
US existing home sales fall to lowest in 8 years
Bear Stearns to eliminate 650 more jobs
Market going crazy! I see a divergence between the news and the market action. I'm not buying in to the upswing here. That's just me. Although my shorts are getting absolutely slaughtered today. I'm holding on.
lol dont even know what tos is, i trade with questrader
VA Beach Girl,
I am with you on that. The divergence - the market goes up on terrible news - What's with that ?
David in NH
Charlie,
You can go onto Ivolatiliy.com and look at the implied volatility levels for GOOG. They are decreasing and that will decrease your option value.
Jeff,
NO bears for one thing, they are afraid of me. They avoid my property. I let the one GIANT BULL(a nice ten point whitetail) pass free and clear of my rifle, to let the bull market run!! Looks like it is working!!
Next week I will not be so kind.
Once next week passes, I will be back to my normal routine!!
hey, couldn`t get your get your ivolatility link to work, any other links? all this help is much appreciated , Im new to this site and investing, but hopefully this goog option will be my last stupid trade
Krystal,
I agree with Jay C, and I do not find his comment condescending at all. In fact, with all the new readers and bloggers here, I am reminded of what Jeff posted way back when...."be knowledgeable in what you post, the person on the other ends appreciates it".
Jay C.is spot on, and I appreciate it.
I dont trade on "gut feeling", and no one here should be influenced to trade that way, my opinion of course.
nevermind found the ivolititlity site, am signing up now, anyone have any good articles on how volitility going up or down will effect option prices in the near future?
C2...
I am now once again LONG ELON!! I owe you buddy!! I only took this trade to be able to throw this back in your face since you got me on it the last time!! LOL...
Charlie,
Click on the bookstore link above. Lots of good books. Try:Option Volatility & Pricing: Advanced Trading Strategies and Techniques
by Sheldon Natenberg
VA Bch Girl -
My only comments to you woul dbe to trade individual stocks - Jeff even mentioned it today. To hold onto technical losers can wind up being a baaad thing. There is no guarantee for tomorrow's action either - up or down except what the technicals tell us. We must trade the charts more now than ever becasue the fundamentals are are screwed up with emotions and other influences on them.
Just my two cents based on the school of hard knocks.