WWJD- Follow Up
Thursday, March 13, 2008 at 08:21AM Thanks to everyone who participated in last nights interactive trade exercise. You can see the results were a landslide, and we had the most participation I have ever had via one of these activities. Here are the results...
The overwhelming majority (60%) agreed that now as the time to take a short/put position.
Coming in a distant second place (22%) are the traders that would not take a position; they would wait.
Next are the folks that don't like the risk reward (7%). These people must have broken calculators or spectacles. The R/R is fantastic.
Traders who would avoid taking the trade altogether (5%) mark the fourth spot. And interestingly enough, fif place goes to the people who have decided to give their hard earned money to the market and take a long position (4%).
Want to know my vote? Let's look closer at the trade set-up...
Based on the technical set-up, this is a great place to manage risk. If the stock penetrates resistance at $80, it would be easy to call it quits and take a small loss. However, the question is...what is the likelihood of this stock using this level as resistance?
Look a little closer...
I noticed this when I was discussing this trade set-up with a reader who shall remain "nameless." Look at the most recent few weeks of price action. How many times has the stock used $80 as resistance?
None.
In fact, the last time it had used this level of resistance was well over a month ago before the breakout. It is the downward sloping line that illustrates the most relevant level of resistance.
Why?
Because the stock has actually used this level several times in recent price action, while the horizontal line has not been used.
What this means is that the downward trending resistance line has a better chance of being touched yet again. If you entered the trade here at $80, my opinion is that you would have to allow it the room to touch this line as resistance. This would bring unnecessary risk to the table, and could be reduced by waiting one more day.
Here is what I mean...
Moral of the story...when surveying support and resistance areas always give more weight to the areas that have been utilized more by the stock price, and give more weight to recent price data.
My answer: I would have waited another day to take the trade.
Note: "Nameless," thanks for the example :)
Reader Comments (47)
I learn something from you everyday, that is why I am addicted to this blog. your post opened my eyes to a few more things.
thanks again
BTW- I should note that there were no real patterns here...
"Habit 6: The perception of patterns, where they don't exist"
Thanks Jeff, I voted that I would wait--I think I must be getting the hang of it!
Jeff:
Great lesson. It helps point out my lack of patience and dangerous tendency to anticipate trades.
Sam H (one of the 59%)
Jeff
Out of curiosity, did you take the trade the next day or was this a kohler pass because of no pattern?
Dandle,
AIRM is one of those tough lessons the market gives you about holding over earnings.
Awesome lesson!
Kim you nailed it. Good trading.
Jeff,
that was a great lesson. You have just offered me more insight on how to look at support and resistance. And using the movement against the S&R as a verify tool. I am going to look at this more and again. I need to remember this and train my mind to it.
Thanks for the lesson
Sean M. - true although I was position sized correctly. (Learned that hear Thanks Jeff)
This excercise has given me something to think about. It seems like recognizing support and resistance is the most important thing. Aren't patterns just the combination of more then one support and resistance lines?
Jeff,
What is your take on gold at the moment? Being that it hit the 1K mark will be hard to punch through, if so, would you consider a entry at that stage? I did take my profits on the gold futures around 992 last week.
Wow, with a reversal like this in ADSK I just want to close-out while I have some profits. Where did this strength come from?
I for one was probably too anxious to take the trade. Thus reading more into it. #6.
Hi, My name is PeterC and I see things that are not there.
OSIP-broke down on monday. Now hitting diagonal resistance line[retest?]Thoughts on whether this looks like a good entry?
I would have waited until the price tested the diag. line before making a decision, but looking at the options price and the wide spread price, I still could not afford this trade with my account size, darn.
Thanks for the learning lesson.
Jeff,
Your last 3 'main' posts are examples of why you are THE best.
THANKS !!!
Great post Jeff
I'm always learning from you. Hopefully I'll start making money soon. Thanks
Sean M. & Dandle:
Yes, the AIRM chart makes me quiver a bit too.
I have a question to the two of you or any other OA's with an opinion on this subject.
Would a "strangle stradegy" be applicable prior to earning report in this situation?
Thanks for your input.
Jim
Great exercise!!
We have a great teacher!
Student input is also great and appreciated!
Occasional poster committed reader.
Tom in SC
Jeff,
That was great and the participation was fantastic. Hope to see a little more. Thanks again for all the lessons and the help taking down all the free money.
Option Addict,
I was in the 59% gang. I'm really glad you posted this, Jeff. I think I just discovered a major mistake of mine that I was unaware of. As always, you really helped me out just now. Thanks, man. Wow, my eyes were opened big time on this one.
I'm trying to get the difference between leaning your account one way or another (30% bear / 70% bull, for example) and NOT timing the market or trading based on market trend/direction as one of those "bad habits".
When the S&P makes comments like today's, and the market reverses to some degree, do you start taking small profits in your puts? I've lost about 3% in profits since the announcement off the lows of the day.
Thanks again
CEOJWS - Not sure. It seems like it would have worked in this case, but I have no idea if it would work out often enough to make money.
I too would like some with more experience to answer this question.
Jeff is it possible to do a weekly exercise for a few months? Your the best.
I was in FSLR on the breakdown sold before it rallied. So I made 80% on that trade. I came very close to pulling the trigger for calls on Tuesday. I would have scored a double. Oh well.
WTF with this rally folks? PCP making me emotional today.
But BTU making me happy...bought the bounce off $50 yesterday.
Jeff,
That was a great couple of posts. It really illustrated the point of seeing patterns when they don't exist. Thanks that helped clarify quite a few points for me also.
Anu
Dandle and CEOJWS,
I remember hearing somewhere that you would want to be expecting a 10% move or more. You also want to make sure it has a history of making big earnings moves.
Some people go 1:1, I know other people that would take (say on AIRM, yesterday, 1 40 put and 2 or 3 50 calls). Also, if you can find a stock that offers $1 or $2.5 strikes, you can score real big.
Berkshire
This is information I have gotten from other traders. I do not trade straddles or strangles.
I feel I need to know which way it will go, rather than playing both sides of everything.
Berkshire
Dandle and CEOJWS ,
You certainly can strangle many stocks over earnings but Jeff has said in the past, you should be in these stock weeks before earnings because the IV increases as you approach earnings and drops off rapidly after earnings.
Someone must of had a buy program kick in on the S&P announcement that the Sub-Slime mess has an end in sight. Anyone can say that - of course it will end someday (Duh)
David,
Yeah, as soon as the largest ever inventory of un-sold homes becomes sold, the sub-prime mess should be pretty done.
Berkshire
Rick,
I live in Bedford - You must be across the street from me.
Berky
Is there "the largest ever inventory of un-sold homes" right now?
Doug,
I was so tempted to sell my PCP puts this morning, but I'm really trying to be more patient. Trying to establish rules and not freak out.
Dave
Thanks Jeff, I great to see where our thinking process is off...
DBA good re-entry if breaks 42.50....any takers?
I think this was just knee jerk reaction, and didn't change the overall trend. Everyday its some crap ass news that f's up my profits.
Good play to get into some puts here? What are people seeing?
As far as I have heard from the home-builders.
The existing home inventories are huge, new home inventories are huge. And we have more people here than almost any other time.
Seems to all fit together.
Am I wrong on my figures?
I suppose Doji could help set us straight.
Berkshire
Jeff,
I rarely post but read your blog daily. I voted to wait. I am really, really glad. Thanks for all you do! I loved the "7 Habits". Each post helps me a great deal. Once again, thank you.
Great learning Jeff! Thank you very much.
OSIP didnt even so much as hesitate at that $36 level of resistance which has resulted in me being angered.
Westy,
Did you play the swing on the SPY today?
Dave
Jeff,
Great example, great lesson.
Question - Now that we all know this is FSLR, how does the longer term uptrend line (start on gap up on 2/14/07) factor into your put decision or does it?
That uptrend line seems pretty strong with multiple touches (7-8). Does this override the short term down trending resistance & warrant a pass on the put trade until it breaks that trendline or are you planning on exiting your put at that longer term uptrend line (i.e. your target price)?
Thanks for the education.
Clean Cups
Shout out to the homies!! Especially my boy, KBH.
Sorry I missed this exercised. I "blinked" on checking your posts last night. (I'm usually checking in during the day.)
My concern about what to do was what about the MACD and Stochastic that were both heading positive? This would work against a put trade. But supporting this bearish take on FSLR (now that we know what it is - and I own a position in it), is the declining Market Sentiment.
In the days after the excercise presented data, we have seen the stock increase and go against the bearish trade. Resistance at "80" did NOT hold.
Trading right now is very "educational"!
Jodi,
Yes. I took TSL. Did you take it?
JEFFREY KOHLER!!!!
God Bless America you had me going crazy last night with that poll. I thought I was losing my mind when I saw the results.
Jodi,
Thanks for the kudos, btw.
Thank you, Jeff.
Jeff
Thank you for a great exercise. I found it very beneficial to hear what you would do in this situation. Especially after I looked at it.