Did Cracker Barrel just signal an imminent reverse?

The fuel that propelled shares of Cracker Barrel to the moon over the past 8 years may be running lows. Cracker Barrel ($CBRL) was downgraded to hold from buy today when Maxim Group released this news. The stock found support today at $160 but hasn’t really shown a lot of nitrate to push back up to the post earnings $170 level. Investors may be nervous about more downgrades and unwilling to press the pedal any further until more news is available.

The candle stick pattern that Cracker Barrel (symbol $CBRL) formed on 11/23/2016 is called a bearish star. So far this bearish indicator has followed the rules for this candle stick pattern nicely (see rules below chart). This indicates further downside action for the stock.

 

cbrl

The shooting star is made up of one candlestick with a small body, long upper shadow and small or nonexistent lower shadow. The size of the upper shadow should be at least twice the length of the body and the high/low range should be relatively large. Large is a relative term and the high/low range should be large relative to the range over the last 10-20 days.

For a candlestick to be in star position, it must gap away from the previous candlestick. In Candlestick Charting Explained, Greg Morris indicates that a shooting star should gap up from the preceding candlestick. However, in Beyond Candlesticks, Steve Nison provides a shooting star example that forms below the previous close. There should be room to maneuver, especially when dealing with stocks and indices, which often open near the previous close. A gap up would definitely enhance the robustness of a shooting star, but the essence of the reversal should not be lost without the gap.

There is a gap to fill between $160 and $155 and it wouldn’t surprise me to see that gap get filled before the end of this month. Especially because  the highest open interest is at the $155 strike with over 1300 Put options contracts open.

cbrloi

 

Since November 2008 the stock has gone from $11 a share up to $170 a share. If a recession happens in the near future, watch for this stock to be cut in half.

cbrl10yr

Moreover, in a recent CNBC article outlining the current market landscape, Bob Doll said, “For the last few years, the search for yield, perceived safety and low volatility has been an investor’s dream, and billions and billions and billions have gone into those things. That is over and done and it’s unwinding. That is because the economy is doing better and inflation is picking up a bit”.

This could be a head wind for Cracker Barrel  which has a %4.78 yield. If investors pull out of high yield stocks in search of performance a double edge sword may cut deeper into the “billions and billions” of shareholder gains. A long term negative outset may also be contingent on growth. If the company is stalling, as perhaps indicated in the latest earnings report, the balance sheet could take more cash flow and total asset decreases. As long as the company maintains “Wall Street” standards and can mask the slow growth by a higher EPS then the stock may find a floor. If not, and things get ugly I foresee much bigger losses for the company.

The best trades are the ones in which you have all three things going for you, fundamentals, technicals, & market tone. Full disclosure, I am short $CBRL.

Follow me on Twitter @Jeffreytief

The TachusChord website is for educational use only. Any opinions, news, research, analysis, prices, or other information contained on this website, it’s social networks, email distributions or any other material provide by the TachusChord and associated companies, employees or volunteers is provided as general market commentary, and does not constitute investment advice or a solicitation to buy or sell any stock, foreign exchange contract, contract for difference or securities of any type.

 

Using stock options as a safe bet for a Twitter buyout

Uncertainty around the election has resulted in declines for most stocks. Over the same time period shares of Twitter have been out performing the major indexes. This leads me to believe there may be a near term floor in shares of the micro blogging site.

past6days

 

There’s no denying this Fall has been a roller coaster ride for Twitter which saw shares go up from $18 to $25 between Sep 28 and Oct 5 on rumors that Disney, Salesforce, or Google may pursue a bid to acquire the company. The speculation which fell short of an official deal produced a quick rise and fall. Solely on rumors. However, the price of the stock before the rumors began is basically unchanged (up some) even with the major indexes taking a beating!

If you can’t already tell I’m a believer in Twitter as a company with value. For investors and those on the long side, this rumor mill has done nothing other than show us what a potential bidder may be willing to pay for the company. More accurately it has shown us what Wall Street believes the perceived value of Twitter might be is if a buy-out (M&A) were to occur. This leads me believe that shares of $TWTR are worth $25 dollars a share, the price $TWTR flew at during the high of these rumors, and possibly worth more. If unknown bad news is released this could change my fundamental outlook but because I have sold options around my core position I can withstand a 25% drop (at a $18 price).

From the beginning, I looked at the rumor as a positive sign and started acquiring shares.

twtr_costbasisowned

I didn’t want to be overly aggressive on my first trade so instead of buying hundreds or thousands of shares I use options contracts to help me reduce my cost basis from $18.31 to $13.41.

Selling Put Options Contracts: I may choose to hold these options contracts through expiration and if the stock is below these strikes these contracts ensure the counter party of this trade that I will buy their shares at those strike prices (see details below for $16 & $24 strike puts). The counter party here is the person who bought this put option I sold. I’m basically selling insurance to shareholders who fear a price decrease or speculators who are shorting the stock. Selling this insurances puts money in my pocket which decreases my cost basis. It also increases the amount of stock I might own from 300 shares to 700 shares if I don’t close these contracts before expiration because I will be obligated to buy the stock.

If the stock price is above these strikes when these contracts expire I don’t have to buy more shares and because I am willing to buy more shares at a future date I have the benefit of collecting the premium up front to reduce my cost basis.

TWTR_Puts.PNG

Selling Call Options Contracts: I also sold the $18, $20 and $23 calls for and collected a $528 credit for the promise to sell the shares if the stock is above these strikes come expiration. Selling these Calls caps my upside. You can think of this as the opposite of selling puts because I’m promising to sell my shares come expiration if the stock is above these strike prices.

twtr_calls

I bought the $24 and $28 calls for upside.

twtr_calls_debit

Putting it all together:

  • Collecting a premium in return to buy and sell the stock effectively reduced my cost basis to $13.41.
  • A move to $13.41 is a %24 drop from today’s closing price.
  • Selling call options caps my upside, however I sell options because I’m more concerned with protecting my downside than making gobs of money.
  • If Twitter’s stock prices stays the same between now and the time my contracts expire I will make money since these options expire worthless and I get to keep the premium I collected from selling the options. Then, I can sell more options to further reduce my cost basis if I choose.
  • A close above $30 come December 22 (standard options expiration date) will produce a decent size gain.
  • A close above $30 is a 71% move which is very ambitious.
  • Rather than expect a real buy-out to be a catalyst for a 71% move in the next month I like the idea of safely selling options while collecting a premium and reducing my cost basis.
  • If a buy-out happens I will still be happy!
  • Even if a buy-out doesn’t happen I can exit my position for a gain as long as the stock stays above $13.41 come December 22

On a side note, last night Facebook reported earnings which resulted in a %5.6 drop in share price. The decline in Facebook didn’t have a negatively correlated impact in $TWTR today. Not to mention the initial price action on $TWTR was positive after earnings compared to what happened with $FB.

twtrvsfb

In summary, this rumor mill has provided a gift to us traders or anyone looking for an opportunity to be part of the acquisition.

Follow me on Twitter @Jeffreytief

The TachusChord website is for educational use only. Any opinions, news, research, analysis, prices, or other information contained on this website, it’s social networks, email distributions or any other material provide by the TachusChord and associated companies, employees or volunteers is provided as general market commentary, and does not constitute investment advice or a solicitation to buy or sell any stock, foreign exchange contract, contract for difference or securities of any type.

Who’s Who in $TSLA today

Hopefully you caught the fact that I used the Tesla stock symbol in the headline and understand that I’m referring the action in the stock market today on $TSLA.

News over the past 24 hrs has hit an extreme negative. You can do a search on CNBC.com for “Musk” and read all about it…

TSLA news

If you’re wondering who’s trading this stock you’re not alone.

Looking at the options activity and Average True range of this stock might help you figure it out.

Volume on the $202.50 call which expire at 1:00pm Pacific time today has steadily been increasing during the first two hours of trade. The high on the day for these calls is $2.81 although most of the volume happened when the price was around $1.80 today.

TSLA_9.2($202.50C)

However, the volume on the $197.50 puts have been much heavier than the calls. The high of the day on these puts is $2.65 although most of the volume happened around $1.00 today.

TSLA_9.2($197.5_P)

The Average True Range of $TSLA right now is $5.25. The Average True Range is the degree of price volatility. Basically, this is the average price high to low over the course of time. So far, the stock high of today $203 and the low $197.60, which is approximately the Average True Range. Unless more negative news comes out it’s likely that $TSLA will close somewhere between the high and low here.

Big point. If the stock closes between these options strikes, $197.50 and $202.50 the sellers of these options will make money because these options will be worth nothing! That means that the options sellers will keep the combined premium they collected by selling these puts and calls ($1.00 + $.180 = $2.80). Selling these calls and puts requires a lot of capital and there is risk but the data is showing that the “smart money” side of the trade are options sells.

Note: the volume on the put strike is about 30% higher than on the call side. This probably means that the “smart” money is hedging their bet to the down side or a bunch or speculators, retail investors and shareholders who think this news matters are scared!

Follow me on Twitter @ Jeffreytief

 

 

 

 

Notable alerts from 6/16

After my post yesterday “11 tips on using alerts to boost your trading” I’ve decided to share some of the alerts that triggered today, charts, potential trade setups, and my thoughts behind each.

The company or sector symbols include: $GLD, $XLF, $AMZN, $FIT, $UNP, $NKE, $VRX, $GS, $WFC, $NUS, ES_F, NQ_F, CL_F

GLD (Gold)

Gold made a 52 week high today but had a sharp pull back during the day. I had three alerts trigger at the open from $125.96 to $125.06. Because new highs usually proceed new highs I was initially bullish on gold when I received these alerts. I don’t trade GLD very often but like it as a proxy for what’s happening in the market. At $125.06 it was a good scalp to the high of $125.67. However, there was a major breakdown in the precious metal and after making a new all time high GLD closed at $122.38. I believe this has been the single biggest 1 day decline for GLD in the last 52 weeks! GLD is well above the channel it broke out of early this year, see blog. Watch for more downside action in GLD. Im particularly interested to see if it re-tests channel high around $115 which could be a good entry.

gld

gldchart

XLF (Financial Sector ETF)

The financial market has been leading the market down over the past 5 days but staged a nice recovery today. My alert on XLF triggered 1 cent above the bottom at $22.38. I also had two alerts trigger on WFC (Wells Fargo) and GS (Goldman Sachs).

xlf

GS.WFC

I was monitoring this level on XLF to confirm further downside action in the broader market. When the alert triggered I wasn’t willing to trade $XLF on the long side but in hindsight it would have been a great trade as XLF closed at $22.76. Going forward, I’d like to confirm that this bounce isn’t a one-day wonder before taking a new position. As a side note, I may only trade about 10% or less of the alerts I set. Most of my alerts help me monitor what is happening with a stock and the market and aren’t intended to be entry or exit locations for trading.

xlf

AMZN (Amazon) dipped below the 20 day Exponential moving average when it fell below $712. This is something we haven’t seen Amazon do since late April. Amazon is a market leader. It reversed nicely off the low today and closed at $717.75. Look for AMZN to go above $730 for a bullish breakout. It may just chop between $730 and $700 for a while but if it begins to breaking down look for further market downside, especially in the Nasdaq.

amzn

AMZNchart

FIT (Fitbit) the maker of the  popular activity tracker wrist band fell 4% today. The company has had a nice run since coming off it’s Feb low of $11.91 but is inching closer to retesting this low. Should this low get retested buyers may step in and hold a bid. Only time will tell.

fit

FITchart

UNP (United Pacific Rail) was a stock I was looking to short. My alert was set at $87.48 but the stock gaped down at the open and I wasn’t sure if I had missed my opportunity or not. The stock closely follows IYT (ishares transportation index) so I like to follow both these together and look for any divergences. I sat on my hands and decided to let this one pass but it would have been a solid short trade for about 30 minutes.

UNP

UNPchart

NKE (Nike) retested a low it made on June 1st. It bounced off this level but should it break lower more downside price action is probably on the horizon, at least for the short-term. The outlook on retail has been extremely negative over the past few week as many retail stocks have taken a dump. I don’t think retail is hated enough to justify a contrarian approach in the sector so I’ll continue to watch retail and see if NKE can find a bottom and gain footing in the sector before buying any retail related stocks.The other concern with Nike is any negative news around the Olympics. Usually this is a time of year when apparel companies announce advertisements and sponsors so if news comes out that Nike lost these bids to competition it could hurt the stock more.

NKE

nkechart

VRX (Valeat Pharmaceuticals) has been a company I’ve been following and trading for quite some time. See blogs here, here and here. I stopped trading VRX on April 29th which turns out was the right decision. I am patiently waiting for a better price before I re-enter any long positions here. Today’s alert confirmed more downside action when the price broke below $23.08, which was recent support.

vrx

VRXchart

NUS (NU Skin Enterprises) was one of the better performers in the market today. The stock closed up %10 percent after announcing a strategic partnership with Chinese investors and positive update on earnings guidance. My alert didn’t incite me to take any action but it’s now on my watch list and I’ll be looking for potential entries.

NUS

NUSchart

My early morning alerts indicated that prices in the S&P, Nasdaq, and Crude oil futures were slipping to new short-term lows. I thought we’d have another down day because some key levels were broken however prices manged a reversal into the trading session and repaired the potential breakdown with the S&P and Nasdaq closing int he green. With options expiration tomorrow it will be interesting to see how the market closes the week.

Futures

Follow me on Twitter @ Jeffreytief

 

 

11 tips for using alerts to boost your trading.

When it comes to trade ideas there are almost too many choices available for traders and investors.  By my estimates there are probably over 10,000 stocks you can trade in the USA and that’s not including, ETFs, futures, or Over the Counter Pink Slips (penny stocks). Alerts are more than just a quick way of identifying potential trade setups. Just because an alert triggers doesn’t mean I have to make a trade. I probably only initiate trades on 10% of my alerts that trigger. My alerts are purely “alerts” or indicators that give me information about what’s happening on the stocks that I follow. Whether your preference is to to stick with a handful of stocks you’re familiar with or go hunting for the next setup here are some tips on how you can use alerts to optimize your trading.

1. Alerts to notify you:

Probably the most obvious reason to set an alert is because you cannot monitor the price action of a stock every single minute of the day. Alerts can trigger and notify you through email, text on through the trading platform when the stock is at a point where you’d like to buy or sell. However, investors and traders who cannot quickly act alerts are at a disadvantage. One remedy to this problem is to use a conditional orders which will execute for you when a stock meet your price objective. I’ve found that conditional orders are limited, clunky and don’t always execute in an orderly fashion. In my recent blog update I notified you that my partners and I are developing a software program which will let more people actively participate in their trades without having to monitor the action each and every minute of the day! We believe this solution will give people a better experience than any alert or conditional order can offer.

2. Alerts to identify your exit point: 

I HATE setting real stop losses. A stop loss is an open order, or as I like to put it, a public announcement saying “I will sell here”. Market makers see stop losses and if they want can push the stock lower to take your shares then buy them right back up! This has happened to me more times than I’d like to admit which is why I don’t set stop losses. Getting whipped out of trades is not fun and rather than showing my hand by setting stops I prefer to have an alert that tells me the stock is at price where I  want to sell. On a side note, for more info on how Market Makers control the price spread check out my blog here.

3. Alerts to identify breakouts:

Alerts that trigger above prior points of resistance may help notify me before a breakout develops. This is a good way to get into a trade before a big move ensures. If a breakout occurs I can take a position and set a new alert at the next resistance level where I will take profits or add more depending on market conditions.

4. Alerts to identify support:

Setting alerts at multiple support levels is one way I identify potential entry locations. When an alert triggers where I believe a stock has bottomed I can take on a position and then set another alert below that. If my second alert triggers than I might be wrong and should get out of the trade. However if I’m not sure where the bottom will form I can set several alerts around the location where I think the stock will bottom. Each time one of my alerts triggers I can lightly scale into a position until I have on a full trade.

5. Alerts to identify market tone:

The more stocks you set alerts on the better idea you will have about the direction of the overall market. This can help you understand whether your alert triggered because of a unique move in the stock or because the broad market breath is trending higher or lower. If several of stocks I have alerts on are triggering at the same time it’s usually the broad market strong moving in one direction or the other. So before jumping into a trade, make sure you can decide if your alert is unique or because market forces are pulling/pushing all stocks in a similar fashion. Another way to measure this is by looking at the $ADD (Advancing vs Declining stocks) or $TICK. See link for more info on these.

6. Set alerts to selectively choose which stock you should buy or sell short: 

Part of my homework every nigh when I review stock charts is to set alerts at key levels. Having multiple alerts set on a variety of stocks gives me more trading options when the market opens in the morning. A majority of my alerts will trigger in the morning and I can choose which trades make the most sense based on the alert.

alerts2

7. Alerts for technical indicators and calendar events:

If you’re looking to optimize your alerts beyond price action many trading platforms let you set alerts on technical indicators like the MACD oscillator, Volume, Bollinger Bands, moving averages, etc. And calendar events like dividends,  earnings, etc.

 

8. Alerts for portfolio metrics:

Many traders will also choose to set alerts on metrics like Net Liquid Day Change, Margin Requirements, Portfolio Delta, and more.

9. Alerts over time:

Once I set an alert I usually don’t remove it just because the price has changed. If I set an alert at a critical juncture on a stock I will usually keep that alert in tact even if the price has moved significantly above or below the price where I set my alert (see AMZN chart below). Many times this comes in handy for stocks that I haven’t monitored in a while. When these alerts trigger, those stocks are then added to my watch list.

Alerts

10. Alerts shouldn’t be noisy: 

Although I’m encouraging you set alerts on multiple stocks it is good to clean up your alerts and only have them set at meaningful locations. Too many alerts may cause you to forget the reason behind why you wanted to monitor that stock in the first place.

11. Alerts should be checked against news:

For alerts that trigger because a stock as increased or decreased beyond the average price range of a stock it’s important to understand why that stock has moved more than usual. See Average True Range for more info on this indicator. The increased volatility in the stock may have been induced by company specific news such as a downgrade or earnings event. In these cases its good to re-evaluate the reason why you set that alert and decide if it’s still worth the risk.

Follow me on Twitter @ Jeffreytief

 

 

4 Key Pillars to Successful Trading

 

In this blog I will discuss. 

  • My current status update.
  • How to generate income over time by day-trading.
  • 4 key pillars to being a successful trader.
  •  4 core tenants for planning a trade with a recent real world example.
  • How to start overcoming psychological problems traders face.

It’s been a while since I’ve posted. Partly because I’ve been swamped with work but also because I haven’t been inspired by much of what’s happening in the broad stock market. The continual upward trend on light volume and weak structure has not given me an abundance of confidence. The bull’s sentiment backed by dovish Federal Reserve banter means there’s a good chance the S&P 500 makes new all time highs soon and that has me questioning being overly short. Contrary to this, I do not feel comfortable putting money to work on the long side for more than a few weeks. Why? Much of the economic news has not been good; i.e. Q1 earnings results, interest rate uncertainty, Brexit fears, China, high student loan debt, employment rate declines, and increasing default rates on subprime auto-loans (similar to the housing crisis in 2007). If the news gets better surely my outlook will change but for now I’m going to play it safe and stick with day trading.

Other than my 401k and IRA, I’ve been mostly in cash, using some capital to day-trade and put on small short-term trades that last a week or two. This isn’t investment advice but a transparent disclosure of what I’m personally doing.  I’m sorry I haven’t been able to share some of my short-term trade ideas but I’m happy to say that my win/loss ratio is well above 50%. An example would be my silver trade (SLV) which I initiated on May 31st and closed out on Friday, June 10th for a 50% gain! I’ve also been cutting my losers quick, perhaps a little too quick as you can see by my volatility trades for 2016.

I’m currently working on a project which I hope will give people an opportunity to participate in my day-trade and short-term ideas. My partners and I are developing a technology that we believe can let more people actively participate in the market without having to monitor their trades each and every minute of the day! It’s been challenging, exciting and fulfilling to get past the concept phase and into testing the software in a real time trading environment with actual money on the line. For now, that’s all I can disclose about this project but I really just wanted to let you know that this work is part of the reason I haven’t had time to post my blog articles.

Chart of Silver from May 31-June 10 (2016)

SLV.PNG

How to generate income over time by day-trading.

I believe day-trading (if done right) can generate more income than investing in the long-term. Average “investors” look to beat the S&P 500. This means that if the S&P goes up 5% in a year and they make 6% they are doing well, or if the S&P 500 goes down 3% in a year and they only lose 2% they are doing well.  As a day-trader, I seek to make between 25%-100% on an annual basis not matter what! This isn’t to diminish long term investing. They are totally different and each has it’s merits. Since the market tends to go up over time most people (reasonably) prefer a long-term buy and hold investing approach. It’s much less risky, but also much less rewarding. Some of the challenges new day-traders face is the ability to do more than just predict the short-term direction of a stock. It is an extremely emotional, psychological and difficult endeavor and one most people fail at. Without a process it can be a futile endeavor. I have had much success and failure in this area and after 13 years of trading have begun to understand what it takes to implement a successful process. I’ve said it before, day-trading is the hardest thing I have EVER done. That is why I want to share with you a process that may help you discover some success in this area.

4 key pillars to being a successful day-trader over time…

  1. Every trade you make is unique and independent of all your past and future trades. Just because a stock has acted a certain way in the past, doesn’t mean it will act the same again.
  2. You must have a plan before you enter a new trade.
  3. You must be correct greater than 50% of the time (I can write another blog on  this point alone but will save that for another day).
  4. When you’re wrong you must not lose more money than you make when you’re correct.

These four keys may be very obvious but implementing them is not as easy as it sounds. Trust me on that! There are many barriers (including subconscious barriers) which prevent even the best traders from implementing what they know to be true. In the next part of this section I am going to walk you through a trade I made, the psychology behind my decisions and the satisfaction I experienced even though I could have made a lot more money than I did. Then I will finish by explaining how this trade was a small piece of a longer term process and how using the four key pillars to being a successful day-trader really work.

On Friday, June 10th I sold short CAT (Caterpillar). This means I was betting the stock would go down. There was nothing special about this trade. In fact, if you look at the minute by minute chart of the S&P 500 ETF SPY (left side) and CAT (right side) they are very similar (see charts below). CAT did however close down more than SPY on a percentage basis. Subtle differences between the price action on CAT and the broader market provided me with clues and an edge, but I probably could have picked any DOW or S&P 500 stock and had similar success simply by implementing the four keys to being a successful day-trader.

CAT&SPY.PNG

Justifications for shorting CAT:

  1. CAT has had a tremendous run and was due for a pull back (42% rise from Feb low to April high).
  2. The broad stock markets around the world were falling, which meant that it would be hard for large cap stocks like CAT to go up without any game changing company specific news. Big companies like CAT usually (emphasis added) go down on days the broad market goes down and up on days the market goes up, so shorting was the most likely direction to be successful for the day.
  3. At the opening bell, CAT had a deeper sell off than the rest of the market.
  4. CAT is closely tied to commodities like oil which was pulling back sharply.
  5. CAT is closely tied to the US dollar and when the dollar goes up, commodity related stocks tend to perform poorly.
  6. An alert I had previously set triggered which implied that Cat had risen to a level which I believed was a good entry and location for a short trade on a market down day.

*disclaimer – I am fully out of this trade and have no intention to go long or short of it again until market conditions justify a trade.

Despite these justifications, I needed a solid trade plan before I established a position. Remember, this is a day-trade so having a lengthy, detailed, mapped out plan is not really a viable or realistic option. The plan should only take a couple minutes to formulate in your head however, the plan needs to be comprehensive enough to consider all possibilities.

4 Core tenants of a good trade plan…

  1. Determine your time-frame for the trade.
  2. Determine potential entry and exit points before you trade. Entry and exit points may be based on the amount of money you are willing to lose compared with how much you believe you can make. This can be based on a percentage increase/decrease, or a specific price point for the stock you’re trading. For me, this tenant is somewhat dependent on tenant #1.
  3. Determine how many entry points you want to have. For me, I typically do not use all my cash available for the trade on my first entry. I don’t want to clue High Frequency Traders (HFTs) to what I’m trying to accomplish. I also want to save some dry powder to see if I can get a better price. When you play poker do you shove all your chips into the pot when you think you have a decent hand? Probably not, if so please tell me where you play at!
  4. Determine how much capital you are willing to use for the trade.

Once you know these four things you can begin implementing the trade idea.

Implementing my trade plan…

  1. Between 7:43 and 7:46 AM (pacific), I sold short 1000 shares of CAT @ $76.42. I divided my first 1000 shares into two separate trades. I usually like spreading out my trades because I don’t want HFTs to catch on to what I’m doing. There is an extra trading cost associated with this strategy but it gives me some extra time to see if I can get a slightly better price, and to see if I really like the trade. If I do get a better price it covers the cost of the extra trade. In this case my first two trades were at $76.40 and $76.44.
  2. The 1000 shares at $76.42 tied up approx $76,500 worth of day-trading buying power (margin), half of what I was willing to place on this trade.
  3. This was a scalp trade from the beginning. I didn’t want to be in this trade for more than 30 minutes. 30 minutes is a personal preference. There is an opportunity cost if our capital is tied up and we cannot put it to work on a trade generated by our trading software program.
  4. With the initial 1000 shares I was looking for a 2:1 win/loss ratio. My stop zone was $76.62 and profit taking zone was around $76.02. So, if CAT hit my profit zone I would gain $400 but I was only willing to lose $200 if CAT hit $76.62.

CAT_t1&2

Within minutes the stock started to move nicely down in my direction to $76.27. I had two separate orders to buy-to-close the 500 shares @ $76.21 and 500 shares @ $76.17. The idea was to take profit early and maybe re-enter the trade on a bounce. At $76.27 my 1000 shares showed an unrealized profit of approx $150 dollars but suddenly the stock bounced up and my profit was gone faster than it had arrived. This is where the ability to adjust your trade plan can increase your chances for success. Remember, some of my priorities are to be in the trade for as little time as possible, realize a decent profit and move on to the next trade.  My target range of $76.02 was not a hard set number. I imagined it as an “ideal” place to take profits. I believed that it could easily reach that number. One thing I’ve leaned about beliefs (the hard way) is that they often interfere with my ability to make money. When your belief is so strong about the future price of a stock and the direction it should go your brain will subconsciously block any negative information that contradicts your belief. This is because our brains are hardwired to avoid pain. Preconceived believes about the direction and future price of a stock will emotionally and psychologically cause traders the most pain because it’s not until they’re in a bad loss that they realize the data has been indicating all along that they were wrong. Instead, we should strive to understand this dichotomy by interpreting the data and accept that our beliefs may be wrong!

Back to the trade at hand…When the stock surged back up to $76.43 I added 1000 shares to my position bringing the total dollar amount of the trade up to $155,000. This was the max amount I was willing to utilize for this trade, which was the plan from the beginning. However, adding 1000 shares changed the dynamic of my trade in two ways…

  1. I was required to re-think my win:loss ratio. Was $76.02 still my sell target and $76.62 my stop zone. If so then the dollar value of my potential gains would be greater than before but so would the dollar value of my potential losses.
  2. Was my time frame still 30 minutes?

There is no right or wrong answer to these questions. It’s depends on the trader and their appetite for risk. For me, taking money off the table and freeing up capital for the next trade was a top priority. I decided because I was adding more exposure, and taking on extra risk, that I would immediately sell the 1000 shares I bought regardless of what direction it went next. For example, if the stock went above $76.50 I would sell half and take a $70 loss but if it went back down to $76.27 I would gladly sell half for a $150. By tightening my profit and loss zones my ratio of 2:1 never changed and neither did my potential gain or loss. Also, after the surge back up to $76.43 my belief that I was right didn’t change. I didn’t let fear change my perception but I also would be carefully monitoring any new data that might suggest I was wrong.

Sure enough the stock dropped back down to $76.28. I tried buying back the shares at that price but I think High Frequency Traders (algorithms) were not letting me get filled so I settled at $76.30 for a $120 gain. $120 in one minute is a great time/profit ratio (for anyone) so I was very please to take half of my trade off the table, free up cash and be more patient with my $76.02 target.

After thirty minutes CAT was still trending down in my direction but the price hadn’t decreased enough for me to realize much more profit than I had previously taken. I decided to be a little more patient and see where the price would go. After 37 minutes I took off another 500 shares at $76.20 and then after 45 minutes I took off the final 500 shares at $76.05. I made slightly over $400 on the trade.

CAT remainder

Not long after I had sold my final shares did the stock reach my $76.02. I guess in hindsight I could have been a little more patient. The stock went as low as $75.38 which would have been a $2000 gain had I covered all my shares near that level. One takeaway that I’ll try to apply next time is to keep a small position which doesn’t tie up much capital. That way if the stock does make a big move in my direction I can reap the benefits or if it goes against me I can cut it without regret and still have plenty of dry powder for the next trade.

The point of this story is not about how much money I could have gained. Nor is the point of the story to impress upon you a 30 minute time frame like the one I applied here. Actually, for most traders, it would probably be wise to be more patient than I was and let the trend play out. The point of this story is to show how I applied the 4 key pillars to being a successful day-trader. I didn’t base this trade on past CAT trades (or any trades for that matter). I didn’t let any preconceived believe about the direction or future price of the stock affect my decisions. The big point is that if I can repeat this process successfully over 50% of the time I will be be profitable in the long run as a day-trader. Consistent winners add up over time, even small ones. The more trades you can make using this strategy the better your results will be. This is exactly what we are trying to accomplish through the technology we are building, and that’s exactly how you can day-trade to generate income over time.

4 key pillars to being a successful trader over time…

  1. Every trade you make is unique and independent of all your past and future trades.
  2. You must have a plan before you enter a new trade.
  3. You must be correct greater than 50% of the time.
  4. When you’re wrong you must not lose more money than you make when you’re right.

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1 minute chart of CAT on June 10th, 2016.

CATday.PNG

 

Closing the door on Valeant…for now

At this point the it seems like the catalyst I was looking was a non-event. Today, Valeant issued it’s delayed 10K. The news from CNBC stated that…

“the restatement reduced previously reported fiscal 2014 revenue by about $58 million, net income attributable to its shareholders by about $33 million, and earnings per share by 9 cents.The restatement for the first quarter of 2015 lowered revenue by about $21 million, but increased net income attributable to Valeant by about $24 million and earnings per share by 7 cents.”

Trading was hauled this morning for the first few minutes of trading. Once it resumed the lackluster price action was a clue that the information had already been baked into this stock. With this catalyst off the table my upside was taken away and the trade became more risky. I took my final position off the table. I am completely out of the trade. In summary, I had 11 different trades for a total $3371 and %134 percent gain.

VRX4.29

For previous recap see my earlier blogs here and here

Trade Summary

Trade 14: Combination of stock and options on VRX. Valeant Pharmaceutical. 

14 (a)

  • VRX stock
  • Date: April 5-April 19
  • Gain: $1267
  • Avg. purchase price: $30.54
  • Avg. sale price: $33.42
  • Percent Gain: 10%

14 (b)

  • Sold to open VRX April 15 $32 put
  • Date: April 14
  • Gain: $109
  • Avg sell price: $0.77
  • Avg buy price: $0.61
  • Percent gain: 20%

14 (c)

  • Sold to open VRX April 15 $32.50 put
  • Date: April 15
  • Gain: $100
  • Avg sell price: $0.54
  • Assigned stock
  • Percent gain: 100%

14 (d)

  • Sold to open VRX April 22 $31 put
  • Date: April 18
  • Gain: $78
  • Avg sell price: $1.19
  • Avg buy price: $0.72
  • Percent gain: 40%

14 (e)

  • Sold to open VRX April 22 $32.5 call
  • Date: April 15-19
  • Loss: $183
  • Avg sell price: $1.45
  • Avg buy price: $1.84
  • Percent Loss: -26%

14 (f)

  • Sold to open VRX April 22 $33 call
  • Date: April 18-19
  • Loss: $40
  • Avg buy price: $1.69
  • Avg sell price: $1.44
  • Percent Loss: -17%

14 (g)

  • Bought to open VRX May 20 $30 call
  • Date: April 5-April 7
  • Gain: $1126
  • Avg buy price: $4.6
  • Avg Sell price: $5.96
  • Percent Gain: 30%

14 (h)

  • Sold to open VRX May 20 $35 call
  • Date: April 6-19
  • Gain: $20
  • Avg buy price: $4.94
  • Avg sell price: $5.22
  • Percent Gain: 5%

14 (i)

  • Sold to open VRX May 20 $35 put
  • Date: April 6-19
  • Loss: $115
  • Avg buy price: $5.93
  • Avg sell price: $6.94
  • Percent Loss: -17%

14 (j)

  • Bought to open VRX May 20 $40 call
  • Date: April 11-29
  • Loss: $100
  • Avg buy price: $2.11
  • Avg sell price: $1.24
  • Percent Loss: -41%

14 (k)

  • Sold to open VRX May 20 $30 put
  • Date: April 11-29
  • Gain: $233
  • Avg buy price: $5.45
  • Avg sell price: $7.84
  • Percent Gain: 30%

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Valeant longs looking forward to less worse news this week!

In this blog I will discuss:

  • Why this is an important week for Valeant Pharmaceuticals shareholders
  • Positive and negative viewpoints
  • Weekly chart
  • Possible entry locations
  • Past and present trades

Supposedly, this is the week Valeant Pharmaceuticals will deliver on their promise to file the company’s 10K. A simple good faith filing without newly discovered and devastating financial results could send shares soaring. Most analysts know the company’s debt troubles and therefore have already priced the stock accordingly. There are fears that could support the bearish case if Valeant misses their June 11th time frame to file, or can’t follow through with filing this week.

Other fears that might drive Valeant stock down include the possibility that government will put a price cap on drug pricing. This would surely hurt profit margins but drug price caps haven’t happened yet therefore any short-side trade based on that assumption is simply an unfounded speculation. I do think price caps could be a problem but Valeant’s main opposition is Hilary Clinton who might not win the candidacy.

Some real concerns remain over Valeant bondholders restructuring the debt. Will they file bankruptcy? Right now I don’t see the bankrupt scenario playing out since bondholders would suffer losses. Small scale changes in debt repayment could be a positive catalyst for the stock if it helps the company build cash and sell assets.

Honestly we don’t know what will happen, but I think it’s unlikely they restructure in a way that would cause losses for stock and bondholders beyond losses long term investors may currently be sitting on. I also think government would love to get their grubby mitts on pharmaceutical profits and won’t jeopardize this by requiring devastating price caps that would cut potential profit on higher tax rates to pharmaceutical companies. This was recently proposed by Motley Fool as a reason why not to own Valeant, see article.

Moreover, I think future price action should prove or disprove these arguments as insider’s will load up or sell out before any big news hits the wires. Right now, it’s a little early for folks to be making extreme claims that support their bias view, which is not my intention, however I would be remiss to not share with you that I am leaning bullish on Valeant simply because the news has gotten less worse.

I’ve written before, the news going from horrible to less worse is a positive sign for the company, see article. Going from horrible to less worse might be a funny way to put it, but however you put it, it doesn’t change the fact that short-side traders got squeezed when this shift in news sentiment occurred on April 5, 2016. Just like then, they could get squeezed hard this week if Valeant’s 10K filing is well received.

Skeptics have gone as far as saying the recent shift from horrible to less worse news is a smoke screen, and the rug will be pulled out from under the stock once they file their 10K, or don’t! Despite much bad news this past year I’m taking a contrarian view and I don’t believe that Valeant is going to make new lows unless news gets worse.  For me, a break of the $30 and then $25 support zones would be ugly.  Unless something is truly wrong under the hood, the stock should bounce right off of those levels if tested. Given the inherent risk in this trade I only have on a small position and won’t add any new exposure until more news is out or price action confirms direction.

Interesting points of reference for traders this week might be the first touch of $VRX at or below $35. This would be a good spot to go long on a re-test from the gap support which held last Friday. If $VRX can’t stay above $34.90 and your scalping, remember not to let your losses add up or to scale into the trade small. Next interesting buy on dip levels are $33.40, $33 and $32.80. Anything below $30 is suspect, above $37 possibly bullish. Trading $VRX to me requires letting the price direction confirm your belief. Given the volatile nature of of this trade this can be even more difficult to do so tread lightly with your entries. Caution is advised, and swinging for the fences probably isn’t a good idea. If you are trading on margin you should know that $VRX has a higher margin requirement than most other stocks.

The weekly chart is showing a rising channel. I expect this channel to be broken to the upside once the 10K is filed but will be out of my trade if bad news sends the stock plunging I will be out!

Capturevrx

 

Open trades

VRXopen

Closed Trade

Capturevrxclosed.PNG

vrxclosed2

VRXclosed3

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Home Run trade on Home Depot

In this blog I will explain my thought process and reasoning why today I scalped Home Depot for a home run.

New All Time Highs

Home Depot ($HD) recently made a new all time new high this week, Monday, March 4 at $136.23. You may know a similar saying, “new highs are likely proceeded by new all time highs”. That’s more of a side-note than the basis for my trade.  What was compelling was that it pulled back over the last couple days with the market. The current profile showed more bullish strength and it was a good opportunity to get in on the action!

HD_Daily

Stock Market Bounce

The market recently pulled back two days in a row. I was looking to see if the $SPY $204 level would hold. Given my skeptical view on this rally, and as depressingly resilient this market has been for bearish trades, there is a lot of volume distribution at $204. A solid break below $204 would signal a liquidation break and a more bearish stance however the pivot point held at $204. At a pivot point you see that the greatest amount of trades happened in this range. I use the Volume by Price indicator to show me where this range is. The key importance here is that these places in the market profile are where traders have to make decisions whether to sell or to buy. These ranges in the market profile are back-stories for us to see on the chart and show multiple dimensions; time, volume and price.  When these three things line up in the market profile it can be a good place to enter a short-term trade. Volume and price showed recent accumulation around $204 (For Home Depot there was good accumulation between $133-$134). When the price didn’t break below these levels in the first 5 minutes of the day traders quickly had to decide to buy or sell.  It was game on for the traders and the long side scalp paid off.

SPY Chart Below:

SPY4.6

Another intermediate indicator I used was the 15 minute 100 exponential moving average. This is the green line on chart below and shows that every dip below has been bought up.

HD_15min

The scalp this morning turned into a pretty decent gain as momentum was strong and the market rallied.

Full results below:

HD

 

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When horrible news gets less worse. Playing the Valeant bounce

In spite terrible news over the past year the news has gone from horrible to less worse and there is a glimmer of hope for this beat down drug company.

On Tuesday April 5th, Valeant Pharmaceuticals announced that a special board committee had completed an internal investigation without discovering additional financial fallout from the firms previous ties to a controversial pharmacy company (Philidor). Furthermore the company has set plans to meet a key April 29th filing deadline required to avoid potential default on debt obligations. (Since writing this, “less worse” news has revealed information that Perrigo’s Joseph Papa is finalizing deals to take over as CEO).

The trade idea came about on Thursday April 7, when Valeant won support to waive a default on their loan, as well as other eased restrictions. New update on position here.

At times, I lean more contrarian in my trading approach which is why this recent spurt of good news led me to initiate a trade in Valeant using options contracts and stock, symbol $VRX. In this blog I will outline my open and closed trades and how I have so far successfully played this potential reversal in the trend.

You probably know the famous Rothschild quote, “the time to buy is when there’s blood in the streets“. Looking at the 12 month chart of Valeant one can see that the blood has flooded the streets for this stock.

The blood starting spilling late in 2015 when industry experts started arguing whether or not Valeant is the next Enron and might go bankrupt and politicians, like Hillary Clinton created a flash crash in Valeant’s stock with promises to “go after” drug companies with high prices.

clintontweet

Shares of Valeant have dropped 744% since this Tweet was posted on Sep 21, 2015.

chartclintontweet

I really hate that companies like Valeant can price gouge drugs. It makes me sick to see patients selling their homes and taking on more debt to buy a medicine that should be more easily available to the average person. But just because I feel this way (just like many feel this way) does not mean Valeant is going bankrupt!  One thing I’ve learned is that the market does not have a moral compass. If it did, the market wouldn’t have rallied after the March 22 terrorist attack in Brussels (see chart below).

spy3.22a

I’m almost to my trades but wanted to share this last chart of $VRX dating back to year 2000. Notice the huge volume this year. Keep in mind, for every seller there is a buyer. I’m suspicious that large institutional buyers are gobbling up shares of Valeant at discount prices, just like Rothschild would have done in the 18th century. This is the contrarian in me. It’s also very hard to say for certain who is on the other end of this trade but I am taking a very small bet that the smart money is getting ready for a reversal in trend.

VRXweekly2000

Here are the trades. 

Trade 14(a): 4/5/16 -4/7/16 (closed)

  • Lightly bought to open the $VRX May 20th $30
  • Price Paid: $4.14
  • Avg Price Sold: $5.96
  • Avg. Percent Gain per contract: 30%
  • Highest Percent Gain: 88%

VRX

Trade 14(b): 4/5/16 -4/6/16 (closed)

  • Lightly bought shares of $VRX at $28.27
  • Sold half at $30.20
  • Percent gain: 7%

Trade 14(C) 4/6/2016: VRX (straddle)

  • Straddled remaining shares with May 20, 2016 35 put/call for $11.20
  • Sold to open May 20, 2016 $35 put
  • Put premium collected: $5.81
  • Sold to open May 20, 2016 $35 call.
  • Call premium collected: $5.31
  • Total premium collected: $11.12

If you’re new to options trading the trade is a little more complex.  I’ll try to break it down:

The put side of the trade:

They way this trade works on the put side is that I promise to buy 100 shares at $35 IF the stock is below $35 come May 20th expiration. Because I made the promise by selling the options I collected $5.81 per contract ($581 total). My cost basis on this promise is $35 minus the $5.81 premium I collected so my break-even is really $29.19. That is a 17% decline from today’s close!

The call side of the trade: 

The way this trade works on the call side is that I promise to sell 100 shares at $35 IF this stock is above $35 come May 20th expiration. Because I kept 100 shares which were bought at $28.27 I am promising to sell the stock at $6.73 profit per share. But because I also collected a premium of $5.31 for selling this contract my real profit per shares would be $12.04. That’s a 52% gain.

My break even:

If the stock is below $35 on May 20th and I keep the put that I sold I will have to buy the stock at $35 per share. With 200 shares my cost basis per share will be $31.63. That doesn’t include the total options premium I collected for selling my strangle. Including the total premium would drop my cost basis down to $20.5 (31.62-$11.12).

The question to seriously consider is if this stock could drop 41% from today’s close. This would mean the shares are at my break-even of $20.5 and I would seriously need to consider whether or not this is another good buying opportunity. It may or may not be, but one thing I know that will help me determine this is if the bad news has gotten worse!

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