08-03-14 Trade Plan

After a long up trend we are finally seeing some corrective action happening outside of the supporting trends.  Last weekend I was talking about some of the warning signs we were seeing in the indices and what they meant if we saw some selling, and we did.  It's a tough place to trade for someone in my time frame (1-6 weeks hold time) since the longer term trends are still moving higher and the intraday supporting trends have yet to fully turn over with successful back tests from price (which would make lower highs/lows and in effect create the supporting down trend).

There are two options in my opinion; 1) wait for a fat pitch to the short side (many stocks signaling short setups at the same time) with indices confirming or 2) do nothing and wait for more clarity with the relationship between daily trends and the supporting trends.  I choose both, if there is a fat pitch of short setups with indices confirming then I'll take it and manage risk.  If there isn't then I will just wait for more clarity and that could very well take more than a week.  If the uptrend does restart I think that would take longer than a week to rebuild itself which is why that really isn't an option for this week.


Bottom line in the indices is we need more information for either direction right now unless you are trading the Russell short.  It has been in a 130m down trend for a while and is approaching that big daily support at $108.  If that support breaks in a way that isn't just trapping late shorts/taking out stop losses or rather without using all it's rocket fuel, things could get nasty for all the indices not just the Russell.

If the short trades start triggering I want to use long puts because not only will the delta be in favor but volatility expansion happens to the downside, so potentially big (and quick) winners can come out of playing long volatility short delta if you can capture that downside action.  Just make sure you aren't holding this kind of trade through earnings because you will get crushed on volatility and the directional risk becomes much more random.  Volatility becomes more important when you are playing the downside as it starts to go crazy, up trends tend to be more stable with a grind higher and volatility becomes a lot more tame.

This weeks watch list is way longer than normal.  That's because I have both long and short sections filled up.  I want to cover all the bases since there isn't much clarity in the big picture right now and be prepared for both directions.  The whole point of my index analysis is to give directional bias to the kind of setups I want to pay attention to in my watch list.  I'm not looking for the out-liars, I'm looking for the big picture to increase my probabilities.  Since there is no supporting trends in the indices yet, I have supporting up trends in the long section and supporting down trends in the short section.  I let the market take over from here and wait for whatever opportunity presents itself, whenever that may be.

The take away from this week should be that there is larger than normal potential for a change in market conditions (one could argue we have been shifting market conditions over the past two weeks or so) and we need to be prepared for that while still acknowledging the longer term daily trends in the indices.  And that is how I do it.  This is also a larger than normal weekend post, so thanks for making it this far.  Glad to answer any questions.  See you all Monday.

Trade well,
-Michael