Wednesday, January 14, 2004
Issue Contents:
| 08:04 | Good Morning The day ahead. |
| 08:22 | TradeStation 2000i End of an era. |
| 08:35 | NASDAQ 100 Index High expectations. |
| 09:00 | Daily Swing Trade Today's stock setup. |
| 13:27 | Subscriber Mailbag Using options to swing trade. |
| 15:20 | Subscriber Mailbag When is a test a test? |
| 16:16 | Active Trader Transcript Real time forum log. |
Again, not much in the headlines at the moment, other than some comments on FOMC Chairman Greenspan's speech yesterday:
(WSJ.com) - Greenspan said inflation "appears quiescent" despite the dollar's continued slide. Import prices rose just 0.2% in December. In one of the few signs that a weak dollar could prove painful, the price of oil touched a 10-month high of $35.
On the U.S. economic calendar, we have a few items on deck, as President Bush hosts the Spanish Prime Minister at the White House:
- 7:00AM MBA Purchase Applications
- 8:30AM International Trade
- 8:30AM Producer Price Index
- 9:00AM Philadelphia Federal Reserve Bank President Anthony Santomero speaks at a conference on communities, in Philadelphia.
- 12:30PM Federal Reserve Governor Ben Bernanke speaks about conducting monetary policy in a low interest rate environment, in a lecture at the International Center for Monetary and Banking Studies, in Geneva, Switzerland.
- 2:00PM Beige book.
On the earnings front, highlights for today include some tech biggies, all coming after the close: INTC, YHOO, QLGC, AAPL and TER. DAL already came out with numbers this morning.
Sometime in December, something curious started to happen to my charting program, the old TradeStation 2000i. It would collect overnight data only to stop at 9:30AM and then mysteriously, data would come through again at around 9:40AM. Needless to say, this was not good. I did everything I could to fix it, but alas, to no avail.
As of today, I am using TradeStation 7 for all real-time charting, while keeping TradeStation 2000i for end of data analysis with data from Dial Data.
I scanned the headlines this morning, and investors are expecting great things:
NEW YORK (Reuters) - Stocks were poised to open slightly higher on Wednesday as earnings season kicks into high gear with expectations high for strong scorecards from technology bellwether Intel Corp.
and others. (WSJ.com) - U.S. equities markets looked set to recoup some of Tuesday's losses early Wednesday, as traders prepare for a heavy day of earnings, particularly in the technology sector.
Last year, when prices were not so high, the year-to-year and even quarter-to-quarter comparisons were slam dunks with surprises on the upside. After the market today, we will see if the numbers from INTC, AAPL, YHOO and QLGC can keep up with both higher prices and even higher expectations.
The strongest of the indices at the moment is the NASDAQ 100 as the push from the panic buyers sink their money into tech stocks, again.
Take a look at the candlesticks from the last three days, by the arrow on the chart. This has to be the strangest combination. Last Friday formed a shooting star. Monday was an inside day. Yesterday started off on the upside but reversed. This means that there is persistent selling (resistance) in the NDX 1541 area.
It's a very odd combination of candlesticks, reminiscent of some sort of tweezer top, which is a reversal pattern. The market desperately needs better than expected numbers to blow the lid off this baby.
We continue to be short position on DIA using February 106 PUTS.
Yesterday, the Dow Industrials hit the 20-day EMA in intraday trading. This was our first downside target, and it was the first spot that traders who didn't want to roll over to February puts could exit.
Obviously, the danger today is two-fold. First, we have earnings from four big tech stocks after the market. Second, buyers might show up on the pullback to the 20-day EMA right here. I am going to stay with this trade for one or two more days, in case it bounces a little and then collapses. The stop loss continues to be at last Friday's high, at $INDU 10,590.
I'll be finished configuring workspaces on TradeStation 7 today while Mike has the volume filtered lists in the bag. We'll be able to pick stocks again starting tonight.
by Teresa Lo
This question was sent in by a subscriber:
T, could you help with options purchases?
I have been starting to put your options method into practice, both live as well as paper trading only. The difference between the ask and bid is substantial at times. Enough to require that the trade must make a pretty decent move in my favor to make up the .10 to .20 spreads I sometimes see at my entry point. Do you just buy at the ask or do you bid it down if the spread is .15 to.20?
Also, you mention that when the trigger is reached you would let it settle out for a few minutes to prevent getting caught in gyrations right around a significant support or resistance level. Do you watch on a small time frame like 5m and let it make a bar or just give an arbitrary few cents before entering?
I did the DIA Jan. put but stopped out that first day. Today I noticed the Feb. 106 puts had about .15 and sometimes .20 spread when you posted the switch to Feb expirations today. At least on paper, I would have entered at 2.65 and ended the day slightly positive.
I also paper traded two Dow stocks on their first retrace after breaking the recent up trend – IBM and DD. Both would have been picked up as Feb. in the money puts upon breaking the prior days inside bar. Obviously, I wish IBM was not just on paper! It hit both targets today. These options also showed .15 and .20 spreads throughout the day and sometimes it would expand and contract with very little price movement in the underlying symbol.
When it comes to swing trading with options, the spread between bid and ask is often just as you report, and there's not much we can do about it. The alternative is to simply be long or short the underlying stock, but the downside there is that it could gap up or down against us, and it might be a lot worse than 20 cents. In my mind, the price I pay to sleep at night when I swing trade with options is worth it. I'm hoping to make a few dollars, so I have to give up a few dimes.
When I buy options, I put in a limit order 10-15 cents above the offer just to make sure I get filled, but enough to avoid any deadly price spike. When I sell to close a trade, I just use "market".
The trigger price for swing trades is often set at the previous day's high or low. Market makers and specialists know that this is an action point for a lot of traders and they generally take advantage of the fact that sell orders usually gather just under the previous day's low while buy orders usually gather just above the previous day's high. Quite often, when these areas are hit, the stops are elected while the orders actually become market orders. The result is a big price spike. In order to avoid this, we should not act on our options trades until the spike in price is over, and usually, you can monitor this by watching volume spike and then go back to normal.
There are other ways to deal with this, such as wait for an intraday retracement to get in, etc., similar to how we deal with gaps.
We received this email last night:
I have a question about today's Market Analysis. I have been subscribing for a while but today is first time I am not sure I understand the newsletter.
You called this a Test of Top on daily of $INDU. Do you consider today's (Tuesday) blue bar (outside bar) to be the test of top? Or did you think that we would get a green bar today and therefore called this Test of Top?
If today is the "test of top" bar, how would you setup a swing trade today? Would you do the usual swing setup: use daily chart of DIA and buy the puts when price trades at stop trigger where stop trigger price is the yesterday's low * 0.995 (Monday's yellow inside DIA bar * 0.995) with the first target of 20ema?
This is the chart that was posted to the newsletter. I re-read my analysis and I think the more appropriate description should have been as follows, with changes from the original in italics:
Here's the daily chart of the Dow Jones Industrial Average. After a two day rest, buyers are back, but the question is if they can buy it back up to the January 8 swing high. A move up here would set up a test of top on the daily chart. Given the extreme ADX readings for this symbol and timeframe, we are on alert of a lower high followed by a reversal to the downside.
In fact, if we look at today's chart, going into the close, the $INDU daily chart is now on an UPswing going into a textbook M Test of Top right here.
Real time forum log.
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