The Chart

For the past month, the QQQQ has established a steady downtrend.  These conditions allowed us to publish a shorting watchlist, and to comment about its performance after one week.

However, as the following chart demonstrates, last week’s gains have broken this pattern:

QQQQ Recent Uptrend

The Signal

It is difficult to purport whether this short-term uptrend has signaled the end of our credit crunch.

The market’s massive short-term gains this past week does not downplay the market’s massive mid-term losses this past year.  The overall downtrend may still continue as the credit crunch consumes more business and exposes its true damages.  At the same time, it would be wise to minimise any risks and reap profit while the market is deciding.

This learning is a reaffirmation of our Mentor’s advice:

Let the market reveal its hand.

Thus, anytime the market has consistent, consecutive movements opposite to the larger trend, it becomes a signal to watch – and watch closely.  It may well be the market has bottomed-out, but let that be revealed to us for a few more days, rather than preempt this move.  Moreover, such movement may prove to be consolidation, rather than a turning point, and it may be prudent to review trades and associated risks.

The Watchlist

As for the previously published watchlist, all of these have broken their recent downtrend, as they followed the market’s uptrend.  Most likely, if these were real trades, one would use triggering mechanisms to automatically close these trades.

Market Summary

The QQQQ market index continued the down trend established in the last month.  This means that the short-term support at $28.00 was broken this week, and heads towards another support around $25.50.

The SP-500 mirrored the QQQQ’s movement, proving to break the support at $740.00 and reiterating the down trend.

Watchlist Performance

Our published watchlist performed rather well:  in one week, 34 stocks averaged 4.7% in our favour.  Three stocks performed over 10%, and 31 stocks were profitable.

The following table demonstrates the performance of each stock, from the close on Monday, 2 March 2009 (enter price) to Friday, 6 March 2009 (exit price).  Note that the calculated percentage change is according to the investment type – either short or long.

* Watchlist stocks which were from our web application and computer analysis.

Now with a fair bit of profit in one week, we’ll continue to watch these stocks and exit each trade according to individual conditions. We’ll update you on our paper trading performancing when this watchlist ceases to be profitable.

Bleeding Sectors

Most sectors are presently near their respective support levels. These sectors will be interesting to watch in the next couple weeks, as they may break through their support).

However, the five sectors which have already broken their support include:

• Transportation
• Utilities
• Conglomerates
• Consumer Durables
• Consumer Non-Durables

Ticker Watchlist

Within these sectors, we reviewed their components for individual stocks which may reflect the sector’s trend.  Thus, we sorted the lists by descending capitalisation and reviewed the top few stocks.

This produced the following shorting watchlist:

• Transportation
  • UPS
  • BNI
  • UNP
  • FDX
  • NSC
  • CSX
• Utilities
  • D
  • DUK
  • FE
  • PPL
  • ED
• Conglomerates
  • GE
  • UTX
  • MMM
  • PPG
• Consumer Durables
  • XRX
  • PBI
  • FO
  • LEG
  • WHR
  • NWL
• Consumer Non-Durables
  • PG
  • KMB
  • AVP
  • EL
  • CHD
  • AVY
  • PTV

Another Source

We also reviewed stocks which resulted from our software.  We first exampled a healthy list of under-performing stocks, but also checked any stocks which may be up-trending (or at least over-performing the market).

This analysis produced the following watchlist:

• Long
  • APSG
  • DLTR
• Short
  • KF
  • HOT
  • WYNN
  • DDM

The software did produce other potential stocks to watch, but the aforementioned might be the most relevant.

Trade Strategy

We changed two aspects of our trade strategy during this period:

Invest smaller amounts of capital per trade.

The markets are very volatile right now, so instead of potentially losing large chunks of capital, it would be wise to keep our trade risks minimised.

Stop simultaneous trading, and stay focused.

Previously, we were victims of “batch trading”, in which we would trade 3 or more stocks in one go; thus, if the market went in the wrong expected direction, we would lose in all positions.

Now, we are focused on 1 or 2 stocks (even though our watchlist may be around 20 tickers), so that we can keep track of its daily, volatile movements.

Journal Snapshot

We executed 6 trades – all options – during this period.  Here is a snapshot of the trades and their corresponding performance.

Not bad – eh?!

Overall picture

To minimise our risk in current market conditions, we drastically reduced our individual trade size.  This means, that even though we had great individual returns, our overall capital performance was roughly +2.8%.

Granted, this figure is small for one month – but at least we are making small consistent profit!

Stock & Option Courses

Our mentor asked us if we would like to deliver a course in late March.  We discussed the timing and (perceived) lack of demand to support a full-fledged course, and determined that Trade4Good will not be delivering courses at the present moment.

Obviously, we will update you via this blog if we do decide to deliver another course.

Smaller Workshops

Though we are pausing our efforts in financial education through courses, we still will provide smaller workshops to those who are interested.  As such, these smaller courses will be focused, 4-hour sessions which teach a particular part of the larger course syllabus.

Now, we have reconvened with new direction and gusto.  We decided to change our trading motivation, and determine if this may affect our trading psychology.  Previously, we would reinvest any gains to build a critical mass through compounding.  In contract, we have decided to collect any gains as monthly income for a short time frame.

Let’s see how we do for this month, and review at the end.  Happy trading!

The Early Beginning

While the market was open, Fernando and I had been searching for profitable straddle amongst a variety of different stocks in our watchlist.  Nothing was working because of high bid-ask spreads and low resulting profits.

We decided to try QCOM, even though its earnings was 3 weeks away on 6 November 2008.  Without any parameters, the analyser returned 49 straddles – so we were anxious to see if anything would still be applicable after applying our own criteria.

Our first search returned two results:

QCOM Straddle Combinations, Try 1

However, when we refreshed our price data a minute later, there were zero applicable straddles.  About a half an hour later, we tried again, and found 6 results:

QCOM Straddle Combinations, Try 2

One of the straddles, the JAN09 47.50 C and JAN09 35.00 P straddle, was also reported in the first straddle list. For this reason, we thought it would be reasonable to enter a straddle on this particular setup:

The Possible Ending

We opened our straddle position on a Monday, and on that Friday, 24 October 2008, we were in profit. Here is a chart to show you this movement (and our actual exit date):

QCOM Daily Chart

This is the price data if we would have exited our position at that time:

We discussed our unrealised gain of $1,920, and whether we should lock in the 32.9% gain of original trade capital, or wait until after earnings.

It was a true debate between the three of us, with the major points being:

• Stay in, because our original strategy was to exit after earnings release and associated movement
• Get out, because we are already in profit, and can not guarantee profit in this climate or after earnings
• Stay in, because the trend could continue, and we make more profit as the put goes beyond making 100% profit
• Get out, because as we progress towards earnings, we would only have 60 days left until expiration and time-decay would work against us

The Actual Ending

It was a common occurrence for our QCOM straddle to lose all the unrealised profit from the previous day. It seemed inevitable: $1,500+ profit one day and barely anything the next. In fact, we had several opportunities to exit this trade.

Earnings was released on 6 November 2008, and a week later, we decided to get out at the next profitable cycle. We closed our position on 14 November 2008, and the following is our exit option price data:

As a result, we gain $1,788 or 30.7% of our trade capital.  If we would have shorted QCOM, we would have only made 17%, so we’ll definitely pocket the gain from this real trade!

Here is the Machiavellian quote I found (but realise I don’t want to debate any political views or make any statement by quoting him):

“All courses of action are risky, so prudence is not in avoiding danger (it’s impossible), but calculating risk and acting decisively. Make mistakes of ambition and mistakes of sloth. Develop the strength to do bold things, not the strength to suffer.”  -Niccolo Machiavelli, The Prince

It seems like besides being a diplomat, political philosopher, musician, poet, and play-writer, Machiavelli could also have been a trader.  Hence, since the Renascimento times we can say:

• Have a money management rule
• Have a trading strategy at place
• Quit “sloth-fullness” and test whether your strategy really works or if it can be improved
• Plan few moves ahead, knowing your entry and exit points
• Paper trade as much as you can
• Revise all your trades
• Remember that losing is part of the game

From a much more recent “philosopher” that I would like to quote:

“Stay hours in front of a computer can be very boring. Go out and enjoy your life more” -Mentor

To sum up, test if your strategy really works. If the strategy works, and you realise a real trade goes against you, then don’t just stick to it, but STAY COOL. Remember to sing a very old song: “Ice, Ice baby…” (I know, sorry!)

It’s a numbers game in the end! Trust in yourself and your “strength to do bold things”. Ah! don’t forget: only invest with the money you can afford to loose.

I have to add this because it’s quite funny – I just opened a fortune cookie that says:

“If you must play, decide on three things at start: the rules of the game, the stakes and the quitting time.” -Chinese Proverb

Happy trading!

The Trade

This article focusing on our virtual trade for UBB, known as Unibanco, a Brazilian bank floating on the NYSE.  During a Trade4Good meeting on 17 September 2008, we reviewed the overall market, industry, and individual stock.

Market Review

To start our analysis, we reviewed the market using the SP-500 indicator, as this was most likely going to influence (and therefore reflect) the stock better than the QQQQ.

Market Overview of SP-500

The long-term view clearly reveals a down trend which began one year ago in October 2007.  At present day, the down trend seems to be steeper – meaning it’s going down more quickly – so get ready for a crash.

Moreover, the SP-500 has broken a support around $1,200 established two months ago as the lowest low for at least two years.

Industry Review

The corresponding industry is Banking, and we reviewed this chart second, as it shows an overall trend in all banking-related stocks.

Industry Overview of Banking

Notice that the industry chart also reveals a long-term down trend.  Yet, perhaps the most important indicator is the increase in volume as the industry goes down – Seller’s are having a huge rally!

Stock Review

The stock, UBB, itself has 4 clear signs of continuing in a down direction.  Review the chart below to see if you can see the same 4 signs, or more:

Stock Overview of UBB

The four signs we saw include:

• Price has revealed a clear 4-month smooth down trend
• Volume has significantly increase in the last month
• Price has broken the support establish in August 2007
• Moving Average 200 is above the current price, and turning downward

With the evidence at the time, we decided to do a proper virtual trade with OptionsXpress.  Here is our order:

The Movement

There was some discouraging movement at first because the next two days UBB moved in the opposite direction.  Nevertheless, the close of the 19 October 2008, was still within reason of the trend, and the trend still looked strong from the market, industry, and stock itself to continue to pull downward.

Stock Chart

The price movement is shown in the chart below, and reveals how the short-term trend is a faster slide downwards.

Price Movement after Entry Point

Option Chain

The preceding stock chart shows that the stock price decreased in value; however, the option chain table below follows the option price movement:

We are now debating to close the position before the time decay may start to reduce our profits.

The Results

As of 24 October 2008, the trade has been extremely profitable.  The final close order is outlined below:

This means we can now calculate the profitability of the stock versus the option:

What this demostrates is the non-linear profitability of options.  If we would have shorted UBB, we would have only made 50% return on investment.  While this is outstanding, it has no merit against the 314% profit of the Put option.  Rather incredible: the Put option produced a profit 6 times more than the stock!

This is due to option’s inherent leverage, and therefore move more rapidly than the underlying stock.

A couple of months ago, our Mentor said to me:

“You’re trying too hard!”

I’ve never quite understood what he meant by this. At the time, I was disappointed with this criticism – after all, I was giving my heart and soul in order to make trades work for Trade4Good on a regular basis.

Yesterday, I was reading a passage of a book that was written around 2500 years ago, and I think I’ve finally comprehended what he said (I hope!):

Do you think you can take over the Universe and improve it?
I do not believe it can be done.

Everything under heaven is a sacred vessel and cannot be controlled.
Trying to control leads to ruin.
Trying to grasp, we lose.

Allow your life to unfold naturally.
Know that it too is a vessel of perfection.
Just as you breathe in and breathe out,
there is a time for being ahead
and a time for being behind;
a time for being in motion
and a time for being in rest;
a time for being vigorous
and a time for being exhausted;
a time for being safe
and a time for being in danger.

To the sage
all of life is a movement toward perfection,
so what need has he
for the excessive, the extravagant, or the extreme?

(29th verse of the Tao Te Ching)

I though it was a good idea to share this with you.