Friday, July 14, 2006

Defensive Trading

Another triple-point down day (thus far - there's a little more than an hour left) on the Dow. Terrific!


During a sustained fall like the one we've witnessed over the past week, I change from offensive trading to defensive trading. What I mean is this - - when I trade offensively, I am putting on positions with a certain amount of risk (usually fairly substantial) and, given the bid/ask spread in options, a guaranteed instant loss. But I'm taking the risk.

Once the market goes my direction for a while, I take on a defensive position. This usually involves checking out the intraday charts (some as big as 60 days) and finding out which price point constitutes a change in direction (even if it's short term).

My point is that I want to lock in the profits I've enjoyed by resetting my stop prices MUCH tighter, while at the same time giving the market an opportunity to fall farther. So whereas my stops were very fat initially, they are now reset to pretty much guarantee profits, while at the same time allowing the market enough "line" to continue to head down more.

19 comments:

Brian said...

Super helpful Tim...I was just pondering the same thing.

And on that note, a little (or long) story on data accuracy, why Prophet is better than StockCharts:

Back on 6/29 I had tightened my stop on my UNP short to just above the downtrend line (connecting 5/16 high of 67 with 6/2 high of 95.20). Anyway, I stopped out on 6/30. After the trade I went to stockcharts.com to do a post-trade annotation and chart printout (sorry to go to the competitor, but I have an easier time annotating with them...I use prophet for all else, i swear). When I drew the same trendline it came out that the 6/30 rally just kissed the downtrendline, then I noticed that the 5/16 high was registered as 96.68 in StockCharts, not 97, thus creating less slope on the downtrend....had I used StockCharts that I wouldn't have stopped out for a loss and would be in the green!

So I was about to put an angry post on this blog, but decided to verify the data using other sources. It turns out that BigCharts, nytimes, and Yahoo all have the 5/16 high as 97, same as Prophet. So it's 4 against 1, and StockCharts is the loser! Go check this out if you're interested.

This time I actually would have been better off with the bad data (ironic, huh), but it made me realize how much a few cents can throw off your trendlines, making any trendline analysis impossible!

So shame on StockCharts! And props to Prophet.

Sanjay Sola said...

Next week we have PPI numbers on Tuesday July 18th and CPI numbers on July 19th.

Doesn't seem worth the risk to be in the market on big news days. the gap ups could put you in a lot of pain, especially when the market is oversold.

Anonymous said...

PPI and CPI ... Inflation just got a LOT worse.

Anonymous said...

Regarding inflation, the summer driving months and heavy oil and gas usage will just be STARTING to trickle into the CPI/PPI figures. For anyone who thinks those numbers are going to be coming down on a month-by-month basis, I'm afraid you might be in for a surprise.

The economy is slowing down, there can be no doubt about that. For a normal economy cycle, this could last anywhere from 6-18 months. And with the dollar weak, trade deficits at all time highs, and the national debt at levels beyond belief, I would suspect that this cyclical bear could very likely last 12-18 months, and probably already started back in June.

But at the same time, there can be no doubt about inflation, either. I've read a number of articles that state that the "true" inflation figures are far higher than those that are reported to the general public. "Real inflation" is around 8% right now, much higher than the figures that are being presented by the Fed.

Anyways, it looks like stagflation is setting in. With Paulson at the helm of the tresury now, my GUESS is that the US will go on a quest to recover some of the dollar's value. Whether or not this means raising interest rates far above levels that would be expected to stave off inflation, is anyone's guess.

-Tony

Tim Knight said...

Thanks, Brian. I've always been really proud of the cleanness of our data. It's especially evident with intraday data. We try to be as spike-free as possible! Have a good weekend, everybody!

chanon said...

just brought GOOG call options,
Tim, am i ploting the trendline correctly, how many months back u usually look at?

GOOG

Brian Donahue said...

Hey Tim--

I was wondering, regarding your defensive trading posture, how much of that necessity has to do with the fact that you're using options?

I am just doing shorts, and holding for about 10% gains. for example, I am open short on WDC, and though the price has dropped from the downtrendline, my entry price is already above the trendlinem. Though I could take profits now in the short term, given my nice entry it seems like a nice opportunity to just keep my stops above the trendline to ride it as long as possible (but risking my paper profits should a heavy reversal occur).

Since options value also has to do with time and volatility, are you more defensive in the case of a short term reversal than if you were holding simple shorts?

Enjoy the weekend!

- Brian

Tim Knight said...

Chanon, the trendline seems fine - I tend to look at longer term graphs, but for the short term, those seem good.

Brian, a fair bit of the defensive posture is due to the fact these are options. After all, their value is going to deteriorate very rapidly if the market gets renewed strength. Were these straight stock plays, I'd be less nervous, simply because you have an infinite amount of time to let things unwind.

cristri25 said...

Show of hands who is LONG USO this weekend :)

I think the DOW hits 10,300 this coming week ... then , maybe a bounce,. ! i think th4e mid east this weekend is going to get VERY messy.

KEEP your fingers crossed.

Anonymous said...

I completely messed up this week, I had the perfect setup and totally went against my own advice. I was short GM above $29.00 and long PSQ at $70 for about 2 weeks, sold out of these 2 positions on Wednesday right before the big fall. Went long QLD like a fool and what would have been one of my best weeks that would bring my portfolio to 52 week highs its now nearly flat for the year....Going long DOG, MYY and PSQ...DOW 10,000 NASDAQ 1850 here we come.

Anonymous said...

Anon, if you're going long DOG, MYY, and PSQ now, you might be in some trouble next week. We could see some sharp rallies inspired by short covering and "bargain hunting."

This is not a "top" where you would start those short positions. This is very near the short term bottom right here with the Dow at 10,700.

Just trying to help. But please be cautious. Look at Tim's support and resistance levels for guidance in when to take out those long or short positions.

-Tony

Super Bull said...

I am covering my shorts and looking for long opportunities myself.

dmsullivan said...

Hi Tim and all

Do you use sell stop limit orders for your stops or just stop orders?

for my current puts i set stop at the ask price and sell price just below asking price in anticipation of upswing. Is this too close/ risky in your opinion?

Do you use straight stops? I found setting straight stops often are filled way below the stop price.

thanks

Mark said...

Like Tony said, and I think most of us bears think this is the short-term bottom, and to go long on DOG at this time would still net some long-term profit, but short term there will likely be a spike down on it. If you do it, just cover yourself in case we're right and if you're looking for short-term profits. Have to remember that DOG will do opposite of the DOW or DIA.

REV and SMRT may be some short-term longs to look at, now that they appear to be hooked back into the market trends. SMRT may bounce up about $1, while REV may do just over a dime. The difference is because they are about 1:10 ratio apart in price.

Hurricane, what are some of your longs for this week? GOOG has to be one of them.

Vicki Moore said...

I'm new at trading and do not have the confidence I need to do well. For instance, I bot a put on SHLD early Thurs. after I saw the H & S pattern. I got out after a .5 gain because I have been stopped out so many times, didn't want to lose what gain I had. SHLD went way down Thurs. and Fri. so I lost out on huge gains. I just started reading Tim's blog this week. I've learned alot from all of you so when I gain the confidence I need I should be just fine! Thanks!

TR said...

Amazing week! Tim, this blog has certainly helped me in addressing how to make a little money when the market drops. I used to fight it and try to find the winners in poor market conditions, but now with the help of the people that post and your great posts, I look at strength as an opportunity to take advantage to profit from the fall. Good post today, I actually closed out my short positions early in the day into the strength of the fall. Not long yet, but looking at more direction.

Side question, where did the name Prophet.net come from? I like little pieces of useless information.

Have a great weekend!

Tim Knight said...

TR, I thought of the name "Prophet" in 1992 just before founding the company. I liked it because it was seven letters long and was a double entendre. Fun fact: I was struck by the name in front of Burger King, which is the same Burger King that the two Google guys celebrated at when they got their first $100,000 in funding from Andy B (who was my investor too).

chronictown said...

im finally learning how to make a little change when the market goes down , thanks to the bears! ive been watching bhp pcu fcx in the mining sector. i think these stocks are ready for the plunge! mark ive been watching rev ,may try the long side for a quick scalp.keep up the great info guys. good luck all.

Anonymous said...

BHP and FCX are the cornerstones of the mining stocks. I wouldn't even consider shorting them. PCU has strong relative strength, too, so I'd stay away from that one.

Why short commodities (especially gold and copper)!!?? You're just playing with fire there.

Stick with Tech, Home builders, Telecom, and the like. Pick out some high-P/E aggressive growth stocks as targets. Stocks that NEED lower interest rates and free cash flow to operate. Find some other cyclical stocks that are peaking out and short them. But for Pete's sake, don't short gold and copper stocks. That's just nuts.

I'm not saying that metals stocks won't go down with the rest of the market, but the odds aren't in your favor with giants like BHP and FCX.