Trade Review – November 10, 2006

NOTE:  I consider these trades HIGH RISK.  I use less than 5% of my overall investing portfolio for these and similar types of trades, so please do not mirror my trading activity or treat it as a “tip” or guide for your own investing.

So, it is the end of the week and I want to review my active trades.  I added 3 trades this week (see Testing a New Exit Methodology and 3 New Momentum Trades) for a total of 5 active trades.

Symbol	Profit Range	Current Value	Fri Price	Sell conditions
BGC	37.77 – 43.19	+ $300	39.64	below 37, above 43.5
RHAT	14.25 – 22	+ $675	17.85	watch near/under 15
GYMB	ST: >47.50 LT: >50	+ $105	46.97	today’s stop: 44.40
OMG	ST: >50.90 LT: >55	- $181	49.29	Today’s stop: 46.95
RIMM	ST: >124 LT: >130	- $40	122.39	Today’s stop: 121.37

So, I’m up about $860 across all of those trades and about -$40 on the three new trades I placed this week.

LESSON:  I noticed looking at my P&L chart for RHAT this Friday that my maximum potential profit has shrunk by $600.  That’s a lot, especially since the stock is right at my predicted sweet spot.  The decrease in potential is due to a decrease in volatility.  The lesson is that I should have used a Calendar PUT spread at 17.50 instead of a CALL spread – if I had, the decreasing volatility would have been locking my profit in further!  I knew that, but didn’t think through the circumstances around the RHAT price drop.

Faith Hill – Poor Loser or Big Jokester?

Last night at the Country Music Awards, the announcemen of female Entertainer of the year was the big moment not to miss.

I like nearly all of the entertainers, but I have to say I was rooting for Carrie Underwood.  I was a fan when she won American Idol and she’s worked hard and fast and released 3 greats hits this past year.

Faith Hill’s reaction, to me, made it seem like she didn’t think Carrie was deserving or that the result was unfair.  And hey, Faith has had a great year too, no doubting that, but still… even if you believe it was a joke, it was at best a joke in poor taste and stil disrespectful to a very earnest newcomer.

Faith claims she was “joking” now, but you judge for yourself.

Rogue Clone

I finished up the sequal to Clone Republic today, Rogue Clone. As I said in my Clone Republic post, I like this series by Steven Kent.  I think I like the second one even better than the first one, as the Harris characterization becomes deeper. The only criticism I have, which many 2nd segment from a trilogy suffer from (e.g. The Empire Strikes Back really annoyed me) was a rather abrupt ending that leaves a lot of open questions.  You may consider that a good thing.

Anyway, read them in order and I think you’ll enjoy both.

Oh, and for those interested, I’ve found these tidbits as well:

• Read the first page on Amazon (you need an Amazon account)
• Sad Sam’s Place, the author’s web site (Sad Sam’s is a bar in the Clone Republic)
• Steven Kent’s weblog

About my book reviews:  For the most part, I just read for enjoyment.  Don’t expect deep critical reviews

3 New Momentum Trades

NOTE:  I consider these trades HIGH RISK.  I use less than 5% of my overall investing portfolio for these and similar types of trades, so please do not mirror my trading activity or treat it as a “tip” or guide for your own investing.

I looked at the Saturday weekly mechanical screen lists for RSIBD and SOS-D to select some positions to buy to leverage my new method for identifying exit points for trades.  As a precurser to this, I checked some indicators to assure myself that we were in a clear upward trend:

• The NASDAQ 100 is above its 50 day moving average, which is above its 200 day moving average, getting higher highs and higher lows.
• Looking at http://www2.barchart.com/momentum.asp, advances/declines, new highs/lows and other momentum indicators show a positive market.

I don’t like to invest against the predominant trend, so that looks good for now.

Out of the RSIBD and SOS-D stocks, I looked at several and selected GYMB (Gymboree), OMG (OM Group) and RIMM (Research in Motion) to take long positions.  Normally, I take option call spreads when placing positive positions – these limit profit, but also limit loss potential as well.  For these, though, I don’t want to cap my profit and I will depend on my ATR Stops to limit my losses, so I am taking long positions: stock plus option calls.  All three positions will have a P&L (profit and loss) chart similar to this:

Note that the Maroon line represents P&L relative to stock price movement in the very near term and the Blue line represents P&L at the point when options expire.  All three underlying stocks have prices ranging from $46 to $123, so the degree of price movement will be relative to that.  For each of them, I tried to have the stock and option position be about equivalent or have the stock position be slightly larger than the option position.  This flattens potential losses (to the left) and accelerates gains (to the right), as represented by the P&L.  I’ll monitor losses and gains along with other positions at the end of each week.

Testing a New Exit Methodology

Way back in 1999 and 2000, just as the .COM bubble was bursting, I started using a mechanical algorithm (RSIBD – Relative Strength IBM) to select stocks for me.  I purchased 5 positions, adjusted weekly, and re-balanced anytime one position got about 25% out of line with the others.

Fortuitously, I made some large gains and stopped before the bottom fell out.  They key thing I learned is that during a clear Bull trend, momentum strategies can build up some excellent gains – however, they tricky part is making sure you are in a trend that is working for you.  Also, you may noticed that the most powerful decision I made, in terms of profit, was when to close my positions.  If I had continued using the same strategy, I would have trickled away much of my gains.

A few days ago, I read a mechanical investing article that talked about using stops generated from “average true range” to identify exit points.  It occurred to me that this method (if validated) could be used as an indicator in addition to its utility for exits:

• What if all 5 of my positions get “stopped out” within a very short period?  Could that indicate a general market downturn?
• What if 80% of my positions do not get “stopped out” for extended periods?  Could that indicate a solid positive trend?
• What if I have a lot of turnover or get whipsawed?  Market transition, perhaps?  Pullback, perhaps?

So, I backtested this method of defining “stops” and tested it starting in January with the SOS-D screen.  I only made purchases on Mondays, so if I got stopped out, I stayed cash on that position until the following Monday.  Frankly, it was sort of choppy and stopped me out a lot, forcing me to decide if I should buy back into the same position when it came up on the screen again and again.  I was making gains though, to the tune of about 20% for the year through May. 

Let’s look at a chart of the year for the NASDAQ100 (generated by http://finance.yahoo.com):

 What really got interesting though, was when, during the 2nd week of May, I got stopped out of all five positions in a single week.  I gave up a little profit, but if I had stayed cash at that point, it would save a huge amount of the market losses through the end of July.  If I examine those stops on the chart above, I get a confirmation in the form of the price breaking below the 50 day moving average (and then the 200 DMA, shortly thereafter).  I tweaked the methodology by observation as well, adding in a couple of rules for myself to try maximizing the retention of gains when a single position goes bad.  I added these two additional alternative stop conditions:

• Close the position on any cumulative position loss of 5%.  This means if I happen to buy into a position at a bad time, I will limit my overall position loss to 5%.
• Close the position on any cumulative pullback of 5% from a High Point.  This means if I ride a position up to some gains, I get out within 5% of the High.

Staying in cash until the NASDAQ broke back above the 200 DMA would stop a lot of pain.  I can use the same system while in cash to monitor and watch for a period when 80% of the positions begin holding for multiple weeks – that *may* identify a time to re-enter that is sooner than the 2000 DMA crossover point, I haven’t tested that yet. 

From late July, several of the SOS-D stocked identified have not stopped out up through this week, meaning that the positions would have racked up large gains over the past 3 months.  Re-balancing to account for different rates of gain would also help preserve gains if individual positions go bad, though few appear to during this period.

As an additional methology to add to my existing trading techniques, this looks good.  I will be opening 3 positions today to put it to the test in real life.  I am a little bit nervous taht we may be reaching the end of an uptrend, but at the same time, we’ve broken through the April highs, so there could conceivably be a continued Bull market for a while.  And, if I am near the end, at least my new “stop” technique should put me on the side with minimal losses if the trend breaks down.

Trade Review – Nov 3, 2006

So, it is the end of the week and I want to review my active trades.  Right now, I have two trades – a Calendar spread on BGC and a more complex Call spread on RHAT.

Symbol	Profit Range	Max Profit	Sell conditions
BGC	37.77 – 43.19	$1200 @ 40	below 37, above 43.5
RHAT	14.25 – 22	$1400-$2600 @ 15-17.5	watch near/under 15

With announcements by Microsoft and Novell on an agreement yesterday, I was a little worried about another RHAT drop, but it held steady and was actually one of few gainers today, ending up $0.57 at $16.67.  This is right in my sweet spot of 15-17.

BGC, after it’s drop which precipitated my trade, has held steady around $38 all week, staying in my profit zone as well. 

Overall, I wouldn’t mind if both of these stocks crept up a bit next week, but they’re both looking solid for now.

Chance Fortune and the Outlaws

Jacki signed me up as a volunteer reader for Kira’s class and we had our first reading session today.  I went to the bookstore yesterday with the intent of picking up something interesting and I found “Chance Fortune”.

Both the kids (3rd graders) and I really enjoyed the first two chapters and are looking forward to reading the rest of the book together over the next few months, and, based upon what I’ve read already, I can recommend it for young readers. I would put it in the same category as Artemis Fowl or Harry Potter, but with superheroes.

 I’ll update the review when we’ve finished the book.