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Wednesday, December 21, 2011

SPX Update: A Discussion of Trading Strategy, and the Rally's Potential

Yesterday the market knocked out my preferred count, in a brutal rally which further demonstrated that this is not a market for the faint of heart.  This remains a trader's market.

For any inexperienced traders, this is a very tough market right now.  During clear trends, the market favors trading against larger time frames: swing trading, and buy and hold (or short and hold) are strategies that work.  During range-bound markets, the best strategy is often quick trades and day-trades.  Holding and hoping simply doesn't work during such times, as the recent large overnight gaps are serving to emphasize.  A market which seems like it's about to trend is very different than a market that is actually trending.  It's important to learn to recognize the difference between an established trend and a potential trend... and it's even more important to understand the limitations of the strategy you're using.

Having a system to anticipate market direction is only one piece of the puzzle.  In addition to a system which helps guide you on direction, there are two key strategies which every new trader must develop:

1) A method of risk management, and
2) an exit strategy. 

When do you close a profitable trade?  Do you take partial profits or full profits?  When do you cut your losses and bail on a losing trade?  I have said this many times, but when it comes to stop-losses, you should know your exit before you enter the trade.  Once you've entered the trade, your emotions take control and you will compound any and all of your mistakes.

Think of it like a poker table.  When you've got $1000 in "profit," but you're still at the tables, it's not real profit until you cash out your chips.  As long as you are still placing those bets, the potential exists of giving it all back and more.  There's an old trader adage: "You'll never go broke taking profits."  I would add my own adage to this:  "If you never take profits, you'll eventually go broke."  Especially in this type of market. 

A trending market is a different animal than this range-bound market; but even then, management of profit and loss is key.  Let's take this point to its logical conclusion to drive it home.  Imagine you were a bear heading into 2008, and you made a killing on your shorts during the long downtrend, but you never took profits.  You would have had to endure the drawdown from 2009 to 2011, and by now you'd be back to even, or in the negative. How about if you were a bull in 2006?  Same thing.  What's your strategy to protect profits?

Trading is always a risk/reward proposition.   How much are you risking, and what's the potential reward?  Are you holding out to try and gain an extra 2% while risking 10% or more?  Does that make any sense?  Is the market approaching an inflection point -- i.e.- a potential reversal zone? If it is, your risk is increasing, and it's important to understand that in your decision process on what to do with your profits.  If the market is approaching support in a downtrend, how much are you risking to hold on to your positions, hoping for a break?  Can't you always get short again if support fails, or short again from higher levels if it holds?  The reverse is true in an uptrend.

These are a few of the questions you need to ask yourself to be a successful trader.  Being able to anticipate direction is only part of the equation; if you don't develop a system and know how to manage your trades -- and when to take profits and when to take losses -- then knowing direction won't actually help you much... and you'll eventually go broke, as 95% of traders do.

Conversely, a winning strategy can make even a losing system somewhat profitable.  If your system is wrong 60% of the time, but you only lose 5% each time it's wrong and you gain 10% each time it's right, you will make money in the long run.  If you have a system that's right 80% of the time but you never take profits or you consistently make bad entries, you will bankrupt yourself through poor management.  The system can't save you -- just like in the rest of life. 

Ultimately, you have to develop a clear strategy, clear goals, and learn to bite the bullet a lot.  Trading is almost always about doing the exact opposite of what your emotions want you to do.  You have to short when the rally looks like it's going to the moon; and you have to buy when there's blood in the streets. 

And many times, you just have to stand aside and wait.  This one is especially tough for Western society; the concept of non-action being something productive is difficult for our culture to swallow.  Complicating the matter is the fact that, as a trader, you often have to act on uncertainty; and you also have to not act on uncertainty... and somewhere along the way, you have to learn the difference between which type of uncertainty is which.  A lot of that goes back to the risk/reward equation and understanding probabilities.  If you chase a Royal Flush on every hand you play, you'll go broke long before you hit your cards.

The good news about patience is that the market's not going anywhere -- there are always trades to be made tomorrow.  The other good news is: if you can survive this market, you can probably survive any market.  The market for the past few months has been as tough as any I've seen.

Alright, on to the charts.  Tuesday has opened up a lot of possibilities.  The question everyone wants answered is how big will the rally be?  With the preferred count out, the two counts which stand now as the most likely options are the bullish alternate count and the Wave 2 rebound count.  A one-day move does not a trend make, so it's difficult to predict which will unfold at this point.  Let's look at some secondary evidence.

The first chart I'd like to share is an old indicator that every trader on the planet looks at from time to time: the options put/call ratio.  The theory here is that this is a contrarian indicator: the more calls are being purchased, the more bullish traders are.  And the more bullish they are, the more likely they are to be wrong.  To be honest, sometimes I hate this indicator -- but it seems to be functioning reasonably well lately, as you'll see from the chart. 

Put/call has now reached an area which, over the past few months, has often been synonymous with at least a short term top.  I have marked the signal line ("Sell Zone") and used dashed horizontal lines to line up the signals with the S&P 500 (SPX) in the bottom panel.  This signal has worked in favor of the bears 69% of the time since late June.



There are two big issues I see for bears right now. The first is that the bulls simply look stronger.  If you look at the daily chart above, you can see that the market retraced about 61% of the whole move down in only one day.  The second is the ubiquitously talked-about seasonality factor of the famed Santa rally -- this is just not traditionally a good time of year to be a bear.  The Dow Jones Industrial Average (DJIA) has closed in the green this week 78% of the time. 

There is another factor arguing for the bears right now, though.  I have previously published charts showing down volume/up volume ratios... in the interest of space, this time I'm not going to publish the chart, but yesterday was a big accumulation day.  Conversely, Monday was a major distribution day.  Historically, when these two types of days follow in that order, it argues that the lows will be revisited.

So how about a wave count that matches all the available data?  Interestingly, there is one, which I first proposed on December 15.  It's a version of the bullish alternate count which has the market working on a triangle.  This count would suggest a reversal lower on Wednesday, possibly after a little more upside.  If we get a reversal, there is no predicting what Wave e of a triangle will do.  Usually, Wave e's perform a false breakdown below the triangle, and then whipsaw back into it.  However, Elliott guidelines state that the only rule for Wave e is that it must end within the price territory of Wave a.  Not terribly helpful for projection purposes.  The updated SPX chart is shown below, with a sketched-in potential path -- but it's really just a potential more than a projection.

If the bullish alternate count is in play, the suggested final target for red Wave C is 1270-1310 (I swear it's red -- Stockcharts is doing some bizarre glitch where it turns black when I upload it to my chartbook).


The count shown above would suggest a reversal lower at some point today, in Wave e.

The final chart is the count which suggested the decline was a complete first wave down, and which now has the market forming a second wave retracement rally.  The market already traded into the target retracement zone for this rally... in one day, which is quite a bit faster than I would have expected.  This count would foresee new lows following this rally in the not-too-distant future.  Given the seasonality factor, this second wave could play out as a flat correction.  In other words: a trip from the top, back to the lows, back to the top -- before finally heading decisively lower.  If this count is in play, the top is near.



I wish there was something more I could give you, analytically.  There are a lot of cross-currents at play in the market right now, and it remains difficult to anticipate the market's intentions beyond the next day or two.  A one-day explosive buying panic simply throws more flies in the ointment.  The evidence suggests the lows will be retested at some point, and there is further evidence of some type of top forming. 

Beyond that, I remain long-term bearish -- and, given all the evidence, bearish about the very short term as well.  Next solid resistance comes in around 1250, so we'll see how the market does at that level.  Even under the terms of the bullish alternate count, a trip back toward 1225 SPX would be fairly normal here.  Of course, this market has been behaving anything but normal lately.  Trade safe.  

The original article, and many more, can be found at http://PretzelCharts.blogspot.com   

181 comments:

  1. Morning.  Poured my heart out into this one, hopefully there's something helpful for the newbies in there.

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  2. Thanks for the feedback in the previous post.  I learn every day from this blog.  Your willingness to educate is much appreciated.

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  3. You're welcome.  I was worried I might have come off a bit gruff after I reread it.  I'm not kidding that I lose sleep over you guys.  :(

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  4. Futures red now... surprise surprise.  ;) 

    My shorts from 1242 ES are looking good now.  :)

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  5. Good morning. Much thanks, as always.

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  6. It was amusing watching the CNBC guests trying to come up with a reason for the move yesterday as there always seems to be the need for an explanation.  There wasn't one as the backdrop hasn't changed other than the pressure on the spring down got to wear it was too much and needed to release energy.  Instead it's maybe Spanish bonds etc.  Of course with Oracle's miss, Intel's warning, China's market down every day and European austerity - what the hell is there to be bullish about ????  I guess home buying in the US lol - not

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  7. I love that crap.  MarketCrotch is the same way in their headlines each morning.  "Stocks Up 3% as Investors Realize Europe is a Historic Vacation Destination!"

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  8. Excellent as aways PL,
    second chart, "a trip from the top, back to the lows, back to the top"
    when you say "lows" you mean the low of 20th dec or a test of the (lower/higher?) red trendline? Would just like to understand how "flat" a flat correction normally is.

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  9. ES futures givin' bulls the finger now.  Big spike and full retrace-plus.

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  10. A trip back to the most recent lows.

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  11. WILL THE RALLY CONTINUE ??  That's funny as I never knew 5 down days to 1 up day equalled a rally.  Sort of thought rally implied at least a few days - oh well,  eternal optimism

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  12. Wow, futures in full-on crash mode right now.

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  13. I didn't take it as gruff at all.  I can hear your concern for us.

    I love today's discussion of trend vs range bound markets.  I am reassured that you describe this as a tough market.  It means I am learning in a challenging market rather than winning fat and dumb.

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  14. what do you think about going short at these levels pretzel?  i think i missed the boat

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  15. You're talking futures?  Or premarket?

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  16. as a newbie, this couldn't have come at a more perfect time, thanks for the analysis and the much needed advice as I was also one of the ones caught with my shorts out ( ass exposed) trying to swing trade using options, probably not the best strategy, if there's a day/swing traders bible out there you could recommend would be greatly appreciated, for now back on the bike with alot of ground to cover figuratively and financially , with the help of this blog I'm sure I can doti, thanks again

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  17. It's a rally when it retraces 61% of the whole move down in that one day.  But I know what you mean.  :)

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  18. In chart #1 why isn't the red B at SPX 1158?

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  19. Love it, great graphic.

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  20. Because it's a hypothetical triangle.

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  21. I'd probably wait for a retrace of some type.  Think you should be able to get 1235 at the minimum.  Honestly, I'm not sure whether I'd jump in short at this point -- I prefer to anticipate rather than chase... but that's just me.  Also, the market's still a bit vague here.  Maybe using tight stops and trading it real active.

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  22. PL Great analysis.  Being one of your newbie's I do appreciate all the time you took to write down some basic investing rules.  Yesterday was ugly, down 9% in a single day and I am still holding short.  Decisions, decisions, dump some time today at the low (if I find it) or hold on for a week or more and see what happens.  I can be wait as the funds are long term and not needed anytime soon.  Given your perspective, I have to ask myself, what would PL do?  Not asking for investment advice, just trying to learn from the master.

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  23. For one, I would suggest staying away from options, unless you're *very* clear on trend and timing.  A big third wave is a great place for options.  Everywhere else, not so much.

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  24. Well, if the SPX goes to 1310, how will your account look?  What's the risk, what's the reward?  It's always hard to realize a loss, but sometimes it's better to cut and run early, preserve capital, and wait until you have a better trading proposition.  Would you short at these levels?  If so, where would you cover?  Where would your stop loss be?  Forget about the 9%, pretend you were just handed this account from a friend -- what would you do with it? 

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  25. thanks pretzy.  btw love the update today,  you're such a natural teacher.  not gruff at all

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  26. Thanks.  I always worry (ex post facto) about how things are perceived on the internet, with no tone of voice.  I remember one day I said something to Mav and he thought I was annoyed with him, when I was nothing of the sort.  I was actually trying to be warm in my post to him, lol.  Just things can be "heard" differently when you read 'em.

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  27. Yes, if you're doing alright in this market, you're doing well.  For someone like me, this is a dream market -- tons of volitility and big intraday moves to jump in and out of.  For a swing trader, or someone who has a day job... not so much.

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  28. Thanks PL, great leaning from the master.

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  29. Don't know if I want that title, lol.  I put my pants on one leg at a time too and all that. 

    There's an old Zen expression which says that experts are impossible to teach -- in other words, once you think you're an expert or a master, you stop trying to learn and you stagnate.  I also believe the expression about business "either you're growing or you're dying" applies to individuals as well.  So, I don't think of myself as a master at all.  :)

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  30. I put an order to cover around 1226, but the overnight move missed by 3 points.  Think we'll see it again?  This bounce is already 6 points strong in a short time span.  Think the cash market will push us down or are the dip buyers already salivating to get in this move and we're going higher immediately?

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  31. Being humble is what everyone like about PL, not trying to force his views on everyone like a politician, just sharing what he has learned (the hard way I am sure) and not for a profit.  Keep up the good teachings as we are learning a lot from you.

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  32. I put it all out there in the update, man.  Got nothing new based on the pre-open here -- nothing really convincing in the structure to lean me either way.  I can tell you that I wouldn't want to be short above that spike high. 

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  33. I love days like this, and it's another reason I trade futures.  ES moved almost FORTY points overnight... now it's back to flat for the open.  "Nothing to see here, move along."

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  34. PL,

    What a great tutorial. You are a true professional. What a pleasure to be here.  Thank you and God Bless you. Regards

    Daniel B

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  35. Thanks, Daniel.  A pleasure to have you here.  :)

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  36. nice work PL; it's good to read about other things than EWT once in a while! 

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  37. Thanks.   I try to challenge all my assumptions pretty frequently, and you can't do that remaining locked under one system.  As I've said before, I don't like using EWT in a vacuum. 

    Also sometimes my articles end up almost being me "thinking out loud" so to speak.  This is probably one of those.

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  38. So now I'm wondering if bastiat took a crack at shorting 1235 ES...

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  39. pl do you have a predetermined level in mind to cover your shorts, or will you let the market unfold before you make that call?

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  40. haha yup i held out until 1235.50 :)

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  41. Nice.  That was a pretty good call on the fly, huh?

    But as far as covering levels, I'm playing this one by the seat of my pants.  :)

    I've moved my stops down a bit to at least lock in some profit.  But I'll cover when it "looks" right to do so.  Or I'll just move my stops again and go to bed.

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  42. NDX back at bottom of support/resistance -- leading the way

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  43. yet another ridiculous call on your part pretzy.  thank you for the advice

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  44. Covered here at 1229, prior 4th wave support.  I'll take my 13+ points and reasses.

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  45. that's good dude! always challenge yourself! closed my short position here at 1235; this is a bull market so gotta stay nimble;  like u said, trade safe! 

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  46. Yep, thanks, I appreciate it.  I got faked out by the ES a little this morning - I was going to raise my cover price from 1226 to 1229, to see if we retested that level during the cash market, but decided to put it at 1231 instead to be safe.  WE of course blew past 1231, and reached below 1229, so I feel bad, but I am lucky.

    I was underwater on that trade, and instead of cutting and running yesterday, I averaged in late in the day and again overnight, raising my average to 1236ish.  Got bailed out this time, making a few points I should be happy with, but next time I might not be so lucky.  Trade management is vital.

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  47. I'll go short again if those lows break.

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  48. lol, see me reply to your reply earlier; we did the same thing. keep the stops close on shorts in a bull market. rather safe than sorry. still holding my longs for the top, but of setting some losses for today with quick stabbing shorts and puts.

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  49. PL, excellent job of looking at many different alternatives. Thanks again for your work.

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  50. PL,

    Great article today.  Didn't think it was gruff at all and I could "hear" the concern you have for all of us that follow you here.  Totally believe you lose sleep over us.  You have a better developed sense of fiducial responsibility than I've seen in a long time...and there's not even a binding contract!  :)

    Unfortunately I "held and hoped" yesterday which put me in the red.  Your comment about the market retracing to recent lows has me thinking that I should do the same thing for today so that I can eke out something and live to trade another day.  Of course, I realize that wasn't trading advice :)

    When you say recent lows, would you hypothetically say within a few points of 1202 (SP-cash)?

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  51. Did you ever consider a second service, one that's maybe embedded in this one or otherwise linked, where you charge a subscription fee and post real-time trades there, while keeping this discussion board free?  And maybe the subscription service gets the update an hour before the free one, or with extra goodies?  The logistics are likely more difficult for you, but that might be a way to keep the community you've built large and intact, while generating a recurring revenue stream.

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  52. ES about to walk off a cliff here?

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  53. Ah, to short again or not to short again, that is the question.  13 points is a decent day.

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  54. im seeing spx right on the 50dma, so im out and waiting for a pop to reshort- clearly yesterdays explosions up was front running the ecb news.. now what?

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  55. Yeah, those are good suggestions.  Not sure I'm ready to jump to that, but those are good ideas if I were.

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  56. lol, same thought here. not taking any changes. my longs are in at 1235 since yday so doing fine.

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  57. Ty for the dma update.  You guys would probably be shocked if you knew how often I look at nothing other than price data.  Literally nothing -- just the price ticker.

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  58. On a chart of course, not just the numbers.  I'm not Russell Crowe's character in "A Beautiful Mind," lol.

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  59. i think that 's as far south as she goes for now; likely another stab at 1230 later today. we'll see.

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  60. Ah the caprices of the news cycle.  Looks like today will give up plenty of yesterday's move. 

    Well placed article on 'trading strategy'.  Hope this doesn't sound patronizing to anyone here, and this is intended simply as sound and helpful advice: 

    Holding after Monday's close after such a huge move down for the entire session and especially after the last wave down in the last half an hour of trading was pretty much asking to have your head handed to you by this market the next day.  

    And especially when the close is near 1,200, which longs are likely to defend heavily and especially during EOY and holiday week.  Even without a Housing Starts news story helping them out.

    The moral of the story here is:  You were given your nice gains. And at that point, it's time to close them out and see what the next day brings you.

    This is not indifference to anyone's losses and I don' think anyone 'deserved' it for having held on for more. 

    Nor is it after the fact 'I told you so'.  I've been guilty of EXACTLY this sort of thing myself more than once, so I am speaking from experience here. 

    This is one of those things that is only learned the hard way, I'm pretty sure.  And you have to see it in terms of actual drawdowns to your position in real dollars to really get it.

    Whatever the losses anyone may have incurred in this instance, the 'lesson' involved here is likely to be far more valuable than the losses. 

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  61. Alright, had to give it a shot here.  Took a quick short stab at 1232.75 ES.  Tight stops above the close.

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  62. I do exclusively in options.

    The benefit is on leveraging without margin.

    The disadvantages are three fold:

    1. You have to know the trend.
    2. Your timing has to be impeccable.
    3. It is a wasting asset - time is your enemy.

    Having said that, you can use some fancy strategies to mitigate the disadvantages to a large extend.  Put/Call spread (time/vertical)  is a good way to mitigate the ticking clock issue. I used roll-over as well to buy time and to chase a trend.

    In any case, good profit taking/lost cutting strategies are important.

    BTW: I use option for swing as well as day trading,

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  63. This is true. Sarcasm and tone are hard to interpret over the web.

    Ps. Morning pretz!

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  64. pretzy i have a question for you.  you covered your shorts at 1229ish, then said you would look to go short again if the market broke below the low at 1228.25.

    in that situation do you consider any trade below 1228.25 to be an attractive place to short anew, or would you like to see it go a couple points below the low, etc?

     and, rae you thinking that by breaking below the low that would trigger  sell stops that would enable meaningfully new lows to be put in?

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  65. Very much agree with your point, even after holding and suffering.  The best lessons learned are the most painful ones.  I was lucky to make back about 45% of yesterdays losses before closing out today.  But I have now learned a great lesson, actually several of them in a single day with plenty more to go.

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  66. Sorry, didn't see this earlier.  That's possible, but I wouldn't try to take it to the bank.  As I said in the article, 1220-1225 would be normal in a "normal" market.  Lots of stuff up in the air right here, projection-wise.  It's even possible that yesterday was the whole damn rally already.  Next day or two should help clarify. 

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  67. I just watch the chart and then decide.  I was looking at it from more of a wave perspective, there wasn't any speculation to stops.  But I didn't like the action right there, so I didn't reshort immediately, though I was quite tempted to, as you may have gathered from my "to short or not to short" musing.

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  68. I went short at 1,239.  Seems an easy call.  Very surprised that longs were able to take it back up here. 

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  69. Morning gap fill.  That's the market makers at work.

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  70. PL:

    Are we on the abc of yesterday's 1,2,3,4,5?

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  71. Alright, I have to get some sleep.  I have stuff to do tomorrow/today, and can't be running on 3-4 hours again.

    bbl

    p.s.- morning, Mav.  Night - lol.

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  72. Yeah.  And a gift to us.  The bots are programmed to fill that gap and make something back on the retrace as well I'm pretty sure.

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  73. Possibly.  Not 100% sure on the short-term count at the moment. 

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  74. Pretzel, I know that I've said it before, that I am here for entertainment.  I'm definitely interested in the topic and the EW angle adds to that interest.  I of course like that I'm able to participate and add my sometimes witty, often banal comments into the mix.  Despite the quality of the analysis here, I would no more trade of off this site's content than I would from something CNBC said, if I watched.     Thus, in that regard it's very much like CNBC - entertainment, only I can participate here.

    Its simply not how I trade at present.  I want to learn more so that I can incorporate it into my trading.  So for me at least any trade that I might occasionally post here, isn't based on an EW count or EW bias.  For example I nearly went long on MRK last week, because it moved consistently (though bullish and against the market).  Such a counter-trend trade is hardly consistent with the prevailing EW counts. Speaking for this trader only, If my trade is good, its my doing.  Likewise if I post that I'm  getting squeezed or stopped out, my doing as well.  No need to lose any sleep over my bad trades. 

    I can't stress this point enough, it would be irresponsible and foolish of me to trade based on something other than my own system. 

    Depending on how things are pharased, there are some subtleties between "Pretzel, how do you see the next market move unfolding, because I'm now in a trade ?"  and "Help, Pretzel my trade has gone bad, what do I do?" While the problems with second question are obvious, there are some problems with the first question as well that may not be as apparent.

    The problem with the first question is that the person is already in a trade, and Pretzel Logic should not factor into the decision making of that trade once the trade was executed, before hand maybe, afterwards definitely not.  I can't tell you how many times I've seen that question or similar here, in truth I have even been tempted to ask it myself at times.  I've seen lots of questions and statements whether phrased this way or not that scream, "Pretzel what do I do, I'm in this trade and now I'll have to wait till he gets back?"
     
    The danger in that question is that  regardless how how good Pretzel's insights and responses might be, the individual is that much closer to surrendering a key element of their decision making process and that's a formula for disaster. 

    Pretzel isn't so crass as to answer in this manner, but consider that all he can really respond to you once you are in the trade is effectively.  Take the profit; Take the loss; Risk staying in longer/getting out sooner for greater profit/loss. 

    Bottom line, once you are in the trade.  It's yours and so is the decison making.  Hopefully you made the decison (stop loss)  ahead of time on where to get out if the trade isn't going as planned.  Consider then if anyone needs an answer from Pretzel after a trade has been executed, that something may be very wrong with your trading and it should be a possible warning to you.  If anyone is really that uncomfortable with their own decisons, there are quite a few auto-trading and related services available, where they will trade your money for you.




     

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  75. Closed it out for a scalp gain at 1,236.  Indicators had bottomed and were suggesting a reversal.  Looking to get back in short on the next swing back up.

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  76. Closed out my shorts this morning at 1233 that I opened towards yesterday's close at 1242 and held overnight. Today seems like a day I shall be going long around the retest of LOD for the next few days. My EW count is showing this morning was just a correction in the uptrend or PL's bull case. Going to scale into BAC calls as they look very attractive...

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  77. B.O.B. is a member of the "establishment" who doesn't want independent/individual traders to gather a glimpse of their games, tricks, manipulation, and fraud that they commit every day. 

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  78. Nice trade. And this is a good place to close out and reassess.  ST indicators are bottomed here.   I'm about to close out the second piece of the short I put on now as well.  Closed out the first already.

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  79. Lol.  WTF?  I f***ing WISH.  You think I would be posting here daily if I were in the 'establishment'?  Do members of the 'establishment' post about being happy scalping a few ES points?  I was just offering some suggestions to PL, since he's been so good to us.  It needs to be in his interest to keep it up.  This post did make my day though, so thanks for that.

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  80. Man, dem bears are giving no quarter to bulls right now. The put position I just sold jumped another 15 cents right after I sold it. Which is worth a lot.

    Since we're on the topic of trading strategy today:

    My own worst 'habit' as a trader in the last year has been to sell too early. And this is WITH using the best exit strategy that I currently know.

    Which is an ingrained reaction to having habitually held my positions too long when I was a newbie. It's one of the better 'problems' to have though, when the question is not whether you profit but how to maximize how your trades turn out.

    I've experimented with plenty of exit strategies to figure this out better. Still haven't found that one that works 'best' though.

    And since we're on the list of problems that traders tend to make. I have a Top Three List. And I can state with certainty that I am very strong in these areas:

    The worst problem IMHO is not managing position size, leverage and risk. More money has been lost by traders not figuring out this single issue than any other, I am pretty sure.

    The second worst is entering a trade and not knowing what to do when it moves against you.

    And the third worst is entering trades impatiently and not waiting for conditions and the set up to be optimal for entry. This is the 'problem' that most traders tend to focus on most. How do I know when to get in on a trade when it'll move in the direction I want it to?

    I firmly believe that MUST figure out the first two issues stated above before you make will consistent money though.  Not controlling position size and risk.  And not knowing what to do when it doesn't go as 'expected' will lose you far more money than entering trades at the wrong time.

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  81. Hey Pretzel, about your last chart of today's post: You labeled yesterday's retrace as a wave 2. Does one look at the subdivision of waves in order to arrive at a count? Does the subdivision have to be clear, or one can "fit" a count into the wave? Are you counting the subdivision as a ABC?

    Please help me resolve these questions because, my approach has been not to utilize EW unless the market gives a logical neat count. And yesterday's example is an example of an unclear subdivision.

    Just my .02, I was thinking of the possibility,  of an irregular ABC correction from the lows of (looking at futures charts) 12/15 at 1999-as 'beginning of A' .  the next low of 12/19 at 1996  'completed B' yesterdays run up as 'wave C'.

    I appreciate any input.

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  82. I noticed a question from yesterday about where to get live charts.
    I found the following site to have almost every future, index and forex pair in real time(few second delay): http://www.forexpros.com/indices/us-spx-500-futures-advanced-chart

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  83. Most traders are human - reacts to pains faster than gains.

    Now, I learned to execute by the chart and not look at the p/l of my positions at all.

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  84. Just to add some wise words that I've once heard:
    If one even captures 1/3-1/2 of a move, he has gotten the better portion of it.

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  85. EW count - if yesterday was 1 up, then this little abc this morning could just be A of  ii down. The little bounce off the lows, may be B, with C of ii taking us lower. 

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  86. If it gathers momentum with an impulsive count, we're going much lower.

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  87. B.O.B., you are welcome.  I've only come across this blog a little over 10 days ago so I don't know your history.  However, your comments of "...maybe the subscription service gets the update an hour before the free one..." juxtaposed to "...that might be a way to keep the community you've built large and intact, while generating a recurring revenue stream." are either faulty thinking or deliberate sabotage. 

    PL can only do one or the other.  If he goes the subscription route, readership will quickly drop off a cliff, but he will have steady paying customers.  The free delayed site will be abandoned by most readers. The growth in his revenue will also be close to zero at best.  It is a lot easier to attract readership and a greater following with a free site open to donations (which will lead to higher revenues in the long run), than to close it off with a subscription service (usually offering a free trial period.) Most non-pro and unexperienced readers will drop out after the initial free trial.  Whereas those who can follow along and learn will eventually become profitable and will donate accordingly.  Furthermore, the greater PL's audience, the more self-fulfilling his predictions will become (as everyone will likely move near his predictions).

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  88. Actually it would be consistent with PL's count considering Drug MFG's are safe haven type places to park your cash when things are getting a little sketchy.

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  89. My .02 is your count is possible, but that C wave could just so far be "a of C" (yesterday), "b of C" forming now, to be followed by a "c of C" back up. 
     

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  90. And this ties in with the concept of a high probability trade, doesn't it? And also, to PL's comment about the unprofitable outcome of front-running.

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  91. Well true enough.  Very.  And I'd rather catch 1/3 of 1/2 of a move than continually find myself on the wrong side of them.  Or not knowing what to do if I am.

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  92. Even though ORCL is off its low, NASDAG continues to get worse...   If SPX drops & closes below 1230, are we back to the bearish count?

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  93. Hmmm, one of the bigger challenges for me has been that I mostly DO exit positions when the chart indicators or approaching resistance 'tells' me to.  Or just before they tell me to. 

    But I've seen so many trades I make 'surprise to the upside' . . . and I have a habit of not sticking around for that upside. 

    Lately, I've taken to selling 70% of my position when the charts 'tell' me to, and then holding the other 30% to see what happens. 

    Which is working out just okay.  And am just as often closing it out for less than I would have.

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  94. One more thing.   Because of his EWT skill, If PL wanted/needed a steady income stream from his work, he could EASILY earn over $1,000,000 a year working for the establishment.  It comes down to choice.  Independent entrepreneur or employee?

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  95. Look at iBankCoin, then try to tell me that model is faulty or my thinking is faulty.  Case closed.

    And I agree that having his site free has allowed it to grow rapidly and it is a good model.  And I was in no way suggesting he stop attending to the free boards or not divulge any EW info or even trading strategies.  Just that those who wanted more detailed up-to-the-second trading ideas could have that for a nominal fee, that is all.

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  96. I am an options trader, so my lost had already been defined when I entered a position. So my decisions boil down to whether to roll over, bring in another leg, etc. Basically measures to lower my risks.

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  97. Not familiar with iBankCoin, but I will look into it.  Thanks for pointing it out.

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  98. PL... just a heads up regarding B.O.B.'s and Guest's discussion above on the pros/cons of subscription/non-subscription service.  Just in case you missed it since it did not occur below your post.

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  99. This is certainly a possibility. Though from my intermediate experience with EW, I've noticed, (and will parrot what 'Master Pretzel' said) Wave Bs are usually impossible to predict, foresee, or trade.
    During the times when I label a chart(and as I said, only when I see something clear. I try not to curve fit) I only apply a B label to a wave when I see the 'unpredictable' aspect.
    I know some of you may disagree, but that's my approach and that's what I found effective

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  100. I can only tell you that when I see Pretzel's stated bias say bearish, and the charts/counts suggest that as well. Then I for one don't see an eqiuty that moves bullishly during that time as being consistent with the count.  I mean I don't trade Wall street cliches e.g. that one or "sell in May and go away" et al.

    BTW, while there might be some truth to that statement about pharma's in general,  MRK itself had a rather bad November, moving down with the overall market rather than against it as it did last week, so I would not have considered that trade then.

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  101. That "happy" energy was short lived. 

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  102. Incredible.

    All chickens running around with their heads cut off.

    Fascinating, actually.  How pathetic man is, when he hunker hugs into handhold groups.

    --------------

    Imbeciles, I have already told you all for 3 days, what the story is---if you know how to read, that is.

    A closingprice above mid1250's spx is IMpossible.  MY primary trendline stops it;  plus, so does 200day ma.

    I give this 5thwave of 5thwave of 5thwave STUPIDmoney SUCKERSrally--that I PREDICTED--MAX until this friday.

    ----------------

    The post above by pl is the most pathetic he has written.

    I actually feel sorry for him/her, for the first time.

    Wow.  This pussy's confidence goes up/down,

    so easy---no wonder his wife is the boss.

    And I think he likes that fact---a lot. 

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  103. When I see the VIX as it moves on to the lower Bollinger Band I see a catapult or sling shot that is being stretched and ready to fire.  Everyone knows its going to move decisively and unmistakeably higher.

    The only thing I wonder is how much lower can it go?  We haven't seen levels this low since July just before things went wild.  Fair to say that it should be easier to get confirmation as to the expected decline in the markets from a rising VIX once things start moving. 

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  104. Not over yet, moon ingress Sagittarius (emotional optimism) and Sun trine Jupiter  all tomorrow morning before market open.  

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  105. So cash market players should hold some longs overnight?

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  106. Ah, higher futures to gap up at open.  Nothing new,  Gekko will be ecstatic!

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  107. I'm scanning through a book by T.S. Hennessy called The NEW Elliott Wave Rule. Has anybody here evaulated his ideas?

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  108. In july when the VIX was at its rediculous lows, the SPX was in the 1300s.  My opinion is that SPX will not hit 1300s by the end of this December.  By January, with more traders back in the market, I think the market will represent more realistic fear with a higher VIX/lower SPX.  That should spike up the VIX around then; but it would be a dream come true to see the VIX spike up earlier than that.

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  109. If you have info/opinions, then feel free to post them. Why resort to name calling? Very childish and takes away from any credibility you may gain from your ideas.

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  110. The Vix, like the futures, have been in a world of their own.  Even in down days they're down - like a slow leak in a tire.  The market really hasn't gone anywhere but they are down like 1/3 from where they were.  Not sure what that is signaling other than bullishness

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  111. Tricky - but, if today plays out as an abc flat, then the pattern would support another count up.
    Astro supports a a little more lift before Thurs pm and Friday.

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  112. AF, I am options trader also, and as an options trader it is CRITICAL to exit and take profits when the indicators tell you to.  Otherwise, the possible move against you plus the time decay of the option will kill your profits faster than you can blink.  I've held on to positions too long too many times.  In the end, profits end up being  less than they would have if I had sold earlier - even though the underlying security/index may have moved further in my favor.

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  113. NDX is lagging like hell.

    also, why do they say NDX leads? I know pretzel mentioned it before

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  114. One additional difficulty with options is that spreads are wide, and being whipsawed is VERY costly.  Therefore, once I decide to exit a position, I have disciplined myself to NOT reenter the trade if the underlying looks to move further than I expected after I sold.  I have been burned many, many times doing this so I won't do it anymore.  I rather look elsewhere for the next trade, or I will wait 2 or 3 days to see if the underlying retraces significantly to a price where the option price has improved significantly from where I sold it due to price AND time decay.

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  115. Maybe it means NDX leads market direction.  It led all segments higher during the October rally.  It looks like a rotation from high tech into consumer staples, etc. today.

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  116. I don't normally use pure put/call.

    Most of the time, I use spread (vertical/time). That help me to nail the swings. Nevertheless, some times I do exit completely if I think that the trend has turned completely and is going against me completely.

    Most of the time, however, I can cash in on one leg or the other. 

    For example, I am now sitting on a bunch of SPX Jan 133/134 call spread. At this point, I have some hunch that it is going up, but am more or less clueless what count we are rally on.  When I am a bit more sure, then I'll either cash in today or in the next few days.

    My max loss had already been defined by the spread.

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  117. Wrong thread, sorry. Here we go again ....

    I don't normally use pure put/call.

    Most of the time, I use
    spread (vertical/time). That help me to nail the swings. Nevertheless,
    some times I do exit completely if I think that the trend has turned
    completely and is going against me completely.

    Most of the time, however, I can cash in on one leg or the other. 

    For
    example, I am now sitting on a bunch of SPX Jan 133/134 call spread. At
    this point, I have some hunch that it is going up, but am more or less
    clueless what count we are rally on.  When I am a bit more sure, then
    I'll either cash in today or in the next few days.

    My max loss had already been defined by the spread.

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  118. Today VXN, the VIX of NDX, is increasing by 3% contrary to the VIX which is decreasing by 4% and this is a divergence. We shound always work on divergences as they anticipate the future  

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  119. Uh, wow.  Talk about what to do when you are on the wrong side of a trade.  Just got myself out of a pickle to get back to even. 

    Went short again after the bounce off of 1,230 at 1,234.  Took a big put position.  Larger than normal, since I figured it was a no brainer that we'd retest 1,230 again.  Which of course didn't happen.

    So on the run up to 1,237 instead of bailing, which would have meant a sure $1,000 loss, I instead ADDED even more heavily than my original purchase to the position.  Which meant getting myself VERY strung out on the way up. 

    But with the indicators topped, my calculation was that a pullback to at least 1,235 would happen, so I needed the much larger piece I bought at 1,237 to get me back to even from what I purchased at 1,233.  And I had we gone to 1,240 I would have doubled my entire position again, believing that I'd at least get the pullback to 1,237.

    As it turns out I closed out the trade at an actual profit at 1,234.  Which required losing a little bit on the first piece I bought (not much) but making a LOT on the second and much larger piece from doubling down on a trade that is moving heavily against me.

    Btw, I am NOT saying this is a good strategy to use if you don't know how to tell that a wave that is moving against you *probably* is at it's end.  There are a lot of tells and some intuition required for this sort of thing.  You can compound and magnify your losses BIG TIME if you don't do this right.

    But there are a few salient takeaways here: 

    It's almost never a good idea to exhaust your buying power.  The situation I described is precisely when you need it most.   

    An initial move against you can also be an additional buying opportunity (but extreme discretion is advised here). 

    As a general rule, I definitely DON'T like to trade this way.  But when you see a four point move against you that happens FAST, then thinking you'll fall back to even from there tends to be wishful thinking (at best).  Any 'stop' I may have is now blown through.  And I feel I am better off at that point recognizing that strong moves are ALSO followed by retracements that give you an opportunity to even the trade up. 

    But in order for  THAT to happen I have to defy logic / fear / what the market is showing at the moment . . . and buy in even HEAVIER than I did originally (usually double the first purchase) at where I *think* the wave is going to (finally) stop and start it's retrace move.  This cannot happen if I don't have any buying power left.  And it won't happen if I don't have the balls to make the trade and am just thinking about how much the initial trade is going to move.
    @7de21350bbd9ffd3adc564ae6bbb9076 
    In this case a panic sell would have lost me one hell of a lot more than waiting it out. 

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  120. Out of the money spreads are almost always money losers.  Many small loses add up to large loses.  The profit to risk ratio is poor.  It is a low probability, low payout trade. 

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  121. One advantage of option spread is that members of the pair decay together, more or less, time wise.

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  122. If you believe the real trend is down, you'll make money, might just take a few days

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  123. Agreed.

    That's why I don't normally do out-of-the-money spread. Unless it is a mult-year leap option.

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  124. My guess is higher beta, thus 'risk-on' Nasdaq sees outsized gains, 'risk-off' Nasdaq sees outsized lossed.

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  125. Not on the short dated options I trade for day trades.  They produce the biggest intraday returns and I can buy a LOT of them 'recover' from the sitch I was just describing. 

    And in that sitch I NEEDED to buy a lot of them.

    It's extremely uncommon that I'd ever hold one of those overnight though.  They can lose 50% of their value on an overnight gap in the wrong direction.

    Which isn't the case if I am trading a different instrument. But if it's a different instrument, then I am not able to go eight times my original position if the wave really moves against me (this math is important), which I've had to do a few times.  That would be when a wave moves a full seven to nine more points from where I bought in. 

    Which means it's probably a full eleven to twelve point move with no intervening two point retrace the entire time (which is VERY uncommon), and I probably bought in when it was at least three points deep into it's trajectory and the ST indicators were maxed and where I *believed* there would be resistance or a reversal.

     And with what happens in this market, I don't like 'waiting things out'. 

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  126. Thank you much for posting. +1.
    Please keep posting, I am interested in using spreads to maximize profitability/cut losses. and  especially the  money management (legging out of positions) aspects.

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  127. Hey Pretzel, do you have a chart for gold? Obviously this trade takes on an almost religious experience for some, but I'm wondering if the jokers at EWI are finally right and it has topped or if this is just a wave 4 correction to be followed by a blowoff top for wave 5.

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  128. Bad habits are extremely hard to kick. Perfect example today on SPXU, which is the 3x inverse S&P500 ETF. See chart. I would swear that prior to today's high at A, that point was discernable due to the wave count and the trend ceiling. But I didn't take profit and exited later flat. Really stupid. I think not looking at the chart close enough, i.e. being complacent in real time, is a problem that contributed. The chart's timezone is 7:30 to 14:00 for the cash market.

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  129. Buyers are not giving it up to close this session out.  Impressive rally back to up test 1,240 here.  Shorted the first attempt for a scalp trade.  Will wait to see what happens now.  Bulls seem awfully determined here.

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  130. I found it useful for the purpose of intraday counting using 30 min. time interval.

    It makes the counts jump out, Don't know about SPXU, by SPY appears to be on 1, after the abc from this morning open till noon.

    We have been on 1 since then. Can't wait till we are at 3 - where most of the dramas and fireworks are supposed to happen.

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  131. BTW:

    I use line plot  instead of candles, etc.

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  132. Ah, and there goes 1,240 with that spurt up to 1,241.  Bulls are gonna close this out green it now looks like. Hanging man candlestick on the daily chart then.  Not good sign for bulls overall. 

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  133. OMG, VXX is imploding like air out of a balloon.

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  134. The tricky spot.  This could be all of the 2 if that was a complete 1 down per Pretzel's third chart above.  It could also be all of the blue d on the second chart.

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  135. wow.  i don't know how traditional investors can make money in this manipulated market.

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  136. For this ETF, the wave shows up very well on the 5 minute chart as I posted it. I'll look at SPY later on 1 minute.

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  137. We're due for some kind of retracement here at 1,243.  Today has been a LOT of seeing ST indicators maxed out.  With both selling and buying through it all.  Very curious day overall.

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  138. If we do not see retracement, bears may see VIX drop to the teens before January... as Green mentioned, to the low values of July.

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  139. hoping for a test of 1260 this week or next so i can start scaling in my IT shorts from higher up....

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  140. I would love to hear S&P drop the bomb on France on its AAA downgrade by the end of this week; but who knows when that might happen.

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  141. Probably not right before Christmas.

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  142. Right there with you.  1,260 would me another IT short position for me for sure.  Not willing to go there here though.

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  143. Ah, sellers getting the 'last word' in. And yet another instance of me closing out too early. Hmmmm.

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  144. Looks like SPX may want to go back to its 200 DMA.

    So, I'll keep my call spreads. It is probably unlikely that it will punch through the 200DMA by that much. I'll then wait for the momentum to die down a bit. Then buy some way out-of-money calls to take care of the time decay of my debit leg. And cash in on my credit one.

    I may also buy some put spreads to ride it down as well.

    Hope this helps.

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  145. Manipulated it definitely is.

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  146. Damn, it ain't over til it's over right??  Now I'm glad I sold. Bulls getting one last jab at sellers.  Closes are always a curious affairs.  There was something in this one for everyone apparently.

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  147. Marvich, if the primary tren is assumed to be down, then NDx is leading down. This is a kind of confirming indicator that the trend my actually be down.

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  148. The wave count really hep me hang on for the ride up.

    It does take faith. :)

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  149. It's quite the obvious upward channel that has formed off the LOD at 1,230.  Should be easy to trade tomorrow if the trend holds. 

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  150. It bounced off its 50 DMA and never looked back. Looks like the bulls wanted to move the pig to its 200 DMA. Looks like the shorts were squeezed from noon till close.

    In a day like this, with ORCL and housing, the price action was a total surprise to me.

    It pays to be agnostic.

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  151. Well, if the emerging pattern is to follow the shape of 11/30 - 12/08, then expect another climb to tag the 200 DMA, then at least one big down day from there. So we should get a chance to short with good risk/reward shortly. And if it bounces back the next day like 12/09, then yet another chance to short.

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  152. Agreed.  Today's trading was a lot like many of the sessions leading up to the October 27th high at 1,292. 

    There were multiple days of waterfall declines in the morning session, only to see buyers erase the downward move and end the day flat or slightly higher.  Meaning the morning declines were giant bear traps followed by wrenching short squeezes.  Which served to clear out all shorts on the ride up. 

    I remember it clearly now:  just when the morning session would make you think, alright, this is it.  The top is near and we're going to reverse here, the afternoon session would come along and ratchet higher and take out all stops with it.  Which only fueled the afternoon rally.

    I remember it being a very difficult time to get into a short position and feel like you could hold it.  Because it WAS. 

    Very much topping type market action. Lots of 'hanging man' and 'hammer' candlesticks on the daily chart at that time.

    The final blow off island top came about a week later, I'm pretty sure. 

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  153. Well, will risk showing amateurism in EW with this comment. I'll dare to predict the essence of PL's chart update tomorrow. What we saw today does not rule out any of the 2 counts. For the bearish count we saw and a-b-c pattern with to complete blue 2. Next target is for 3 below 1202.37 (1195?). For the alternate bulling count, today we completed d with tomorrow/friday action taking us to e at around 1210-1202. That is the are to lookout and take profits for either count and re-enter shorts if trading falls below 1200. NDX fell below resistance today which would rule out the alternate bullish count for now.

    Ok, let's see how much this comment gets butchered by the master.
    For me I'm 1/2 of my shorts overnight (went in at 1238 and 1242). Got out of my Treasuries shorts today.

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  154. Interesting exercise.

    Sector rotation out of Nasdaq bespeaks an unhealthy market, but why can't it be a sector rotation into other parts of the SP500 and overall, still take the broader index higher for a little while?

    I'm also unconvinced that the minor wave 3 (in either the bearish or bullish chart) is necessarily complete today. I believe you're thinking the 123 completes Blue 2 in the bearish, and Blue d in the bullish count.

    Also, what about it being a 5-wave minor structure instead of a 3-wave minor structure, with more upside yet? Granted, if today completed the minor 3, that leaves very little room for a wave 4, so unlikely. But what if the 3 isn't complete?

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  155. The overall sector has been making a run this month.... Given the ratio's, about 65% of a stocks performance comes from its sector.

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  156. Another 'Who's Who' list of hedge fund faves topping the WS Selling on Strength list.  And with the SPY at the very top. 

    Confirming what I've been thinking about the 'rally'.  This is all about selling off inventory heading into 2012. 

    I suspect we therefore get a HARD run down right after X-mas and just before the calendar turns over to 1/1.  The Street doesn't want to START the New Year up here.  It wants to sell out the year here, and then start the year from lower. 

    http://online.wsj.com/mdc/public/page/2_3022-mflppg-moneyflow.html

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  157. I'm gonna owe you :-)

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  158. Yesterday my beloved Oracle has disturbed Santa Rally and now my Selling Indicator is saying: "please let's exit the market" It agrees with brianthurt, regards

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  159. I am behind the eight ball tonight.  I've been dealing w/ personal stuff literally *non-stop* all day. 

    The rumors of my death have been greatly exaggerated.

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  160. A quick shout out to Ronald for his donation!

    Many thanks, Ronald.  :)

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  161. what would be an example of a put/call spread, i've used vertical spreads before (buy call/sell call), also in the money of out of the money options, and how long before expiration do you decide to rollover

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  162. The only reason to feel sorry for me is because I have to deal with your obnoxious ass on a daily basis.

    You demonstrate your ignorance in believing that the market is something you can beat with "confidence."  This is the attitude of a child.  "If only I'm confident enough that the market will go down, then it will!"  Another term for this is "magical thinking."

    And stay the f*ck out of my personal life which you have zero understanding of, you spoiled f*cking child. 

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  163. Futures up right now -- but overall, the things I'm looking at are suggesting the bulls will be running out of gas soon.

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  164. PL, with the market hours you keep, you'd be better in a European time zone. Not quite the allure of Hawaii but at least Santa arrives here a few hours earlier :)

    I hope you manage to score some good Zzzzzz's over the holiday.

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  165. Thanks, Rolf.  I hope so too.  Not looking promising tonight, though.  Got off to a late start, due to attempting to have a life outside of this blog today... not helping that the charts are a mess right now.  Going back and forth over 15 different charts and time frames right now... ugh. 

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  166. @PL: that means..new high for y..and then adios amigo? :)

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  167. There's a lot of stuff arguing we're close to a top here.  Maybe not quite there, but the things I'm looking at are suggesting very soon.  There's just a ridiculous amount of variables to try and process right now...

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  168. ..but is it right that you expect another move to 1270 now? and then probably the top..

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  169. Only if the bullish count is playing out.  Other indicators suggest a top might form today around 1250-55

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  170. This evening or tomorrow morning I will have a more clear idea

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  171. Update's posted, let's continue discussion on that thread.

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