F$#%&@& ININ, spread orders, Technical Analysis

Double Sigh. (See earlier ININ post "Whipsawed" for the first one)

With two confirmed candle patterns testing the new support, the bull flag was broken yesterday for a very good entry signal. Apparently the rest of the world saw that too. But I didn't trade it.
Another case for the lesson about watching a stock deliberately and taking the signals that are there, even if you got stopped out for a loss already. In fairness, I have been hesitant to take on aggressive positions in this holiday time when the volume in the market is so low, but there sure was nice volume here on this one. Granted, the stock has almost doubled in under 3 months. But with all that volume backing it up, who are we to say that it's tired?
(Click on the picture to make it grow.)


In hindsight, I realize that my mistake was setting a stop loss order too tight for a volatile stock like this. I assumed the old resistance would provide new support when I should have sized for a stop under the old support and kept a mental stop below the new expected support to allow for intraday noise like we saw on the big hammer day. 3% below support is different on a stock like this than on a steadier big cap stock. To see the other posts with the story of this ININ play, click on the ININ link at the bottom of this post.

After my post yesterday, I watched BHI for the Harami pattern to be confirmed with an up day. It was looking stronger earlier in the day, but even with some selling toward the end of day, it was still an up day. Because of my distrust for the market at the moment, I decided to play it a bit more conservative and do a bull put spread. This way, it doesn't have to make the big potential move I see. All it has to do is close above 75 at Jan expiration. Jan 70/75 bull put spread. I actually placed it in two accounts.

Let's talk limit orders and negotiating. With options and especially spread trades, we very rarely want to place an order at the natural bid or ask. There is usually room to negotiate.
The spread was 1.25 at the bid, 1.45 at the ask. I placed the orders for each account for a limit of $1.35 at 3:07 PM. They sat there. I decided to negotiate a bit. I moved one of them to a limit of 1.33. It sat. Seconds before 3:15 I moved the limit to 1.30 and it filled in exactly one second while the stock was at 75.57. I let the other order for 1.35 sit. At 3:29, 22 minutes after it was placed, the order filled for $1.35 when the stock was at 75.48.
To my knowledge, the bid/ask on the spread did not change in that whole time as the stock moved in a relatively tight range. Whether it was the difference of .09 in the stock price or just antsy market makers, I got the fill I wanted by waiting and still did better than the natural bid on the order that I did bring down my ask.
The moral of the story is that we must not forget that this is a market place and therefore a place for negotiating our price. Sometimes we have very little room to negotiate, but other times we have more. With the bid ask spread in options chains and the resulting spread in a combination of two options in one order, there is often room to negotiate, even on more heavily traded options chains. In a very heavily traded stock and options chain, the market will be tight, yet there will be a spread. Depending on the stock price the theoretical price of an option or spread position will always be right about at the mid of the bid/ask spread. We will rarely fill right at the mid since the market makers need something of an edge to want to play. But we can most often negotiate somewhere between the natural(bid in this case since we're selling a spread) and the mid. Notice on this options chain (after hours) that because the stock is very heavily traded, the options have quite high open interest. High liquidity makes a tight market. A tight market shows the bid and ask straddling the theoretical price. That's what we want to be aiming for.
Options markets are super efficient and any talk of market maker manipulating your position is nonsense, particularly if it is a liquid market.

Note that the shorter term in-the-money option has a slightly wider spread. It's hard to count on after hours prices as exactly accurate, but I'd read this as bullish. The ITM option has more intrinsic value and less time value to burn. Therefore, the seller of this Jan 70 option is taking on quite a bit of risk, more so than the ATM and OTM options with all time value, and widens the spread (the their cut of the action) to compensate for upside risk.

Now look at the chain for the Vertical spreads. The bid/ask spread is wider than for a single option on almost every spread. Yet the theoretical price is just about exactly in the middle. Because there are two individual sides to the trade the market can fill them individually or together. Whatever the case, we don't care, as long as we get the combination filled for our price somewhere near the theoretical.

Notice the odd fill I got for each individual side of the bull put spread. Someone out there in the market is willing to negotiate in odd prices. It's also possible that each side was filled in different places. Regardless, I got my fill for 1.30, better than the natural of 1.25.


I hope that was helpful. However, I want to make sure to distinguish between this kind of negotiating that with a normal stock purchase. Most stocks trade with a far smaller spread and this will not be nearly as much a consideration as it is with options. If you want to get filled on a stock order and don't want to wait around hoping for a dip and miss the boat(which I've done too many times...and then chased it like an idiot - don't chase it like an idiot), buy with a limit order on the ask price.

In other news, KBH looks read for a break of this flag and some upward movement. Ideal entry on the break of this line. Good reports from homes sales today and yesterday could mean a touch of enthusiasm for home builders.



Finally, if this chart of ISE doesn't convince you that technical analysis can be very useful in observing what's going on and being in sync with the market, I don't know what will. Do you think other people are drawing lines on this same chart too?

Hit ININ and run

It's been a long day. The second day of Advanced Technical analysis with Dave Johnson and a cameo from Thinkorswim's Tom Sosnoff was very good. The drive home was long and full of traffic, so I won't put up too much right now.

The workshop gave me plenty to think about, particularly in better establishing my rules and general trading approach. In the coming weeks, I'll try to share some of the lessons learned over the past two days.

Maybe it's a dead horse by now, but one last quick follow up on ININ. I asked Mike Coval about the trade, getting stopped out and whether or not to re-enter. It was while Dave Johnson was speaking, so we looked at the chart very briefly.



He felt that my biggest fault was assuming the new potential support would hold and setting the stop loss level based on that. Particularly with how the stock has reacted to new highs for the last year, with steep pullbacks, I should have had a stop at or under support at 17 or so.

I tried to make a quick, quiet case for the ascending triangle being broken on big volume with a pullback and a successful test of new support. But he didn't seem too interested in that and pointed to the high MACD and Stochastic turning down. I should point out that we didn't look at it on the interactive chart.

If I were to follow what I learned at the workshop, I would consider it both a confirmed hammer and a bullish engulfing pattern, which is a self-confirming pattern. New support. But I don't know that I will take the trade. Dave Johnson talked about that a bit. Seeing the signal but not taking the trade. However, I'm still wrestling with this and won't attempt any psycho-talk.

Anyway, as Dave Johnson said many times today, patterns and candlesticks are subjective. Everyone is entitled to a slightly different view and all can be "right."

Whipsawed

Sigh......

Ladies and gentlemen, I would so much have liked to have the first trade I show on this blog be a winner. A Gigantic winner! But, alas, "The Cost of Doing Business" has been paid.
ININ opened lower today and quickly darted down well past my stop order at 18.55 and triggered a market sell at 18.52 at 9:32 AM before pushing right back up to close near the high of the day's range, though still down a touch below my designated support line of 19.13. Truthfully though, I'm of mixed emotion about it. If this support area holds, I'll be forced to consider getting back into the trade having already lost on it once. If it breaks down, I'll be glad to be out already. My loss was actually less than my designated risk allowance since I positioned a bit conservatively, rounding down in number of shares. It feels a lot like I got whipsawed out of a situation that is now destined to use this level as support from which to make the expected move higher. However, it's strangely liberating to be out of a stock that is acting skittish. Let's explore.
As we know, support and resistance levels are areas and not exact numbers. In fact, to call the support line at such an odd number like 19.13 is perhaps a bit silly to begin with. Speaking of silly, I had to laugh at myself for writing in the post about doing business "If not now, then maybe the moment for this stock to make its move is still just around the corner..." Hello!?!? Note to self: The stock just put in a high of a 300% gain for the past year.
In any case, the high volume day today gives a mixed message. Certainly that it closed lower and is potentially breaking support on high volume is a major red flag. But today's candle also is a gigantic Hammer. Instead of the support line I proposed, if we were to use the closing daily highs for the resistance line (18.37) of the recent triangle, the stock actually closed above that support line today. An up day tomorrow would both confirm new support there and do it with some added strength of the hammer to back it up. This would be an ideal entry for a patient investor that chose to pass on the breakout day and waited for a test of new support.


Will I re-enter? Doubtful. I'll remain open to the idea, but I'd want some real convincing. I'm not getting great feeling about the tech sector. The Nasdaq broke below its recent trend support and potential triangle. It hasn't formed a lower low yet, but it's certainly going sideways.

The $GSO Software Index is definitely moving sideways now. (ININ is a software company.)


And the mighty SOX seems to be sitting heavily on the 50 MA after faulty bounce and lower high. Not necessarily a good thing for the Nasdaq. Tomorrow is make or break.

Another noteworthy tidbit is the after market close news today that Interactive Intelligence CEO Sells Stock, but even with all the selling this guy did November, he still owns a huge number of shares. You can look that up in the "Insider Trading" link from the left column of the Corporate Snapshot page.

In other news, Gold has pulled back during December and today bounced off it's 50 and 200 MA. This seems quite significant and looks like a no brainer on the chart(lightning strike me now). I'd imagine all the gold traders out there are seeing the same thing.
Here's the GOX. (The XAU looks similar.)



I like AUY for a gold play. Here's the bounce off new support after a big volume breakout. Based on the height of that 8 month channel, I figure a target of 16 is reasonable.



That's all for today. Thanks for stopping in to read the blog.

The Cost of Doing Business

Hello again. Since I talked about it last night in our meeting, I thought I'd use yesterday's trade to briefly discuss something which is....losing money. The cold hard truth of participating in the stock market is that in order to make money, you must be willing to lose money. You will not receive any gains without the first step of being willing to take on risk. Whether it is an aggressive options strategy or a conservative approach, we must take on AND MANAGE risk. That's where cutting losses short and proper position sizing come in.
The first step is deciding how much you are willing to lose in any given trade. Until you do that, you can't do much other than talk and if you do choose to make trades, you will act with fear rather than the understanding that you are in control of your risk.
Most people recommend risking 1-2% of your whole portfolio in any given trade. From there you make your position size depending on where you see support and where you will set a stop loss order.I won't go through that again, as it's in the last post.

Now for today's action. Though I'd have liked it to take off like a rocket today, it didn't. Such is the nature of a breakout. It is different than a bounce off of support. We should anticipate and expect that it will come back to test support. With a breakout we have two choices. We can either buy on the breakout and take the risk that it will come back down to test support and possibly not hold there, resulting in a "fake out." Or we could pass on buying the breakout and wait to buy on a successful test of new support. The risk there is that it just might continue to rocket higher without you in it(see LVS on 11/08/06). Today saw a bit of profit taking, though it was on considerably lighter volume than yesterday on the breakout. There was some buying off the lows of the day too, so that makes some argument for new support. However, depending on the broader market conditions, next week may show investors deciding that this is not the right time for this stock to go higher and will bail out. If that happens and the stock goes back below the resistance level, then so be it. I've positioned with this possibility in mind and I'll exit with the acceptable loss(perhaps less since I positioned for the Stop loss level and not the support level). It will still be a "good" trade as long as we adhere to the plan and read what the chart is telling us. If not now, then maybe the moment for this stock to make its move is still just around the corner, in which case so might be a re-entry.



Have a great weekend!

Position sizing

We talked about this at our last meeting, so I thought I'd show how to calculate a position size using my newest position. ININ Nice fundamental scores and the numbers in the Estimates keeping it from a higher score look OK to me. Big chart rank looks to be decreasing, but it's too soon to call it out. The group chart looks good. Consolidating after big upward move with the rest of the market.

After positive earnings announcement, there was good buying on 9/24. Since then it's gone sideways. Another buying volume spike on 11/14, but resistance was held.
Today saw a big breakout after volume ramping up the last two days. The consolidation also formed an ascending triangle, now confirmed in it's break. The last thing we need to call it successful is for the price to either just charge ahead, or successfully test old resistance as new support.

So now I expect the former resistance at about 19.13 to be new support. I’ll get out on a close below that line. However, planning for some wiggle room intraday, I will set a stop loss order(stop sell) at 3% below that, 18.55. With my buy price of $20.18 and the stop sell order at $18.55, barring some catastrophe, there is about $1.63 risk in the trade.

Most teaching recommends risking about 1-2% of your whole portfolio in any given position. That doesn't meant the amount you can put into a trade. That means that amount you'll put at risk. So whether that's $200 or $20,000 you take your chosen acceptable risk amount and divide it by the $1.63 at risk in the trade we've planned. Then you have the number of shares you should buy. In most cases, I will round down to a nice round number, particularly with optionable stocks. It's nice to have round lots of 100 if you want to leg into a covered call.

Using the projection from the ascending triangle pattern, my target is around 23. With approximatley $1 to the support level and $3 to 24, my risk/reward is about 1/3. If and when it reaches $23, I'll either take the profit or re-evaluate the potential of "letting the winner run."

This is not a trade recommendation. I am indeed a bit nervous that it has already moved 6.25% today and over 15% in three days. It's just an example of position sizing and considering whether the risk is worth it. I welcome any thoughts on the trade, however.