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Hi, this is Bo Yoder… Thanks for Listening!
I wanted to show you some of the recent market action in the S&P 500.
Now, normally when I trade the S&P 500 I am looking at the ES chart… as you can see, this is the “/ESM9″ which is our current contract for the S&P E-minis. As you can see from looking at the volume here, the flaws of looking at longer timeframe charts futures contract is that they only trade for a few months at a time and are constantly rolling over every couple of months. (Much like an option.) There is a lot of argumentation about whether the “continuous contracts” some data providers offer are accurate enough, so I like to go ahead and just look at the spyders (AMEX:SPY) when I’m looking at anything longer than a couple weeks.
Let’s go ahead and do that… as you can see here, as I switch back to the SPY that with this exchange traded fund we have continuous data.
So, let’s just recap… the stock market has essentially crashed as a result of the whole subprime mess. The bailouts came in, and we saw the market pop as one might expect right back into areas of chart resistance. If I bring up a trend tool… and draw a horizontal line at below that range, and another one at the high of the range, you can see how that resistance level has been important for several these little minor tops.
Now, as any of you who’ve read my articles or seen some of my other videos posted on my blog know that I’m bearish and have been for some time. I believe that the market is replaying the same bottoming action which we saw in the 2001-2002 bottom, which of course formed after the tech bubble burst. In that market, we had a strong provincial Tory bottom… much like we see here. And we had a bounce of approximately 20% which closely mirrors the markets today. The stock market rallied into areas of chart resistance as well as moving average resistance… and actually if I just take a moment and switch this daily over to a weekly chart… can see the moving average resistance currently in effect.
On my charts, the Green line is the 20 period Exponential moving average… and you can see how even though Price pushed through during this timeframe here… and tested here… the 20 was the dominant resistance level for really the entire move down.
The 20ema is a very important level.
Now, dropping back to a daily chart. You will see that there have been in number of false starts. The first time we hit resistance, there was a very nice selloff… in fact, I had that selloff right from the very highs. It gave me two solid days of bearish action, then gapped up and took about half my profits away the next day. So that was a failed trade that provided me with just a little bit of profit.
Then we had another area of resistance is the market pushed up into the middle of the range. And once again I had that same short trade taking I believe in the middle of the day here. After my entry, the stock market gave me a beautiful gap to the downside, then the next day the market rallied and came up to this former resistance level… you can see at the very top of that tale that the resistance was enough to push it down to its lows.
Market began to selloff, I thought I was golden… the market should it come down to test areas of support, but instead once again it began to squeeze. So, here are two just wonderful entries on the short side of the stock market that could have delivered massive risk to reward ratios as both had very tight stoploss levels due to their daytrading entries which should’ve produced very well as I thought they could produce multi-day or multi-week holding periods… yet both got squeezed out.
Surprisingly enough, we then went through this same cycle yet again. The next resistance level, was right in the middle of that range and again we had good signs of resistance with a three-day wall around $85 per share area. Then the market came back down… again moving back down towards moving average support and ended up with a good solid red bar. Again, I went to bed that night feeling very confident about my short… and woke up the next morning to a nasty gap which stopped me out for a loss and the market went along its merry way.
So, I’ve been talking about the frustration that I’ve been seeing. Yet, I traded my plan and that’s really what I want to take away from this video. Even though I’m essentially stepping up to the plate, and doing everything that I can do it correctly and effectively to get great entries right at the top of this bar, right in the middle of this bar, and somewhere in the middle of this little range here. All entries were right at the highs of these moves, which is really all I can ask of myself as a professional investor. My job is to get the best entry possible, and I believe I did… even looking back in retrospect.
Once my entry has been taken, the trade is out of my hands… I then have to wait for the market to either follow through as my investment strategy pays off, or stop me out for a loss. Persistence is very important… and here’s the reason why. I trade a very high risk to reward type model, if this particular trade pays off I will make nearly 20 to 1 (approximately a 15% gain on my total portfolio value) one thing about this type of trading is that your accuracy rate is very low… you just don’t win very often, but when you do the profits are very very large, and those enormous gains more than make up for any losses sustained during a drawdown cycle.
I find this to be a much more profitable way to trade then a higher accuracy investment strategy which brings with it a lower risk to reward ratio. This style is more about grinding. Yes you will be profitable more often than not with that style, and you will have bigger drawdowns with a style that I employ… but as a grinder, I find it to be a lot more work and you really don’t have that much profit potential in such an investment strategy when the market really begins to move.
Here’s the reason why…
If I had taken this move down to my original profit target it would’ve delivered me a solid risk to reward ratio of about five to one. On the second trade my risk to reward ratio would have expanded expanded more like six to one. For my current trade, I still have the same essential profit target for this investment strategy… I believe the market will retest the $72-$74 per share level and make a higher low… or head right back down to retest the lows around 68 or 70 which I actually think is a much more likely scenario right now.
I really think the market is weak enough to need a double bottom it is ever going to put in a serious turnaround. Obviously, if the current weakness continues in terms of economic numbers and earnings announcements, I believe for instance that the bank stress test beta will be fairly catastrophic news when that hits. But even if it goes only part way down to my more conservative target I’m still going to get a radically increased risk reward ratio of eight or nine to one, and if he goes back to the lows I’m looking at more like 10 to one. If I am able to add, that could easily double my potential profit.
This profit potential more than makes up for the scratch trade here, and the losses here, and here. So a pretty minor series of losses giving me pies in the face before hopefully if this last entry turns out to be “the top” that delivers the massive risk to reward.
So, now the question is… when you have had negative feedback from the market and every time you go in there you get slapped… why keep going back?
The answer is that my research goes much deeper than one or two losses. I know that over time if I seek out these important trend changing events, utilizing my daytrading skills to take very elegant entries in the intraday markets, then essentially I’m taking an initial scalp trade and simply letting it ride for a swing if not a position trade… I can reap enormous risk to reward ratios off the daily moves.
However, this very rarely happens on the first try. Sometimes it takes three or four entries before you get “the trade” that ends up becoming the big trender which will make your month, your quarter, or even sometimes your year!
I have a couple of these over the years that have gone 20 to one or better, and literally became the bulk of my profits over the course of the year. This kind of trading follows the 80/20 rule which is true in many parts of life… 80% of your profits will come on 20% of your trades. It takes a certain kind of psychology, and a determined mindset be able to go into a trade knowing that the likelihood is high that you will be taking a loss or a scratch. You have to understand that you are fishing for that home run game… which will eventually show!
The key is… will you be there when it appears?
And will you have the guts to hang on and hold that trade into maturity?
These are issues I work on with my clients all the time. If they can build the faith they need in order to stick to their guns, and maintain their investment strategy or trading plan in this campaign style trading strategy their rewards will be enormous.
So there is a little blast of very current information… obviously we are looking at the chart today as the market gaps down at the open. It’s a little too early to get excited yet, we are very much in the same situation as this day or this day, when the market is beginning to challenge minor support levels.
In any case, I nailed another clear top and if this time when support fails I’ll have a really great trade which should stay open for several weeks…
So! There you have it… as always, thanks for listening…
Good Luck and Good Trading!
-Bo Yoder
<UPDATE>
The market looked fantastic at the open, but formed a higher low and squeezed just as I was afraid it might. This failure took back my paper profits and I ended up stopping out the trade for a small loss. This collapse makes the following video even more important as I move forward and wait for the next investment opportunity.
(What makes the short squeeze even more disgusting is the fact that I doubled my position as the rally lost momentum near the 840 level. By re leveraging the trade, I gave myself a risk of approximately 0.6% For a potential total portfolio gain of 20 plus percent. So frustrating, yet I wouldn’t change any of my decisions… time to start looking for the next trade!)
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