Wednesday, January 28, 2009

DoctorMad Redies for Battle...

DoctorMad is working the battle lines and trenches, holding many of his troops in reserve for the next bear campaign:

Stocks. The bulls continue to hold the line and prices surged on better volume, but not great. Take out the FOMC whipsaw and volume was pathetic for most of the advance. I'm sticking to my thesis that the best trade this week will be when we spill out of the pink channel on volume. Until that happens you are front running any shorts you put on. I've been doing a little of that front running, but I am saving the big guns for when we eventually break and likely retest the pink channel. Also keep a close eye on the blue channel if we get more powerful rally over the next couple of days. That bottom line of the blue channel is THE uptrend line we held so many times on the move off the November lows. It should be powerful resistance and I plan to swing big there on the short side if we tap it from below. If we break back north of it and start trading in it again, get long again and stick your stop just under the nice rising trendline, because the bulls are going to go on a rampage.

Bonds. The rumor of BIG BEN being brought to the battlefield immediately turned out to be false and the bears took that initiative and slammed us right back into the down channel. Notice how the channel offered resistance again earlier this evening after it fell back in. A very positive development for the bears and I think they are going to get their wave 5 for this impulse which started today. The 50% retrace of the entire parabola up would be 127 ZB and I would look for a bounce or at least a pause there. I'm out and will look for a re-entry once this impulse is over and we get some sort of retrace (channel) going.

The bulls and bears in oil are set to have a big rumble early next week. If you get the yellow line and purple line coming together you are setting up for an explosive move when this wave 4 triangle breaks. You can tell by my count I think it breaks down.

- DoctorMad

Mark does a great job of ushering his troops, but he currently doesn’t have any in this bond battle and is looking to rejoin the fight. I took a different approach on this trade because I knew that having only highly leveraged, closely dated TLT puts would mean that I would likely have to exit and re-enter this trade repeatedly.

Thus I took a three tiered approach as I saw that this might be a trade that lasted a while and getting the timing right is always difficult unless it just outright crashes. So, I bought a 3 way combination of puts when I first entered this trade. Since I had a good entry point and corresponding stop (Mark nailed the last entry), I purchased a small position of front month puts. Then, since I knew they were dangerous I purchased a passel of March expirations and to make myself whipsaw proof I purchased some leaps.

This strategy has worked well on this trade so far. I ditched the front month and more than half the Marches on the break of that channel yesterday, but I held onto the leaps and a small portion of Marches to make sure I stayed in the trade. That has worked so far, and now both Mark and I will look to get back into the battle in a more leveraged way when we see another clean entry opportunity.