Friday, March 27, 2009

Markets I Love to Hate

Of all the market environments I’ve traded in, I’d have to say that overbought rallies and oversold selloffs seem to be the hardest for me personally to trade…. And unfortunately the SPX is in the midst of an overbought rally. I’m the type of trader that hates being a “late to the party Charlie”.

From a swing and position trading perspective if I’m not in on the first few days of a swing, then I usually wait for a retracement before entering new directional trades. Usually the retracement comes, but there are always the few exceptions where the market is able to rally a ridiculous amount without putting in a decent retracement. I’ve done a rather poor job of taking advantage of this recent market strength. Allow me to walk you through my thought process… (I've also shown a 30 min. chart so you can see the intraday action)

1. Strong rally signals a potential intermediate bottom in the SPX at 666, thereby putting me in “buy the next dip mode!” In other words, I’m anticipating the market putting in a higher pivot low, making me want to be a buyer (read: enter bull put spread).
2. Ah yeah…. come to papa! As the market started to pullback last Thursday and Friday, I was hoping for a continuation of the retracement the following Monday to give us at least a 3 day retracement. The ideal retracement for me is usually around 3-4 days.
3. Gap up on Monday. #*%!... so much for my retracement!
4. Tue & Wed retracement was jacked up by the HUGE rally in last hour of trading on Wed. which continued on Thursday.

So, in hindsight what could I have done better? Well, perhaps I could have at least scaled into some bull put spreads on the two day retracements. For example, let’s say I normally enter 10 contracts when trading put spreads. I’m ideally looking for a nice clean 3 day retracement prior to entering the put spreads, but as we all know sometimes all we get is a 2 day retracement (see #2 above), or a 1 ½ day retracement (see #4 above). Perhaps I could have entered ½ or 1/3 of my position on those 2 day retracements. Then:

1. If market moves straight up after the 2 day retracement, at least I’ve got some put spreads!
2. If market retracement continues a third or fourth day, I can use that as an opportunity to add in the rest of my put spreads at a better credit.

Tyler-

1 comment:

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