October 28 - Market Commentary

Today was definitely and interesting day. Finally after an explosive rally fueled by better than expected bank earnings and other economic data, we have come to another pullback. But what now???

Like the pull back in early October will this be followed by another raging rally? or is this the down turn some have been waiting for?



Today we broke the 50 day simple moving average to the down side and closed below it, ending the day down almost 2%. So far the rally has had all the technical indicators on its side, but I believe a breach of support will bring a lot of technical traders to the realization that this market is over-bought and in that sense a pullback to lower levels will become a self-fulfilling prophecy.

I will look for follow through tomorrow. The bottom on these pullbacks has always contained a day of short trading ranges, followed by the upswing thereafter (reference above chart).

October 28 - Algo Trading

Recently I've noticed that no matter how much I follow a trading plan or set stops that there is always some emotions involved in trading. If someone is a strong believer that a stock should be going up or down for some reason, they will eventually see it in the technicals and be convinced that this is the way the direction should be. The way we trade is constantly influenced by external inputs of data. The human mind is easily influenced by news or other convincing sources of information.

To eliminate emotions from the equation we must eliminate the human from the decision making part of the equation. A machine is completely impartial and uninfluenced by emotional impulse in decision making - not to mention faster than a human in executing a planned trade.

So I have started to brush up on my Java in order to interface with Interactive Brokers' API for trading platform. There are some strategies which I will look to employ on the paper trading account after much back testing. I will publish some of the strategies as I go along.

As a side note, it is interesting to note that most of the traded volume on exchanges are executed by computers as part of algorithmic trading platforms. The NYSE releases weekly program trading statistics, and for the week of October 12-16, program trading accounted for approximately 29% of the average daily 2.5 billion shares traded. (http://www.nyse.com/press/1256207611289.html)

October 26 - What everyone expects will NOT happen!

Well it's been a while since I've posted to the blog and the main reason is that I'm waiting for some certainty to the markets..... Everyone seems to be sold on the fact that the recession is over and we're on our way back to the top... Well I am NOT one of those people.

I believe that we are over-bought at these levels of the market. Stocks such as AAPL have surpassed their all-time, pre-recession highs and this does not intuitively make sense to me - the rise has been too far and too fast.

Even though news is not a technical indicator I believe that the way that the media reports the news is. During the downturn all reported and emphasised news were bad and the market reacted by over-selling. Near the bottom and on the way up, the reported news was a mix of good and bad. The rally was further sustained by continued reporting of unexpected rise in house prices, surprise declines in unemployment rate, and upbeat earnings. Now we are again seeing a mix of good and bad news. It is interesting that data such as lower unemployment rate is not having as much of a rallying effect on the market anymore.

I am selling far out of the money calls on the broad market and stocks such as GOOG, AAPL, MA, and other which I think are over-bought.

October 14 - AAPL and GOOG post trade

Today I bought back the OCT 200 AAPL calls at $0.05/share making the trade a success. I still think AAPL is over-bought, but will not short again until there is confirmation of a downturn. In the meanwhile, it seems too strong.

As for GOOG, apparently people think its a good buy at these ranges and continue to pump up the price. Even though I think they too are over-bought at these levels, I closed out the trade at a loss. I bought the DEC 590 calls back for $5.60/share. I would love to see them disappoint tomorrow, but for now I had to reduce my exposure to make sure I don't get caught offside incase they top expectations and the market gets itself into a buying frenzy.

October 8 - AAPL and GOOG updates

I feel that an update on the AAPL and GOOG positions are in order given the recent movements in the market and that we're approaching their earnings dates.

AAPL:
This trade was initiated on August 27th when OCT 200 AAPL calls were sold for $0.80/share. Although the underlying stock has moved higher since the selling date, the calls are trading just below the $0.80 mark as time value has decayed and lowered the premium. Normally I would not hold this call when the stock is soaring and we are days away from earnings. However, these calls will expire on Friday October 16th, while the earnings is reported on Monday October 19th. This way I am avoiding the volatility that can result from the earnings after the announcement. I don't see AAPL trading above $200/share until next Friday but I will watch it closely just incase I need to close it out before expiry.


GOOG:
This trade was initiated on August 27th when DEC 590 calls were sold for an average of $2.50/share. This stock was fine until the past 2 days where it has climbed from nearly $490 to around $520.

The trade plan calls for a stop-loss limit of $5, which is why I am thinking about closing out this trade, especially as the earnings call is scheduled for next Thursday October 15th. A good report can send this stock soaring. I do not want to take that risk, especially as these calls are long dated - all the way to December 18th. I will look to the next trading days to see if I will close it out or hold on to it.

October 7 - Market Commentary

I've been watching the markets the past week and trying to figure out at which level the pull back will be exhasted and the rally will resume. It seems that we've bounced off the 50-day moving average quite nicely. However, on a technical basis I don't think we're out of the woods. The S&P500 made a top near the 23rd of October and since then we've made a lower top on the 29th. This bounce from the 50-day moving average has yet to strongly break above the 1065 level before we go back to rally mode.

If we fail to break the previous high and stay above it, we may see a move down from there!
I will look to the next couple of days to see how the market trades.