RUT Extension

Hi everyone! The RUT is looking a little extended to the upside, but much more is possible. I started in on a short position today, looking to catch a percent or two. The position will build as price increases, feeding the sheep ;-)

Hello!!!

Hi everyone! Hope all is well. Sorry I have not posted for so long. I will try to get a post up here shortly. I have been spending time with a few things. First off, redecorating! The wife was on vacation, and of course that requires me to do her bidding! Second, I have begun some intensive training with some clients. So, trade and be merry, I'll try to comment on the DIA/DJI/COMPQ downward extensions shortly (all the other ETFs/Indices have compensated there declines).

DJI/RUT's current downward extension

The DOW and Russel are currently downward extended, around 3%. I noticed this yesterday when the NASDAQ went neutral. These indices being extended downwardly, along with the reset of the NASDAQ means we will bounce up to the levels of DJI 11,415 (um, which is now) and RUT 737ish, which appears soon to come. The DJI, RUT, and NASDAQ will then all be neutral. I'll keep my eyes open and post more if I get a chance. The DJI and RUT bouncing down off these levels is pretty good. Although long term classic TA channels state we broke through some major resistance recently. Short term down, longer term up (but this is speculating, which I do not play)! Later all!

NASDAQ Retracement

The Q's have about completed their retracement and will reset any bias at 46.97. There is currently a triangulated channel offering support. When this channel breaks, I suspect the 46.97 area to be broken and then consolidation while volume unloads. Once volume dries up, a new market traend will need to be established for the next extension. The chart is viewable by clicking here.

The COMPQ has already reset at the 2402 area. The NDX and the Q's will reset soon with the NDX having more to move for the reset. They need to hit 1909ish to reset.

ETFs and how I see them

We all know, I am looking for the corrective move in the NASDAQ. All the fan mail telling me it is not coming is welcome ;-). Keep in mind, it is a corrective measure, something required of the markets. I am not looking for a reversal, nor calling it that way. Some traditional technical analysis support the immediate correction, here is how I see the ETFs currently:

NASDAQ Weakness

The NASDAQ seems to be leading weakness, with options expiration today, I would not expect to severe a move, but come Monday, I believe it may be more downside. The target on the Q's remains 46.90.

Newsletter Cancellation

Good morning everyone. I'd like to take this time to thank my loyal subscribers. My main goal in starting the newsletter and Channellines was to raise capital. Unfortunately, this goal has not been reached. The Slope of Hope commentors suggested I start my own newsletter and blog. Over time, as most of you know, my trading style have changed slightly. I am no longer as dependent on technical analysis as I formerly was. I now use laws of probability and statistical history analysis on the indices and ETFs. This is a new crowd. Some of the technical analysts see the light I am trying to shed on the markets and their methodologies, but, all in all, people do not accept change and fear stepping out of their comfort zone. I do not market the blog or site, for, like trading capital, I have no marketing capital either. I have barely broken even on the newsletter since it was first established, considering the hours I put into the blog, newsletter, and subscriber support, I make about 0.25 an hour. So, existing subscribers, you will have to visit www.paypal.com to cancel your subscription. I will periodically throw out a newsletter for the next week or two to cover your last payment. Any individuals who are interested in

A. Establishing some type of partnership

B. Learning my methods and be trained how to trade the technique

C. Providing loan of capital

Please let me know at Channellines@gmail.com

I have been told by various people, fellow bloggers included, that I need to simplify things for people. I wish it were just that simple. My time spent analyzing the markets and placing/consulting trades I believe should be compensated for. So, the majority of my time will be put forth to those people who request it and have established some type of agreement with me. I am currently not under any contract with any third party, but one or two are in the works. If they do not pan out, I'll start selling crap on Ebay! Today is my tenth wedding anniversary. I promised the wife a diamond (still never got one) and a vacation (have never been on one) for this occassion. As of 1:15 AM, she believes she is getting both (or has hopes of), and I still have not a resolution to that dilema. I appreciate the comments today, most in a long time. I don't know Jack, but he does not get the idea of the concept apparently, as you see my frustration! For those short the Q's. awaiting a reset, with deep ITM August options, if at the end of the day, the Q's have not reset to 46.90, roll them to September, all other principals still apply. Next tier, if required, drop 1 more ITM to offset delta loss of the further dated option. The blog will remain here, and I will write when I have the opportunity (not only when things are "assumed" to be going my way). If the Q's still extend, that is a larger percentage gain when it turn, if they drop now, exit and take your profit. If you have provisioned capital allotment correctly, which would you preffer? Go up, or down? Now, ask me again if things are going my way! Have fun trading today, see ya around. Email me at channellines@gmail.com!
You may also be able to catch me on Skype ( a messenger (www.skype.com)), look up user channellines@gmail.com!

Your friend,
Winace (George)

Interesting...

I find it quite interesting that my blog traffic keeps growing yet my subscriptions are not. The people who originally subscribed for the newsletter did so for the technical analysis part of my studies. I appreciate those who have an open mind to take in this new information. Also, the feedback I have been getting are from very experienced traders, thankful for the methods I share. I must agree, most new traders are going to find these principals hard to grasp. Once you lose money on false hopes, you come to a new sense of learning, your mind is a little bit more open, and you are a little more willing to learn. Every trader starts out educating themselves with everything they can get their eyes, hands, and ears on. Then, they think they know more than anyone else. This is were reality sets in, on the hard, cold market trading floor. It does not quite work that way in the books does it? So, new traders, try and skip a step or two, save yourself some cash, and read through the blog! The more experienced, or seasoned, traders feel free to ask away questions in the comments or via email. This does not exclude new traders, of course, you can ask all the questions you want.

Here are some of the days charts with the resets I mentioned Monday, note how they reacted. The point here is to exit when the points are hit. Do I know, or calculate, where they go from there? No, wait until they extend again, and fade. Using these extensions many times will give you clues whether it breaks or bounces, but that is it, just real good clues!

The bottom two charts are for my TA fans. The charts show what I am expecting, in a technical sort of way. This does depict that we are at a retest of resistance of a retest of resistance. In other words, a VERY BRUTAL AND VIOLENT DROP from here should be planned for, the odds are pretty great.

QQQQ Repeats history

Today did not play out quite the way I expected, but, all in all, the markets did behave somewhat rationally with my technique of analysis. The Q's, instead of resetting, decided to extend their extension. The extreme has been reached, and I do not believe it will be broken. The maximum extension (without relief) I have identified on any of the ETFs, is 6.86%, and it was also on the Q's. Note the comparison charts below. Ironically the time frame of the extension (4 days) is identical also. They also both began with a continuation gap. Previous history shows this run was compensated by 1PM (eastern) the following day. Let's see what Monday brings us. Another observation worth noting, the chart from April, the reset mark was hit, to the penny. If you look up your charts, what occurred after that was not pretty for those still holding short. Get out when the reset is hit, at market prices, I personally, do not try to squeeze out with a limit order. If you do use a limit order to exit, be sure it is one the market maker will not refuse. (The exact tops and bottoms of my measurements are not drawn on the charts, I preffer to keep that secret just that, a secret. But, rest assured, I use the same, exact, stringent, rules on every measurement).

QQQQ at 6.75% extension level

The NASDAQ (QQQQ) has pushed to unprecedented extension levels. I am all short at this point, the odds of a successful return by shorting the Q's here is extremely high.

Trading like a sheep.

If anyone is interested in learning my technique, I may be able to work some type of arrangement out with you that is profitable for the both of us, just drop me an email at channellines@gmail.com

Just a small lesson I wanted to point out to my fellow traders. I have traded like a sheep myself in the past and worked pretty damn hard at it. As a matter of fact, most people think I was a pretty good sheep! A few years of intently studying the markets and market dynamics shed some new light on things for me. There were no secret combinations of indicators, oscillators, channel lines, trendlines, etc, that consistantly worked well enough for my liking. I started flipping market psychology and put myself in the position of a market-maker. Market makers (MMs) are obligated to full-fill the needs of the trading public. If there are no buyers and your selling, they are the buyer of last resort. So how can they take these transactions and consistantly make profit? Sure, you have the spread and such, but where is the BIG money? Take a look at the chart below. Line A is the trend, most speculators attempt to get in at the beginning of the trend, some do, some do not. Momentum players and late-comers get into the buying around A2 somewhere. During the buying, from the "sheep", the market makers are obligated to sell. They are continuously selling as price rises, effectively averaging down there price by selling in larger quantity. Of course, as the trend developes, more volume is provided by enthusiatic buyers. The MMs need a point where they can unload, or buy back, these shares. There is a very defined rule for these MMs and large money players to follow, it gives them the trigger to buy the shares back. When the market corrects, and this point is triggered, they buy the shares back for profit. If you were a fortunate sheep to get in at the A2 area, you may escape with profit. The large majority got in at the A2 area. If you are buying in an uptrend, or selling into a downtrend, and 3/4 of the volume takes place in an area represented by the highlighted area in the chart, what makes you think you will get in consistantly in the A1 area? You may think your that good, but so does the person trading next to you. When B happens, what do these people do? Sell off, right to the MMs eager hands. Sheep 0, MM 1. Anyone who bought in the highlighted area are now at a loss. When a loss is evident, human emotion takes over. Now the MMs who were selling into the incline, were they nervous? Not at all, as long as they keep their cost average down, they KNOW they will profit. It is just a matter of when. The incline (A1 and A2) can only be of certain heigth and magnitude, for if the MMs or "smart money" run out of capital to keep the cost average down, they will take a loss. These are powerful entities, this will not happen. The whole trick is two-fold. First, determine the magnitude possibility and average run. This also requires identifying the compensatory move. Second, is figuring out the art of averaging down to cover the market depth (magnitude of maximum extension) without running out of capital. This way of trading is profitable almost ALL the time. In fact, most of my trades in the last 2 months were made being long the market. Buying in, averaging down, and selling at a LOWER price than entry, and profiting. These "smart money" players and market makers utilize this technique while using stock. Small guys like us need the leverage of options. Delta and theta are the largest enemies to this technique. Keep steep delta and be in and out quickly. My way of measuring market depth is my secret, for it is deadly accurate. Use of some common indicators, along with a historical study of the ETF may yield some good information.

Reset points hit, all but the NASDAQ!

Here are a few charts representing the reset points that were taken out today. Note how a bounce is pretty common once these objectives are taken out.

ETF/Index charts that look just damn ugly.....

NASDAQ Extension

The NASDAQ (QQQQ specifically) has extended to the 5.5% area without being compensated for. Historically, the 5.2-5.6% area, on all ETFs, WHEN they make it there, turn about 96% of the time, the most extreme extensions will touch of the 6.5% area. I started a short position yesterday, I've added to that position 3 times today, I am more than ready and anxious for that correction!

Current extensions

The current ETF peek extensions, rounded to 0.1% are as follows:

DIA 2.0
IWM 1.7
QQQQ 2.4
SPY 1.9

I am looking for a 3% entry on QQQQ, at that point I will start accumulating a short position.

RUT/IWM

I was eyeing the RUT/IWM this morning for trade potential. There was a 2% downward extension that was looking good. I went to the store, came back 10 minutes later, and the opportunity evaporated, damn. The technique of tiering in positions allows you to enter earlier into an extension when you have increaed capital. With increased capital allocation, you can cover deeper within the market extensions, hence an earlier entry. This results in more trades, many of them would be missed by delayed entry of a smaller account. This is how a market can remain primarily neutral and non-directional while large market players and market-makers keep in profit. Their profits are not as large, but nickel and dime the average trader to death. This, is also referred to as "whip-sawing". I remain on watch for opportunity.

Subscriber Questions

I have been getting some questions regarding my trading techniques and principals. I am going to post an email conversation from Steve (in Chicago) below. Steve appears to be very interested in learning this technique and principal from myself, and another well known trader. This traders technique varies slightly from mine, I assure you, but the principal is the same. My trades I have been posting here, in real time, have gone 5 for 5 (5 posted, 5 with gains). This is taking up a considereable amount of effort. I am watching 8+ indices/ETFs, identifying trades, posting them, playing them via virtual trade, updating, etc. at my own expense. This does not seem cost effective, since subscriber rate has not gone up substantially. Friday, I abandoned the "real" money transaction in my account to post the play by play action here. People, I am in it for the money, not to make friends! Sorry, if that seems cold, but hey, when the money comes, I'll buy friends if required! Seriously, at this point in my life, I am not screwing around, hard, cold cash, without emotion. So, 5 for 5, 10 for 10, very likely 100 for 100. I firmly believe I can accomplish that, but doing it here, in real time, is feesible, but not profitable. As far as the "other" trader, known for his tactics, well, he has scoulded me for releasing too much information as it is. But, on the other hand, he has cash, I do not. So he would definately have more to lose than I! The buying friends comments, is not that entirely cold. Just think of it this way, more people would be interested in interacting with me if I were driving a Ferrari as compared to my 10 year old mini-van! So the quest continues, let's see what opportunities next week has in store for us!

Excert from email, edited at my discretion with permission of its author(s):

Hi Winace -

I think I'm starting to understand your method, and I wanted to send this via email rather than the comments because I think that the blog is still in free mode, and I didn't want to give anything away. I was hoping you could tell me if I'm on the right track with this.

Here's what I'm seeing.

You wait until one of the indexes extends past its peak extension. At this point, the index is ready to "snap back." It may still have further to go, but it likely won't go far. In this case, you're still expecting the DIA to continue to drop a bit and buy long on the way down.

You find a point where the index is unlikely to stretch to. I'm unclear on where this number (108.16 in this case) comes from. You break the distance between them into ten pieces and pick an arbitrary amount for your first buy (1000 in this case), right at the peak extension.

If the market bounces back up at this point, you wait until you hit the reset point on the other side and sell.

If not, you wait for the next step down and buy again. Your dollar amount is the same as your previous buy. Because you're averaging down, your average cost is closer to your second bet than the first.

You keep going with this process until the market either goes up and hits the reset point or gets lower than your stop. I've seen that you've calculated your maximum loss. As long as you set the lower bound low enough, the market will retrace back up by at least 23.6% eventually, and you've moved the cost basis down enough that you'll be profitable even if you bought all the way down to your lower bound.

Now I just need to figure out how you got the lower bound... Very interesting method, though!

(As a hypothetical, let's say I see the S&P going up to between 1320 and 1360 before armageddon hits. I want to go short and bet on armageddon. The highest I could see the S&P going is up to 1440. If it gets past there, things have gone horribly wrong on my trade. I start shorting at 1320 and keep adding the same dollar amount to my bet every 11 points up until we hit 1430. I then stop. If we get above 1440, I bail on the trade and lick my wounds. If I'm right, I wait until we hit the reset on the other side, cover and collect my profits. Is this close?)

Response:

Hah! You got the idea! But now what if I told you this. I have found the technique, the retracement level, and MOST IMPORTANTLY the point where to start the measurement that has NEVER BEEN PROVEN WRONG!

The key point to this whole method is WHERE do you start measuring from? It is VERY SPECIFIC! The RUT trade was based on 0.10 that it DID NOT move. Now, how's THAT for picky! But yes, you have the principal. Now think about these things, you know the game they play, what are their rules?

A. How far can the ETF move WITHOUT retracing?
B. When do you exit? (What retracement level)
C. Entry is all based on the power you hold, the more money you have, the earlier you can enter.

A. and B. do have definite, decisive answers, without exception, both up AND down.
C. is a calculation.

You have identified the game Steve, now them damn rules.......!


Next:
Hi Winace -

Thanks for your advice on this, and congratulations on the latest batch of trades. Hope you're filling your pockets! Just wondering if you can confirm my understanding of how this works. As soon as I get done with traveling, I'm going to start papertrading some of these.

On the options front, you're choosing options three strikes ITM for the starters because delta will be closer to 1. As you move on and the rubber band stretches, you're choosing lower and lower deltas (deeper out of the money) because you're expecting the rubber band to snap them well into the money and gain the benefit of the increase in delta. Otherwise, the method would work just fine without options, but you would need a lot more cash to make it happen and lose the benefit of delta increasing as the options move ITM. Am I close on this part?

The trades you've listed have a low multiplier, which should indicate that you're placing trades near the "elastic limit" (i.e. the point before the snap back occurs.) In other words, if the market is just consolidating and never goes too oversold or overbought, you might be happy just sitting in cash for a while.

I can think of lots of gauges you could be using to determine the overbought/oversold percentage (Williams R-Squared, Bollinger bands, Relative Strength, MACD all come to mind), but I think that what you're using is probably using to calculate has nothing to do with any of these. Is that also right?

By the by, I noticed that 2 Sweets numbers his percentages using XXX. It looks like he is using a similar method, but instead of dividing it into evenly spaced entry points, he is starting at the entry point and multiplying the distance to the next tier by XXX each time. I'm wondering if doing it this way could reduce the maximum capital required for each trade.

Response:
Steve,

First off, hard to line my pockets when I have nothing to start with! But hey, I'll never quite trying. The delta play has different advantages, what you explain is actually the worse, you want your last play to have steep delta, so keep the delta the same throughout the trade. For example, if you start with .7 delta calls, keep around .7 delta calls for each tier purchase, so you may be rolling to different option contracts. When it comes time to exit, if you can not batch exit, sell the deepest ITM first. This whole principal is most suited for big time stock movers, but it works well with options also, just keep enough time. The theory behind rolling deeper into the options contracts is to minimize the effects of theta. Theta, as you know, increases as delta decreases. If you have the capital to keep deep ITM (3 or more strikes on all purchases), that is optimal. The advantage of ATM is similar to what you stated, as the position moves against you, delta is decreasing and your rate of loss is less than what you rate of gain will be once the option reaches back to its initial purchase price. Good catch on the multiplier, most people can't even grasp the concept, I am impressed with your quickness. Entering deeper within the extension allows greater percentage returns, which, when capital is limited, leverages well against commission costs. Also the deeper you enter, the lower the multiplier, the lower the capital requirement, the higher the percentage returns on low level tiers, and the greater the "insurance" coverage into market depth. All my trades cover past the extent of the "historical" extreme, which means, with my way of judging market depth (extension), it has never stopped out that trade! If the ETF extreme (highest recorded) is 6.23%, the trade does not stop out until 6.75%. It's a suckers bet Steve, but the fact is, most suckers can not understand how not to be suckered. There is way too much information out there to confuse people. If everyone traded with this technique, only the newest to the markets would lose. What would happen to volatility? It would flat line. Every rise would be sold, every drop would be bought, we'd stalemate. So, for the best interest of the general wealth of the "entities at power" within the USA, what needs to be accomplished? Confusion! The more confusion injected into the markets, the more confusion published in trading strategies, the more confusion in the news, oil, whatever, the better. All these things are much larger than I, so why listen to me? That is the general demeanor of the human race, the sheep type mentallity. If everyone else listens to the confusion, so will I. When panick hits, they just try to run faster than the guy beside them. Seriously, no joke intended, like a herd of sheep. With your permission, I would like to put this email and response on the blog. OK by you? I'll remove your name of course. The indicators/oscillators you speak of and your assumption, you are correct, I use none of these. Basically, if you find it pre-packaged, it was built off confusion. Confusion input equals crap output. These do guage when the markets extend, but they do NOT tell you if that extension is normal, or compensated for. So no end, when do you begin? The most critical point is the beginning point of the measurement. Now as far as Sweets goes, there are many ways to use this information and trade principal. I have experimented with the numbers you mention. You have two number sets, one is in direct relation of market depth or extension, this does have high similarity with Fib ratio's, such as extensions which equal: .864, 1.728, 2.618, 3.482, 4.346, etc. These themselves are not Fib ratio's, but the Fib ratio divided by the retrace, subtracted from the whole is! Kinda complicated mathmatical formulas, but not at all required to use them! The second set of numbers is entry tiers, I keep my tiers so that the worst possible retrace exit is still profitable, increasing proportionate spans in relation to depth proves gaps in profitability, the deeper, the worse. But, yes, it reduces capital, but when you do buy, it is at a substantially higher price. The more tiers (I use 3,5,7, and 10), the more you can average down, which keeps the range from "best exit" to "worst exit" narrower, which leads to more consistant percentage of returns. So, 6 of one, half a dozen of another. Sweets also relies more heavily on historical information as to mine only monitors extremes. But, both Sweets and I are tired of beating our heads against walls. He wants intelligent conversation regarding REAL trading concepts, and I want to find someone who want to make some big cash! Our journey continues!

Response:
Hi Winace-

Feel free to post this, and you can use my SteveInChicago handle if you want. I really appreciate the depth of your responses as I work to learn more about all of this. There's a lot to chew on here!

Thanks again!
Steve

Trade exited.

I exited the trade at 44.95, I don't want to be the last one out!
In summary, here are the gains:

Date Range 8/1/2008 - 8/2/2008
Trade Date Action Symbol/Desc. Qty Price Comm. Net Amount Gain/Loss for symbol
POWERSHARES QQQ TRUST SERIES 1
08/01/2008 O STC .QQQHR - QQQQ AUG 44 Call 10 $1.54 $12.95 $1,527.04
08/01/2008 O BTO .QQQHR - QQQQ AUG 44 Call 10 $1.25 $12.95 ($1,262.95) 264.09
Total Realized Gain/Loss for QQQQ $264.09
Total Realized Gain/Loss $264.09

That is:
1,262.95 (trade capital utilized and commission)
1,527.04 (Sold including commission charge)

264.09 Gain


That is 21%, no matter how you slice it, 21% is 21%

;-)

Trade comments

I do not want the target to be hit at 44.97, if it does, I exit, but I'd much rather see the position move against me, so I can profit more.

Matrix and Current Target, Q's trade

44.97 Current target exit.

10:21 Update: Entered next 4 tiers as contingeant orders, so all I watch is the exit now ;-)

Trade executed

In on the Q's long ATM 10 contracts at 44.42, next entry is 11 contracts at 44.26. Matrix will be coming up in a minute.

Slow ass computer

Couldn't get over to place the order quick enough, it bounced by that time, waiting for a new low of 44.41 to enter, Think I may have missed the boat. Hopefully someone out there has a quicker machine than I!

44.98 is current exit of you did get in.

On a side note, looks as if someone put a 10,000 option contract Iron Condor on the Q's! Hope they don't know what the hell they're doing!

Contingeant trade set up - QQQQ

If the Q's hit 44.52 before making a considerable upward move, I'll be setting up a trade. This will be a "budget trade". Total capital estimate 16K. Options play. Buying 10 calls at 44.52, about 1.25 each (delta not real steep). Let's see if we can tag 44.52!!!