Mark Dupee Chats With Jea Yu
Marc Dupee talks with Jea Yu about his short-term stock-entry tactics, “Tier Symmetry,” market makers, and more. The following concepts are covered in the interview that you may wish to review by clicking on the links below.
Stochastics Nasdaq 100 Futures and the E-Mini Nasdaq 100 Borsellino’s Stock Index Futures Trading Course
Marc Dupee: I was intrigued by the title Day Trading Techniques of a Master Guerrilla Trader, the Underground Trader.com Guide to Electronic Trading. What makes you a master guerrilla trader?
Jea Yu: Well, you know what? The publishing company wanted to throw that in there.
Dupee: The title implied to me that yours is a martial arts approach to the market. Were you trained by a martial arts expert?
Yu: Well, I’m a black Belt in Tae Kwon Do.
Dupee: Are you?
Yu: Yes. I use a lot of Sun Tzu (the ancient warrior who combined his musings on warfare in a sixth century BCE book called The Art Of War) in my analogies to the markets. And it’s true: A skilled fighter puts himself in the position where defeat is impossible. The position where defeat is impossible is cash. And when a trade is running against you — when your (trade entry) fails, take your stops and try to position yourself where defeat is impossible.
Dupee: So the way that you do that is you follow your stop losses? Is this how you are ascribing that to Sun Tzu?
Yu: Absolutely. Yes. But basically, here’s my thing. My whole underlying theme is to react, not to predict. Too many people get so wrapped up in trying to predict and make opinions about where the market is and whether they feel a stock or the market is oversold and where they feel the stock is just too cheap the way it is right now. And the problem with that is you cannot get into the habit of predicting. It’s just like me asking you, Marc, when do you think the next 20-degree day in July is going to be? You know, it’s fruitless to make a guess. But the reality is that when you do get a 20-degree day in July, what do you do? You react. And the whole basis for my style of trading is, I love momentum. My definition of daytrading is profiting off intraday oscillations. So when I say let the trade come to you, if we’re playing scalps, we’re playing oscillations. So (the question becomes) what do we use to gauge what’s overbought or oversold.
Dupee: You’re a scalper. That’s what your system is about, scalping?
Yu: Not necessarily…Well, yes, I’m a scalper at heart; there’s no doubt about it. My whole feeling is that the longer you are exposed to the stock, the bigger your risk. So if you can catch an immediate run, the early entry, the sweet-spot entry, you take it. The whole idea of being a scalper is that you don’t have much tolerance for risk. Most people say, “Well, scalping doesn’t work for me.” Well, those people are usually getting in too late and out too early. If you buy your stock, you want to buy it when it is oversold, not because you think it’s oversold, but because the indicators tell you. One-minute stochastics, when a stock falls under the 20-band and reverses –
Dupee: Let me get to that in a second. What do you consider scalping, what point value are you going for?
Yu: Well, my definition of scalping is being in a – it’s more of a time frame duration. Scalping involves being in a trade anywhere from 30 seconds to three minutes.
Dupee: It’s a time thing, you’re in the market 30 seconds to three minutes.
Yu: Yes.
Dupee: Can you walk me through, in simple terms, one of your best trades of the week, one of a master guerrilla trader. And also if you could, omit the bit about market makers. I know that’s one of your areas of specialty, but we’ll get to that later.
Yu: My techniques are done intraday, but they can be extrapolated to the daily also. It’s all about time frames. Now, last week – the last time I spoke with you (February 14, 2001), I told you I called swing trades on BEA Systems (BEAS) at 48 1/2, Siebel Systems (SEBL) at 60, and Commerce One (CMRC) at 24. And the very next day now, my low-end targets were: BEA 55, 57; Commerce One low-end 27 to 30. Oh yes, and Yahoo! —
Dupee: Can you walk us through one of those trades?
Yu: All right. Let’s see. Tell you what. Why don’t we go ahead and take something from today, intraday? All right, we bought Ciena (CIEN) at 75 on the open this morning. So what we got this morning was a lock limit down on the Nasdaq futures. A lock limit down open is a very extreme oversold position. In essence, it’s a zero band stochastics open.
Dupee: You’re talking about the NDH1. It shows up on your charts as a zero-band stochastic on the open?
Yu: Right. So when the market opened at 9:30, initially, you expect the last of the stop-losses or profit-takers to get out.
Dupee: Well, maybe we should back up a step here for someone who may be unclear about what you mean by a zero-band stochastic. To you, it’s an extremely oversold position and a buy signal.
Yu: Right. Exactly.
Dupee: And so you take the oversold, zero-band stochastic from the NDH and lay that signal from this futures market over onto Ciena as a buy signal.
Yu: Right. Ciena is the tier-one optical-fiber stock, which means it will move with the Nasdaq 100 futures, literally. You can actually chart the stochastics, overlay them right on top of the futures, right next to the futures. What we’re looking for is as the stochastics are falling, we understand that they are oversold. But it’s not necessarily a signal to go long. What we’re looking for is for the stochastics to reverse. It’s just like stretching out a rubber band and pulling it down. As you pull it down, you realize we are getting oversold or the rubber band is getting pulled down a little too much. The more it gets pulled down, the stronger the snap back, right? Or the greater the likelihood of a snap back. What you’re waiting for is actually the instance where the rubber band appears ready to be let go.
Dupee: And so what does that signal, the need to let go? What actually triggers your entry?
Yu: Okay. That signal is when the percentage “D” stops falling and forms a “V” shape, meaning that it stops falling and it is starting to reverse.
Dupee: Okay, the signal is when the stochastics percentage “D” forms a “V.” So if you’re looking at this with one-minute bars, it would be the close of the next one-minute bar, if it goes down, hits a zero and basically shoots straight back up into a “V” formation. Does it have to cross over the 20-band or —
Yu: On the open we were so oversold, we were so gapped, that it actually bounced off the 20-band.
Dupee: Oh, you mean it bounced to zero and then it bounced straight up to the 20?
Yu: No, it hit the 20-band and then it bounced.
Dupee: Oh, so it didn’t hit zero right away? It hit 20 right away?
Yu: Right. When I say lock limit down, it’s the equivalent of a zero band, but since it was the open and we’re gapping down the stochastics, or taking a couple minutes to factor everything in.
Dupee: So it may not exactly be reading zero. But you interpret the low stochastic reading as if it were a zero reading. So then you get a “V” shape in your stochastic and boom, that’s your entry trigger?
Yu: Right. Now, we get a “V” shape on the stochastic at 9:37, and when that happens, the futures stop falling. Now, when we look at Ciena on the open, we realize – I use a three-minute moving averages chart, the five-period is the lead indicator — Now, the reason I use that is because I want to know where my price targets are on my entries. Now, let me give you an example. When a stock sells off in an orderly manner, the downtrend is lower lows and lower highs, naturally. So the five-period is going to be the lead indicator. That’s going to keep making the lower lows. The 15-period, which is the laggard, is going to continue to make lower highs on a downtrend.
A stock that’s selling off in an orderly manner is going to show that it is going to be trading slightly below its five-period (moving average using three-minute bars). In the event of a panic, a stock is going to panic and diverge. In other words, it’s going to panic, react and outshoot the five-period way lower. So, the five-period MA on Ciena, which on the open was sitting around 77, Ciena opens down, falling to 74-and-change on the open. So that tells me I have a 2 1/2-point divergence, even though Ciena may be weak. Right now it’s in a state of panic and I have a 2 1/2-point divergence between where the stock is now and where the lead indicator (the 5-period MA) is. So when that happens, it tells me that I have 2 1/2-points of potential upside, so long as I can get a stochastics bounce and have it backed by the futures. Now the nice thing is that Ciena’s stochastics –
Dupee: So let’s summarize: You have three things working for you. You have the stochastic balance, you have the moving average retracement, and you also have the futures stochastics, right?
Yu: Exactly.
Dupee: Could you just summarize?
Yu: All right. Basically, I use the one-minute Nasdaq futures stochastic as a lead. As the one-minute future stochastics reverses back up, I confirm it with the one-minute stochastics on Ciena. I see Ciena trading right now at 74 1/2, and I realize that on a three-minute moving average chart, the five-period (moving average) lead indicator is trading at 77. So in essence, Ciena has overreacted and is in a state of panic and overreaction.
Dupee: And as soon as you see that, you just buy it?
Yu: Well, as soon as I see a reversal, right. In other words, just like I said, a reversal back up. The rubber band has been let go. When I see a reversal back up on the one-minute futures and the one-minute stochastics with Ciena, I look to buy.
Dupee: We are in February of 2001. Your book was published in 2000 and was based on trades and market events that occurred mostly in 1999, which was notably the best year ever for the Nasdaq, up 86%. In fact, it was the best year for any index in US market history. Have you changed your methodology since publishing the book?
Yu: Not at all. And let me explain. With my method, there are only two kinds of markets. There are oscillation and trend markets. So one can say, well, 1999 was the greatest trend market. But intraday, we still had down days and we still had oscillation days. But we mostly had trend-up days. So that’s why my methods apply intraday: they break the markets down into either trend or oscillation markets. Now on the flip side, we have had more trend-down days. So the methods remain the same.
Dupee: You emphasize tier synergy in your book, and mentioned it earlier in the interview. With tier synergy, you depict how the market can be divided into sectors and how momentum flows from the top down. Momentum, either up or down, starts with a Tier One general like Intel in the semis, which generally translates into a rally in a Tier Two chip stocks like Applied Micro Devices (AMD) moving in the same direction once Intel starts a momentum impulse. In your book, you mention that Yahoo! (YHOO) is a Tier One Internet stock that is shadowed by Tier Three Net stock AtHome (ATHM). Do you feel that your conclusions about tier synergy are valid in both bull and bear markets?
Yu: Yes. The tiers are always valid. The only difference –
Dupee: In bull and bear markets?
Yu: Yes, absolutely. The only difference is that the tier stocks can change based on price and even fundamentals. So Yahoo! still remains a Tier One. But (now that it is so down in price) At Home is what we call – I don’t know if you can print the word!
Dupee: You mention ATHM as a Tier Three in the book, when did it drop off as a Tier Three?
Yu: Anytime a stock drops under $10, it’s out of the initial first three tier sectors.
Dupee: Ok, but back to this question of your interpretation of tier synergy in bull and bear markets. It seems to be just the opposite in a bear market: the Tier Threes lead the Tier Ones. If you look at AtHome, when it was still a Tier Three, it rolled over much sooner than Yahoo! and remained down permanently, like 50% percent below its peak. ATHM was down 50% from its peak more than six months ahead of Yahoo! So I interpret this as an instance of a Tier Three leading a Tier One.
Yu: That’s an interesting point. Let me put it to you this way. The Tier Ones, taking everything we do intraday and extrapolating it to a daily scenario, any time the market rallies, the Tier Ones will move first. If there’s enough momentum, the momentum will roll into the Tier Threes. However, that’s an interesting question. How do I put this? There’s a point of no return. Once a stock falls off the tier index – once the bubble’s burst, the majority of the companies fall right out of those top tiers. And when that happens, they move on their own, because money flows just trying to get out of them.
Dupee: Have you noticed instances where the Tier Threes led to the downside and acted as a leading indicator of a Tier One or market decline?
Yu: I would not necessarily call them a lead indicator. But it’s dangerous to even assume that the lower tiers are doing anything that will forecast what’s going to happen to the Tier Ones. The lower tiers, once again, once they reach a point of no return, are on their own momentum. There are days where Yahoo! would be up and AtHome wouldn’t move a single tick. In other words, they’ve been completely disassociated from that sector. And once you get under $10, you reach a point of no return with the institutions.
Dupee: With the Internets by and large imploded, which Nets do you still trade?
Yu: Verisign (VRSN), Yahoo! and Ebay (EBAY). I’d say that’s about it, just those three as far as the Internet is concerned.
Dupee: What go-go sectors are you focusing on now and can you give us a current tier breakdown; of Tier Ones, Twos, and Threes?
Yu: Well, we like the router sector: Juniper (JNPR), which is a Tier One and Cisco (CSCO), another Tier One. And in the chip equipment makers, Applied Materials (AMAT), KLA Tencor (KLAC) and Applied Micro Devices (AMD). They all move together.
Dupee: Could you give us a sector with, and the way, you see their current tier breakdowns?
Yu: We like the volatility in the network storage. VERITAS is a Tier One; Brocade (BRCD) is a Tier One. Emulex (EMLX) and Qlogic (QLGC) are Tier Twos. Network Appliance (NTAP) and EMC (EMC) are Tier Threes.
Dupee: EMC is a Tier Three despite it being one of the largest storage companies?
Yu: Yeah. I guess once you get big, fat, and you’re cheap, you don’t move.
Dupee: Maybe this would be a good chance for you just to tell us briefly about UndergroundTraders.com.
Yu: Basically, we’re an on-line chat room that makes trade alerts intraday, allowing traders to watch techniques in action real-time, as well as earn while they learn. But our goal is to educate traders in our message so that they can fend for themselves.
Dupee: That’s nicely worded. One of the things that you seem to do very well, is that you’re very good in your ability to read the “Axe,” the lead market maker in a particular stock. For instance, when an Axe holds on the inside bid as other market makers jump to a lower price, it means the Axe may be accumulating stock. And conversely when they hold on the inside ask when other market makers jump to high prices, the Axe is probably selling. Is this still how you see the major Axes, Goldman and MSCO, Merrill behaving?
Yu: Actually, whenever a market maker makes himself transparent against the noodles –
Dupee: The noodles is what you call…
Yu: The Nasdaq 100 futures. In other words, in essence, when the noodles are rising and an Axe market maker is selling and holding a certain price level, thereby diverging the stock from its normal oscillation. The market maker is making himself transparent on purpose. He is making himself transparent with the full intent of allowing other market makers and traders to lean on him. In other words, when the stocks – when the futures peak out and reverse, they want the traders and the other market makers to lean.
Dupee: And by lean on him, you mean –
Yu: In other words, “come in and short the stock with me.”
Dupee: So you see the Naz futures rising, but you see Goldman inside-selling a certain stock.
Yu: Right, exactly. For example, I see Goldman Sachs on, let’s just say, Qualcomm (QCOM). It’s 72 on the ask. Futures are rising through the 80-band –