This Week’s Battle Plan
The Birthday Gift
A few things never change. And for me
this is good. The first thing not to change this week is an annual
ritual for me. I knew my birthday was approaching. How? Not from the
calendar. From the mail. Every year around this time, I get a birthday
card and a gift from my grandmother. A woman from very simple means
who is 90 years old and still going strong. Each year she sends me a
check for $10. Now, I’ve been doing OK for myself since I left school
21 years ago. The markets have been pretty good to me. But that
matters little to my grandmother. That check gets sent like clockwork
every year, in early August. And as much as the rest of my family
likes to poke fun at this gift, I’ve come to expect it. No change is
necessary here.
The second thing that happened this week is the other thing I’ve come
to expect. That very oversold markets eventually rally, sometimes big,
and overbought markets eventually sell off. This week we saw how true
this expectation is.
Two Massive Moves,
Plus A Healthy One
Let’s go back a few weeks and look at
what has transpired. In my Battle
Plan two weeks ago I mentioned that the market was the most
oversold I had seen in two decades. In fact, looking back to 1960, a
period of 42 years, we had not seem oversold levels anywhere where we
were. But that mattered little. Because we went down big on Monday and
down further on Tuesday. Grossly oversold became…well, I didn’t even
have a name for it. It was a once in a lifetime occurrence. But it
occurred. A market that was on a three month nose-dive with just about
everyone in the world screaming we were going even lower. By
Wednesday, it became even worse. I had been long the market waiting
for the rally and again we were deep in the hole. And now I was
becoming nervous. Because for the first time since I was 14 years old,
I was thinking I may actually need that $10 check that was soon to be
mailed to me! But a few minutes later, reality set in. And the world
becoming normal again began to occur. We got the second biggest rally
in the history of Wall Street. And all those who thought that markets
only go down (think 1998-1999 and simply turn it upside down), got
caught and those of us who trade reversals were amply rewarded.
Now, let’s move ahead a few days. And we find ourselves still very
oversold with the likelihood of another rally (see
my piece from last week). And what do we get this past Monday? The
third largest rally in the history of Wall Street! And the market
rallies the next few days and leaves us where? That’s right.
Overbought. CVR 3 sell signals on Wednesday night and a slew of
downward arrows on our Market
Bias page on Thursday night. And the market did what it was
expected to do. It sold off…hard. The S&P’s lost more than 45
points and again we are rewarded.
Markets don’t move one way! Yes, sometimes they do, like they did
recently. But the majority of the time they move from overbought to
oversold and vice versa. They move to an extreme and then reverse
in an effort to find equilibrium. And that is where the greatest
money can be made, both intra-day, and daily. It’s not perfect, but
it’s reality. It’s a reality that has existed for centuries, no
matter what the market has been, and it is a reality that will likely
exist forever. It’s there for you to take advantage of and make
your living from. Again, it’s not perfect, and there are times along
the way that you get stopped out many times as the market moves to a
crazy extreme as it just has. But, the payback (many times big
payback) is when the snapback occurs. And you can honestly say that
you were long the market on both the second and third biggest up-days
in the history of Wall Street.
We have many lessons and courses that are free to you on this site to
help you learn to trade this way. Take advantage of them. And
if you need help finding them, e-mail our Editor-in-Chief Duke
Heberlein (dukeh@tradingmarkets.com).
Tell him how you trade, what you are trying to accomplish, and your
level of trading experience. He’ll send you to the right lessons and
courses to help you learn even more.
Increasing Your
Returns For The Rest of The Year And For Years To Come!
I never guarantee anyone they will make more money from trading. There
are no guarantees in this business. But, I’m happy to say today is the
exception to the rule. Here they are:
Increasing Your Returns – Part 1
A few years ago my futures account rose a bit over 60% for the year. I
was aggressively trading and it did what it was supposed to do. But,
when I looked at all my trading I saw not only many profitable trades.
I saw my brokerage firm making almost as much as I did!. I estimated
that without commissions, my returns were in excess of 110% for the
year. My commissions chewed up more than 50% of the returns. Stated
another way, I had to do better than 50% for the year just to break
even! There were two solutions here: Lower my trading activity or get
my commissions cut…drastically.
This past week I was on the phone with one of the head executives of a
well known boutique brokerage firm. He told me that his “active
account base” has dropped 72% from two years ago! This is
incredible. But, he’s a smart guy with a good team and they will
certainly survive and will prosper again when the market improves. But,
if you are a good customer of his, he does not want to lose you.
Nor does any brokerage firm want to lose you. And, from this reality,
it becomes a buyers market. And you can dictate the terms. And if you
feel you are paying too much for commissions and it’s eating into your
returns, now is the time to shop for lower rates and then come back to
your firm and see what they can do. My guess is they will absolutely
work with you. If you tried this three years ago, they’d tell you to
take a flying leap. Hell, in 1999, Datek told me it was a three-year
week wait just to open an account with them! Now, everyone is
“customer friendly” and wants your business. And there is
room to negotiate, especially if you are over-paying to start. And, if
you actively trade, these savings will assure your account has more
money in it at the end of the year…guaranteed. Take advantage of it
now, as market conditions are ripe for the negotiations.
More Money – Part 2
One of the pleasures I’ve had since April
is to have worked with a number of traders through our mentoring
program. Hopefully, these people learn from me as I have certainly
learned from them.
This past week I graduated two gentleman who run a $10 million dollar
hedge fund. They now have structure in their trading and well are on
their way to a successful future. When we reviewed the trades for the
past week, one really stood out. It was a trade where they took their
biggest loss of the past two months. It was a loss of $1.05/share.
This may not sound big, except their trading is structured not to lose
(on average) more than 50 cents on any one trade. When I looked at the
trade, I asked them what happened. It turned out they were trading IBB,
the Nasdaq Biotechnology ETF. They did everything correctly in this
trade. But, it turns out the specialist trading this security keeps,
on average, a 25-30 cent spread. Plus, he is unwilling to take any
size, which means the market moves wildly against you on many trades
(he must be related to the guy who runs the Biotechnology HOLDRs.
These guys are bad. My guess is their grandmothers would send them $10
for their birthdays too…had they not already picked her dry!).
Stay away from stocks and funds with large spreads! The QQQ’s for
example trade with a one and at most two cent spread. Compare that to
the IBB and BBH’s which have 25-30 cent spreads. A 25 cent spread
on a $49 IBB security means you are in the hole 1/2% every trade!
Not good. Avoid stocks like these and you will immediately lower the
cost of doing business. And like the commission savings from above, it
all adds up to more profits at the end of the year. Again, if you need
help here, e-mail me or Duke. We’ll get back to you fairly quickly.
This Week
On Friday, Saturday, and Sunday, some of us will be at the Online
Trading Expo in Anaheim California. Both Don Miller and Dave
Landry have private all day seminars going on there, I’ll be at the
TradingMarkets booth most of Saturday morning and early afternoon and
Carolyn Boroden e-mailed us Friday to say that she may also be coming
by over the weekend. If you are attending, please make sure you stop
by and say hello. If you would like more information on the show and
on Don’s and Dave’s seminar you can find it here.
Have a great week trading, and remember, lowering your commissions,
reduced your trading in big-spread stocks, (plus ten dollars from your
grandmother) will automatically add up to a more profitable year!
Larry
Connors
and Brice
Wightman
PS – If
your grandmother isn’t sending you ten bucks for your birthday, e-mail
Haggerty. He’s loaded.
Larry Connors is
CEO and co-founder of TradingMarkets. He is also the author of four
books on trading, including “Street
Smarts,” co-written with Linda Raschke, “Connors
on Advanced Trading Strategies“, and “Trading
Connors VIX Reversals.” Larry also recently released the
video course ”Buy
The Fear, Sell The Greed: Timing The Market Every Day For The Rest Of
Your Life.â€
Brice
Wightman is a Market Analyst at TradingMarkets.com