ART & SCIENCE of Active Trend Trading–April 27, 2014

Good Day Traders,

It seems fitting that as IBD® celebrates its 30 year anniversary this week; the Active Trend Traders would announce enhancements to the services that it will be offered starting in May 2014.  I have long been a fan of Mr. O’Neil and the way he developed the IBD® trading system and his uplifting outlook on keys to success in America.  Since I read my first edition of “How To Make Money In Stocks” and started subscribing to IBD, I have admired the soundness of William O’Neil’s view of the world and investing.

In the front page article Mr. O’Neil says, “Learning to invest is a lifelong skill no one can ever take away from you.  If you’re just starting out remember the best way to succeed is to never give up.  As a young investor, I could have become discouraged at some point—and yet that was right before I bought what turned out to my biggest winner.  IBD® may have never started is I had thrown in the towel in those early years.”

This quote from the Monday, April 28, 2014 edition of IBD® captures my own belief and it was this belief that led to the birth of the Active Trend Trading System.  In late 2007 the idea dawned on me, what if we combined the most successful parts of various existing systems, taking the best pieces and discarding the rest, what would a system like that look like and above everything how would it perform.  For the next two years we researched systems, and at the end of that time christened the initial iteration of the Active Trend Trading System (ATTS) in 2010.

I didn’t just jump right out and publicize the System because I was overly concern with plagiarizing the works of others.   One major thing convinced me that the development and then publicizing the Active Trend Trading System was alright.  Throughout the history of technical analysis improvements have always been based on taking what was already there, refining it and adding more observations to make it better.  Take William O’Neil’s IBD® System.  Mr. O’Neil studied and copied the works of his mentors, Jesse Livermore, Jack Dreyfus and Gerald Loeb, added his own research and observations and came up with his own system.  So studying existing systems, modifying them through research and observations is not only the right thing but the necessary thing to do as a technical analyst.

Ok, that explains some of the background and beliefs behind ATTS, so what can readers expect from future editions of the Art & Science of Active Trend Trading?  First, we will continue provide the free update edition similar  to the one currently provided, but there will be a subscription edition Art & Science of Active Trend Trading providing access to our “Go To” & “Running” watch lists of fundamentally strong growth stocks and Index ETF’s that are setting up near proper Action Points.  The subscription level Art & Science will also include the weekly Mid-Week Market Sanity Check webinars, focused on trading stocks and Index ETF’s with the Active Trend Trading System.   In the near future we will add premium features including how to do income generating trades and an ATTS educational curriculum.  Plus special mentoring and coaching opportunities will be added in the later in the year.

Ultimately, my goal in expanding the services offered by the Active Trend Traders is not to grow a big business or start my own paper, but to provide a clear and simple path for traders of all levels that will lead them to the trading success they truly want, if they are willing to do what it takes to succeed.  I look at my efforts as a legacy project that will bless the lives of all who choose to come along.  If I can show folks where to find trades and how to capitalize on their learning, minimizing risk and maximizing profits then this endeavor will be successful and I’ll get more messages from subscribers like this:

Testimony

I am convinced that traders like Michael who have learned the ATTS can trim their own sail for the future and are equipped to face any market condition with positive expectations.  Having the right expectations, while they are not guarantees of success can be critical to navigating the course to success.  If you want more information on the expectations for the Active Trend Trading System visit our website at:  http://activetrendtrading.com/expectations/

During May the Mid-Week Market Sanity Check Webinars at ActiveTrendTrading.com will provide training on The Five Pillars of ATTS, tracking stocks & Index ETF’s set ups and trades.  Lastly, every Friday at 1:30 p.m. Pacific, the Active Trend Traders is one of the hosts for a free “Market Stock Talk” Webinar.  I want to invite you to attend register here:  https://attendee.gotowebinar.com/register/6392991970501818113

Please keep those great personal stories flowing, it is awesome to share in each other’s successes!

General Market Observation:   Several words come to mind regarding the market over the past few weeks—scared, weak, volatile, downside acceleration & profitable.  How did profitable slip in there?  This market has been tradable but one needs to adjust expectations and recognize that some of the more traditional breakout or reversal signals have not been working well.  For the current market environment, conditional orders at proven zones of support and resistance have worked best for planning both entries and exits with limited gains, but also with very tight stops thus limiting losses.

With the Market still in correction, the S&P remains stronger than the Nasdaq or Russell and is holding above the 50 day SMA, but it has formed a lower high in a broadening top formation.   These topping formations tend to not end well for the bulls, so a break and close below the 50 by the S&P may accelerate the current downtrend!  See charts below.

SPXNasdaqOver the past few weeks the market seems to be on a Wednesday to Wednesday cycle.  This means that around Wednesday of each week the market has either bounced off support ran up for a few days and around Wednesday of the next week rolls over or vice versa.  So for short term traders who anticipate this kind of action profits are there if expectations are modified to be happy with smaller gains of 5%, 10% or 15%.  Since the market is currently in correction and in a downtrend, trading with the trend is the best option and patience to wait for the rebound to resistance and then reversal clues provided by the small bodied candlesticks like doji’s, hanging men or shooting stars.  Additionally choose very target specific profit targets and be happy with the smaller profits.

Outs & Ins:   This section will be continued in the free edition of Art & Science but will be replaced with more specific trading information in the subscription edition which will highlight potential trades and ongoing trades.

This weekend there was a wholesale swap out of stocks within the existing Running List.  OTEX debuts on the list with a spectacular breakout from a downtrend channel following earning on the 4/24 on a big volume spike.  Upside for the stock is that Friday’s price move did hold the break above a down trending 50 SMA so time will tell if this will be a short lived pop or if a more constructive pattern will follow.

The big thing I’m watching this week is potential bearish trades if the stocks reporting earnings continue to be punished after they gap up from a great earnings report and then fall off dramatically the way both NFLX & FB did this past week.  If this continues to happen, it will provide ominous clues as to what’s going to happen with the market going forward.  We alluded to the analogy a few weeks ago that many of the strong growth stocks and the Indexes are acting like a bouncing ball going down a flight of stairs.  This analogy still holds with the big question being will there a landing or a chasm at the end of the stairs?

Over the next two weeks over half of the IBD® stocks will report earnings with 16 reporting the week of April 27th and 11 reporting the week of May 4th.  These events will provide clues to overall market health and potentially some fireworks if the current pattern continues.  If you happen to be long in any of the stocks reporting this week, measure your risk closely for holding through earnings, make a decision on your course of action and then be quick to change course if necessary to protect those profits from going over the water fall!

out-In 4-25

 

Recent Trades:   The current market conditions are resulting in few sound entries for a long term trades, but there have been numerous short term opportunities for Income Generation (IG) trades.  I like to trade stocks or ETF’s with premium rich weekly options for these trades.  The IG trades last a few days to a couple of weeks and can be set up with conditional orders so that a trader doesn’t need to be stuck at the computer during trading hours.  Here are a couple of trades executed over the past couple of weeks.

TSLA:  I like TSLA and at some point would like to own shares, however it continues to live within a down trending channel, so buying shares is not a high reward/risk option.  While TSLA is not at a proper Action Point to buy shares it doesn’t mean that TSLA provides no opportunities to generate income.  TSLA offers two attractive characteristics that make it worth watching.  The first is a $38 trading range and secondly weekly options rich in premium.  A trade set up on TSLA on 4/15 when price action bounced off strong support of the down trending channel, the 100 day SMA and horizontal support at $189.

TSLA provided two entry opportunities, the first on 4/15 moving back up through $189 and the second on a retest of support at $194.50 on 4/17.  Contracts of the May 1 200P were sold both days with an average credit of $10.55 was collected for these naked puts.  On 4/21 TSLA broke above $200 and closes just above the 8 day EMA so ½ of the position was closed at this point and then on 4/22 prices moved up and closed within a stone’s throw of the 50 day SMA now acting as resistance so the remaining open position was closed for and average debit of $1.975 which reflects a gross profit of $857.00 per contract over a 4-5 day holding period.  See the chart below.

tlsa

 

PANW:  Palo Alto Networks demonstrated similar price action to TSLA, a good growth stock but in a downtrend channel with strong resistance at the 50 day SMA.  On Thursday 4/17/14 at the end of market PANW showed price action that resulted in a doji indicating there was a standoff between buyers and sellers.  The expectations were that the 50 day SMA would provide a strong ceiling and that the 100 day moving averages would provide a strong floor for a bearish debit spread that would mature over a two week period.

Just before market close on 4/17, a debit spread was entered for PANW with strike prices of 70-65P for a total debit = $1.84 or $184/contract.  A standing conditional order was places to sell the position if price action fell to $65 and the trade would be closed for a loss if prices closed above the 50 day SMA.  On 4/24 PANW sold off hard in the morning hit the 100 day SMA target at $64.70 the conditional order fired closing the position for a credit of $2.875 which equates to a profit of $103.50/contract or a gain of 56.25% on the initial debit.  See chart below.

PANW

Please note these trades reflect an option strategy I use to Generate Income each month, but the trigger Action Points entries and exits for the trades was based on the Active Trend Trading System (ATTS) and are the same triggers used for longer term trades when the market is cooperating!  Having the same triggers greatly simplifies trade planning and execution.

Comments and opinions written below this line of text may be provocative and only obliquely related to trading.  Some may find these “Off the Wall” comments challenging to their outlook on life.  I will not post any comments made on subject matter below this line to the group, so if you disagree blast away. 

 

OFF THE WALL Main Wall

Off the Wall:  I had a wonderful discussion with one of the Active Trend Traders over a great cup of coffee a couple of weeks ago.  They shared their success not only with the ATTS but also with conquering their own proclivity of self-destruction when a trade was going their way.  This trader made a statement that was very enlightening.  They said that in order to get past that demons of greed and fear, they asked themselves a simple question, “Do I want a 30% gain?”  Now to some traders this may seem like a no-brainer to answer, but is it?   Apparently during this traders brief trading career they had too often watched great gains of 15%, 20% or higher evaporate into loses because they were frozen by first greed whispering “hold tight you want more!”  Then frozen by fear as the gains melted away to lose with Fear’s alluring call, “wait it will come back!”

Apparently for this trader asking the simple question, out loud and in their Trading Journal was enough to deafen the voice of both demons and in fact keep them from even coming up.  The trader’s own logic took over as they reasoned out that yesterday I had small gains but today I’ve made a few thousand dollars, do I want to keep most of this 30% gain?

The final statement that this trader said to me after this first enlightenment was, “You know 30% in the bank is great, and if it sets up for another buy, I can do it again!”  Ah, they get it!

Share Your Trades:  Many of you have sent me notes regarding the success you are having with the Active Trend Trading System.  Please send you stories to me at dww@activetrendtrading.com so I can share them with our fellow traders.  Plus, if you are considering a trade that appears to be at a proper Action Point, send that alert also!  Thanks!

 

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