One thing to work on

When a positive trade turns negative, evaluate the strength of the reversal and cut losses early.  Become emotionally detached from the trade, and try to look at it from the other perspective.  Staying objective is critical. 

Yesterday, I shorted JW.A and was up 40-50 cents in it.  Unfortunately the trade turned against me yet I refused to recognize the reversal.  I ended up take a 80 cent loss though an ideal exit would have been flat on the trade.

JW.A 1 min

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5 min

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The interesting thing was even though I knew exactly what was going on in this trade, I failed to execute my plan.  My entries were good, and I liked how the flag near the low was slowly grinding down.  The first indication of a reversal was when this bearish flag turned bullish.  In retrospect I should have covered here, taken the small gain, or covered the position flat once it broke the 15 EMA.

 

Closed-end funds (cont)

Although relatively flat at the open, the three funds I held overnight made strong reversals higher in the morning.  My original plan was to hold these funds for a few days, depending on their strength, exiting in the last leg of the reversion to their premium mean.  The moves proved to be unsustainable and each rolled over from their highs.  As I mentioned in the previous post, I kept a tight stop on these positions because any sign of weakness could lead to another break of yesterdays lows, resulting in capitulation.  I also did not hesitate to take profits, however marginal they were, because I felt the bounce higher was not consistent enough to be sustainable.  The best mean reversion trades will display very consistent candles on the way up and very brief consolidations and pullbacks - the mentality being, these are the best prices (long) in the short term.  Today’s price action did not show these qualities.

These income CEFs will stay on my radar for the next few days.  Another sell off and break of the lows could provide excellent mean reversion entries.   

Closed-end funds

Closed-end funds (CEFs) tend to sell off dramatically pretty much across the CEF spectrum a few times a year, usually off some catalyst like an increase in dividend tax or a rise in the risk free rate.  Given the right set up, these sell offs provide great mean reversion opportunity.  Some things I look for in a good set up:

  1. The sell off, usually multiday, needs to accelerate to signal a capitulation of longs.  Spikes down and sweeps on heavy volume are good indications.
  2. The CEF must trade at a fairly consistent premium to its net asset value.  The sell off will erase this premium and a good entry will be around NAV - the trade essentially predicting a reversion to the risk premium mean.

I’ve been keeping an eye on CEFs this past week, and today PTY, PCN, and PKO were on my radar, each setting up for decent entries for long swing trades.  We’ll see how they perform tomorrow.  I’ll be keeping a tight stop on each position because if they break the low, further capitulation will probably follow, providing an even better entry long. 

PTY


5 minute chart: Nice volume on the downside this morning, and I like the spike in volume into the close.

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Daily chart: I like the wick today and extremely high volume.  Good indication of a reversal tomorrow.

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Price vs NAV chart: note today’s price indicated by blue range.

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PCN


5 minute chart: nice volume near the low

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Daily chart: Volume and wick

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Price vs NAV:

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PKO


5 minute chart: lack of volume and no spike down is a little worrisome

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Daily chart: I do like the wick and relatively high volume

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Price vs NAV: Price is actually 2-3% below NAV today. My only concern is the lack of consistency in premium over NAV. 

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Trading IPOs

There are a few characteristics to look for in a good IPO trade.  First and foremost, it must show strength off the open.  Then, if it comes in from the high, it must consolidate.  Ideally this consolidation is no more than a third of the range from the high.  This is usually a good entry long if the set up starts the “cup and handle” ie attempts to break the high.

BRSS was on my radar in the morning because of the consistency of the strength off the open.  Notice the first 5 min bars are solid green: there is very little uncertainty in this move.  My entry was at 12.70 with a stop of 12.40.  I scaled out of the trade as it went parabolic on an increase in volume.

 

A losing day but better risk management

A couple losses today, but I kept them small by staying disciplined with my stops. 

Short AGNC - the idea, more predictive than reactive, was to short on the break of the 28.50 level of support on the daily chart.  I also knew AGNC would be volatile during Bernanke’s speech. I covered when it crossed positive. 

I also shorted CTRX on a 1 min flag at 48.  My thesis was a rollover would cause bottom pickers to capitulate.  I covered on a solid green 5 min candle which broke the 15 EMA on heavy volume.

A return to fundamentals

The morning after a bad day, I like to rehash the fundamentals.  Keeping it simple and staying focused is key.

  1. Do I like this trade?  What do I like about it?  Are the candles consistent?  Is it holding the EMAs?
  2. Is this particular set up working well in this market environment?
  3. Does this set up have the opportunity to move points?  Is the risk reward ratio at least 3:1?
  4. Before entering the trade, identify where it is broken. Place the stop and do not pull it.  
  5. Once in the trade, what is the stock telling me from its perspective?  Remember to stay objective and flexible in my expectations. Recognize when a trade has turned from signal to noise, and just get out.
  6. Be patient and watch the clock. Timing the 5 min candles is key.  Do not let the fear of missing the entry force you into the trade.
  7. Limit trading in a choppy market.  The best trades each day are relative.  Wait for the absolute best setups; do not settle for the B trades.
  8. Capitalize on other people’s mistakes.
  9. Anything can happen.