Caterpillar Earnings Were Great– Now What?

• Posted by: stevenplace, January 26th, 2012 at 10:58 am
• Comments: 0

As Josh rightly points out, $CAT had a solid earnings beat and just great numbers all around.

On the back of the report, the stock is gapping up big into some potential resistnace levels.

With this in mind, I consider a slightly contrarian bet, thinking that we’re due for a breather in the name.

The trade idea can be found in today’s SFO Daily, and you can view it here.

Identifying a Trending Market With Bollinger Bands

• Posted by: stevenplace, January 26th, 2012 at 10:03 am
• Comments: 0

what goes up...

So are we overbought or not?

Wrong question.

The right question is, where are we in our market cycles?

I believe the market has 3 cycles: price, trend, and volatility.

When a market is stretched in a mean-reverting market, fading the move is often a profitable trade.

But if you try to fade a trending market, you can get run over.

I have a very simple method of determining what kind of “trend” we are in.

It’s the relationship of Price and Bollinger Bands.

To view this study, you will need 2 things:

• 20 day, 1 standard deviation BB
• 20 day, 2 standard deviation BB

When price trends, it has a tendency to stay between the upper bands of these two technical indicators.

Here’s what our current market looks like:

See how majority of the price is staying between the blue and green line? This tells us that it is a trending market.

The chart below is the QE-2 driven cyclical bull market of late 2010 in the $SPY.

Notice how in a trending market, traditional “overbought” signals often signal that trend continuation is the game. The market can “ride” the Bollinger Band higher.

So right now, the markets are overbought, but they can persist that way because we are in a trending cycle. Play the trend until there is evidence of distribution and a price topping pattern

Silver and Physical ETF are Stretched

• Posted by: stevenplace, January 25th, 2012 at 10:09 am
• Comments: 0

Seems that there’s always a huge dust-up over Sprott’s $PSLV fund and whether it holds any more “value” relative to $SLV or silver futures.

I’ll put in my 2 cents (silver cents, of course) and look at the relative performance distribution between the two.

So if past history tells us anything, and if mean reversion actually does hold, then a long $PSLV short $SLV pairs trade makes sense, for now.

Want more? Go to the expert on this relationship here.

Using Statistical Measures to Determine Stretched Markets

• Posted by: stevenplace, January 25th, 2012 at 8:42 am
• Comments: 0

Price is made up of 2 components:

1. Trend, whether it be up, down, or neutral

2. Volatility, which is the price action that deviates from the trend

When market participants look at technical analysis indicators, they are attempting to determine the trend and whether there is a good place to put risk on in the context of the volatility.

Sometimes, however, modelling the volatility is left to “fuzzy math” or esoteric indicators.

I’m looking for measurements that will provide a little more statistical robustness.

This is one area I’m developing.

Change Distributions

We know that stock price is a time series of data that can generally be modelled as a lognormal distribution.

Meaning, the price change will fall under a big bell curve.

Does this only apply to daily price changes?

Here’s a time series of 10-day rolling returns in the $SPY, with a sample size of a few hundred trading days– the most recent data on the left.

This is one useful measure of volatility as it gives us areas in which price can be “overbought” or “oversold.”

But the problem is, eyeballing a time series of data won’t really be helpful.

Below is a chart showing the distribution of those rolling returns, since 1993. Outliers are removed to improve chart readability.

As expected, price action is a lognormal distribution, whether we look at 1-day price performance or 10-day price performance.

Where it Gets Fun

We can curve fit this data to go under a bell curve, and so we will know the historical odds of the $SPY being above 5% on a 10-day basis.

If the options market is giving us higher odds than historical, then you can develop a statistical edge and create an option selling system that is statistically robust.

This is a Starting Point

Obviously I haven’t shown you the “best” parameters to use, but you can take this methodology and start applying it to individual equities and indexes.

Parameters to potentially change are the sampling window from which you derive the distributions, and the length of the performance window.

What do you think about this line of reasoning? Have any improvements? Let me know in the comments section.

How to Trade Short Term Options, Read the Tape, and Become a Millionaire Options Trader (with SangLucci)

• Posted by: stevenplace, January 24th, 2012 at 10:30 am
• Comments: 0

How can you trade high-risk options without losing your shirt?

You could start buying a ton of weekly options and hope for the best…

…or you can learn aggressive market timing strategies and watch your account hit ALL TIME highs as the momentum works in your favor.

I have a feeling you want the 2nd choice, and that’s why I brought millionaire options trader Sang Lucci to IWO for a 35-minute interview.

How Sang Lucci Combined Tape Reading and Option Buying for Huge Profits

By now you know that successful options traders all have one key trait: consistency.

After working with a proprietary firm and developing that trait, Sang Lucci raised capital and moved into options trading.

How did he do it? You can find out in this audio interview– just click to play:

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.

After the interview, go grab his 7 Video Lessons on Options Trading.

What You’ll Learn in the Interview:

• How Lucci went from a college painting service to a lead trader at a proprietary trading firm
• Why the prop firm shut down and what we can learn about adaptation
• His big trade in Citigroup, where he made a 1000% return on a quater million dollar position.
• A completely different perspective of finding trades– looking for what’s wrong, not what’s right.
• How weekly options have completely changed the game in options trading.
• What smaller traders have to do in order to be successful.
• Why option buying works, and what more conservative option traders can learn from his trading system.

Right click this link to save the audio as an mp3 to your computer.

If you prefer a transcript, right click to save the transcript.

Here’s What You Need To Do Next…

1. Tell me what your favorite part of this training was. Leave a comment, and tell me exactly how you’re going to use this to improve your trading.
2. If you absolutely loved this interview, share it with your friends on social media.
3. Go grab Lucci’s 7-Part video training course on options trading — it’s free, so go grab it now.