I’m a rookie futures trader. My goal for now and for the next year is simply survival. As a rookie trader, I’ve made my share of mistakes. On Friday I made one major mistake that cost me in both $$ and emotion.
As a rookie, I trade one contract at a time and expect to be trading one contract at a time for at least the next year. I started with the e-mini S&P but have moved to the e-mini Dow, or YM.
By the opening bell on Friday, I had already made four trades, one winner, two losers, and one winner, which brought me back to par. My stops were getting hit and taking me out with minor losses so when my upside target was hit on the fourth trade, I got back to break even. This was a lot of trading for me because I usually only do 2-3 trades per day. At 9:34 I entered long one contract of the YM but I decided not to put in a stop because my stops were getting hit so quickly in the pre-market session and I wanted to give the trade some time to work things out. This was a major mistake. As the market dropped, I waited for a bounce that never happened. I then did what a lot of rookies do and that is that I added another contract to average down because I was certain the market would bounce. Of course, that was a strategy that was destined to fail, and it did. By the time I accepted the fact that there would be no bounce, I was down considerably and in order to clear my head I sold and took the loss. At that point I upped the number of contracts to four and entered short the market. I rode that position down for several ticks and then cashed out. I was still down on the day so I waited, entered short four contracts again, rode that down, and then cashed out. By this time I was down $5 on the day. I decided that I should call it quits, but then I saw a long opportunity, entered with one contract, and was stopped out almost immediately. I decided to once again enter short and did so with one contract and when I exited that position at 3:24pm, I was up $5 on the day. I stopped at that point.
What I did on Friday is something I never want to do again. I put huge amounts of money at risk and could have easily blown up my account had the market rallied while I was short. Market internals and price action indicated that being short was the best option, but the mad men at the helm could have come in at any time and rallied the market 50-60pts, or more, and the losses I experienced early in the day would have been magnified. I’m not going to say that I was stupid because that doesn’t help, but I definitely was not smart. Yes, I managed to salvage the day but it came at a high emotional price and could have easily gone against me in a big way. The moral of this story is that trading futures without a stop is just asking for trouble. I was lucky and what worked this past Friday will probably never work again. When the futures go live Sunday night, if I trade I’ll do so with one contract using a protective stop.
As illustrated above, trading futures is extremely dangerous and my account is merely for educational purposes. I am not in any way trying to encourage anyone at any time to enter the futures markets. In fact and after what happened this past Friday, I’m questioning whether I ought to be trading futures and may go back on simulated trading for a week or two.
And now for something completely different.
Volume off the top. I’ve been waiting for quite awhile to see something like this, but this is not what longs want to see. 3.1billion shares traded Friday making this one the highest volume days of the year. If this kind of volume occurred on an up day after a long decline, I’d consider that a confirmation of a bottom and so in this case I think the volume and price destruction confirms that we’ve finally topped out. Of course, this is probably pretty obvious to everyone by now. Topping is a process, not an event, and in hindsight it seems pretty clear that we’ve been topping out since mid-September. Fooled me as things started looking good early in the week and I was convinced that we’d break out of the triple top pattern and then head higher. That potential break out has evaporated. Even though the market came down hard Friday, $SPX managed to close up 4.6pts on the week. Some will point to that and say that Friday’s action was just a little ‘profit taking’ and that’s all. Don’t believe it.
We had a couple of indicators that pushed into extreme oversold territory on Friday.
Approximately 89% of volume went into declining issues, so this is showing extreme oversold.
$TRIN closed at 2.47 so that is another sign of an oversold event.
RSI on the $VIX 60min chart pushed way above 70 during the session but then closed at 68. This is showing overbought.
And that’s about it. Other breadth indicators, such as $NYUPV, did not hit extreme oversold levels. Even so, one does have to expect some kind of bounce on Monday, though it wouldn’t be something I’d buy. It can’t be ruled out that the markets have topped for the year. Clearly Big Tech is being destroyed and Big Tech has been one of the key engines behind this rally. AAPL reports this coming Thursday and if they don’t absolutely blow the doors off then AAPL may have seen its better days. However, AAPL has always been great and lowering expectations so that they can easily beat so don’t be surprised if this is what happens.
Daily chart of $SPX showing an important swing point from August 30th. If $SPX should take out the swing point at 1425, then don’t be surprised to see it run down to the next swing point at 1397.01. We get there and then take that out with volume then it’s anybody’s guess as to how much further we’ll drop.
Also note on the chart that the ADX line is at 16 and is approaching a reversal area and looks to be setting up a bearish cross of the falling +DI line. This happened on the Q’s recently which, despite last weeks three rally days, has proved to be the kiss of death for the Q’s.
The RSI 14 is at 45 and it will take many more days of decline before this gets to the oversold 30 area.
(Click on the charts to open them in a new window.)
And then there’s the Q’s, down 2.39% on Friday. The next Fib projection level is 64.42 and you could say that we’re essentially already there. That brings the next Fib projection at 62.75 into play. 62.75 would take the Q’s all the way back to where they were in July. That’s just a Voodoo Fib projection and possibility and the Q’s can reverse at any time, but if the Q’s don’t reverse on AAPL’s earnings, then don’t be surprised to see the Q’s trade somewhere around June levels of $60 or less. I’ll believe it when I see it but such a move can’t be ruled out especially if we get any more earnings disappointments in the days ahead of AAPL’s release.
The RSI 14 for the Q daily chart is now at 33 and is fast approaching oversold levels. Once the RSI hits this area, which should happen by mid-week next week, the decline should stall though it need not stop.
No one knows what’s going to happen next in the markets, including me. I’m sure the Bulls are out this weekend telling everyone that the market is oversold and that people should take advantage of this once in a lifetime buying op to load up on stocks. Don’t believe them. Last week, maybe Thursday, I saw a headline on Yahoo Finance where Dick Bove was claiming that C was a screaming buy. C lost 3.28% on Friday and I’m sure Bove is still screaming that C is a mega buy. Of course, what does he care? He’s totally insulated from those who may have bought C on Thursday and then he’ll guilt those who complain with “Aren’t you in it for the long run?” Total BS.
Only the paranoid survive, baby!
GL and be careful in the week ahead.