Jeff Pierce's  Instablog

By All About Trends

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Many of our subscribers have asked how they can more effectively utilize our services and more efficiently act on our ideas. We are pleased to announce an exciting new enhancement through Ditto Trade, an online brokerage firm whose proprietary technology provides our subscribers the ability to act on our alerts in ways no other brokerage can.

With Ditto Trade, you can choose to have our alerts automatically executed in your Ditto Trade account according to your own personal pre-set parameters, or utilize Ditto Trade's mobile app to receive our alerts directly on your mobile device and instantly act on them with the press of a button. In either case you always maintain complete flexibility and control.

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Demo Video

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*All About Trends is an independent service that is not affiliated with any licensed brokerage firm. The opinions expressed are those of All About Trends only and should not be attributed to any other person including any executing broker-dealer utilized by a subscriber.

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4 Stocks Holding Up Well

Time To Be Cautious On Markets

By Chris Ebert

Stocks and Options at a Glance

It looked as though the stock market was ready to change gears last week, and although it came close, it did not make the change. The market remains in Stage 1, also known as the "lottery fever" stage.

Stage 1 is a normal part of the stock market cycle, despite the fact that Stage 1 represents a market in which stock prices are rising at an abnormal and unsustainable pace. Euphoria-fueled rallies tend to occur at least once every year or two, and usually last no more than a few weeks before the market reduces the pace of the trend to a more sustainable rate. Stage 1 often ends with a minor pullback on the S&P on the order of 5%.

What makes the current Stage 1 abnormal is its longevity. While Stage 1 rarely lasts more than a few weeks, the current Stage 1 began over three months ago on March 1, 2013, making it one of the longest-lasting on record over the past decade. Historically, longer-lasting Stage 1 Bull markets have been followed by major corrections on the S&P of 10% or more, and occasionally, Bear market declines of 20% or more.

Bull Market Stage 1 - Longest lasting stages on record since Jan. 1, 2004

• #1) 21 weeks - Oct. 7, 2006 to Feb. 24, 2007. The S&P subsequently fell 3.5% in a single day on Feb. 27, 2007, part of a 5% pullback over the following week.
• #2) 15 weeks and counting - Mar. 1, 2013 to Jun. 7, 2013.
• #3) 13 weeks - Apr. 28, 2007 to Jul. 21, 2007. The S&P was within 25 points of its pre-crisis high and subsequently fell 7% by the first week of August 2007, part of a 50% decline over the following 20 months.
• #4) 12 weeks - Dec. 3, 2010 to Feb. 19, 2011 The S&P was within 25 points of its pre-correction high and subsequently fell 17% during the summer of 2011.

*All strategies involve at-the-money options opened 4 months (112 days) prior to this week's expiration using an ETF that closely tracks the performance of the S&P 500, such as the SPDR S&P 500 ETF Trust (NYSEARCA:SPY)

You Are Here - Bull Market Stage 1

Bull markets tend to progress from stage 0 to stage 5 and then repeat the process, beginning again at stage 0. There is no limit to the number of times the process may be repeated, so a Bull market has the ability to continue indefinitely, until at some pointin the future Bull Market Stage 5 fails to materialize, and instead Bear Market Stage 5 takes its place.

Stage 1 represents an over-extended market, which often precedes a correction. This stage has one very distinctive characteristic; all trades labeled with a "+" are profitable.

• A+ trades (Covered Calls and Naked Puts) are profitable.
• B+ trades (Long Calls and Married Puts) are profitable.
• C+ trades (Long Straddles and Long Strangles) are profitable.

Click Here for a complete chart of all Options Market Stages

What Happens at Stage 2?

• A+ trades (Covered Calls and Naked Puts) remain profitable.
• B+ trades (Long Calls and Married Puts) remain profitable.
• C+ trades (Long Straddles and Long Strangles) begin returning losses.

The market neared Stage 2 this past week, and would have made the change if the S&P had fallen below 1600 and remained there. For the upcoming week ending June 15, 1610 is the magic number, and for the following week ending June 22 the number is 1621. Each of those levels represents the point at which Long Straddle and Long Strangle trading would become unprofitable.

Stage 2 represents a change in the pace of an uptrend, from one that was unsustainable, to one that is much more reasonable. But while such a change of pace may seem reasonable in hindsight, to traders in the market at the time of the change it may seem ominous.

When traders become accustomed to long-lasting rallies, a pause in the rally can spark fear. Fear is dangerous because it can cause unexpected sell-offs. Take a market accustomed to rallies and mix in a few bad days or weeks in which prices fail to bounce back, and all of the ingredients are in place for a correction. While the ingredients are not there at the moment, traders should pay close attention to the 1610 and 1621 levels of the S&P over the next week or two weeks, respectively. An S&P below those levels does not guarantee a subsequent correction, but it does make the ingredients available should sufficient economic news become available to act as a catalyst.

Weekly 3-Step Options Analysis:

On the chart of "Stocks and Options at a Glance", option strategies are broken down into 3 basic categories: A, B and C. Following is a detailed 3-step analysis of the performance of each of those categories.

STEP 1: Are the Bulls in control of the market?

The performance of Covered Calls and Naked Puts (Category A+ trades) reveals whether the Bulls are in control. The Covered Call/Naked Put Index (CCNPI) measures the performance of these trades on the S&P 500 when opened at-the-money over several time frames. Most important is the profitability of these trades opened 112 days prior to expiration.

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This week, Covered Call trading and Naked Put trading were both profitable, as they have been for an extended period. That means the Bulls remain in control. The reasoning goes as follows:

• "If I can sell an at-the-money Covered Call or a Naked Put and make a profit, then prices have either been going up, or have not fallen significantly." Either way, it's a Bull market.

• "If I can't collect enough of a premium on a Covered Call or Naked Put to earn a profit, it means prices are falling too fast. If implied volatility increases, as measured by indicators such as the VIX, the premiums I collect will increase as well. If the higher premiums are insufficient to offset my losses, the Bulls have lost control." It's a Bear market.

• "If stock prices have been falling long enough to have caused extremely high implied volatility, as measured by indicators such as the VIX, and I can collect enough of a premium on a Covered Call or Naked Put to earn a profit even when stock prices fall drastically, the Bears have lost control." It's probably very near the end of a Bear market.

STEP 2: How strong are the Bulls?

The performance of Long Calls and Married Puts (Category B+ trades) reveals whether bullish traders' confidence is strong or weak. The Long Call/Married Put Index (LCMPI) measures the performance of these trades on the S&P 500 when opened at-the-money over several time frames. Most important is the profitability of these trades opened 112 days prior to expiration.

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This week, Long Call trading and Married Put trading were both profitable. Both forms of trading became profitable in late January. It means the Bulls are not only in control now, but they are confident and strong. The reasoning goes as follows:

• "If I can pay the premium on an at-the-money Long Call or a Married Put and still manage to earn a profit, then prices have been going up - and going up quickly." The Bulls are not just in control, they are also showing their strength.

• "If I pay the premium on a Long Call or a Married Put and fail to earn a profit, then prices have either gone down, or have not risen significantly." Either way, if the Bulls are in control they are not showing their strength.

STEP 3: Have the Bulls or Bears overstepped their authority?

The performance of Long Straddles and Strangles (Category C+ trades) reveals whether traders feel the market is normal, has come too far and needs to correct, or has not moved far enough and needs to break out of its current range. The Long Straddle/Strangle Index (LSSI) measures the performance of these trades on the S&P 500 when opened at-the-money over several time frames. Most important is the profitability of these trades opened 112 days prior to expiration.

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Long Straddle trading and Long Strangle trading became profitable on March 1, 2013. Since then, each trading strategy has continued to profit, and has reached historically rare levels of profitability on several occasions.

Perhaps more important than the recent high levels of the LSSI is the longevity of the elevated levels. At 15 weeks and counting, from the time the LSSI turned positive, the current streak is one of the longest of the past 10 years. Those long streaks do not make good company, as they are associated with subsequent losses for the S&P, most notably the bear market of 2008.

There's no way of knowing whether the correlation between a long-term elevation in the LSSI and subsequent stock market sell-offs is useful for predicting future sell-offs, but the relationship is worth noting.

A possible explanation for the difference in magnitude of corrections, between those that occur after a briefly elevated LSSI and a long-term elevation, is that the market behaves somewhat like a child. When an elevated LSSI shows a market that is behaving out of bounds, swift non-severe discipline often brings the market back into compliance without much trouble. A market that has been out of bounds for an extended time tends to become bolder, sometimes flaunting its non-compliance openly. In such cases, correcting the market may require more severe measures.

The correction will occur, eventually. An elevated LSSI has always led to a correction in the past, and there's no reason to suspect this time will be an exception. It's just a matter of how long until it occurs. The reasoning goes as follows:

• "If I can pay the premium, not just on an at-the-money Call, but also on an at-the-money Put and still manage to earn a profit, then prices have not just been moving quickly, but at a rate that is surprisingly fast." Profits warrant concern that a bull market may be becoming over-bought or a bear market may be becoming over-sold, but generally profits of less than 4% do not indicate an immediate threat of a correction.

• "If I can pay both premiums and earn a profit of more than 4%, then the pace of the trend has been ridiculous and unsustainable." No matter how much strength the Bulls or Bears have, they have pushed the market too far, too fast, and it needs to correct, at least temporarily.

• "If I pay both premiums and suffer a loss of more than 6%, then the market has become remarkably trendless and range bound." The stalemate between the Bulls and Bears has gone on far too long, and the market needs to break out of its current price range, either to a higher range or a lower one.

*Option position returns are extrapolated from historical data deemed reliable, but cannot be guaranteed accurate. Not all strike prices and expiration dates may be available for trading, so actual returns may differ slightly from those calculated above.

Questions, comments and constructive criticism are always welcome. Enter them in the comment box below, or send them to OptionScientist@zentrader.ca.

The preceding is a post by Christopher Ebert, who uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. He studies options daily, trades options almost exclusively, and enjoys sharing his experiences. He recently co-published the book "Show Me Your Options!"

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By Harlan Pyan

The following is an excerpt from yesterday's premium report by All About Trends. Enjoy a free 15 day trial to their service and receive daily stock picks, market analysis, and a complete trading plan.

Last week to our paying subscribers before the market tagged key support zones that we talk about every day we released a special report on:

Using trend channels, lateral supports and the 50 day average to define ones risk.

To all of you on the free subscriber/ those that read our articles list you received a very scaled down version without the long side watch list that went out to our paying subscribers.

How have we done?

Since May 24, we've earned the following gains from trades we've featured:

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Total gains: $1,253.25

And for those with accounts of $100,000 where options trades are recommended over stocks, we have the following gains:

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Total gains: $453

Before we get into a special discounted offer, let's revist that special report to drive home the point about just how important those tools of the trade and the set ups that come from them actually are.

As you recall we laid out the trend channels, blue lateral supports and 50 day averages. So let's see how pertinent that information was to us when all said and done. But first we'll revisit the groundwork of the opening report with BLK as the example.

First, we will recap what we said on June 4th -- then we will see where we are today.

=====================================================
From Special Report released on Tuesday June 4th 2013:

We talk all the time we talk about support zones around here.

The three we talk about the most are:

Trend channels when they apply and usually are annotated on the charts in green

Lateral support zone and usually are annotated on the charts in blue

And typically the 50 day average.

All of these define risk. Here's what we mean by that.

Take Blackrock- BLK for example.

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We see trend channel support in the green line very clearly. As long as the stock is within those green trend lines its overall trend is up.

So let's say you had a weak emotional moment and chased a bus with it at say $290

Look at that level and look at the overall trend of the stock. See it? The overall uptrend as defined by the green trend channel is up.

So what's the problem? Nothing really if you think about it. You are long a stock in an overall uptrend it's just that it's pulled back within that overall uptrend below your entry point.

Now let's say you bought in the face of fear when it and the indexes were down on Monday. What's the problem here? Nothing really it's still within an overall uptrend that has pulled back off of uptrend high.

What's the difference between the two entries? One is you bought near trend channel resistance the other nearer to trend channel support. It's all about defining your risk and managing that risk.

What's our risk right here then? Well it comes down to trend channel support. What percent is that away from our entry? It's 2.5%, big deal right?

What if it breaks trend channel support after we buy it and are down in it?

We stop out as the uptrend pattern is no more. BUT before we do that we need to see where a prior support level is in blue or where the 50 day average is because if they are near we may want to hang in to them. In this case the 50 day also just happens to be trend channel support.

Remember supports are floors where stabilization can easily take place and an uptrend can get defended. Our point being just because a stock breaks one type of support doesn't mean it's toast you know. Just look at the April lows in the NASDAQ Comp. for that.

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The NADSAQ broke trend channel support BUT it stopped at a blue line support just below it. And the rest was history away we went. So if you automatically stopped out it was premature.

What's the moral of this exercise? Before you take any trade look at a chart and ask yourself, IF you were to be buying it right here what's your risk percentage wise in the event it were to go to the green line or the blue line or the 50-day average.

This is why we say knowing where supports are helps define ones risk. It also smooths out the volatility folks.

Let's take it a step further and add a new element that ought to really drive it home which is trade size risk management to the mix.

We try to stick to 5-7% per position when we do a trade AS A GUIDE. When you combine that with everything above you see that the risk to the overall portfolio goes down immensely.

On its own trade size risk management is the saving grace for when a stock goes against you. You see when properly employed on its own you can take a 20% whack on a stock and say with a 5% position the total impact to the overall portfolio is one measly percent.

When you use it in tandem with using trend channels, lateral supports and the 50 day average the risk is even more diminished per trade baring an unforeseen news driven event in after hours over which you have no control over anyway.

So you see? We have multiple layers of risk management per position and per the overall portfolio.

Now let's apply all of the above to some names on the long side watch list and some that aren't.

=======================================================

6-10

Now let's take a look at the before and after of some of the standouts from last weeks special report in before and after form.

BLK
BEFORE

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To the blue support line is 6.5%, using 5% of the overall portfolio is 2/10ths of 1% impact

AFTER

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6-10 From the face of fear lows that corresponded with the indexes and this issue tagging support zones and key Fibonacci retracement levels this issue has rocketed 20 points!

Notice how it came down to a blue support line that we talked about and had showing in advance?

GOOG
BEFORE

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To the 50 day average (834) is 3.8%, using 5% of the overall portfolio is 2/10th of 1% impact to the whole.

AFTER

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6-10 From the face of fear lows that corresponded with the indexes and this issue tagging support zones and key Fibonacci retracement levels this issue has rocketed 39 points!

Notice how it came down to a blue support line that we talked about and shown in advance?

BIIB
BEFORE

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AFTER

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6-10 From the face of fear lows that corresponded with the indexes and this issue tagging support zones and key Fibonacci retracement levels this issue has rocketed 15 points!

Notice how it came down to a blue support line that we talked about and had showing in advance?

REGN

BEFORE

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AFTER

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9-10 From the face of fear lows that corresponded with the indexes and this issue tagging support zones and key Fibonacci retracement levels this issue has rocketed close to 30 points!

WYNN
BEFORE

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AFTER

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6-10 From the face of fear lows that corresponded with the indexes and this issue tagging support zones and key Fibonacci retracement levels this issue has moved 5.5 points

Notice how it came down to the 50 day average that we talked about and showing in advance?

Heck this one alone we bought at $134.03 and here it is pushing $140.00 for a $600.00 gain so far in just three days!

LL
BEFORE

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AFTER

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6-10 From the face of fear lows that corresponded with the indexes and this issue tagging support zones and key Fibonacci retracement levels this issue has move 7.5 points.

Heck this one alone we bought at $ 78.37 and here it is pushing $83.00 for a quick $463.00 gain so far in just three days!

And if all of the above doesn't drive home one of the points we are trying to make about using the 50-day average do yourself a favor and grab a 7- month daily time frequency chart with the 50-day SIMPLE moving average on it and look at the following names. Once you do it will become instantly clear to you the power of this trade set up we are always on the look out for.

OII, SNTS, YELP, PRLB, HTZ, NUS, WDR, ICE, KMX, KR, TSCO, MNST, AZO
EAT, LM, MMM, TMK and the list goes on.

And how about those index charts! Classic All About Trends Key Levels!

Let's take a look at the SPX and NASDAQ Comp. while we are at it. See the 50-day average? See the tag of the green uptrend channel support? Like we've said and constantly pound the table on of the importance of the two they were KEY levels we like to initiate trades on and of course if short cover trade upon.

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In summary from the original report

As you can see we've laid out in each what is the risk percentage wise of every issue based upon the green uptrend channels when applicable, the blue lateral support zones and the 50 day average. Keep in mind that those are also levels where support and stabilization can occur so upon a tag of them it doesn't mean that you automatically stop out of them. If stabilization at those levels occur and you stopped out? You'll wish you didn't.

You can also see we added the trade size risk management element to each as well based upon 5% positions. We'll let you do the math on 7% positions.

So what did we accomplish with this exercise? We've defined risk two ways visually and we've also smoothed out the volatility which in turn smooths out the emotional state as well.

When you look at the percentages as shown you can clearly see there never really is anything to worry about from this point forward when it comes to taking on positions when stocks fluctuate (and lets face it ALL stocks fluctuate) and go below your purchase price as we've just framed the risks and the overall portfolio risk.

That goes a long way to towards managing ones mental stress and state.

Enjoy a free 15 day trial to their service and receive daily stock picks, market analysis, and a complete trading plan.

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