David Kern's  Instablog

I received an interesting piece of mail this week.  If you invest/trade the markets long enough, you’ll get these sort of mailings fairly regularly.

It was an invitation to participate in a class action lawsuit over something Apple did between 2001 and 2005.  I don’t really know or care what they were sued over, but Apple settled – and the cash is now available to be claimed.  Essentially, if you bought shares of Apple during that time you might be entitled to some portion of a settlement.  I did a search of my trading records, and sure enough – there it was.  I’d bought AAPL on 11 Oct 2005 and sold on 18 Oct 2005: a quick 4% gain.  However, as I reviewed more of the legal mumbo-jumbo, it became clear that my take on the lawsuit settlement would amount to $0.07 (estimated) per share.  Bottom line – not worth my time to even fill out the class action paperwork.  The 4% I made on the trade four years ago far exceeded any reimbursement that I would receive from this settlement.

The interesting thing was realizing that the price I paid for AAPL at that time was $50.59 per share.  Wow, wouldn’t it be nice to have kept those shares?  My unrealized gain today would be 646%!  That’s not really” g0-crazy-retire-to-Fiji money”, but it’s well over 100% gain annualized…  Why did I sell at that time?  Probably a stop, could have been an itchy trigger finger with a desire to book gains – really I don’t remember.  When I look at the chart from 2005, it’s really a facepalm moment.

This has been an introspective moment over the weekend, as it’s caused me to question some of my approach to trading the markets.  I assess that I do well above average at picking what to buy, and I’m usually pretty good on when to buy also – but my timing on when to sell has had some sucktastic moments.  I’ve experimented with putting trailing stops on everything – only to be whipsawed out of stocks that continued up-up-and-away.  I’ve bought uptrending stocks that then paused and/or retraced just after I buy  – so I sold (locking in a loss) only to find them explode upward the next week.  I’m starting to think that I need to slow down my timeline a little; step back from every wiggle of the chart and let my trading positions work for me.

I’ve believed for a long time that “buy and hold” is a steaming load of crap.  There are a plethora of market indicators that clearly show market trend, and it’s foolish to go long in a bear market or short in a bull market.  My favorite indicators for trend are the market breadth and bullish percents (which as of this writing still show a bull market).  These work well and consistently.  My issue seems to be finding my rhythm for when to take profits or cut losses, and I’m open to ideas on how to improve my game.  I don’t care to hear the Warren Buffet answer (who has said his time horizon is to never sell), but I feel there’s gotta be a better system for when to sell.

By the way – going back to the question of buy and hold AAPL from Oct 2005 – I don’t think that would have been a good idea at all.  There were a couple of clearly defined downtrends the first half of 2006 and most of 2008.  I think any reasonable trader wouldn’t sit on his hands through that bleeding.  Certainly I couldn’t have, considering the market breadth and bullish percents clearly showed defensive situations during that timeframe.  What do you think?


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The UK rag The Daily Mail broke a story yesterday that Royal Dutch Shell may be quite serious about a buyout of British Petroleum. This rumor has been quite profitable for my position in BP (follow that and the rest of my portfolio here) - but I think the chart says that more strength is ahead.

My chart notes (click the image for a better view) show that today's price action topped multi-year resistance going back to 2008. Remember how bad 2008 was for stocks? Nobody was willing to pay more than about $45 for BP from about Sept 2008 through until May 2009. Then the oil spill knocked BP back down to the 20's.
But now, the chart says "all that is behind BP." The rumors were a nice catalyst this week, but the real reason for higher prices is increased demand for the stock since July!

UAL looks good to me right now, and I’ve initiated a position with a bit of a different strategy here.  I thought taking a minute to explain the technicals and the mechanics of the option position would be helpful.  First off, here’s the big picture point and figure chart:

My chart notes should say it all, but this has all the makings of a strong stock that’s getting stronger.  More importantly, after showing its strength – Mr. Market has generously given us a second chance to buy low.  For the other P&F technicians out there, can you identify the recent buy signal I failed to mark on this chart?

Working in from big picture to smaller detail, here’s fairly heavily marked up daily candlestick chart of UAL.  Click on it for a better view.  What I’m trying to show here is how UAL has a recent history of responding predictably to technical analysis.  There are plenty of stocks out there that can make you money, but if they’re not moving is ways your brand of technical analysis can identify – they’re no good to you.

In particular, this daily chart shows that UAL has a history of falling back very precisely to Fibonacci retracement levels (the 61.8 in particular) prior to resuming the previous trend (in this case UP).  What’s even more noteworthy here is that the 61.8 is closely aligned with the 200 day moving average – another place we would expect buying interest to pick back up.  All of this is within the context of the broader markets continuing to be “on offense”, with rising bullish percents telling us that buyers are still in control.

The way I chose to play this one had more to do with necessity than habit.  The quiet markets around the holidays have left me holding some positions I really like and not much cash to put into new ideas.  In this case I chose to make up for that limitation by using a low cost bullish vertical spread of call options.  This last chart shows how this works.  Because I’m expecting a strong move up over the next month, I used nearby (January 2011) options to minimize my time cost (theta for option geeks greeks).  By purchasing in-the-money calls at $22.5 and selling and equal number of calls at $29, I’ve removed much of the rest of the option premium.  This essentially creates a very low cost position about the same size I would normally hold – using very little of my capital but potentially reaping all the benefits.

As always, you can track this on my stock portfolio page – though Google docs doesn’t make it quite as easy to track option pricing.

Disclosure: I am long UAL.