The Big Picture The big picture refers to the whole, going beyond individual trades to see the larger mosaic of the market, and how former interacts with of the latter. Even an objective, rule-based trend following trading system is subject to and affected by the big picture. This chart is the Intermediate Term chart of the Dow that was the basis for trading SPY in our prior trading methodology. It's a perfect illustration of the interaction and how it has affected the individual trading signals since mid-February: Six months of a sideways Dow with short, truncated trends The good news is that these sideways markets always turn into horizontal markets, and that is the time and place where we want to be ready and waiting with a trend following trading system. The past two years, at least leading up into the late January top, was mostly vertical and to the upside, It provided the necessary backdrop to develop a new way to exploiting intermediate term trends; the system that we are now trading. Global equites are already engulfed in bear markets. We can see evidence of that with EEM, an emerging markets ETF, which instead of going sideways from the initial February dip has entered into a downward trend. On May 16th its model generated one for the first "real time" signals for the new system trades: The difference between the Dow chart and that of EEM is the difference between making money in a sideways trend and making money in a more pronounced vertical trend. In that trade, EEM puts were up as high as 242%, and that was based on entering the trend just past its midway point. The historical test showed two other Sells in March and April. Even during the big picture sideways trend there are opportunities. Take a look at AAPL and MSFT below, two of the high flyers from last week, both of which generated Buy Signals in early July arising out of their individual upward trends against the horizontal trend of the broad market. MSFT and AAPL's respective trends were clearly more vertical than horizontal. These are the types of trades that will flourish and we can look forward to when the big picture market makes up its mind which way it wants to go next. I continue to think it will be down, but we take these trades as we find them, no matter what I think. OPEN TRADES The shaded column on the far right represents the highest return each option has seen to date. Note how as a group the earlier trades (bottom third of the table) show the higher returns, suggesting it takes time for trades to unfold. These returns as a whole are less than we expected based upon historical simulation, but they are high enough as we wait for a more vertical trend in the broad market to "lift all boats." STOPS One quick word about stops. I don't like them and always thought if a system needs stops to make it work, it has bigger problems than just stops. Nonetheless, in a sideways trend stops can provide a buffer while waiting for the bigger trend to turn. Since I have had numerous inquiries about stops and whether I personally like them or not, here is my best stop advice: Keep your stops between 60% and 75%. That will serve to provide some capital preservation and at the same time keeping you in the trade long enough for it to unfold. When the trend changes, you will know it because those stops will rarely, if ever, get hit. New Trades For Monday There are no new trades for Monday morning. If there are any trades pending for Tuesday I will send out an Interim Alert about an hour before Monday's market close.
