New Trades for Monday Repeat Sell Signals: BABA and FB. Stay (or add) with your current puts on both. Big Picture Update The major averages, INDU, SPX, Nasdaq and NYSE continue to make new short-term highs and then back off. It has been the same pattern over and over again for the past six months. One of these "back-off" weeks will be the beginning of something much more serious on the downside. Maybe we're already there as the chart below shows prices in a rising wedge pattern suggesting an imminent bearish reversal. Next week will tell. S&P 500 - Tired, Extended & Close To The End The Stocks We Trade One of the great aspects of our former trading system was the limited number of stocks and indexes we were following. Even taking all of the intermediate term and short term trades, there were only about 20-25 stocks from which to trade. There are more than twice that in the current iteration of the trading system, resulting in a lot of choice, but now too much choice. I want this system to be just as easy to trade as it is profitable...and vice-versa. This weekend I've pared back the list of stocks from which we will be taking signals. There will still be plenty of opportunistic trades and it will make trade management easier. Speaking of which... Trade Management Some observations from a heavy duty review of all historical and then real time trades and the most obvious ways to trade them: 1. The higher the profit target, the better overall returns. This suggests making your first target no lower than 60%, our minimum stop, but preferablly higher, i.e., 75-100%. We have over 500 historical and real time trades backing this up, so go for the three-point shots if you can (that's triple digits for non-basketball fans). Best practice: Take some profits off the table on the way up and keep at least small position open for even higher gains. 2. Just with profit taking targets, the higher the stop-loss, the better overall returns. As a guide, I suggest stop-losses no lower than 60% and no higher than 80%. The system actually does better without stops, but that requires a herculean psychological effort. If you are up to it, go for it, otherwise stay between 60-80%. 3. Our newest finding is that overall the trades do better with shorter-term expirations. The options are cheaper and the trades shorter, freeing up capital for the next round of trades. Going forward we will be choosing closer expirations than we have been in the past, trying to stay in a 3-6 week window. As always, traders can choose their own options so long as they are in the direction of the newly generated signals. Because of the staggered profit-taking benefits, I would rather buy 2 less expensive out-of-the money options, than one more expensive at-the-money option. It allows for much more flexibility in trade management. OPEN TRADE SIGNALS
