CLU12 - Update for July 27th, 2012

Price analysis for the week of July 27th, 2012:

Market Overview: The very normal seasonal correction (Sell in May and walk away...) has played itself out in rather typical fashion. Those 'weak hands' that bought through the spring rally have probably exited the market by now and the normal seasonal summer bottom has come in. Considering current drought fears too, it should not surprise us to see Natural Gas moving higher through the summer 'air conditioning' season as well.

Trading Strategy (1 month): As has been the case for a few weeks now, I have been looking for a technical 'bounce' back into the mid $90 range (daily 50% levels) and I wouldn't be surprised to see $100 tested over the course of late summer. Since $100 is such a big fat round number it shall act as a magnet should the mid 90's be breached in earnest. Having said that, $91 to $95 area should represents a significant resistance zone and may take a few weeks to penetrate..

Trading Plan for this coming week: Daily momentum indicators are currently in a bear divergence (meaning price is moving to new highs but momentum is not). Because of this, one ought to temper their bullish enthusiasm until resolved. Additionally, price is in a very tight trading range on the weekly charts (between $86.84 and $93.25). Until either of these levels are broken I shall be looking to buy dips into the high 80's and sell rallies into the low 90's.

 

Focus for the week: Continue to work with using the hourly chart for targets/breakouts and the 9 period ema on the 15m chart for entry points. Additionally, my primary goal for this coming week is 'process goals'. In that I want to create an algorithm trading style wherein the same process is repeated exactly the same way for every trade.

Analysis process: Assuming the 60m chart is both trending (as measured by 9/20ema relationship) and has well established targets (typically I use 'harmonic' price patterns like the ab=cd for example) and both volume and momentum are in confirmation. On 15m signal (9/20ema confirmation of trend, price trading at or between 9ema & 20ema) move to Trade Process.

 

Trade Process: Upon completion of analysis process begin trade process. Enter order (on stop) to take a position on 2 (two) contracts AOCO -12 [for total risk of $250 on the trade] / +10 & +40 [for total reward of $490 on the trade]. AOCO means that once the primary open order is filled there will be an automatic exit order entered on 1 (one contract) at plus 10 ticks ($100) and one (1) at plus 40 ticks ($400). Additionally, there will be a stop loss order entered on 2 (two contracts) at minus 6 ticks ($120). Once the first exit order is filled (at plus 10 ticks) the stop/loss on remaining one (1) contract is moved to b/e+1 (or +1 tick from where the original entry. 

 

Comment 1. While I have noticed that quite often the market will come back and re-check the entry price, I am happy with this approach as it 'guarantees' a risk free trade on the remaining 1 contract. And in this business, as soon as one can get themselves in a relatively risk free position, the better. The question is, any trading model must have a positive win/loss ratio where your winners substantially outweigh your losers. Under the original plan (selling 1 at +10 & the second at +40) the win loss ratio is about 2:1. Even using a system that is only 50% accurate, one still will come out ahead in the long run - quite nicely i might add too. I pride myself on being about 70-75% accurate in my targets. So under this 2:1 win/loss ratio I should do quit well. BUT by moving my stop to b/e+1 on the remaining 'low risk' position (after selling 1 at +.10 right away) I wonder if I am limiting my system's performance as I find that (as mentioned above) price does often come back down and re-check the entry level. On what often inevitably becomes yet another correct price prediction, I end up with a gain of $100 rather than the $500 originally planned for. Something I must give serious consideration to going forward.

 

Comment 2. This past week I found I lost focus on two specific days and ended up costing myself more than $1500 in losses. I find that 90% of the time is spent correctly analyzing, waiting for setups and then appropriately following a process on order execution. The other 10% of my time is unexplainable at this point. it is quite remarkable to look back and try to understand myself during these period as trading is impetuous, hasty and illogical. And of course it all leads to dramatic losses. It has been suggested that emotional journal writing (assessing my feelings) throughout the day, at the end of the day and then at the end of the week (both my mental state and market state) might be a good approach going forward. My goal then for the coming week is the appropriately journal my feelings during the trading day to see if there is a pattern to my behavior (especially during these 'blow-up' periods}.

That's all for this post,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
http://www.therationalinvestor.ca
http://crisdaytrading.blogspot.ca/