How I Made Money and Yesterday's Contributor's Letter

It's said that picking tops and bottoms is the most expensive job there is on Wall Street, it can also be the most lucrative and the most fun too. In all seriousness, those of you who have been around the blog for awhile now know that I've had 3C for a couple of years now, I've known that it is a powerful tool, I just haven't known "exactly" what to do with it. I call it 3C for "compare, compare, compare". It's useful on daily charts, but it's best suited to narrowing things down by comparing intraday charts.

Not to go off in another direction, but I've also been teaching a course about technical analysis for the county school system's "Adult Education" programs. I pretty much stick to the tried and tested rules of TA and Wall Street. Here's a few: "Don't try to buy bottoms or sell tops. Catch the meat in the middle", "If your going to use options, be a seller of options, not a buyer, the juice is in the premium", "Don't jump the gun, wait for confirmation", "Don't try to catch a falling knife", "don't get caught up in the super powers of an indicator", so on and so forth.

Well in fact, it was this very discipline that had kept me from truly understanding how to best utilize my tool and make money with it. Here's what I discovered. 3C doesn't work so great with stocks that are range bound, in major consolidations, etc. Where 3C really shines is in trends, much like MACD. One of the most powerful signals in technical trading is that of a MACD divergence and they occur in trending issues, interestingly, often at major reversals as well-or at least reversals. In effect, I was hesitant to get involved in something that looked like a bottom call or a top call...Why? Because everything I learned about the "discipline" of technical analysis told me to wait for confirmation before I got involved in such a reversal. So I had this great tool that could make me lots of money I just didn't even want to look at the issue too seriously until after its usefulness had past and until after the major gains had passed. Lets face it, the 80% in the middle is nice, but it can take years to get. The 10% at tops and bottoms can occur in a couple of days.

Now options...When I was "coming up" in technical analysis, all of my mentors or those I looked up to kept pounding in my head how easy it was to fall in love with options and make a killing and then loose it all even faster. Furthermore, like a mantra, "sell options, the juice is in the premium". Fast forward to 2007, I convince my wife to let me take some much needed money and throw it into the stock market to trade full-time, the problem was, to get her on-board, the much needed money, left me needing much more to make any kind of a living. Transaction costs were such a huge percentage compared to my profits over the long haul because my account was so small and there were all other kinds of psychological issues as well. Somehow I managed to make it through the 9 or 10 months and not loose my money. I didn't make a whole lot either, I didn't have a whole lot and still don't. I could reasonably get into 5 or 6 stocks, but I may have to wait a week, two weeks or more if I really liked the stock, but mid-January through mid-April this year, nothing trended for more than a day or two, the market simply wasn't moving with the Fed propping it up at every potential calamity where we could have made a few bucks (I know that sounded really bad, but hey, that's trading). With such a small portfolio and only 5 or 6 stocks that may take weeks to move (I'm not a good day trader-I learned the hard way), it's damn hard to make a paycheck every week.

Here comes my savior, Dave (and a few prayers to the big guy as well) who bugged me to sign up for options trading for a year, I finally did and talk about a duck to water! Can you see where this is going? Let me wrap it up for you and you'll be able to piece the rest together. Here's what I discovered:

3C is much like MACD, when there's a clear shift in accumulation or distribution (say like going from pure selling to some early buying) it picks it up every time. When there's a range bound issue and money is in and out every day, it doesn't know what to make of it and here's why, THERE IS NOTHING TO MAKE OF IT! That's why it's a range bound issue. Not every stock is under heavy accumulation/distribution. So I had to rid myself of the guilt of trying to pick bottoms or tops and release myself from the notion that I'm being "undisciplined" and that I'll have my Technical Analytical Association card revoked. I don't care what others think, unless they want to pay my bills.

I also had to rid myself of this notion that I need to "let the market tell me what to do" and wait for confirmation. 3C is telling me what's going on in the market, it's telling me that people smarter than I am with better information, are acting. That segues nice with the "don't get caught up in the magic of an indicator". I don't think 3C is magic, it's actually damn hard to use until you get the hang of it. It's not magic, it's not anything other than "A DIFFERENT WAY OF LOOKING AT THE SAME INFORMATION THAT EVERYONE ELSE HAS" and for whatever reason, it is pretty useful, not perfect. And for those of you who may be using it, just because there's accumulation doesn't mean that a price move is bound to happen. The accumulators could be in it for the very long term. They could change their minds, and Lord knows that more than a few on Wall Street are occasionally wrong. So not every signal is going to produce a "magic" result.

Back to my pre-segue idea. So 3C is telling me what to do, but why am I doing what I'm doing? why do I get paid? As Don Worden, of TeleChart/Worden Brothers (one of the pioneers of volume analysis indicators) points out, "you get paid to take risks, so go ahead and when you have a reasonable justification, JUMP THE GUN", that's paraphrased by the way. Also Don has written some awesome books that look at Technical Analysis with decades of experience and from a totally unique perspective. So, there, don't always wait for confirmation when you are trying to catch a falling knife LOL! Another Technical maxim dislocated.

And Options? "The juice! Think the juice!". With my small account, I found out that the leverage options provided me with, gave me a huge earning potential. Sure, I have to pay the premium. However, with my trusty indicator in tow, I feel that I have an edge over the average option writer. I know something they don't and if I can use their leverage while having a predefined risk amount and they hold the rest of the risk, why wouldn't I pay the premium? I don't even have to carry them until expiration, I can sell them the same day and I've done that and made 200% on my money in a single day! Furthermore, I can deploy my money into more securities, better hedge myself, set up a rotational system in which I'm holding XLF puts and calls and selling them both at different times and making money on both. I no longer have the issue of having to wait weeks for something to make money, I've always got a bun in the oven.

There's a few issues I still have to work out, like a better hedging strategy to deal with the volatility all of these options create in my account and I still practice risk management and carry stops on my positions, even options. However the time decay is a different variable that I still haven't completely solved.

All in all, I've found that since I've been doing things "my way", I've been able to put a pay check in the bank just about every week and furthermore that paycheck averages about 5% of my portfolio value-not too bad if you do the math.

I'm not recommending this to anyone, the fact is those rules that I'm breaking are there for a reason, the vast majority of people are all too happy to break them with no good reason except a lack of discipline, that's not what I'm advocating. What I am advocating is this, get out there and think things through for yourself.

Now, a couple of excerpts from yesterday's Contributor's Letters.

1 p.m. Monday, July 28

"I'm also adding to my XLF Aug $22 calls here around $.46 looking for a move higher this week in financials."

That equates to more than a 60% move in that position today. It's good to be a contributor.

2:44 p.m. Monday, July 28

"I think we are close to a bottom in the market's little pullback. There are a lot of positive divergences showing up, so look for a reversal any time now."

While I'm hesitant to call one day's advance a reversal, it sure has the look, feel and smell of a reversal doesn't it?

Today's dominant price volume relationship for the stocks I track was a very bullish, Close Up, Volume Up-as bullish as it gets. I haven't done much more in the way of analysis so as far as I'm concerned, my position from the weekend videos hasn't changed. Of course oil got rocked pretty hard today, but I remain fairly confident that it'll bounce here within the next day or two.