Market Commentary 8-4-12

It felt good to be back in the plus column yesterday with my Walmart trade.  This market has been very volatile over the past few weeks and timing is everything.  It is so important to remember the basics when trading so you don’t get too emotionally involved.  The market will only go in three directions: up, down or sideways.  Granted the best and most conventional ways to make money are when the market is going up or down, so let’s take out sideways.  This means that your job is to make your best judgment (not guess) as to what direction your trade is going to go and timing your entry with enough space to make a profit.  Now what do you need to know to do that? You need to know how far you think it will go in either direction and you need to know how much money you have to invest in order to pay your commissions and see a profit.  You also need to know the technical setup, the fundamentals of the company (valuation – is it cheap or expensive), overall market conditions, and the news surrounding that company and its sector.  These are all key in helping you determine your entry and exit points.

For me on options trades, it is a little more complex because options move differently than stocks because of the Greeks.  I don’t know what the exact price the option is going to be because of this.  So I always try to choose options that move closer to the stock and that means options that have a Delta between 30-70.  This also means that I have to buy at least 3 contracts to be able to make money on small moves.  I like to buy between 5 and 10 contracts so the moves will happen quicker but that also means more risk.  

The current market was moving sideways for a while without enough of a move to make any money.  However that all changed within the last week and the market rallied on Monday (starting from the Friday before) and then tanked on Tuesday and Wednesday.  Then Thursday and Friday saw a big rally again.  These moves were all directed by the news .  However if you looked at the technical setups and many stocks they followed they were true to their form.  

Take Walmart for instance.  I saw it make a pullback on Thursday and it looked like a textbook bull flag setup.  The trend was up and it had just broke through a resistance level only to come back down to a level of support.  I waited for the bullish candlesticks and for it to break above the halfway point of its pullback.  Then I got in the trade with enough money invested to make a profit if it went to its original fall off point.  It took a day to develop but this morning after good news from the jobs report the stock moved up to my price target and I made my profit.  

News plays a big factor in the movement of stocks and it is best to stick to the other indicators (technical and fundamental analysis) because no one has a crystal ball and we don’t know what the news is going to be.