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Head Games!


Stay focused or stay away.

"So I'm rappelling down Mount Vesuvius when suddenly I slip, and I start to fall. Just falling. Ahh ahh! I'll never forget the terror. When suddenly I realize "Holy cow, Hansel, haven't you been starving for six months and couldn't some of this be in your head? And you know what? It was! I've never even been to Mount Vesuvius!" - Hansel, Zoolander

I settled in this morning as I usually do, scanning the globe for pertinent data points; incremental information to help shape the ever-changing dynamic that is the world's wildest reality show.

As I studied my eight screens, I had a sudden realization-What if I'm holding on too tight? Maybe I'm not seeing the forest through the trees? Perhaps I'm so fatigued after a full year at DEFCON Five that my edge has dulled precisely when it's needed most-smack dab in the eye of the hurricane?

It's a valid question traders must ask themselves often, the proverbial "know thyself."

Trading is cyclical; there are times you see the seams on the baseball as it's spinning towards home plate and others when you couldn't spot a bright yellow softball until it pops you in the puss.

One of the most underrated skill-sets in our business is knowing when to open your stance to take a healthy cut and realizing when it's best to leave the bat on your shoulder to watch a few pitches-even if they're right down the pipe. In Minyan parlance, that's akin to the ability not to trade is often as important as trading ability.

Why do I bring this up? A few reasons, actually.

First, the next few weeks will be thinner than Kate Moss on Atkins, which could potentially lead to an uptick in volatility. Haphazard swings are a recipe for death by 1000 paper cuts so allow for this by properly sizing your risk if you choose to take risk.

Second, it speaks to the importance of syncing your time horizon and risk profile. If you're an active trader, don't get caught up in the big picture breeze. If you've got a broader lens, don't let the noise of the nuances rattle you. Inherent in both approaches, of course, is the notion of discipline over conviction.

Finally, and perhaps most important, is the concept of financial staying power. That means something unique to each of us and there are no blanket answers, sound bites or quick hits that cover this topic. I'll simply say this-don't risk more than you can afford to lose and remember that risk management over reward chasing will serve us in good stead.

Speaking of Which

After slapping on my full bear costume-100% for a pure trade-at NASDAQ 2007 (NDX 1630), I peeled out of that position, in layers, removing my final appendages into Monday's nosty close and in front of Turnaround Tuesday. Into that strength, I nibbled anew on some downside tech exposure, albeit nowhere near what it was into the pivot point of the best set-up of the year.

As I walked through my stream of consciousness in real-time on yesterday's Buzz, I'll keep this light and tight out of respect for your time. Suffice to say that after trading partial positions into yesterday's lower opening and communicating a cut-bait level of NDX 1585, I've still got remnant puts on my skeletal sheets.

I won't post-rationalize risk but I will communicate the thought process, as you've come to expect. First, my puts are at-the-money, which is always a back-of-the-envelope 50 delta. So, while they're moving, they're doing so like Paulie (and Paulie doesn't have to move fast for anyone).

(And if you don't understand what I just said, click here to read John Succo's excellent derivative tutorial)

Second, because the position was sized correctly, I'm able to trade with loose grips on the handlebars rather than stare at every tick. I know the mechanics of the swing are more important than the results of that at-bat-and through that lens, size doesn't matter-but it was part of the process so I'll pass it along.

Third, as discussed earlier, the combination of expiration and skeletal summer ranks could create swings that would make Mike & Trent blush. With big picture resistance looming large, I'm willing to give my smallish position some time and price to show itself. While bottoms are typically points, tops are usually processes as the mainstream mindset migrates through the denial-migration-panic continuum.

The difference between risk rationalization and an observant audible is a fine line-the bottom line-so take this with a grain of salt. The market is a fluid, dynamic beast and the onus is on each of us to adapt without conforming while identifying an approach that fits our independent risk appetite and time horizon.

I will again communicate my intention to flatten my book into next weekend before I sneak away for a much needed respite. Until such time, I'll look to squirrel some acorns away so I have some treats to nosh on while I'm away.

Random Thoughts

  • The Baltic Dry Index broke to a new reaction low overnight, for those who monitor such things.

    Click to enlarge

  • As Television's JeffMacke® touched on in his Macke Unmuzzled video, this tape is the definition of a sleeper hold and boredom isn't an actionable catalyst.

  • Speaking of television personalities, I'm scooting East later today in front of our Roar for a Cure and will scribe vibes from Dougie's Den. Old school Minyans will remember our Nick & Toni series last summer here, here and here!

  • I heard multiple people opine yesterday that China was gonna pop overnight, which may or may not have something to do with the Hump Day bid. While I have no insight into ancient Chinese secrets, I'm curious how much of that 4% rally in Shanghai was anticipatory.

  • In terms of "the best set-up of the year," keep in mind that while it should continue to work, the easy trade was the first fade (right into the kisser of a confluence of resistance at a precise 50% retracement).

  • I've walked through every single step of my thought process on the 'Ville since October 2002 and will continue to do so. That doesn't make it right or wrong or better or worse than anyone else's vibes and views, but it'll always be honest. If nothing else, right?

  • Well, maybe that and funny.

  • And real.

  • And maybe even vulnerable at times, but that's alright. As long as I can look myself squarely in the eyes each morning, I have no regrets. (Thank you Ruby.)

  • I also have no qualms in sharing that I'm jazzed to unplug and hit the hills the week after next. There's no shame in admitting it's hard, there's only shame in pretending it's not.

  • I view Sears Holdings (SHLD) as a proxy for everything from real estate, to housing to the consumer. In that regard, the 13% haircut today is worthy of a mention.

  • What do Goldman Sachs (GS) and Goodfellas have in common?

  • I did, so you know, add some Powershares (QQQQ) puts into Monday's gap fillage at NDX 1611. That inventory will carry a tight stop as I continue to trade around my risk.

  • Red beans in the green sea include Intel (INTC), Wal-Mart (WMT) and Home Depot (HD) (on the back of Sears), and Dow Chemical (DOW) and DuPont (DD) in the Industrial space.

  • Lemme hop so I can get this to you in a (somewhat) timely manner.

  • But not without a little love from Jerry!

  • May peace be with you, Minyans, one and all.


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