The last post candlestick charts as a poker hand goes into minor detail about the 3 black crows chart pattern. It can be summed up by this image

Some more details about the pattern:
If price opens within the body of the previous candle (or at least ties
with the prior close), it’s a valid three black crows pattern. 3 candlesticks make up the pattern, price trend prior to candle should be upward, the pattern itself should move downward each closing at or near their lows, also closing below the previous candles low.

Measure rule. Use the measure rule to help predict how far price will
rise or fall. Compute the height of the candle pattern and multiply it by
the appropriate percentage shown in the table*; then apply it to the breakout
price.**

*In a bull market, an upwards breakout of this pattern leads to 33% meeting target.

**Due to the low number hitting target and possibility that those that do greatly exceeds it, I prefer having a fixed number of days to hold this instead, such as 5 day hold (5.3% average gain) or 10 day hold (6.95% average gain from breakout), losses though probably should be managed with a stop order below the lowest low of the pattern before it breaks out.

How to find 3 black crows without going through thousands of charts:

Some stock screeners allow you to find chart patterns. In this case, the three black crows chart pattern can be screened for.
Open up “prophet” in think or swim’s platform, In the menu bar go to patterns, Find candlestick patterns…
Then click on patterns and find “Three Black Crows” and make sure it is the only one selected.

Then you can go through the ones selected and double click and you will see this.
The box highlights the pattern. You have to analyze whether it is confirmed bearish breakout, confirmed bullish breakout, or unconfirmed. If it’s confirmed bearish, you can either trade the bear pattern, (going short) or just ignore. If you trade the bear pattern you have to know your odds and “expected value” as well. If it’s bullish you can buy it if it hasn’t gotten too far away from breakout line or just leave it. Ideally you look for an unconfirmed breakout so you can act and set a stop buy just above the breakout line.

If the pattern has just occurred and is unconfirmed, you may want to set a stop buy order a few cents above the highest high so that you buy it immediately after a intraday move above the breakout price. This will prevent you from missing out on a big move that happens too quickly for you to react although it’s still possible you miss out on an overnight gap upwards. But overnight gap confirmations actually work best. This pattern is frustrating to set the buy order and have it not execute 78% of the time, but just like a poker player playing suited connectors trying to crack someone who has aces, it probably is still entering the pot to “see a flop” Fortunately, you aren’t forced to pay to place an order that does not execute like poker where you have to call to see a flop, but you do probably want to temporarily have the cash on the side available for this trade so it doesn’t risk putting you on margin to execute it so there is a minor “opportunity cost” to “see the flop”.

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I believe combining two subjects and relating one to another engages the brain in a way that is more condusive to learning. The more associations we make with a particular topic, the more we can draw upon metaphors and general understandings.

As both a poker player and investor, it’s important to know your odds. Unfortunately with stocks, there are a lot more than 52 cards in the deck so to speak and sometimes your odds changes drastically even given the same hand. So where as in poker you can estimate the probability that your hand will win with clarity in the market at times you are playing a bit more “in the dark” (without knowing the true value of your hand/pattern). Like Stock trading, Poker playing is a game of odds over the long run, wit and bold decisive action at the right times. However odds can be estimated using enough of research from past results to at least allow one to determine if it seems worth playing.

The first “hand” I will talk about is the equivalent to suited 1 gapers. Not particularly strong initially, but has potential and worth playing if things continue in it’s favor. We will use the hand 35 of spades in this example. This hand in the market is the “Three Black Crows” candlestick pattern. In theory the pattern is bearish and more often than not it in fact is a pattern that occurs often before a decline. However, once the chart has broken to the upside and confirmed an upward breakout, this pattern suddenly becomes a winning hand. So a hand with bad odds initially that improves and that provides a good enough payout if you hit, is the perfect metaphor.

The chance of stocks breaking to the upside is low at 22%. These are your “preflop odds”. The “flop” (odds of hitting target) improves your odds to 33% say a 24T. You do not have a hand but you have a draw and your odds of winning improve to 33%. After a breakout is confirmed with a move above the breakout line and the “expected value” (Average expected net result) over a
1 day period:1.89% gain
3 day period:3.73% gain
5 day period:5.31% gain
10 day period:6.95% gain

If you hit your draw, you get paid off and this compensates for the low probability of winning. In the market, you have a good expected return even though it often falls short of the target. Sometimes you will drastically exceed the target but overall it is a very profitable hand.

How to play?  You can play the up breakouts in a bull market for the odds mentioned above. Wait until the right “flop” hits (It breaks to the upside) before getting money in.

The hand completely changes if you are playing it to the downside.

 

In the future if people like this concept of relating poker hands to the market, I will make some kind of deck of cards with all candlestick patterns and also price patterns. Price Patterns can either be evaluated as the initial swing or instead as a longer hold. Because the hold is often much longer, the percentage return is often better but that doesn’t always mean it’s a superior play. It’s a matter of style and preference.

At some point I would like to make a handful of decks of cards similar to flash cards in that the reverse side of the cards would be the flop and contain information on the odds and the front would just be the hand and the picture of the chart pattern or candlestick pattern and color coat them to represent the market conditions. In this case this would be part of the “up breakout, bull market” deck.There would be 4 candlestick decks since the odds for each situation are unique.

They would be:

Bull market, up breakout,

Bull market, down breakout

Bear market, up breakout

Bear market down breakout

Then there would be 4 decks for same conditions for “price patterns”.

*data used from book Encyclopedia of Candlestick Charts by Thomas Bulkowski

 

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GLD has been caught in a tight range for nearly a year. I suspect it could make an explosive move higher or lower soon. For now I will play a strangle until the direction is determined.
I want to have until at least September to sell. The “conservative” option play would be to go out 3 months after you plan to sell it so you aren’t at great risk of losing all of your position as the time decay hits you the hardest the closest to expiration.

Once the breakout has made itself clear, I may add to the side it’s moving in. I will add calls if it breaks out to the upside, puts if it breaks to the downside.

8/8 update: BOT September strangle. Candlestick showing double inside bar on weekly chart and triangle/falling wedge for price pattern. Neither are confirmed in either direction yet. That should bring clarity of direction very shortly. I suspect by 8/10 or 8/17 (week end for confirmation on weekly chart) we will get clarity.

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Nat gas is now very overbought, but since it was down for years it is more than possible that it remains overbought for some time just like the market did following the March 2009 low. The indicators on a daily basis don’t really consider what the action has been for years and years before that.Perhaps taking some of profits out now would be a good idea. However, we saw this coming and lets refresh what was said after the bottom call.
http://ibankcoin.com/hattery/2012/04/16/hat-buy-ung-options/

“Volume really feels like capitulation and bottom looks to be in for now. The reason I am so excited about this bottom is because super oversold moves tend to rally longer after bottom. So don’t worry about if it hits overbought, I would hold this THROUGH overbought.”
We are overbought.It’s easy to claim a win after you made a great call. But how many people who called the top in 1929 lived to wait it out until 1932-1933 when it really bottomed? How many people that called the bottom in 2009 or top in 2007 lived to take advantage of the 09 bottom and the entire rally after? Taking some profit off the table is not a sin, but exiting a position that is going to multiply it’s investment 10 fold when you don’t even have a double is.

Patience is certainly a virtue that I am not naturally blessed with and need to remind myself vigorously to just chill out sometimes. I gotta get my contrarian mindset right.

see Jessie Livermore’s book, Reminiscences of a Stock Operator
In it, he describes an old man named Mr. Partridge who would always walk around telling people “it’s a bull market you know”.

“Why, this is a bull market!” The old fellow said it as though he had given a long and
detailed explanation.
“That’s all right,” said Elmer, looking angry because of his disappointment. “I know this
is a bull market as well as you do. But you’d better slip them that stock of yours and buy
it back on the reaction. You might as well reduce the cost to yourself.”
“My dear boy,” said old Partridge, in great distress “my dear boy, if I sold that stock now
I’d lose my position; and then where would I be?”

Jessie Livermoore: “And right here let me say one thing: After spending many years in Wall Street and after
making and losing millions of dollars I want to tell you this: It never was my thinking
that made the big money for me. It always was my sitting. Got that? My sitting tight!”
How many people made 100% since the 2009 bottom?

Well this isn’t an endorsement to hold forever, in fact the market is shaping up to get pretty volatile over the next coming months into the dangerzone of late summer into the fall with October historically being the worst of all months and meanwhile with euro crisis still shaping up to be full of plenty of grenades and landmines…. But it’s one of conviction. Know what you said when you bought it and what your plan was and stick to it. This mindset is DRASTICALLY opposite than what it is for a swing trader which is one of being completely flexible. And if you are going to be quick to do anything, make sure it’s quick when cutting losses, not taking profits. Your profits not only have to be enough to give you a comfortable rate of return, but also to make up for any past and future losses you may experience. While you can’t hit one out of the park every time and may have to know when to take what the market gives, most definitely your gains should be larger in magnitude than your losses, unless they are the same size and you are taking high percentage gains. There is a style for everyone, but one law that you cannot beat is the law of mathematics….

If you have a strategy of using your entire bankroll and taking profits at 30% gains and cutting losses at 10%, winning 1 time after 3 losses actually isn’t often enough. Because 1 10% loss 3 times will put you at 72.9% of your total and a 30% gain will not make back 3 consecutive 10% losses. a 30% gain will put you back to 94.77% of what you started with. If you want to beat the odds, you have to have a much greater edge and/or superior money management so that you risk close to the same total dollar amount each time without risking an increasingly larger percentage of your total.

One great way to do that is to ride out your gains to give yourself a much greater upside than downside. If you are willing to ride out your UNG bet and take a 100% loss, then you really need to ride out your gains to make over double your money and that is if you assess that you have a 50% chance of losing it all and 50% chance of a double. Of course, if you are using options and leverage your probability of a 100% loss is greater, but the amount of gain needed to produce a double is also greatly reduced.

However, with that being said, reducing the position size to what it once was is still not a terrible idea. If you had say a 10% position in natural gas through UNG and the price has increased 40% to 14%, reducing it back closer to the 10% position you started with is okay. However, don’t forget what you set out to do, and that is find a BIG winner and continue to hold it until it greatly appreciates in price, so unless you need to raise cash from somewhere, and can’t find a better area, you probably really don’t want to reduce your position all that much. But if you bought options your gains are larger and selling a bit more if it works with your rules or risk management system is probably just fine. I still think we go higher, but a pause at some point is not out of the question. In fact, it’s still possible we have not bottomed yet, I doubt it, but it’s still possible.

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Funny video of flash crash recorded live by the guy who freaks out. I’m sure this has been played before but is entertaining

WE”RE IN BEAR MARKET

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With TLT overbought at new highs, could it be time to cut and run, or even consider TBT? I would not own TLT. However, I’m not ready to bet against it just yet. The dollar will benefit from the debt crisis everywhere else and be the last to go as long as it is the reserve currency. The money fleaing the Euro, and then the Yen has to end up somewhere. I don’t know if people will want to lock their money up for 30 years over a temporary crisis or if they do they may regret it.
Nevertheless, I think TLT/TBT is something that I will stay away from in favor of UUP as unlike TLT it has failed to break it’s 2010 highs. Although I am not in favor of either at the moment. The strong selloff in May strikes me as a short term buying opportunity into June even though the chart looks like crap I will venture out a bit into risk and buy FCX,aapl,goog,cmg,MLST,TJX,V,ALXN. Stops below 2 or 3 day low.

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I am saving up my IBC dollars to purchase a FAZmobile from which I will perform drivebys. I am building up my arsenal and am ready to launch an attack on he who steps on my turf. I carefully await to make a big leveraged deal from which to buyout other members and shit.

In other news, my large cash position in real life is being deployed now into various “risk” names and my UNG play is working. Got a long term natural gas bet for sure.

I’m ready to earn some dollars and build an arsenal of “game items” or whatever is necessary to survive in the new IBC jungle introduced by Jeremy the IT guy.

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Whether you are a day trader or a long term investor, I still suggest you respect trends. I suggest you do it on multiple time frames…
How might you respect the trend? The first step is setting parameters. Trends are never 100% reliable, but they do offer a considerable edge. The thing about being 100% invested is that if stocks go lower you miss out on opportunity as a value investor. Whether it’s the stock you bought or if another great company goes on firesale and is available for a great offer. Not to mention the possibility you are entirely wrong and the trend is false and perhaps even the stock is a value trap…

As a day trader, you have a higher probability of failure and need more cash anyways. A stock you are short ripping 10% higher in a few minutes or a stock you are long shredding 10% lower in a few minutes is still possible. Trading being halted due to fraud, the types of pitfalls are still possible as a day trader. Cash will prevent a “black swan” event from blowing you up or at least reduces the likelihood. In addition you live to fight another day and if you lose fully invested and lose big, there is a HUGE gain that needs to be made up forif you lose. It’s exponentially harder to make up for a loss the greater it is. A 1% loss needs only a 1.01% gain to get back to even a 90% loss needs a 900% gain. Having more cash prevents you from getting to this impossible condition. So set parameters. It’s better to be in cash and 2 relatively independent bets (or safer yet, pair trades) and be leveraged than it is to be 100% long. I say a 25% cash minimum or more makes sense.

You also need a minimum exposure to stocks. Now those willing to go short instead will have a “maximum short exposure” (and minimum cash while short).

In general if you expect the move to the downside to be roughly equal to that of a move to an upside, you probably don’t want to be any more than 75% long or any less than 25% long. That would imply you can be accurate over the long term with this method 75% of the time (unless the move when correct makes a significantly larger move than when incorrect).You may want to throw in some bets to reduce dependency on the direction of the market…
Some ideas:
Earning plays (betting on earnings as well as post earning drifts)
pair trades: (i.e.long copper short copper miners or vise versa based on a thesis)
Arbitrage: This could include a lot of different things)
Value stocks on a very long term basis (over that time frame could outperform and protect you against a brief downward move eventually but also reduce your exposure short)
Shorting soon to be doomed stocks that aren’t priced that way
Day trading stocks,Swing trading and betting for and against stocks on different time frames.
selling puts and holding cash rather than using that cash to buy stocks, or selling calls and holding cash rather than using that cash to short stocks
calender spreads and other option strategies to profit from the function of exponential decay in options.
The lower your correlation between individual stocks and market direction, the better off you will be. This can be explained mathematically when considering what one of the simulations using the kelly criterion showed. It showed that using half the kelly results in 3/4ths the turn with half the volatility. This means lower draw downs and better return on your risk, and you can position yourself more properly for leverage. Think about it this way. a portfolio that returns 6% with a 2% drawdown is better than one that returns 8% with 4% drawdown. You could leverage the 6% return 2:1 and pick up 12% return with the same drawdown (slightly more because of leverage costs).

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Here is what I am looking at

Very large volume, over the last few weeks the entire amount of outstanding shares of UNG essentially has been traded with a HUGE spike on a day that gives me a sense of capitulation. Then the UNG made a big spike on increasing and well above average volume. Stop set at 52 week low of 14.25. The upside is so tremendous that it is worth attempting here. This is different than a contrarian position in which I continue to add lower, this is my Speculative bottom cal in which I make a leveraged bet using some options. I buy enough time to be able to cut the trade with still plenty of value on the contract and rie the contract out for a very significant gain if we do not stop out.

All the signs of a tradable oversold signal are there.  momentum turning positive and MACD turning up, the Slow Stoch and RSI coming off of oversold.

Weekly chart looks good as well and could shift out of oversold as well.

Volume really feels like capitulation and bottom looks to be in for now. The reason I am so excited about this bottom is because super oversold moves tend to rally longer after bottom. So don’t worry about if it hits overbought, I would hold this THROUGH overbought.

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On S&P

Monthly.

The monthly RSI has came down from overbought signalling a bearish signal.  Monthly slow stochastic is overbought but has yet to cross.

MACD is bullish

Weekly

The weekly parabolic SAR is bearish. Weekly slow stoch is bearish coming down from Overbought after a cross and close to a slow stochastic bearish trigger. MACD is bearish too.

Daily

Daily has been bullish since 4/11. Parabolic SAR and MACD are close to turning bullish but not there yet.

Conclusions, sell into strength for now and raise a bit of cash. Consider adding a hedge.

 

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