Tuesday, June 29, 2010

NOT IMPRESSIVE RALLY AT ALL -- My Four Tier Shorting Strategy

I think is is a little bearish, how about you? But I think it makes sense.


Sent to you by Dominic via Google Reader:


via T3Live Blog by Brandon Rowley on 6/28/10

By: Scott Redler  

This Head and Shoulders Pattern is almost complete. Question is how do you make money? What I recommend is a four tier approach if you have the pain tolerance, this is what I would do.

I shorted Tier one today by buying the July 105 and July 102 puts and the August 105 and August 102 puts-

Example- If you want to risk $100,000:

This is the tier one entry in the 1070-1075 area.
You buy July 105 and July 102 puts and August 105-102 puts tier one $25,000 (this gives you two months)

If the market does bounce back to 1090-1100 into the Job's Report or Quarter's end you buy Tier #2 Puts–
The July 105, 102, and August 105, 102 puts ($25,000).

Above is your "anticipation of the break" that is sometime risky. You're not waiting for Market Confirmation just putting money into the strategy.

If the market does not get back to the 1090-1100 area, then you add your second tier ($25,000) at the 1065 area.

If we do reach 1090 and you are able to add your second tier, then you will add your Third tier ($25,000) below 1065.

Last Tier would be when Neckline breaks and the day we close below 1040 to complete your investment into a Core Short!

This last tier will either be a single or double based on if the market was able to bounce to 1090-1100. You will add two tiers ($50,000) the day we close below 1040, if we never make it back to 1090-1100.

This will get you some prices as you sell a bounce, and then when the Pattern confirms and position into the momentum Down Move.

If you want to invest $20,000 in these puts you do same strategies but in $5,000 increments

If you have a lot of Buying power you can do the same strategy shorting the actual SPY.

Use this approach with the method you feel most confident with..

I'm using the July and August puts to get some more time. If we get this break in the market, it should happen during this time period.

IF we don't break the Neckline, you will only have half involved that you anticipated with the strategy, but never got fully involved because the market did not confirm the thesis.

I started with Tier one today in my swing accounts. I will also trade intraday based on the price action. By having this strategy the edge will be off, if this break down happens in a way that's not conducive for cash flow trading.

Banks almost gave back more than half of Friday's move. That shouldn't have happened. Also technical damage is adding up across the board.

I Give this Strategy 70% chance of working.


Things you can do from here:



  1. To me it feels like 1040 on the S&P breaks and so does 10,000 on the Dow. For me the question is where to cover shorts. I see room down to 100 but others I follow are looking for a move much lower than that.

  2. So as expected I was stopped out of my TLT position for about a $100 loss.

  3. Looking at my risk profile, I would actually exit all my positions at SPY 100 as this is where I have set up to take max profitability.

  4. So the thing I have noticed about being short. When you are right and the market falls, it will usually happen much faster than you think. I didn't think that 1040 would be broken today, but to my surprise it was. The faster it happens the happier I am. With that said the market is week and today has just added more fuel to the short fire.

  5. This is true, this is the reason I used July SPY puts instead of August. One gave me more time to be right, but also less profit as there would still be lots of time premium left on the table. I was on the fence about it at the time but when I looked at the P/L lines I realized that a fast move left me a bit exposed on the August contracts. Can it really be this easy to spot a head and shoulders a month ahead of time and then capitalize on it? The whole world saw this coming, might be part self-fulfilling prophecy, who knows.