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Tales of a Technician: The (Painful) September that was

October 9, 2017

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Today’s post continues a long line of retrospectives. But unlike its predecessors, this one is bound to bring pain instead of pleasure. And that, friends, is because September was my first losing month of the year. Was it because I was a dum-dum? Or was it simply because market conditions soured for my systems and a loss was inevitable? Read-on and you’ll find out!

Remember, I divide these missives into four sections: the Theme of the Month, What I did Right, What I Did Wrong, and the Trade of the Month.

Small-Caps Awake

We all know it was bound to happen sometime. Trading ranges are made to be broken, and the consolidation in the Russell 2000 Index was running into its ninth month in a row. Matter of fact, I’ve been worrying about a breakout since April (see Concerns of a Condor Caretaker). From its humble beginnings at $1,349 in mid-August, the RUT ramped 12% virtually uninterrupted. That’s enough firepower to melt even the widest of wide-winged Condors.

Unfortunately, both my October and November Condors fell prey to the rally. The takeaways and lessons learned over the past month are myriad. I chronicled the most important ones already (see here and here). What’s perhaps most impressive about the surge was the timing. September and October are two of the worst months of the year historically. This year’s bucking of the trend illustrates the folly of following seasonality blindly.  There is a ton of variation to seasonal patterns, and you have to lend the most weight to what is actually happening in the marketplace.

Two sectors aided and abetted the Russell’s relentless rise – energy and financials. I’ve been waiting for months to see energy (XLE/XOP) finally bottom, and it seems the wait is over. Until XLE breaks back below the 50-day moving average, consider any and all dips in energy a buy.

What I Did Right

After experiencing your first losing month in ages, it’s easy to question whether you did anything right, but remember losing money doesn’t necessarily mean you did something wrong. You can be on your best behavior and follow your plan religiously and still lose. The key is to differentiate between losing money because you’re a dum-dum and losing it simply because you were out of the Gods’ favor.

By-and-large this month’s losses came because of the latter. My trading systems are not designed to flourish during a rip your face off rally like that experienced by the RUT. So the real question is whether or not I succeeded in minimizing the damage. Was the loss contained?

Giving back a month or two’s gain is okay in my opinion. Giving back more than that turns a bad dream into a friggin’ nightmare. And though I lost more than I would have liked, it could have been much worse.

So what did I do right?

First, I didn’t lose more than expected on my Condors. The typical loss on these is $3 to $4 per spread. For October I ended up losing around $3 per spread. And for November that loss was pared down to about $2 due to some aggressive hedging. Don’t get me wrong, it still sucks. But the decision to ramp up the hedging on the November trade was probably my highlight of the month. If I can limit future losing months in the Condors for Cash Flow system to around $2 per spread, I will be a very happy camper.

What I Did Wrong

Anytime I increase the number of contracts in a particular trade or system, I’m always a little nervous that I will immediately be dealt a loser. Say you’ve been trading five contracts a month in the RUT Condor, then you decide to increase the size to seven contracts a month. Guess what will probably happen that first month you deploy seven? You’ll lose! Murphy said so. That’s what happened to me with my Oct and Nov Condors. I had recently increased the amount of capital allocated to that system and was immediately bitten. It’s worth noting my size wasn’t too much. It was simply time based on the account size growing to increase the number of contracts.

But here’s the key – I have to stay at the higher contract amount. It would be dumb to go back to the smaller amount because my gains in future months won’t be as quick to recover the losses I just experienced.

This isn’t something that I did wrong, but it certainly made the timing of the market rally all the more annoying.

Trade of the Month

NVIDIA Corp is a favorite among the momentum crowd. And for a good reason. Like a First Order Tie Fighter, it knows how to MOOOVE!

On 8/31 NVDA starting moving out of a consolidation pattern and I purchased an Oct $170/$175 bull call spread for $2.03. After sitting through a mild pullback to the 50-day moving average, follow through finally arrived delivering a rousing six-day rally. On 9/18 at the height of the upswing, I exited at $4.00 scoring a 97% return on my money.

Check out the entire 2017 retrospective series:

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2 Replies to “Tales of a Technician: The (Painful) September that was”

  1. Avatar HERBERTALLEN says:

    I love Team Tackle insights on your own personal trades. Your insights always help to save us from our silly selves. Reminding us, “It’s not whether you win or lose, It’s how you play the game!” Managed risk is the key to success!

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