AAPL with an investment twist

In my previous post regarding Apple, I briefly outlined two simple strategies for trading or investing in the stock. I have traded the options on Apple a few times, profitably, but they are more complicated and not for the faint of heart... at least given the short term trading that I did with them, so I'll skip that particular route.

My current "default" trading is more investment oriented as I am in a few Dividend Re-Investment Plans (DRIPs) so I thought I might spin this a little differently. While there are no dividends with Apple (and I don't blame them as they don't need the dividend spin to push stock any more) the capital appreciation has been substantial on it's own. With dividends the goal is long term dividend growth and re-investment, not so here. With no dividends this means that holding for the long long term may not be the best idea so an exit strategy is necessary. In this case I use a trailing stop order, manually adjusted based on the activity of both the price and  my trading.

Here is the newly annotated chart showing the entry trades with green arrows. Stops are initially set at the short horizontal red lines and moved up as the price moves up and the 200SMA continues trending.

The plan is to scale into the trade in increments. Each time the price nears the 200SMA a new purchase is made. This serves to reduce the risk of getting completely into a trade and having it go South in a hurry. The small entry with a tight stop is built upon gradually. In this case, for use as an example, I figured the valuations based on maximum purchases of $1,000.

Trade entries were made as follows:

8 shares at $120, stop set at $110 (stop loss $80)
5 shares at $200, stop moved to $180 (stop gain $380)
4 shares at $240, stop moved to $220 (stop gain $820)
3 shares at $320, stop moved to $310 (stop gain $2,320)
2 shares at $355, stop moved to $340 (stop gain $2,890)

Note that the stops are only there to catch should the price plummet right after the additional shares were purchased. As soon as the second trade is placed the stop is actually in the money as well, therefore it becomes a profit protection more than a stop loss. 

Adjusted Cost Base (ACB - AKA average price per share) = $208.64
Total invested  = $4,590 (22 shares)
Current price = $402.64
Total value = $8,858.08
Capital gains (on paper) = $4,268.08 or 93%

Here is a two year chart showing the current trend line (green) with the consolidation periods noted with the red lines.

Using the long term trend line as the bottom of each of the triangles, the opportunities for smaller shorter term trades shows up as does the current possible change in trend. Note that the 200SMA has broken the trend line, the consolidation is more pronounced and has it's own lower trend line that coincides with the long term one.In all of the previous trades short selling was not considered as the trend was so obviously up. Now, however, given the change in the pattern I would look at the possibility of short selling as a good short term Counter Trend Position trade assuming that I either sold off the entire long position or had not been trading long term in the first place. You are not allowed to hold long and short trades simultaneously anyway.

Over the next few months I would look for some horizontal price action and perhaps even a shift to a horizontal trading channel to be established. This would have me bring the stop order up to just under the 200SMA or the trend line.

Side note: I toyed with the  idea of "side betting" in just buying a fixed number of additional shares at each purchase point and selling them when the price came within $10 of the upper trend line just to grab a  few extra dollars here and there. Doing this, according to strict rules, produced a little over $600 over the course of the period.

Keeping in mind that this is a small part of any trading plan and not really aimed at producing an income now the overall returns are very good. Of course there could easily be another stock in the portfolio that might not work out so well. Choosing established companies with good records of previous trending can be pretty easy to do. Mix in some dividend producers, short selling and varying the industry mix according to some other interesting plans makes up for the potential for losers.

Jeff.

AAPL, short chart analysis

I've taken a break from all things stock related for a while, I'll be back here and there in the future I expect as I can't help but play about with the charts. Less or no day trading, all longer term activity.

I received, and completed, a survey from Apple regarding the recent purchase of my iPhone.

Another email contained a stock chart for Google indicating a high price and that "they" have been long GOOG since whenever. I checked "their" stats and they are wrong more often than they are right.

The two emails spurred me to look at the Apple stock chart and see what is up. It's one of those stocks that is followed by, "I wish I had bought when....", but I could have bought and didn't for any number of reasons. The prime one was underestimating the product loyalty of the Apple crowd.

Here is the AAPL chart for the last three years with my notations according to a typical trend trading plan that I have used in the past. Of course this one could be played a few ways and I noted an alternate to the buy and hold plan with the green and red arrows, explanation follows.

At the point where the 50 day Simple Moving Average (SMA) crosses above the 200 day SMA, the stock is trending up and can be bought with a few plans in mind. Obviously buying and just holding would work, but seldom is that known so early on.

The alternate is to buy and set a tightish trailing stop (below the 50SMA), then plot the mean for the trend once it establishes placing the stop below the 200SMA which makes the trade profitable even if it stops out. The upper trend line can be plotted equidistant from the mean on the top side of the price at this point. Effectively, this is a mean reversion channel with a non-standard standard deviation of somewhere greater than 1 and creates a very wide trading channel or a safety stop for buy and hold.

Buy and hold:

Buy at $120 in May, 2009
Value now at over $400 or $280 paper profit, 233% ROI

Trend trading using the channel, ideal trades and only long, no shorting and no buy/sell optimization:

Trade 1 = $120 to $200
Trade 3 = $200 to $270
Trade 4 = $240 to $310
Trade 5 = $320 to $400
Trade 7 = $360 to $420
Realized profit = $360, 300% ROI

Other trades that MAY have been taken (circled in green):

Trade 2 = $190 to $270
Trade 6 = $360 to $410
Realized profit = $150, 125% additional ROI

I'll post a separate entry for an option for those who might like buy and hold with an investment twist.

Jeff.

Williams %R and the trend shift

I was checking the validity of the Williams %R (W%R) over the life of a stock trend this morning in order to determine if it was of any value in setting up spread trades. I couldn't help but look at it in the stock trading light though... which makes perfect sense.

I set a 5 day and 20 day W%R and placed them stacked under an ETF, XLE (Energy), but any would produce the same result.

UPTREND

While the trends are very obvious after the fact I used a 100 day sma to determine a firm trend in place. if the price remains above or below this line (with a 2% envelope) then I consider it trending.

Placing trades based on the 20 day while the ETF was in the latest uptrend worked well to capture the overall trend move. Using the 20 day as an initial guide and the 5 day as a trigger for long only trades resulted in entries at the pullbacks to the zone between the 30 and 50 day sma...it could easily be argued in favour of only doing that, using the smas as triggers, but that is not my goal, I am validating the W%R only.

DOWNTREND

Well, it worked as well in the downtrend in favour of shorting the stock and capturing the overall trend and the shorter swing trades as well. Again the 30/50 sma was a decent trigger zone. This could be used to help validate the trend trading using the W%R as just one more check.

NO TREND

This is where any plan needs to be really worked when trading stocks as it is the transition between up and down trending or while the price hovers undecided for a period...even though it may be under or over the 100 day sma. The trendless period is truly when it hovers over and under this line while in a sort of horizontal range. This is the period when a lot of traders loose money as their great plan stopped working for some "strange reason" and they have no contingency to modify there strategy on the fly.

The W%R flails about with no good trigger as the 5 day reaches highs and lows while the 20 day slowly wallows about. Once the trend is re-established the 5 and 20 take off in the same direction. The beginning of the current trend was so momentum driven that the indicators never really gave a good combined entry signal until the trend settled into a groove. Once recognized it would be easy to trade for anyone.

Jeff.

New attempt at oscillation trading

Leave it to me to try something else when what I am doing is working fine. This time I will leave well enough alone and NOT change what I am doing with regards to the option strategy involving using the services that I am currently testing. Also I am still funding for the Optioneer strategy, no change there either.

So, on to my next endeavour.

I don't know what to call this but it involves trend trading, sort of seeing trading with a slight twist.

I am plotting a few indicators and overlays that I have been comfortable with for the last while. On the chart below I left the legends on so just click on it for a larger view.

The solid lines are the typical simple moving averages. The dotted lines are 100 day simple moving average envelopes which I was using a while ago to determine entry and stops for trades. I never really used them but they certainly help visualize stops while the price is in the channel.

The oscillators are both Williams %R which is just an over sold and over bought oscillator similar to Stochastics. I am using the 14 and 5 day for comparing two timeframes without plotting two charts.

The bottom indicator is the Bollinger Band,a volatility indicator. I was going to use a standard deviation but it is identical to this.

Here is a stock that I am currently trading using options. It was a trade based on the service that I just recently cancelled as they were providing one trade per week and I didn't feel that they did much more than watch for chart activity. It is worth noting that I bought long options on September 14th...according to this chart it was the wrong time to go long but I still have some time to go before expiry so I will see where it heads next.

ININ - Interactive Intelligence Inc.

I plotted green and red vertical lines to represent buy and sell indications. As the %R in both the 5 and 14 day period dip to -80 the next day the stock is bought at the opening price, that makes it simple but lower limit orders could be used. Seeing as the stock is trending nicely I could have easily just bought when the price came within a certain range of the 50 SMA, a typical swing trade move. I will plot this over other stocks in varying trends to see how it holds later.

The exit is as important, or even more important, than the entry. Seeing as I am using options I plan on buying options with strikes close to the stock price at the time, estimate the timeframe to determine expiry dates for the price move and not use stops. The total trade cost will not exceed my maximum loss allowance at the time. If I were using stop loss orders instead I would use one of the 100 SMA envelope lines or the 50 sma.

The key is when to take profits and this is where this strategy helps as it takes the subjectivity out of the process.

Initial stops are easy enough, use the SMA that closely corresponds to the Maximum Loss Allowance or an unbroken SMA that forms a trendline and move them with the SMA chosen. The stop will move up slowly. As long as the price does not move too far off the lower trend line (no straight lines here, just the SMAS) there is no need to do anything other than adjust the stop every day or two.

Once the price moves then there are two methods of exit:

1)$3 target (or any price of choice)
a) with stop loss exit
b) with limit order exit
2) %R short term dip

The first is easy enough. Using the entry method I believe that a tighter stop than the profit target can be used. In the ININ example a $1 stop could be used initially and a $3 profit target provides a 3:1 profit to loss ratio, acceptable. Once the price moves in my favour I continue to move the stop loss with the SMA.

Option a) has me move the stop loss up to the $3 target as soon as, or very soon after the stock price passes this price. Exit will be by market order once the price touches the stop. The advantage to this is that the stop can be moved up tight with the price in order to secure greater profits should the price move higher. The disadvantage would be the possibility of the price gapping down through the stop.

Option b) has me placing a limit order and getting the $3 profit, or better if the price is higher at the time of the order placement. The advantage is that once the price is above $3 I am pretty much guaranteed that profit. The disadvantage is if the price continues to move up I miss some additional profits.

Option 2) has the exit order place the day following a dip below -80 on the 5 day %R.

There is a third exit, if the price moves slowly up then the SMA stop keeps moving and either gets hit along the way or just keeps following the trend. The loss slowly reduces along the way and may turn into a small paper profit position.

ININ

Three trades plotted in the last six months profit using:

1)$3 target (or any price of choice)
a) with stop loss exit = $12 (trailing by $1 raised in 50 cent increments)
b) with limit order exit = $9 or slightly better
2) %R short term dip = $9.15

No matter the method there were profits to be had, and that is the important part.

I won't go into the possible option strategies here but suffice it to say that options for this stock could be had for a fraction of the cost of the stock.

One thing that I see mentioned about trading with any type of automatic or mechanical style is that they are prone to curve fitting. I think that the problem with washing any strategy as curve fitted, making the indicators work due to the stock price activity, is that it works historically for a stock and that pattern can be used to identify other stocks that are in similar early stages of the fitted strategy. So why not use the fitted strategy and in turn fit the stock by pattern fitting? I have a successful short list of stocks for my P & F strategy using this idea. Therein lies the key, stock selection to match the strategy employed and not trying to make a strategy that works for a few stocks work for every stock or even ones that I may like to trade.

I think that almost any strategy, if proven for some stocks, can be made work in this way. The second key is in recognizing when the fit is no longer good. This is accomplished by keeping records and tracking performance in order to see when the overall strategy no longer works for a particular stock or group of stocks.

Jeff.

ETF technical, HXD.TO

I was curious how the various ETF's were fairing, this one in particular. I was working on an ETF hedge entry plan that would make trading the opposing ETFs (bear vs bull) in such a way as to make them a risk free and guaranteed profit trade similar to a collar trade in options trading...sort of. I dropped the idea as too complicated but I may take it out and dust it off another time.

Meanwhile...

HXD.TO, Horizons BetaPro S&P/TSX 60 Bear plus.

Here is a five month daily chart, ending in September as the rest is just more volatility.

The blue trend line was the downtrend that I placed back in the early spring, I have not touched this chart in months. The yellow was the mean, roughly. While it was broken back in April I was going to watch the upper line. The SMAs are 10 - red, 30 -blue and 200 -green. The lower trend channel line is not present due to some idiosyncratic StockCharts isssue, but it was below the mean about the same as the upper is above. Had I been playing my CTP strtegy I would have been buying in the mid $15 range and targeting for the breakout.

I loved the convergence of all of the averages and the trend line as this just screamed "buy, buy, buy!" as the price hovered about the 200, then broke and tested it as support twice on the way up.

It's charts like this that make me want to drop day trading and return to the swing style of trading...maybe another time. Even currently the price is bouncing along the 50 sma nicely with five tests as possible buy in points over the last four months.

The best part, for those who like traditional trades, is that this does not need to be shorted to play the other side. Just plug HXU.TO into yur charting software and you now have the inverse of the same ETF, the Bull. Because the price is smaller for it now the averages work slightly different. One could just ratio the prices and buy one when selling the other to stay in a trade and keep the money working constantly while even overlapping the exit and entries a bit for a bit of a hedging factor. Just dump the one that moves the wrong way.

Back to HXD for a moment...Because this is tied inversely to the TSX this is not so much a chart of this fund as the trends would work exactly the same on the index chart that it tracks, inversely. The volume on this means nothing as there is no underlying value so it only indicates that more people are interested in the ETF as it relates to the TSX, not for it's own sake.

I have had trouble with the idea of ETF's for some time due to their derivative nature but they can make an interesting trade none the less. Some of them are priced reasonably for anyone to play around with.

Just another tool in the tool box.

Jeff.