Flat As a Pancake

Berkshire bought Burlington Northern, the USD went up, and the market was flat as a dead pancake. We hit highs of 9827 and lows of 9663. The November 450Put was available for as low as 2.45, and could have sold to 3.60. There were numerous times in the trading tight whipsaw today that day traders could have watched any put in the November chain and found tight .50 profits to be made, and movements were still over 200 points in a day, despite many tight moves.

I had a number of inquiries today about knowing when to trade the market up, when to trade at "best buy," and when to trade at prior day close. In today's market, outside of our OEX Manual, and because of the extreme market conditions we are finding a number of ways to successfully NOT be let out of the market.

1. Our standard rule is to never buy above prior day close.
2. Our secondary rule is to try to buy at discount from prior day close.
3. We follow futures and watch the mood. When the market shows upside or downside of 70 points up, it is a lagging indicator of the market opening. As one "watches futures" they find that as they "move" you can see the strength in the bias, or the lack of strength.
4. When bias is strong and one wants to trade the bias, and our recommendation, sometimes it is right to pay to market opening "the first prices available" and sell for 30 to 40% profits same day.
5. When bias is weak, or confused, as we have seen some days, it's best to just wait for the discounted and best buy price, and because the bias is less strong.

The market held much more steady today, a sign that put strength and downside may be waning, yet it also did not gain significant volume in index options. The count is now a very low bias. It is a market waiting for a strong upside move, and still not finished, or certain if a downside move should come first.


*When we trade we expect numeric precision, or system, and this can be done, but not literally. The market is a moving instrument filled with the fear and greed emotions of the trader, and will confound historical charts and facts, but never argues with supply and demand, or cause and effect.
This is what drives the market. And time. It is this simple, and no one will accept it.

Most traders want to know HOW Floyd projects the Dow and we've got a video and article on it on the website, but I will confound you most with "my view of numbers is if they read out to me, and I just know," as much as S/R on Pnf charts. I believe this comes from years of simplicity in viewing, and in my limiting of my actions. That "clean desk" video on our home page is me. I do not have much around me when I trade.

The whipsaw that we saw, and the massive sell off, after an exhaustive gap day UP, did nothing be reassure me more that the economy is rebounding, and investors are starting to slow their own frenzy.
We want this. If the market hesitates a bit, it is breathing, and we want calm.
Last Friday who could have predicted a 250 point overall decline?

Numerically, the number 0 is key, and I've suggested in our Blue Chip Option service things that I think could happen in 2010, and WHY things happened at 10,000.
The 0's concept does not work or have meaning with numbers like 9800, 7600, etc. but in the total rounds of 9000, 10,000, etc. and the reasons for 2010 showing something will be on our Blue Chip blogs this week.

Bernanke and the Fed kids, staying at high priced resorts, will likely inform us that they are holding rates steady. The focus will be on the phrase "extended period" to see if Bernanke rightly opens the door to a potential down the road rate increase.

_______________________________
And from trader MR on the question: what does trading mean to me?

What an articulate response:

Last week I promised my comments on what trading means to me. In the simplest of terms - it is continuing education, understanding myself, and a chance to regain my long term losses of 2007-2008. On the dark side, I can relate all to well with the comments from some of my fellow traders about the anger, fear, and other negative experiences that can be common side effects of the trading "lifestyle."

Recently I listened to an audio summary of the book "Sway" by Ori Brafman and Rom Brafman that highlighted a very interesting set of facts on how our brains are wired and discusses several psychological forces that derail rational thinking. It relates directly to how we understand our emotions when trading. Here is an excerpt directly from the summary, with my emphasis added throughout.

In an experiment, the NIH researchers placed participants in a specially modified MRI machine fitted with a computer monitor and a simple joystick. Lying inside the machine, the subjects played a video game reminiscent of the Atari era. At the start of each round of the game, a circle, square or triangle would appear on the screen. Each shape held a unique meaning: A circle meant that if you succeeded in completing a task — zapping a figure as it appeared on the screen — you’d earn a monetary reward. However, when subjects saw a square instead of a circle, they braced themselves for bad news. The object of the game would be the same — zap the figure — except that failing to do so would result in a monetary penalty. If the participants saw a triangle, it meant that no money was on the line; whether they hit the target or not, they would neither lose nor gain any money that round. While the participants were playing the game, they were shown a running tab of their earnings and losses. Meanwhile, the scientists monitored their brain activity and noticed that every time a circle or square appeared — that is, every time there was money to be gained or lost — a certain part of the brain lit up.This region, which remained dormant when the triangle appeared and no money was at stake, is called thenucleus accumbens. Evolutionarily speaking, the nucleus accumbens is one of the most primitive parts of the brain — one traditionally associated with our “wild side.” Scientists call this region the pleasure center because it’s associated with the high that results from drugs and gambling. At its most extreme, the pleasure center drives addiction. The MRI study surprised the researchers because it revealed that the pleasure center is also where we react to financial compensation. And the more money there is on the line, the more the pleasure center lights up. A monetary reward is — biologically speaking — like a tiny dose of a drug.

Pleasure Versus Altruism

Now compare this reaction with our neurological reaction to altruistic behavior. In 2006, after the NIH study, Duke scientists asked subjects to play a similar game, but instead of earning money for themselves, the participants were told that the better their score, the more money would be donated to charity. In the MRI images, the pleasure center remained quiet throughout the game, but a different region of the brain, the posterior superior temporal sulcus, kept lighting up — the altruism center. This is the same part of the brain responsible for social interactions — how we perceive others, how we relate and how we form bonds. Considering the two studies, scientists discovered that unlike the parts of our brain that control movement and speech, the pleasure center and the altruism center cannot both function at the same time. It’s as if we have two “engines” running in our brain that can’t operate simultaneously.We can approach a task either altruistically or from a self-interested perspective. The two different engines run on different fuels and also need different amounts of those fuels to fire up. It doesn’t take much to fuel the altruism center: All you need is the sense that you’re helping someone or making a positive impact. But the pleasure center seems to need a lot more.

(end of excerpt)

When I listened to this (and re-listened to it) a giant cartoon light bulb lit up above my head. Put this in terms of trading. When we put our money on the line strickly with the goal of making more money (I need 30% on this trade, I need to clear 10k in profit this week, this month... I need to raise 50k for my kid's college before June) it AUTOMATICALLY engages our carnal, beast like senses. It disengages our logical capabilities and leaves us shell shocked at our trading screens wondering where our money went and wondering why we did @$!% instead of the prescribed X-Y-Z.

First off - this explains for new traders why it is critical to paper trade. We see that when no money is on the line, our primitive brain is dormant and we can think logically and learn. For those of us who trade (or attempt to trade) on a regular basis I propose a paradigm shift. Rather than sitting down for the day with the goal of "daytrading for a living" or "making a set profit" we can redefine our role in a way that engages the altruistic center in our brain and shuts down the primitive side in the process. Perhaps we can define our selves as "Non-Profit OEX Liquidity Providers " who provide the service of buying options from motivated sellers and selling options to needy buyers. We enable trade. If a by-product of our effort results in profit, fantastic - that's just a function of our efforts to keep the market healthy. I think this is the science behind why Floyd teaches us to be Fruit Vendors.

When I learned of the scientific implications of the way we define our trading - I learned the REASON we feel the way we do at times (out of control, insane, frustrated, powerless to change.) More importantly I learned that we can learn to systematically disengage those negative side effects just by assigning a new paradigm to our system of trading - redefining our purpose in what we do.

Obviously there are other ways you can define your frame of reference in regards to your day-trading "mission statement" but the moral of the story is that it does not have to be about the money. In fact - it's probably more healthy if it's not.

OEX Service Provider MR

PS: Floyd made the following comment in the Oct 20th OEX daily alert and I think it stands repeating: "What we may be seeing is the re-making of the USD, and of the values we put on things." I think it will be important to bear this in mind as we trade and watch the market through Q4 2009 and Q1 2010.