I started buying in my personal accounts soon after the moment of capitulation. It really didn't matter what I bought (excepting short funds), I knew it was going up. The key is identifying that capitulation had occurred, and that therefore it was safe to go long once more. For me, it was easier to come to this conclusion watching the chart of the short funds. The QID, for example, went parabolic around 12:40pm:
The rule for the parabola is to set your sell-stop at the bottom of each candle; the first close below the prior candle marks the end. At 1:05pm it looked like the parabola was done for as the prior candle's low was violated (~88.60). It took me about 10 more minutes to register the idea that the low had probably been put in. That's when I started buying. I mostly bought stocks and a few call options; next time I'll concentrate on options alone as the returns are phenomenal, and the risk is low. It wouldn't have been out of the question to quintuple your options investment in the space of 3 hours. It didn't occur to me to buy calls until 3pm, and I still managed a near-triple. The sell-stop on the options would be a violation of the peak of the parabola (i.e., a new low in the indices).
Let's talk about the timing of the various capitulations the past 5 weeks. The first time we had capitulation (October 10th), the Dow, S&P and Nasdaq all put in their lows. The second time, October 27th, the Nasdaq put in a new low, but the other two managed to stay above their October 10th lows. Today, the S&P and Nasdaq both put in new lows. The only October 10th low still standing is that of the Dow, which is the most important index for Elliott Wave purposes because it goes back the farthest. The low in the Dow should hold for the remainder of the B wave; when that low breaks, it'll be for real. No buying call options at that point!
We sold QID today for a decent to great gain, depending on when it was sold. Officially we would've been stopped out at 75.99, but using the systematic parabola timing method described above, 88.60 would've been the exit. I myself sold mine in lots, the best lot at 85.30 on the way up the parabola (I didn't have the guts to hold on). FDO fell through the Exit C price early on before mounting a comeback, so it doesn't have a place in the table of current holdings. If you bought, sell-stop is today's low.
For tomorrow, buy anything, as long as it's on the long side and displayed strength today: GOOG, AAPL, DIG, GDX, UWM, FXI, etc. Use today's lows as the sell-stop. We may or may not get a pullback so buy on a breach of today's high to enter. What follows is just a couple of ideas out of hundreds that would work. If you feel twice bitten, thrice shy, don't. This may be the third bottom, but you must buy each time or else you will definitely miss the recovery.
| Ticker | Entry | Exit A | Exit C | Chart |
|---|---|---|---|---|
| EWZ (iShares Brazil) | 37.78 | 31.11 | Chart | |
| TBT (UltraShort Treasury Bonds) | 63.57 | 59.94 | Chart | |
Please refer to "How To Trade The Ideas" (right-hand side) to read this table.
2 comments:
Another note on options. I buy options that are based on an index ETF, in today's case IWM (based on the Russell 2000). A little known fact is that so-called non-equity options (i.e., options based on a stock index rather than a stock) are taxed at 60% LT capital gain and 40% ST, even if held for less than a year (or less than a day). Such options are considered Section 1256 property and are entered on IRS Form 6781. Please check with your tax advisor to make sure this tax provision applies to you.
Fuller discussion of the tax advantages of non-equity options here.
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