Trade The Journey

Trade The Journey

Paper Trading Update

Top of the Morning! Hopefully, everyone’s week exceeded their expectations in terms of accomplishment. I am continuing to find ways of improving this blog’s content and format.

Indices

Russell 2000: The Russell fell 0.83%

S&P 500: The S&P fell 0.22%

Dow Jones: The dow fell 0.64%

Nasdaq: The Nasdaq fell 1.5%

Bonds:

The yields of five, ten, and thirty-year treasury bonds ended the week above their twenty, fifty, and two-hundred moving averages. The five-year yields closed near their high and returned to near pre-pandemic levels.

Although it’s now in a congestion area, the ten-year yield also made its way to pre-pandemic levels. The area I’m speaking of has a resistance level of 1.95%. Increasing bond yields have been a drag for the Nasdaq since most of the companies in this index are high-growth and heavily affected by higher rates.

Bond prices closed near their lows for the week as investors continued to sell out of bonds and move into value.

Five-year yield: 1.54%

Next test: 1.76%

Ten-year yield: 1.77%

Next test: 1.95%

Thirty-year yield: 2.11%

Next test: 2.18% and 2.42%

Sectors

Best performing Sector

Energy

Remaining Sectors

Consumer Staples showed a slight pullback. The financial sector gapped down from its high. Earnings seasons began with eyes on the Financial sectors’ performance. JPM gapped down after its earnings report, while Wells Fargo made a new high. Citigroup gapped down but recovered to end the day on its high.

Technology looks like it’s in the beginning stages of a bear trend. Materials and Industrials bounced off its fifty-period average. The healthcare sector fell below its fifty-period moving average and may fall further. The utility sector seems to be in the beginning stages of a sideways trend. The consumer discretionary sector remains below its fifty-period moving average.

Consumers stated that inflation is a top concern in the latest consumer sentiment report, even more than unemployment. Annual inflation reached over 7%, prompting the Fed to reiterate its hawkish stance. Some financial analysts and hedge funds call for rate hikes sooner rather than later. Markets show March as the first of three rate hikes, although the Fed has said that more meetings are needed to narrow policy decisions.

Producer Price Index decreased for December. The US budget deficit narrowed due to increasing Personal and Corporate Income Tax Receipts. Wages continue to increase alongside prices for goods and services. This week, I received an e-mail from Netflix stating that they are increasing their monthly membership price to $15.99.

I remember when the price for a Netflix membership was $7.99.

Retail sales decreased for December, which some say is due to consumers completing their holiday shopping months earlier. Initial unemployment claims increased above expectations.

Industrial Output declined. Production of consumer goods decreased for durables and consumer energy products. Non-energy non-durables were little changed. Business Equipment and supplies production also fell.

Inventories rose for retailers, merchant wholesalers, and manufacturers.

Inflation remains a primary concern for the market. How will the Federal Reserve manage the Inflation situation and prevent inflation from remaining at higher levels for an extended period?

Investors will need to closely monitor the bond market, specifically the corporate junk bond market. With easy money available, companies could offer bonds at lower rates, but as the rate hikes begin and money becomes tighter, will companies be able to maintain their current margins?

Will we see rising corporate defaults?

I’m in the process of reorganizing my portfolio from growth to value for the foreseeable future. I’m not too good at picking tops consistently, but it’s starting to look like the chances of this bull run continuing is slim.

The coronavirus remains a concern as the Omicron becomes the dominant concern. Although highly transmissible, the Omicron is noted as less severe than the Delta Variant. The Omicron continues to affect companies due to absenteeism and transmissibility. With the latest supreme court ruling regarding vaccine and testing mandates, enforcement of Coronavirus mandates is largely left to companies with employee counts over 100 people.

With China’s zero-tolerance policy on Coronavirus outbreaks, how will this stance affect supply chains moving forward?


Technical Story

Russell 2000

Last week, the Russell broke through its 200 period moving average towards its support level. It tested the 2139 and closed above the support level at the end of the week. If the Russell can make it above the 2201 level, it could try again to break through its 200 period moving average.

S&P 500

The S&P dipped below its 50 period moving average but looks like it may be able to recover depending on the progress of earnings this season. The S&P looks like it may test the 4139 level this coming week.

Dow Jones

The Dow closed above its 50 period moving average and may test its 36179 level this week.

Nasdaq

The Nasdaq resumed its downward trend. It bounced off its 200 period average and should at least break the 14948 level. With yields rising, I don’t see the Nasdaq making a bull run anytime soon.


Paper Trading Update

With over 300 paper trades under my belt, I feel an update is warranted. Some would say that 300 paper trades is a little excessive, and I would agree with this perspective in some cases. It all depends on how well you understand options and markets in general.

I don’t feel like I understand options well enough to trade them with real money on the line. In the beginning, I had a hard time translating theory into practice. Options are complicated instruments that move much differently than books can portray.

If you don’t understand the greeks and how options respond to volatility, the stock could be moving in your desired direction, and you could be losing money. My goal is not to profit on 100% or even 75% of my trades. I want to understand why my option lost or earned a profit.

My first 100 trades netted a profit, and with one bad options trade, I lost all the profits I had earned from my first 100 trades. I lost my confidence and made a series of bad trades. This past week, I finally returned to my initial profit level.

The most important lesson I learned is closing the trade when it reaches your stop and not looking back. Over time, I’ve learned it’s a wasted effort trying to predict the next bar consistently. Now, I focus on levels and reference areas to determine my profit or loss target.

I also noticed that as I traded more, most of the options I brought and sold were close to the at-the-money level. I rarely trade in-the-money and out-of-the-money options. I like to look at the implied volatility for out-of-the-money options and compare them to at-the-money volatility.

Most of my trades involve buying and selling options outright, hedging when necessary. So far, I’ve done quite well. I’m getting close to where I want to be in terms of creating positions that match what the market is showing me. Instead of predicting the direction in a sideways trend, why not place a condor or butterfly trade and take advantage of the sideways trend?

I believe I’ll be ready when I open up my trading platform, see an opportunity in the market and place a trade without second-guessing myself. Although trading knowledge concerning trends and indicators is highly coveted, discipline is an under-appreciated aspect of trading knowledge. Knowing when and how to take losses is critical to evolving as a trader.


Past week’s Cash Flow management report:

This past week, I managed money quite well and continued to pay down my credit accounts. I had a couple of surprise expenses but nothing major. Every week, I assume that an unexpected expense will occur, and I save in preparation for that event. Consistent monthly expenses often do more damage to your bank account than the surprise expense.

The surprise expense usually adds pressure to the already strained bank account. I try to keep this in mind when I’m tempted to make frivolous purchases.

Grade: C+

Reason: Continued Improvement.

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