On being right too soon, which means being wrong

A few days ago I entered a trade in SCO, the inverse 2x US Oil ETF. I expected the price of oil to drop, because of the shape of the daily chart. It was very near its down trendline and near the top edge of a wedge.

My hypothesis was correct: the price of oil did drop in the following few days. But my timing of entry was not right.

I used the hourly chart, and disregarded a few facts, which turned out to be fair warnings, and by ignoring them, I took on unnecessary risks.

1. MACD had already given a buy signal a day before.  In the hourly chart, that's a stale signal and no longer good.

2. MACD-H was already weakening.

3. RSI was already around 70.

I placed my stop at 55.64, way too low, only because the size of the trade was small. I think that was a mistake.  After a gap like that one, any move below the top edge of the gap should have taken as a sign of a wrong entry and time to exit the trade.

As it turned out, gap 1 was not the breakaway gap I expected.  Gap 2 seems to be it.

Short INTC at 22.41, covered at 22.33

For seven of the last eight days, Intel has been up.  It has gone from 19.0 to 22.40 in less than two weeks.  Now it's close to its intermediate term down trendline. It's also outside of its 22-day MA envelopes (multiplier: 8.0).

On the hourly chart, we can see the strength of the last several days losing steam, and divergences in MACD and RSI.

Half-dollar marks are often obvious points to place stops.

Today at 2:15 there will be the release of FOMC meeting comments, which may well cause quick swings in either direction.  I have been burned before by trading right around an FOMC meeting, let's see if I have evaluated risk correctly this time.

UPDATED Monday 9/26:

Today my stop order at 22.31 was triggered in the first minute of trading when the price of INTC fluctuated wildly between 22.10 and 22.45.  After that, INTC continued its downward movement.

I think in this trade I made a really good entry, but failed to exit at the right time.  The choice of when to let profits run and when to take them off the table is still an unknown for me.

In the two days after I shorted INTC at 22.41, the price went as far down as 21.24.  My plan was to move my stop down to my first target at 21.32 after it was passed.  The problem is, that level was hit but not kept.

The good:

- I followed my plan

- I didn't lose any money.

The bad:

- I could have had a 4.5% gain but instead ended up breaking even.

- This is another trade when my stop gets it and then the price immediately retraces, AKA I get "pierced by a needle" (I just made this expression up with reference to the thin line that passes my stop level).

 

Long SCO at 57.13, sold at 55.64

Along with the downtrend in the equity markets, crude oil is also showing weakness that could last for months. I noticed last week a large wedge forming over the last several weeks. Today it broke out to the downside with a gap. I chose SCO to miminize the capital invested.

On SCO, MACD and Stochastics have given buy signals, and RSI has crossed up above the 50 midline, another positive sign. I have chosen the midpoint of the up gap as my stop. If the wedge measurement I made is correct, target is around 70.

UPDATED 9/21/11: My stop was hit the next day. The timing was wrong, judging by the action of the last couple of days.

Long SDS at 22.41, sold at 22.87

The market is in a down trend, but it had been going up for six straight days.  My hypothesis was that the six straight days up was a bounce and the downtrend was now going to resume.

I used SDS to minimize the amount of capital - rather that putting double what I had in mind in SH. The horizon of this trade is less than 20 days.

Trade entry time was also based on MACD on the hourly chart.

UPDATED 9/21/11: I moved my stop up because I was afraid of a sudden rally in the S&P 500 caused by positive reactions to the FOMC meeting this afternoon.  Instead, there was seesaw action, and my stop was hit just before a drop of the S&P 500 (which resulted in a nice increase in SDS, but I didn't take part in it).

Note that my fear of a sudden rally was caused mainly by reading a piece by David Rosenberg about 12 reasons why you shouldn't be short the equity market before the FOMC meeting.

He was wrong, I was right, but I listened to the voice of fear and ended up losing out on this nice raise from 23 to over 24.