KO on KO

This is the story of a trade that didn't work. 

First, the prologue.  On November 16, I bought KO at 66.98, and I put in an automatic stop loss order at 6.34.  I thought that KO was forming a bullish triangle and it was near the base of the triangle.  The next day it broke down and it hit my stop and I made a loss.

A week later, on November 21, KO had slipped to about 65. Thinking that it had reversed course, I shorted it at 65.19. It kept sliding for a few more days, reaching the low point 64.27 on November 25.  At that point, I was feeling pretty good about it, it looked like my trade was going the right way.

On November 29, however, it shot up to 66.50 (that day there was an announcement by the G4 banks about providing liquidity in relation to the Eurozone sovereign credit problems).

I thought that most of that jump was due to short squeezing, and that it would be faded soon. I decided to sit tight and wait for it to drop again. But instead, KO in the following three weeks barely touched the 66 level, and kept in a range between 66 and 68.

Believing that we're in a bear market, and the KO must eventually follow the market on its way down, a few days ago, on December 15 I shorted more of it at 67, bringing the average cost to 66. This was the equivalent of averaging down, something I know should never be done, and yet I felt this was an exception.  My plan was to wait for the inevitable drop to 66 where I would get out even.  It seems obvious in restrospect that I was just bargaining with having made a bad bet, and trying to find a way to squirm out of taking the loss.

Yesterday, KO opened at 68.50 and quickly reached 69. Clearly, I was wrong, but now I'm double-wrong because I added to it when it was losing. I feel like an idiot and I am embarassed by my mistakes, and the embarassment is so strong that I have a great urge to quit this trade, no matter how much of a loss it shows now, even if I believe that tomorrow KO will be lower.

Also, KO is up 1.21% even though the market is down 0.62%, and I just don't understand. Is it possible that I chose to short the one stock that is holding up in the face of the entire market? Well, it's not just KO, it's all the defensive sectors that are holding up, while financials and tech are down.
So, what to do now? Just quit the bad trade, take the loss, and feel liberated? Or stay with it and risk even more losses, in hope of a smaller loss, enduring a more protracted agony?

Yesterday was a very strange day, some DJIA stocks are up over 1% (BA,CVX,KO,KFT) and several others are down over 1%. It's a mixed day. But it doesn't help me.
I really wanted out of this trade, but this strong urge kept telling me that it's probably better to wait.  Though, I've been waiting and watching KO go from 68.90 to 69.20.  It just wants to go up.

In the end, I placed an order to cover at close, and stopped obsessing about it, because there was no apparent solution.  The order was executed at 69.57 for a loss of 3.57 per share.  Awful.

I have been thinking about this a lot, and seriously considering whether I should continue to do this at all. I am starting to have doubts, and to lose confidence in my ability to figure out a way to make money by speculating in stocks.

This trade was a complete mess.  I know I've read these guidelines elsewhere, and more than once, but it seems like these are experiences that one has to really try with one's own money to understand and learn the lessons.

1. NEVER AVERAGE DOWN. NEVER.
2. IF A TRADE DOESN'T START TO MOVE IN THE RIGHT DIRECTION, GET OUT RIGHT AWAY.
3. BUY ON THE WAY UP, SELL ON THE WAY DOWN (don't fight the tape).

I was trying to avoid been stopped out, and in the end I paid a much greater price than I had if I had placed stop loss orders.  It's really hard to trade a stock that whips up and down like KO has been doing. Or let's say that I haven't yet figured out a way to trade in this type of market.

I have been looking for a metaphor for my style of trading, and I've come across one of the botanical sort. Let's say that finding a trading opportunity is like finding a promising seed or sapling.  It has to picked and put in the ground at the right time.  It has to be watered and fed (with cash). I have to recognize which seeds will grow to be tall trees and which ones will be just little plants, or weeds. And if a sapling doesn't grow, or looks like it's dying, let it go - adding more water won't save it.  I'm not sure how this image helps, but I guess I'll find out.

Another thought I had was that I haven't figured out a system for trading with peace of mind yet. Some more homework will be required to find a good way to hedge risk. Like for example going long dividend-paying stocks and adding some VIX to the mix.

For now, I may have figured out one thing that works.

LOOK FOR STOCKS/ETF THAT ARE TRENDING

General market conditions

EMA(10) of NYSE Advance/Decline - the last divergence was in July. Neutral.

McClennan Summation index has crossed above 0 in early October (bullish). However, it peaked around 700 in early November and is now at 178, heading back towards the zero line.

EMA(10) of NYSE New Highs/New Lows index:
- last bearish divergence was in May 2011. Neutral.
- extreme low on October 3 suggests market bottom (bullish).
- has crossed above, below and above again in the last 6 weeks (may be bullish).

MA(20) of NYSE stocks above 200-day MA has crossed below the 50 line in early September (bearish).

MA(50) of CBOE Put/Call ratio has crossed above 1 in November (bearish).


CORN has found support at 38.50 and had a reaction that took it to 40, but it didn't last and is now consolidating at 39.19. Trend is down. Bearish.

IEF broke out of its channel at 105 but the breakout failed the next day. IT's been in a narrow range between 103.30 and 105. If this is a flag its pole is 101 to 105 and would suggest a move from 103.30 to 107.30 if it breaks above 105. Trend is up and recent action does not look like a typical top. Bullish.

KO has found support at 64.30 and had a violent reaction to 68. However, in the last two days each opening jump has been followed by steady selling. I think this was a short squeeze. Trend was up but has been sideways for 8 months. There is a possible head and shoulder, but a confirmed break above 68.50 would negate it. Bearish.

UUP has had a bearish island reversal in the last 10 days but the last 3 days have seen buying pressure during the days. I still think the May-August double-bottom hypothesis holds. Support is at 22 and resistance 22.60.  Bullish.

XLP has jumped to test the resistance level of 32 set at the May peak, but it has only passed it in intraday trading. I suspect the latest gap up will be faded but for now the outlook is bullish.  The 31.25-31.50 area should serve as support.