Slope Of Hope with Tim Knight

Seven Years Ago

2009-11-08T06:01:04-08:00

The very first page of my charting book has just one line on it:

To Alexander Dobrovolski, who made it all possible.

Even with all the copies of the book that have been sold, no one has ever asked me what this dedication meant, or who Alex was. Today, I'd like to tell you a little about Alex.

From Ukraine via Boston

In early 1999, I had already been running Prophet for six and a half years. But most of that "running" was me operating out of a spare bedroom in my house with the help of a couple of folks operating out of their spare bedrooms. We never had any money.

But due to a surprising windfall, I was in a position to make Prophet a real business, with a real office, and actual employees who came in every morning and left every night - it was going to be quite a change.

But what we needed most was talented engineers. And, let me assure you, finding a good software engineer in 1999 was no easy task. All the talent started getting sucked up once the Internet craze started four years earlier, and the talent that was left was (a) really expensive and (b) not at all talented.

So we scoured, as best we could, to find someone - anyone - decent. By chance we located a consulting firm in Boston that had some engineers from the former Soviet bloc, and they were more than glad to pimp them out (this is, in fact, the term we used).

Now, I don't know how many of you have looked at the resumes of software engineers, but 98% of them look identical; I actually got pretty good at just eyeballing a resume and seeing who was decent and who wasn't. One person in particular, Alex, stood out as quite promising. I noticed that he even had taken the 2nd place prize in a nationwide contest in mathematics back in the Ukraine, so apparently he was awfully smart.

So we asked to speak with Alex. It was a difficult conversation, because his English was pretty limited, but even over the phone he seemed smart and likable, so we decided to take a chance and devote some of our modest cash to this new engineer.

"He's going to cut my balls off."

Like many transplanted engineers from the former Soviet Union, Alex was in this country without his family. He came here because he could earn much better money and, hopefully, eventually bring his family over. As I got to know Alex, he told me he had a wife, Eugenia, and a son of about twelve years.

It was rapidly apparent that Alex wasn't just bright - he was brilliant. Prophet had very, very little when he started, and our charting code - God help us - was written by me (this is the equivalent of having an ambitious eight year old boy construct a house for you to live in). Even over a period of months, our communication remained difficult since we didn't speak the same language, although using the written word, he did just fine. So there were dozens of instances where I'd come over to his desk, start to explain something, and then just fire up Notepad on his computer and type to him what I was trying to say. I could type English much faster than I could get him to understand the spoken word, so we had this curiously silent way of communicating. And, yes, he would type right back, with me right next to him.

We didn't want to keep Alex as a consultant, though. It was apparent to us this guy was a gem, and we wanted him to work for us - - forever, if possible. So we contacted his pimp - - err, consulting firm - - and told him of our intent.

The pimp was none too thrilled to hear this, because he was getting a handsome cut of Alex's pay. But our contract with the firm gave us the permission to hire him away, and we told him that's what we were going to do. So he asked to speak to Alex to say his farewells. I handed Alex the phone and he spoke to his guy in Russian for a couple of minutes. He finally said, "Da." and hung up the phone.

"What did he say?"

"He said he's going to cut my balls off."

"So are you going to stay?"

"Yes."

JavaCharts then Kandinsky

Alex worked in 1999, 2000, and 2001 on just about all the web-facing products that Prophet had. His principal creation was JavaCharts, which was a full-blown charting applet that put Prophet on the map.

This one creation absolutely made the company, because it gave us something that brokerages were actually interested in licensing. So over twenty different firms licensed the product, and it gave us a steady, hearty stream of recurring revenue.

Those were insane years in the valley, because in the span of months, the entire area went from insane booming bubble to collapse. Because Prophet had never had a "boom" period (or venture capital), we didn't have a "bust" either. We were actually a sea of calm amidst a huge storm, and a lot of our would-be competitors simply blew up.

As JavaCharts usage grew from the thousands to the millions of tens of millions of hits every month, the pressure was always on to improve both it and its underlying infrastructure. But, as with any software product, JavaCharts was starting to show its age, and Alex wanted to created something completely new to replace it.

In 2002, he embarked on a new project called Kandinsky (which ultimately would become the ProphetCharts we know and love today). Even though JavaCharts was a really good product, we knew that Alex's experience with it would provide him the knowledge to create something truly amazing as its successor. So his long days at the office continued - - - and his life was all the more complete now that his wife and son had joined him (equipped, as he was, with a fresh green card) in the United States.

The Phone Call

At 8:16 p.m. on November 8, 2002, Alex was - as was often the case - the last one at the office. He wrote himself an email of sites he wanted to check first thing on Monday morning. The subject line, in typical Alex fashion, was humorously meaningless. He even signed it.

From: Alex Dobrovolskiy

To: ADobrov@usa.net

Sent: Friday, November 08, 2002 8:16 PM

Subject: ssssssss

http://clearstation.etrade.com/rfcs_thetrade.html

http://www.devx.com/getHelpOn/Article/9915/

http://www.devx.com/java/article/9856

http://archive.devx.com/free/tips/tipview.asp?content_id=4153

http://www.developer.com/java/other/article.php/1495061

Alex Dobrovolskiy

I imagine at this point he shut down his computer, locked the door, and started to walk across the street to get into his car.

The next morning, I was sitting in the restaurant Fu Lam Mum in Mountain View with my family, and my cell phone rang. It was Alex's wife, Eugenia, whose English was more limited than her husband's.

"Hello. I'm sorry to bother you."

"It's no bother. Is something wrong?"

"Alex was hit by a car. I thought you should know. He's at Stanford Hospital."

She wasn't crying; she wasn't hysterical; and she seemed to feel genuinely bad about calling me on a Saturday morning. Needless to say, we all left immediately for the hospital, not knowing what had happened or how bad it was.

One by One

We met Eugenia at the hospital, and she remained very composed - stoic, even. My wife asked to see Alex, whom she adored, even in his horribly damaged condition. I couldn't bear to go in there; he wasn't conscious, and he was being kept alive by machines.

According to the police, a hit and run driver mowed Alex down as he was crossing Alma. He was thrown at least forty feet. He was as good as dead at that point, and once they turned the machines off, at Eugenia's request, he was gone.

So this brilliant man - - the man who had made everything we succeeded at in our company possible - - and whose wife and child had joined him in a new land - - was dead. Killed by someone with probably half his IQ and one-fiftieth of his morals. Because somewhere, out there, is the slob who ran him over and didn't have the courage to face the consequences of his actions. A coward killed him.

As we told our employees that Monday morning, privately, one by one, the reactions were understandable - shock, grief, and a fear of what was going to happen. After all, we were all, to a degree, riding on Alex's coattails. This was the brain behind our creations.

I was particularly moved by the outpouring of support we received from the community. Both strangers and friends poured money into his memorial fund in order to support his survivors. And, of course, people were outraged that the wrongdoer got away with it.

Obviously I wish he was still here - - he had just started doing some amazing things. But he was formative in a company that created employment, customers, and a lot of happy users. I miss you, Alex, and I'm sorry that this happened.

GOOG Pin Play (by Fujisan)

2009-11-07T19:39:24-08:00

It's so nice to see the market taking the exact route as predicted. Let's see how this is going to unfold for the coming weeks.

DIA & INDU Daily Chart

DIA is the only ETF that has not filled the gap from Oct, and strange enough, DOW is the strongest index of them all at this point. If there is any index driving the market, it has to be Dow.

For those who do not trade DIA, here is INDU daily. Same set up.

SPY Daily Chart - H&S or Three Drives??

Last week, I suggested a possible H&S pattern on SPY due to a broken trend line. By looking at this week's price action, I'm more leaning toward the three drives pattern instead of the H&S pattern, so I decided to put both up.

H&S Pattern

Three Drives Pattern

The reason that I'm more leaning toward the three drives pattern is because the first two drives are "too identical", both in time and price, - it's more like "Head & Head" - coupled with the previous low not being taken out (I guess you could still call it H&S with a diagonal neckline), and it seems to me that SPY likes to repeat this pattern one more time. This is not as clean as DIA's three drives pattern due to a broken trend line, but it goes quite nicely with EUR/USD pattern as illustrated below, so let's see how this plays out.

IWM Daily

IWM is forming either H&S or M&A pattern. The question is how high RS (or A) will go.

EUR/USD

The EUR/USD trendline from last week held and so was the pattern. My price target remains to be 1.5204.

VIX Daily Chart

I don't know if this ever plays out the way it's illustrated, but if it does, that would work out perfectly with my three drives pattern.

Market Cycle

I know that many of you are expecting the market to quickly resolve to the downside and some of you may have been probably loading up a lot of OTM put options for so called "P3" scenario, but let me emphasize once again that the market WILL NOT drop from here. All the major indices are forming a very distinctive market cycle (as illustrated above) and if this pattern holds, it will take 21 trading days to complete this cycle, and the chances are, we will be in this trading range for another 3 weeks. If you like to load up put options, please hold your horses and wait until Nov OPX week.

The US equity market has a tendency of hitting a peak of the cycle during OPX week. Whether it's H&S or Three Drives, you would have a better chance of catching a top of the cycle if you wait until then. I will cover both short term and long term bearish play at that time, so please do yourself a favor and DO NOT load up OTM options.

How to pick ITM Options?

I got the question as to how to pick up ITM options and I thought that this would be a good topic to cover this week.

I would look into Delta of AT LEAST 0.8 and open interests > 1,000. This way, your ITM options will mirror the underlying stock's price movement much closer (the underlying stock's delta is 1) at a much lower cost.

GOOG Pin Play

A few weeks ago, I have discussed an income strategy on GOOG (i.e., iron condor) to take advantage of a range-bound price movement. Here is an updated GOOG daily chart and GOOG is still within the price range.

Now, as we are getting close to Nov OPX, I would like to introduce another low risk/high return option play called "pin play". With pin play, you make a price projection for OPX and take a position accordingly.

GOOG is know to be expiring in 50 increments (500, 550, 600, etc), and with GOOG currently trading right at 551, the probability of GOOG expiring right around 550 is very high.

Let's take a look at Nov open interests.

As you can see, there are more than 7,000 open interests at the strike prices of 500, 550, 600. If yon look at 1 standard deviation price movement, both 500 and 600 are out of the range, and 550 is the only possibility for a potential pin play unless something drastic happens to the market to change the course of the action.

OPX Pivot Setup

This is a side note, but a very nice feature was added to TOS chart. I use Person's Pivots a lot for my daytrade and the pivots typically have daily, weekly, and monthly set up. TOS recently added "OPX" set up for the pivots. This helps us the option traders tremendously to figure out the OPX trading range. Thank you, TOS!!

For those who are interested in SPY OPX price range, here is the SPY OPX pivots. From a swing trade point of view, Friday's close was very bullish. Once SPY closes above the previous swing point of 106.86, there is a very high probability that SPY will go after the next swing point, which is the previous high.

Pin Play Exit Strategy

I was able to get into this position at a pretty good price and now it' already up 80% (got in at $1.05 on Monday and now it's $1.80). If you like to put this position on, please wait for a good entry point. As this is a "make or break" position, I like to keep the cost less than $1.00 per contract if it's all possible, and should not be more than $1.50 per contract (to keep 1 to 3 risk/reward ratio)

If you miss a good entry, don't worry, wait for next month. I laid out how to approach to this strategy and you can do the same on your own. If you are new to this concept, paper trade it first, and then start trading small.

I'm expecting to make approx $4~5 per contract if I was able to hold on to this position up to OPX (not max $9 per contract, unless you are willing to hold on to your position through OPX). I would set up GTC order to exit at various prices - like 0.50 cents increment (such as 1.95, 2.45, 3.95, etc) and eventually playing with a house money. You don't need to take a profit all at once.

Warning: Due to a highly speculative nature of the trade, please do not risk more than 1% of your speculative account. Please be prepared to lose the entire premium if the trade goes against you.

GOOG Long Term Bullish Play

If GOOG takes out the previous high and closes above it, GOOG could go up to 600, so I would drop everything and switch into a bull call spread when it happens. This is a side note, and I'm hoping to cover this topic in the future, but if you compare those power house stocks (i.e., AAPL, AMZN, BIDU, GOOG), they all have a very identical chart pattern on a weekly basis, except that GOOG is lagging behind. If this chart pattern holds, GOOG will follow the crowd and go above the all time high, so I'm planning to cover GOOG long term bullish play when the time comes.

Nov OPX Speculative Play

As we are getting close to Nov OPX, I'm going to cover some OPX speculative option plays next week, so stay tuned!

Another Excellent Taibbi Article

2009-11-07T08:32:59-08:00

I strongly encourage you to read this marvelous article by Matt Taibbi. It is a fascinating look at the underhanded tactics Goldman Sachs (the very embodiment of evil) and JP Morgan took in 2008. Just about the only thing still good in the U.S. is the fact that journalists can publish articles like this without meaningful fear of being rubbed out.

Dandruff Shampoo (by nummy)

2009-11-07T06:07:05-08:00

I know some of you don't like Elliott Wave analysis, but I'd like to share a case in which EW seems to agree a bit with some technical analysis trendlines. In lieu of recent bullish activity, I think we are starting our last ride higher (I know it feels like bears have been saying this forever). If we get one last hurrah, I think it may be one of the greatest shorting opportunities in some time. Keep in mind, I'm not claiming to be an EW pro or anything ... my count is just one of the many out there.

Here's what I'll be watching SPX for in the next two weeks (different paths we could take are denoted by p1, p2, ...):

(p1) We could go up to the 1075-1080 range and form a right shoulder of the classic H&S pattern (with 1100 being our head and 1080ish our shoulders). This would truncate 5 of (C).
(p2) We could float a bit higher to 1100 to form a double top. Note that in a linear scale (chart is log), the 2007/2008 trendline stops us at around the 1100 area. Personally, this would be my favorite scenario. This would also truncate 5 of (C).
(p3) Let us not forget what happened in July, the H&S that broke the neckline only to zoom back above it. If this happened again, 4 of (C) would be that failed neckline break and end later, rather than having ended this past Monday. I consider this path the least probable.
This fifth wave could very well turn into a behaviorally greedy one characterized by a rapid rise into OPEX, followed by a rapid decline.
(p4) The next important level is the 1120 region. Here lies the 50% retracement for SPX from the October 2007 highs to the March 2009 lows. This would be another good place to turn back down and create a new head of a H&S pattern (meaning 1100 is the left shoulder).
(p4) The last levels to watch would be the 1140-1160 range. Here, we have some things converging into these price levels:
- We would be testing the 2007/2008 trendline (in log scale) around the 1140-1150 range.
- The maximum for 5 of (C) so that 3 of (C) is not the smallest is 1152.23.
- At 1158.76, (C) of [2] would be equal in length to (A) of [2].

Some of you may look at 3 of (C) and notice that [i] and [iv] overlap. According to EWP (Elliott Wave Principle by Frost & Prechter), this can happen in the case of an expanding diagonal (blue trendlines). All in all, we are still looking at the end of primary wave [2] (if that hasn't happened already). Any upside left has its days numbered so I am watching the following levels on SPX to short on this leg up: 1075-1080, 1100, 1120, and anything in 1140-1160, if we get there. This market is very vulnerable; one sneeze could start a waterfall. I think in the intermediate-term, there is more risk in being long than in being short.

Good and Evil

2009-11-06T16:54:34-08:00

The nature, definition, and manifestation of good and evil are subjects I have pondered many times in my life. All cultures, philosophies, and religions have their own views on these subjects. Some of them dismiss the idea that evil even exists. This is something with which I disagree.

The best definition of evil I remember reading was this: "That which destroys life and liveliness."

But how does one comprehend goodness? Do we simply invert the aforementioned definition, yielding "That which creates life and liveliness."?

I think that is a step in the right direction. But the thought of goodness conjure up, for me, a variety of other properties. In no particular order - and surely this list is incomplete - I think of:

Balance
Harmony
Order
Love
Faith
Compassion
Generosity
Kindness
Honesty
Bravery
Moderation

None of this is terribly controversial. But there are some subtleties in human nature and behavior that make the topic less simple.

Self-Perception

The mass of individuals on Earth don't align themselves to a standard yardstick of principles and behaviors in order to present themselves as being on a particular point on the continuum of good and evil. People are, in my view, self-interested creatures, and it is tempting for a person to consider someone "evil" who is simply dissimilar to themselves (or whose world-view differs from their own).

I seriously doubt Osama bin Laden stares at his fragment of a mirror hanging in the cave wall, cackles mischievously to himself, and declares, "Oh, what a fine life it is to be evil. I shall crush all those goody-two shoes that oppose me!" Nor do I think the likes of Hitler or Stalin considered themselves to be evil. They were consumed with their own motives, and those in opposition to those motives were going to either get out of the way or be destroyed.

I think the vast majority of humanity would agree that such individuals were, in fact, evil. But what's required to make this sort of assertion is some perspective.

Is Heroism Chosen?

What constitutes a hero?

On a regular basis, the newspapers and television shows have stories of individuals who, in the face of danger to themselves or loved ones, decided to act with remarkable courage and strength in order to attempt a positive outcome. A man runs into a burning building to save the life of a stranger; a woman dives into a frozen lake to rescue someone who fell in; a dog drags an injured dog off a road to prevent it from being killed.

These are all heartwarming, and as sentimental as I am, I'm probably even more affected and moved by these stories than most others. But do heroes choose to be good, or are they simply "wired" that way? And if they are wired that way, are they any more deserving of our praise as anyone else blessed by other genetic dispositions, such as having blonde hair or a nice singing voice?

In the end, I don't think anyone really cares if it was a person's conscious choice or not to behave heroically. The fact is that they did, and the action itself gives that person heroic attributes. It is all the more alluring and praiseworthy to the public that these decisions are usually made in a split-second, because deep inside we're all wondering if we would have done the same thing; we ponder, no matter what our self-image, if we have that goodness within us that we so admire in others.

What Does This Have to do with Trading?

The reason I bring this subject up on a trading blog is because I believe there is a big misunderstanding about the actions of traders and what those actions represent. Specifically, the notion that buying stocks (and being bullish) is "good" whereas selling or shorting stocks (and being bearish) is "bad."

Let's start with a few basic facts:

Unless one's trading size is so gigantic compared to a given security's volume that you are going to push the market substantially up or down, your actions are immaterial to the market as a whole;
Unless you are actively and effectively spreading malicious untruths about a given organization or security, you are trading morally
Your participation in an aftermarket does nothing to help or hinder a public company.

Let's focus on that last point. If you buy 5,000 shares of AAPL, the company Apple doesn't care. You're not helping them, or their employees, or their sales, or their customers, or their management of expenses. If you short 5,000 shares of AAPL, likewise, the company doesn't care.

Now, if it were 1976, and Steve Jobs and Steve Wozniak came to you for startup funding, and you gave it to them, Apple would care very much. Because you are providing them what they need to create a business. And if, in 1980, you as an investment bank agree to underwrite their public offering, Apple again cares, because you are providing them with a source of financing that will help them grow as a business.

But once a company's public, your actions as a trader really have nothing to do with them. Sure, a company (and more particularly, its shareholding employees) like to have a stock bid up to higher prices. But your actions as a trader aren't creating any good (or evil) for that organization. You are operating in a realm outside the bounds of that enterprise.

Creation and Destruction

Some people get the idea that bears are malicious, nasty, grubby creatures that relish the thought of destruction and collapse. I can't speak for all bears, but I would say for myself - - and I would think most sane people - - that this notion is absolute junk.

An objective technical trader does the following:

Examines a chart;
Reaches a conclusion;
Acts upon that conclusion.

There is nothing malevolent in the above. Nothing. If I believe the stock BIDU is going to fall, and I short it, then I am taking actions that I hope will be profitable for me. I am taking a risk. Yes, I am hoping the stock will fall, because that benefits me and aligns with my analysis. It feels good to be right, and it feels good to take a profit. But this "hope" has nothing to do with wishing ill on others; it is simply a supposition made based on analysis.

Others might say bears want America to fail, or that they hate America. Again: utter crap. I love this country. I built a business here, creating employment, products, and profits - - and I sold it to a much bigger firm. I raise my family here. There is, on the whole, no other place I'd rather live.

But my perception that this country is going very bad places doesn't make me un-American. If anything, my willingness to perceive and talk about these concerns makes me that much more of an American. I would like to see this country come out on the other side of this mess in one piece. I would say blind optimists who figure things will get better just because they ought to get better are unpatriotic by way of their apathy.

As for corporations: if you really want to destroy a company - - - if that's your fondest wish - - - then create a better competitor!

Who do you think had a more destructive effect on Yahoo.............(a) short sellers, or (b) the founders of Google? I think even 2 million short-sellers couldn't even approach the damage that the 2 co-founders of Google created. So Joseph Schumpeter's notion of "Creative Destruction" wins the day.

The Amorality of Trading

For 99.9% of traders out there, trading is an amoral act. You're not good for buying; you're not evil for selling; you're not virtuous by being bullish; you're not malevolent by being bearish.

What about the circumstance where you actually make a profit as a direct result of the suffering of others?

Let's suppose that, on September 10, 2001, you were strongly of the opinion that airlines were going to go down in price, so you put all of your trading capital into puts on American Airlines, United Airlines, and the like. September 11 happens and - when the market finally re-opens on the 17th, your puts soar in value hundreds of percent (I do not know what the options actually did during that month, but I am guessing this is close to the truth).

Was there evil intent in your trade? Did you contribute to an evil cause? Did you assist the terrorists? No, of course not.

Did you (unwittingly) profit because of a terrorist act? Yes. Does this make you evil? Based on hypothetical circumstances I have described, I would say the answer is no.

Now, it certainly might feel unseemly if you were in this position (and we won't even go into a potential visit from federal authorities, curious about your prescient timing). Your profits might feel like blood money to you - - you might even donate all the profits to the Red Cross, since it would seem like the right thing to do.

I propose that you have no sin which you need purge, although I do agree it might be fitting, and erase a perceived stain on your soul, to surrender the profits, since the circumstance would be profoundly unusual.

But, let's face it, 9,999 times out of 10,000, a profitable short sale or put position doesn't do well because of an event that causes human suffering. But I think the wise bear keeps his mouth shut about profiting from a company's troubles - - - no matter how morally neutral a trade might be, there is still room in this world for decorum and common sense.

The bottom line, for me, can be expressed simply as this..........

You simply are; and your trading is; and the markets are. These things are neutral, and it is yourrelationship to the market that will dictate your profits and losses. Outside of those boundaries, nothing matters, and no one need care.

Friday Mixer

2009-11-06T12:59:51-08:00

Tim Knight

Last Shorts of the Week

2009-11-06T12:07:49-08:00

Entering these new shorts with these stops:

A 26.49

AES 15.45

AM 23.26

ATVI 11.75

BCS 24.46

BEN 114.84

BIDU 428.71

BLL 50.80

BNE 7.15

CAVM 19.94

CBE 33.90

CEDC 45.30

COL 52.67

FFG 21.28

GEF 57.95

HXL 12.41

IGT 22.05

JCI 27.29

KEX 36.89

MIDD 47.26

NI 13.78

NTG 48.86

OIS 38.46

ORLY 40.51

RYN 40.11

TEG 36.26

UNP 64.96

YSI 6.56

Similarities Abound

2009-11-06T10:09:38-08:00

So many of the ETFs and stocks I am viewing have a similar pattern - - a series, over the past two months, of lower lows and lower highs. I am using today as an opportunity to re-enter a number of short (or ultra-bearish ETF) positions. Recall that a few days ago I lightened up pretty widely; I am loading up again.

Emo

2009-11-06T09:25:20-08:00

One of my favorite comics of all time........

The EKG Market

2009-11-06T07:59:32-08:00

Lord in heaven; can anyone actually trade this thing? The markets have entered their insane phase; just look at those lunges on the /ES.