Tuesday, April 14, 2009

Gold Satan (GS setting up long...or short)

All work and no play makes Jack a dull boy - buy that bear a beer tonight!

Tomorrow may be the difficult day for me and ultimately I may need to adjust (re-accumulating longs so far this week has been painless, with some simple hedging). Early in the session tomorrow however, I am looking to add to longs...then basically scramble if the market is not able to catch a bid. If the futures reverse before the open I will hold off on that idea, but on a gap-lower I'm going to be a buyer early, trusting the market will firm; until it doesn't.

In fact it is GS surviving a test of the 200-day ma that I am most interested in and as long as it doesn't gap below that level (113.40), I will dance with the devil himself; using the 200-day then as my stop-loss benchmark (preferably on a closing basis, however I would take losses sooner if it is below that level after 60 to 90 minutes, making lower-lows and/or volume is heavy without any signs of recovering; I'll convey whichever occurs and my actions via Twitt).

The more I think about this the more I like it. GS is the leading financial stock and the beast of the bellwethers. And while I know there are a lot of fans (not to mention a lot of funds) willing to buy Goldman, everyone I read around here seems to be uber-bearish on this one, even though it has proved itself a very powerful monster.

My risk/reward is very favorable, assuming it sets up properly (again, I would not buy if it gaps below 113.40, unless or until it reversed back above that level and I would add further if it then reversed up above Tuesday's [edit: 115.11] close; employ the 200-day bench then from there).

And here it is again - I don't care if I lose money on this trade.

I don't care because it is a set-up I'll take every time (buying the leader of a group which is rising rapidly in relative strength, at its key moving average early in a session in which the market has gapped-lower). If I trade this set-up 1000 times I know the expectation value is firmly positive (+EV). Give me 10,000 of these - even better. Because if this works I might pull 10-20% in a few days to a couple of weeks, depending; whereas if I get stopped and I have played it correctly, it won't cost me more than 3-5%; not to mention I can then turn around and short a high-volume, clear break of the 200-day; shorting at that point becomes +EV.

Anyway, in your mind I'm walking into a buzz saw perhaps, about to finally have my idiot-head handed to me on a Goldman platter. I've been too stupid-lucky lately but the tide always changes, right?

Fine. In my mind I know I might have a negative session tomorrow. But I believe my potential upside out-weighs what I will be risking. Also, because I'm an idiot, I don't care how wrong or stupid I may be - I'll turn around and get short before any bear panty raids make the next cover of Newsbleak. I don't need to be right.

You point out I'm overconfident - well sure I'm overconfident - how can one succeed at this game without overconfidence? If I'm looking to gamble - even if I have odds to justify the risk - well, I'd better be a little confident. Being meek will not beat the averages. And between you and me, my arbitrage super-computer is still in the shop.

It's the inflexibility and/or inexperience and/or stubborn, scenario-minded thinking that's cost the bears so much of late. I'm over-confident, but also very experienced AND an idiot - that stove might be hot and while I intend to touch it (idiot!) I'll retreat if I get burned (why shouldn't I?). And if it's not burning then I'll touch more and more until I am almost rolling around on the thing.

I'm holding a portfolio (reasonably hedged), but I can change into my bear cheeks inside of a few minutes. Come and get me tough guy - I'm dating Satan's daughter and I deserve to get wrecked. I'll touch her and I'll get burned, but that means I'll cower and run. But if she'll let's me, I'll willing to court this burner for several days or several weeks. The upside justifies properly executed risk.

Total Position: 2.78-to-1 net long, 60% invested
(Note: accts are leaning roughly 1.5-to-1 net long, due to leverage of TWM and SDS hedges)

Currently Long (according to size): ARST, CYOU, MYGN, WNR, RJI, PMCS, MNRO, SNDA, BKE, FORM, BBY, CHKP

Currently Short (according to size): SDS-long (SP500 Dbl-short), TWM-long (Russell-2k Dbl-short)
(Note: inverse-ETFs SDS and TWM represent being dbl-short the respective indices)

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