Wrapping Monday

Somebody pulled the plug and let all of the liquidity flow out of the market at about 2 P.M. - I know my trading portfolio was affected and I'm sure most people took a hit or two. Not sure what it was all about but the Q's dropped through S2 all the way to S3 and if 4 P.M. didn't come they might be falling still.

I'm going with the "profit-taking" theme which is as good as any. Although why all of a sudden at 2 P.M. except, as normal, that's when the program trading machines kick in. This is, after all the end of the first month in the quarter and the fund managers want to have some cash on hand so they can be ready for the buy-fest over the next 7 days or so.


I'm still holding AKS and took advantage of today's pullback to add some more and we are now at full weight. I don't think I'm going to add more at this time. GGB is still in the mix as is DISCA which I decided to hold overnight. Disca is not my kind of stock - it moves too slowly for me and I always feel that I'm wasting opportunity by holding such stocks. But I'll see what happens tomorrow - I was hoping for a 30 cent day today but it didn't happen. Maybe tomorrow. Dropped DPTR for a small loss and I dumped out of JST for a huge profit. I love it when they just explode up for small reasons - apparently they are doing well - whatever it is that they do.

I won't pick on the three amigos tonight because they all went down but not much. AAPL and MSFT lost in the cents range and GOOG lost equivalent in the bucks range - in other words their holders didn't sell them off like a lot of other stocks got sold off.

The model portfolio got ripped and dropped to 12.92% and the benchmark dropped to 5.13%.

The INDU ATR is still coming back down - it printed a 98.15 today. Remember 80 is the floor and that's the number we have to watch for.

The VIX is finally 10% over its 10-period moving average and that is a milestone of sorts and the best news is that the up/down ratio printed 30.15% and that is just pure pleasure - this guy, the NewMoMo dropped to split the 0 line -


and that normally presages a market reversal - up.

My forecast for tomorrow up, up, and away.

The coin says ... heads - also up.

The coin beat me again. The score is now Marlyn 27 - 28 and 12 and the coin is 31 - 24 and 12.

Here We Go Again

Anyone who thought we might get a respite from the range bound madness that is overcoming the markets - take a look


Boring - I'll put an update in the Wrap. We'll see how many times it makes that 15 cent roundtrip.

I did take a huge profit from JST this A.M. - thanks Bullish Jim but I won't be joining you in IN.

I did grab some DISCA this morning off my new day trade finder (close = high). That's working out about as well as I expected in this range bound crapfest we find ourselves mired in. I sold DPTR for a small loss - it didn't appear as if it were going to join the festivities when the Q's started going up.

My two workhorses, AKS and GGB, are staying green and so all is not a total washout today.

See you later in the Wrap.

Stumbling Around

Well I stumbled upon a new method to find potential day trades. It isn't completed yet but I'm going to throw it out here and see if any of you guys want to work with it a bit and come up with some solutions.

This is as simple as it gets - for your favorite price range and average volume simply look for stocks where the "Close equals High of day".

That's all there is to it and here is what it looks like -


On 4/26 we had the "flat top" candle (ignore for the moment the fact that there was a completed BOB just before this event). This was a narrow range day (which seems to be important to the method) followed by a wide-ranging day. The wide-ranging day looked like this -


The fact that this day has a Return to 4 and cross over (the sixth candle is the cross over) just adds to the day trade aspect of the filter.

OK - before we get too excited about that BOB - I tested it v32x where the third candle had a flat top and it returned an amazing 200%+ ROI and a 100% win percentage - but in 80 days it picked exactly three stocks which means that it isn't a good filter for picking stocks - but (second but in the sentence) the win percentage and ROI suggests that when you do have a BOB the closer the close is to the high of the day the better off you might be - think about it.

CandleTricks - II

When I first learned candlestick analysis I learned this nifty little trick that I want to share with you. It is an important tool to add to your tool box because it will help you make sense of nonsense.

First we have the monthly chart of the DIA over a long period of time.


Had you seen that cross over that I circled you would have put all of your money on this ETF and lived happily ever after. What cross over, you ask? Why, this one, I reply -


You see - you can combine 'sticks to make a new stick and now the cross over becomes clear as day.

Even though I had to combine three months worth of sticks to make the cross over what else would you call it? So you see - the current rally was signaled plain as day in February, March, and April of '03. And until we get a counter signal I think it will continue.

You won't get this on any other site on the 'net folks - no where else but here.

The ATR Advantage

Which is better a high average true range (ATR) or a low one? The answer - it depends on the circumstances. If you are going to day trade and you have two stocks where everything else is equal and you only want to be involved with one of them for whatever reason - pick the one with the highest ATR on the minute-basis you are playing (ATR varies with time scale). You do this because you want the most "bang" for the buck and ATR is a proxy for volatility.

But if you are planning a swing trade and you are faced with several different stocks and can't choose between them then the answer is clear - take the stock with the lowest ATR.

Here are the results of testing done with the ATR set at various levels -


Obviousely the lowest ATR has both a better win percentage and ROI. And you can't help but notice that the ROI deteriorates as the starting ATR increases.

Once more this is a volatility issue - before a stock can go up it has to stop and the ATR tells you when a stock is slowing down or "stopping".

One other thing you have to remember is that ATR is also relative to the price of the stock - that is - low priced stocks have naturally low priced ATR and high priced stocks have naturally high priced ATR. So you really can't use ATR across price boundaries.

Remember also - ATR is a guide not a guarantee - trading stocks is a risky business.

Speaking of Fun

All work and no play makes Jack but not much else. I enjoy trading, I enjoy the hunt for a good stock, I like the very act of putting on the trade, I enjoy the wins when they come and I love ringing the cash register on a good trade. But when I relax I like to gamble (as does the Bride).

Over my many years I have played and mastered most of the casino games - at least mastered to the point where I know which ones I should never play and which ones pay the best and by best I mean most excitement and most comps.

For many years I played blackjack - I played back when you could actually make a buck at the game. But over the years, due to exposure, it has been changed by the casinos in such a manner as to make it a chore. If I have to play double deck - fine, I'll even play in a six deck game (but only when I can have the table to myself - there's a reason for this which I choose not to share but trust me when I say it has to do with probabilities and winning). But I will never sit down at a table where you can't double down any hand or one where you only get 6 to 5 for a blackjack. That's just bad and the greedy casinos should be ashamed of themselves. For every guy like me who might grind a couple of hundred bucks out of a night at the table there are thousands who will give them a couple of hundred bucks in a few minutes. This is like the caretakers of the Masters golf tournament changing the course because Tiger Woods got hot - once - it just doesn't make sense. And don't think that the playing public hasn't noticed - I just spent a week in Vegas and some of the loneliest people in the casinos were the blackjack dealers.

For awhile I embraced video poker as the way to play without getting hurt. Most of the games were returning 98% or better and for a number of years the Stratosphere out in Vegas actually had a couple of dozen games that, with perfect play, returned over 100% (based on the pay table). Then the casino managements noticed how people were winning every now and then at video poker and so they managed to beat the crap out that game to the point where you almost do better on slot machines. Thanks guys - the banks of empty games are an eyesore and silent testimony to your greedy ways.

I've played roulette, baccarat, Caribbean poker, Pai Gow, and the newest craze, 3-card poker (which is one of the few games you can win as long as you stay off the bonus button). They also have a 4-card and 5-card version as well as a table version of Hold 'Em. Hold 'Em is an awful game in my opinion - the poker equivalent of a coin flip. I'd rather play 5 or 7 card stud or even a game of Jacks draw than that crappy game - needless to say the several times I've played Hold 'Em I've won. It is all about reading your opponent and has little if anything to do with the cards. Just like trading - read the market which is the other traders and win.

Omaha Hold 'Em which is also played in the World Series is a more difficult game that has just about everything to do with the cards and very little to do with the opponent. As a result it is difficult to find a game of Omaha - too hard for the average Joe - requires too much thinking.

But now when I can't find a video poker game with a reasonable (98.5% or better) return I play craps. Craps is the one game that the casinos can't screw up. The expectation remains the same regardless of the casino you are in anywhere in the entire world. Single odds you give away .8%, double odds you give .6% and with triple odds (which many offer these days) it's down to .3%. Give me $200 and I can stay at a 10 dollar table for hours. Every time I go up a 100 bucks I triple up my wager (once) and go for a big score. If I lose, so what, I'm playing with the house money. If I lose my original stake - that's the price you pay for gambling. I win or lose more than that in 15 minutes on most days playing in the stock exchange casino.

But what I'm after is not a living just a break even plus a bit - and the comps. My bride and I just spent a week in Vegas - stayed at the Paris for 5 days and Bally's for 2 - right on the strip. We stayed 7 nights for free, we ate every meal for free, and drank every drink for free - which includes all of the Courvosier that I could possibly swill in a week (and I am capable of swilling free cognac with the best of them).

We gambled every day and every night - total cost - $1500 including air fare, a boatload of tips, and a rental car for a couple of days.

My advice - don't gamble - it is a losing proposition and eventually will lead to your ruin.

BOB - We Have A Leader In The Clubhouse

I won't say "winner" because that would imply that the contest is over and done and nothing more can change and that it is finished. It will never be finished - the quest is never ending - but we do have a modification to BOB that I'm going to adapt.

Bullish Jim discovered it and you will have to read about that here and I suggest you read Jim's BLog frequently. There are two kinds of trading BLogs out there - those written by people who already know it all and wouldn't change a thing if their lives depended on it and those by people who actively seek change because they know growth only comes with change. Jim's is that kind of BLog - his is one of the good ones.

Anyway, long story short - Jim suggested that we constrain the first two candles to have a limited open to closing range. He did some tests and found some good results and I've followed up and my results are in this post.

I took my original BOB filter ("v1x")

show stocks where close is between 15 and 35
and average volume(90) > 500000
and ema(8) < ema(21)
and close 2 days ago < ema(8)
and close 2 days ago < open 2 days ago
and close 1 day ago < open 1 day ago
and low 1 day ago < low 2 days ago
and volume 1 day ago is more than 20% > volume 2 days ago
and close > open
and low > low 1 day ago

and made a change to it that I called "v31". ("v2" and mods are long gone).

and close 1 day ago is less than 1% < open 1 day ago

I then tested that version - we'll get to the results presently. Then I made a mod to "v31" named "v31x" -

and close 1 day ago is less than 1.5% < open 1 day ago

Followed by another test. Then I made an additional change (which is the change that Jim proposed) and I called this "v32" -

and close 1 day ago is less than 1% < open 1 day ago
and close 2 days ago is less than 1% < open 2 days ago

And tested that version. This was followed by one more change that I named "v32x" -

and close 1 day ago is less than 1% < open 1 day ago
and close 2 days ago is less than .5% < open 2 days ago

Notice that the difference is that the red bar two days back is constrained tighter than the red bar 1 day back. I tried it the other way around and achieved good win percentage but bad ROI. This way seems to work much better.

Here are the results -


And what now?

The tradeoff, of course, is that there is a variance in number of stocks selected as the filter becomes more constrained - here is how that looks -



You see that as the constraints become tighter you get a better return on the investment but the numbers of stocks selected goes way down. This is a dilemma - what to do, what to do?

Well here is what I'm going to do - I'm going to use every version and I'm going to access them daily in reverse order - "v32x" through "v1x" in turn and the first time I get a selection - that is going to be my BOB selection of the day.

Consequently I know that the risk is increasing as I progress through the filter set but we encounter risk all the time in this business. And the way we handle risk? Tighten up the stop.

Thank you Jim you are the Leader in the Clubhouse in the race to find the "better BOB".

CORRECTED:

And for any new readers - I use stockfetcher.com as my test bed. There may be better ones out there but this one is reasonably priced, allows me absolute freedom to write any strange method I can come up with and are really, really, really fast when responding to your plea for help via email.

Wrapping Friday

Another record. That's nuts. Now we go into the new month (well technically still one day left in this one) and the new money comes into the market.

We've had some crazy moves today - it was raining most of the day so I couldn't get outside much and spent the day glued to my screens. Just as well - I had a couple of opportunities and I took advantage of them. I bought DPTR off a cross over but was premature. I'm holding it through the next couple of days because I expect the market will take off again next week. I added a little to GGB and a little to AKS. GGB is about half weight now and AKS is 90%. I'm still holding JST and will give it another couple of days and if it doesn't move with the market next week - it will be gone.

Here's a story on me - I bought a couple hundred shares of MFE this morning just because I wanted some tech exposure, I like the company and it pulling back from a rise. As is my habit (for want of a better word) I put a 25-cent stop below my buy price and hardwired it into the account. I hit the transaction button and then switched to the accounts screen to ensure all was OK - I couldn't find MFE. Totally confused I went to the stop screen and still couldn't find MFE. I then switched to the execute screen and there was MFE - bought and 30 seconds later stopped out. I think the second I hit the transaction key on the stop order it triggered. Needless to say it sat right on that number for the rest of the day and closed 1 cent below it. I don't own MFE and I never will.

Here is the rest of the story on the Q's -


And isn't that a neat end to an interesting day? I don't know how to characterize this action except - wow!

The INDU ATR is down a bit to 101.44 and this guy continues to recede -


I think this means that the rally continues.

The model portfolio that I wrote about this morning lost a bit (2.31) and posted a 15.59 (ICON was the big loser on the day). The benchmark gained a few to 6.39. Still 9 points of Alpha is nothing to sneeze at.

The three amigos (winkin, blinkin, and nod) are embarrassing to say the least - MSFT broke 30 again with a 1.02 now let's see how long it can hold it - doubt it will be for long - I mean this is the stock that rang up 69% profit yesterday evening and all it can gain is 1.02. AAPL managed to pull within 8 cents of a 100 even with its 1.08 gain and GOOG resumed the fall, or the slide - whatever you want to call it.

The VIX stays in neutral which is just as well (neutral, for those who don't know the code is that region between -10 points below the 10-period moving average and 10 points above the average).

A month ago I put together (and wrote about in the BLog) what I called the "must buy" portfolio - 15 stocks that kept going up through the collapse in late March. It is now ringing up 5.22% (that's one month returns folks). I'll publish those names over the weekend. There's probably a few on there some folks would like to put in their core portfolios.

The good news is the up/down ratio is printing 39% - look out above.

For Monday I'm forecasting an up day.

Coin says tails - looking for a down day.

Coin missed, I forecast a split day with the DOW up and the COMPQ down - only got that half right so I'm giving us both a loss. The score is now Marlyn 27 - 27 and 12 and the coin is 30 - 24 and 12.

Interesting Day

Seeing is believing - I don't know why this works this way except that everyone uses pivot points and so it makes sense to buy and sell in a channel such as this.


We've got a little BOB along with some tweezer bottom action and Brett Steenbarger's Bull Bar at 13:15. But it can't break the pivot point barrier.

If someone told you that the Q's were stuck in a 14 cent range today would you have believed him? I doubt it.

Some Mods To BOB

When I first began this BLog I did it with one purpose in mind - to share my ideas regarding filters with the general public in the hopes that it would stimulate others to begin thinking about these things and to start looking at new ways of looking at the market.

I think I'm succeeding. Recently I've had several comments directed at possible modifications to the basic BOB and I listen to everything and try as much as I can possibly get to given a limited amount of time and an imagination that is always running wide open.

Anyway the mods proposed were BOB for close above the EMA(90) only and that the volume on the third candle be higher than the volume on the second. So I tested each of these propositions. True to my nature (contrarian always) I tested both above and below EMA(90) and volume higher than 1 day ago and also lower than 1 day ago. I also re-checked the original BOB. The test period was consistent for each test.

The results (drum roll please) ---


I don't make this stuff up - While there is something to be said for each of the modifications in either win percentage or ROI only the original BOB excels in both.

Keep 'em coming guys - sooner or later someone will find the ultimate BOB modification - I just know it.

Return To 4

One of my tools is the Return to 4 (RT4) method which I use in gap-up situations to inform a day trade.

It looks like this -


Even though I call it the Return to 4 the price could actually drop through to the 8 or to the 21 - the method remains the same. In order to know that you have the real thing you must see the rebound candle and buy off the top of that. In the chart above and below that is the third candle in.


Frequently, as seen here, the RT4 is associated with a pivot level, in this instance it was resistance 1. After crossing back through R1 it rebound from the EMA 8 and passed through it again going up. This trip took it all the way to R4 before it started getting choppy.

As a little added value - note that a BOB formed just below R4 and it took off again for another great day trade opportunity.

This method works from minutes to months although you might not get a gap-up on the monthly charts. Instead what you will see is a long candle and then several short ones as the stock pulls back to the EMA 4, then it will rebound and away it goes.


Here you can see one forming between April and August of '06 - about the time that all of the bobbleheads on bubblevision were calling for a market collapse what was really happening was a RT4. Isn't it amazing?

Cross Over - Reverse English

I mentioned the other night that the cross over method can also be used to short the market - here are a couple of examples -


About 12:45 you can see the crossover clearly. It didn't net much but this is just an example of how it works.


This is DNDN and this shows where I should have sold the stock on Wednesday morning rather than waiting for it to hit the stop loss. The 5th bar in shows the cross over.


The third bar shows the cross over and this one nets a good return.

They don't always work so you have to put a stop in but in a day trading situation these are as powerfull as you are going to get. Use the top of the cross over bar as your stop point and watch your candles for an exit.

Remember - one candle does not make a cake - which is just my obscure way of saying - wait for confirmation before acting.

This works on every time scale from minute bars to monthly.

And once more even though you are as tired of reading it as I am of writing it - stock market gambling is not for the weak of will, spirit, or heart - it takes real courage to put your hard-earned (or otherwise) money on any U.S. company with their proforma earnings and GAAP (which rhymes with crap) bookkeeping methods - never mind a foreign one where regulation is just another four-letter word.

Lessons From the Model Portfolio

These are the stocks that I selected the morning of February 28th to put into my model portfolio along with the base price and the price as of Tuesday and the gain/loss since the simulated acquisition.



Needless to say there are only a couple of "contest winners" but all in all a nice set of winners (with one loser - to date). Considering that these were all plucked out of thin air based on a "going up before February 27th within a specified set of prices and average volume" filter, they didn't do too badly.

This suggests that you want to wait for market pullbacks in your quest for profitability. Unfortunately we don't get such cleansing action but maybe once or twice a year so the opportunities are few and far between. But when they do happen you must be ready to take advantage of them.

Wrapping Thursday

Pretty mild day all told. I bought the KMX as I said I would - we'll see how that works out. Still holding AKS, a small position in GGB and JST and for the first time in a long time all my holdings lost money today.

I did get to play golf and that was good.

The model portfolio lost money today and closed at 16.20% but the benchmark surged ahead and hit 6.60 a .17% gain. The INDU ATR dropped to 102.61 and that is just fine with me. The rally will continue.

So do you remember AAPL computer, the company that blew the doors off earnings last evening, well it made exactly $3.49 per share today which is pathetic. GOOG, a company that didn't do anything in the past 24 hours made $3.19 and MSFT, well, what can I say - another 11 cents in the till. Mom would be so proud. Of course MSFT reported a 65% increase in earnings (can you spell Cook(ed) Book(s)) and that will drive tomorrow's market and maybe even Mr. Softy will catch a bid or two.

GRA dropped a few cents today on good earnings and OI went up 4.20 on adequate earnings. That's why I call it roulette you never know what number will produce a winner.

This guy is pulling back again


which is good.

The VIX remains in neutral and the up/down ratio pulled back to neutral, posting a 47%.

In the face of all of this exuberance I'm calling for another mixed day tomorrow - yes, that's right, I'm forecasting the Dow to go up and the COMPQ to go down.

The coin, having only a binary nature, is calling for a down day tomorrow outright.

Another tie day leaves the score at Marlyn 27 - 26 and 12 and the coin is 30 - 23 and 12. This year, for all of the record breaking going on - is not as good as it looks.

I'll be back tomorrow with some additional posts regarding the cross over method. Stay tuned. Oh yes - I remember - the model portfolio - I'm working on it.

Thursday - Not Expecting Much

Weak opening - and if you think a gap up on the Q's means anything wait awhile - Thursday is the best day for gap closing both ways.

I was correct regarding DNDN and the probability of a jump up which I felt was nil - it jumped down instead and hit the stop - oh well - good riddance - I hate biocrappa anyway.

Looks like we're going to get that down day that I've been looking for - SPY is already red and Q's have lost half of the open. DIA is still plugging along hard to kill that momentum.

I'm going to add KMX to the trading portfolio once the market settles. I picked this one off the cross over filter that I wrote about earlier.

Sold most of my GGB holdings - I'm not going to lose a significant hunk of profits to a stock that just stopped going up. If it pulls back far enough today I'll layer back in tomorrow.

And interestingly enough - AAPL gapped up and immediately began falling.

DIA has already lost back about 60% of its gap up.

Going to be a good day to go play golf. See you tonight with the Wrap.

UPDATE: This is interesting

The power of R1.

Cross Over - The Filter

I have been working on the Cross Over filter for several years and I think I might have finally found one that is everything I look for in a filter - good short term and excellent swing trade potential rolled up into one common package. Here is the filter -

show stocks where close is between 15 and 35
and average volume(90) > 500000
and open < ema(21)
and open < ema(8)
and open < ema(4)
and close > ema(21)
and close > ema(4)
and close > ema(8)
and close > open
and close 3 days ago < ema(21)
and close 5 days ago < close 3 days ago
and close 5 days ago < ema(90)

For a long time I was trying to manipulate the EMAs so that the bundle of averages formed the correct (in my mind) sequence. Then it occurred to me that all I really care about is for the open to be below the three traces and the close to be above them and I really didn't care what sequence they fell into.

The next important step was the fact that I wanted the previous closes to be below the crossing bar and adding the additional requirement that the close of 5 days ago be below the close of 3 days ago adds tremendous value to the entire process.

And believe me when I say that it tests significantly better when the close 5 days ago is below the EMA(90) than when it is above.

When I ran my first tests I was pretty pleased with the results. Long time readers know that the current test period (11/06-3/06) is a very difficult period and it takes a serious filter to break through the malaise of end of year into early year trading. Well this one kicked it - and soundly. After seeing that I tested both sides of the current period and came away with some very good numbers. Here are those results


The Net Change numbers are also impressive


So once again - a simple filter with significant results.

This is not an invitation to speculate on the stock market. If you don't have the stomach for risk I would suggest you buy a market-tracking ETF such as the SPY and amaze all your friends with your constant Beta of 1 and non-existent Alpha.

Simple Methods - The Cross Over

Simple methods that are price-based are the best. While waiting for one moving average to cross another moving average, or worse yet a system of moving averages such as the MACD to get involved, you will miss a lot of a move. For long term traders this is not necessarily bad - for swing traders it means significantly lost profit.

That is one of the reasons why I like using indicators such as a declining MACD as a "finding" method and then switching to using candlestick price action such as the BOB to inform my buy decision. It is also the reason why I prefer exponential moving averages - they are closer to reality than any other kind of moving average.

The Cross Over method is another trader's observation - not quite technical analysis but close enough to be confused for it. You will find cross overs on every time frame and what they signify is a vector change in the stock. A vector consists of both direction and magnitude and the cross over is generally accompanied by a reversal of course and a quickening of price (increasing volatility).

When the cross over is up, as is shown in the following chart of NI -

it can presage an extremely profitable buying opportunity.

The cross over can also be employed on the short side.

The rules are simple - for a buy the day opens below the EMA bundle (4, 8 and 21) and closes above the EMA bundle. This is shown on 3/15 on the chart above. You can buy on the open or close the next day and set your stop below the cross over candle's low.

Exiting a trade is always a personal preference - maybe you only want to hold it for a couple of days, maybe you want to hold until the EMA's start bunching again. You can see where that begins to happen around 4/12 or so. I personally find that candle at 4/03 - one that I term the "cathedral of dead money" (especially after that long white "blow off top" on 4/02) - is an indicator of the end of the run.

As I say there are many ways to find an exit - there are only a few to find an entry and cross over is one of them. Remember it isn't "high" and "low" but "open" and "close" - the body of the candle must bisect the bundle.

Simple methods = good profits.

Wednesday Wrapper

Another! Record! Day! - I've covered this in my earlier post regarding volatility so let's get to business - it's hard not to make money as long as you dump the weak ones and put good ones in their place.

I did that today - I dumped KEP after expecting it to go up on a record in Korea last night and it didn't and that's what you get for buying a stock with a 37 cent ATR. Keep that in mind when you are faced with choices in the market - if the stock looks like it is about to run - a low ATR is a good thing as long as there is a high ATR at the end of the rainbow. But it wasn't looking like it was going to run having missed a wonderful opportunity.

I replaced it with another shot at DNDN which I held this time for an overnight trade - I'm hoping to catch a jump tomorrow. The fact that it didn't participate in today's festivities doesn't leave me with much hope. I also bought JST which is a stock that Bullish Jim bought and I liked the chart so much I had to have it. About mid-day it came up with an RSI(2) < 2 right on the 15's around a support point so I jumped in. It's a nice looking stock and I think it has some room to run.

Still holding AKS and GGB although GGB is starting to disappoint. I think on Friday I'll put on a tight stop and if it hits it it's gone.

A couple I could have had but chose to ignore were PKG and NI. These would have been classic Return To 4 day trades and here are the charts -




PKG was the best of the two and it turns out it announced at 10 A.M. and made triple earnings last quarter. The country runs on packaging.

Why did I choose not to participate - to be candid I'm not feeling all that great and while I can make longer term decisions with a head cold I don't like to day trade with one.

Anyway there is an interesting feature on both of these charts that I wanted you to see and remember and that is that little doji about 5 candles in on PKG - we call that an NR7 or narrowest range in 7 bars (counting two from the day before that I didn't show - it's 6 candles in on NI). That's another one of those "buy me" indicators that day traders snap up as quick as they appear.

The other thing I wanted you to observe and remember if you can is the ATR action on these two stocks. A moment ago I said a low ATR was good if the stock appeared to be ready to run again and both of these had that look about them even though they flattened out for much of the day.

The three Amigos all made money for their loyal fans today and AAPL did the best with a two buck increase. GOOG of course, that stock where one share costs 477 dollars brought home 46 cents for its fans - $4.60 on a hundred shares won't get you a happy meal folks - kids go hungry tonight. And MSFT - what a piece of crap - 20 cents - of course that's 20 times the profit from yesterday. If given the fact that not only did the DOW break records today but both the SPX and the COMPQ went up significantly as well and between them these three megacraps couldn't scrape up enough for carfare home - I have to ask again - why in hell are you holding them? Don't answer to me - answer to yourself - I'm sure you have a good reason such as "just because" or "because I wanna" or "someday that GOOG short squeeze will happen and Marlyn you'll just look stupid! stupid! stupid!"

Of course AAPL earnings rose (after hours) and the stock is up 7 and a half putting it over the magical 100. We'll see tomorrow if it can hold it. The paltry IPOD increase doesn't appear to me to be enough and, we already knew about that for about two weeks now (read Notable Calls) so what the exuberance is all about I haven't a clue.

GRA and OI, two of my former holdings, both announce after market close tonight - GRA actually went up a buck today and OI did what its been doing lately - went sideways - usually this means that GRA made and OI missed but I don't know how with the way PKG came in this morning. If they get it out before I end the wrap I'll let you know what the outcome was.

This guy went back up again -


Which as I've noted is pretty meaningless but the INDU ATR came back in a little to 109.05. That's OK - the rally continues.

The model portfolio is up another 1.09% today to 16.71 and the benchmark went up .91% to 6.47. If I get to it tomorrow I'll print out the model portfolio, the starting and current values.

The VIX remains in neutral and that's not a surprise - no one really knows what to do right at the moment - this week is all about writing options and getting inventory back up again so I doubt it (the VIX) means anything at all.

But the up/down ratio is printing 59% and that should be enough to get us a breather tomorrow. I forecast a down day.

The coin says ... tails - also looking for a down day.

Having both hit the nail on the head the score stands at Marlyn 27 - 26 and 11 and the coin is 30 - 23 and 11.

Neither GRA nor OI have made any splash at all AH so I guess they were adequate. We'll see in the morning.

Volatility Is King

Long time readers know that I hold the average true range as the key to volatility. Any other so-called volatility such as the VIX, VXN, or VXO are pretenders in my humble opinion.

Long time readers also know that whenever I make a bold statement I try to back it up with evidence - here is the evidence -


You can see where the ATR was during the "bubble" of the 90's. It began below 600 (monthly charts please) and then slowly climbed to over 900. 900 seemed to be the catalyst for the fall because once it broke 900 there was too much volatility and not enough liquidity to sustain the price and the market fell.

We've seen this picture on this BLog before - most notably on the daily basis since the 27th of February. You can see that the ATR did not break until the market bottomed - at that point it began to fall in a significant manner and the market resumed its climb. Notice too that well before the market completed its fall that volume was cut almost in half.

Now a lot of people are going to be saying all kinds of doom and gloom crap about Dow at 13000. All you need to remember is that the only number that matters is the ATR at 505.

And I know that there are hundreds of people, maybe even thousands who would disagree with my every statement - but none of them can produce a picture like I can.

But always keep Rule 1 firmly in mind - nobody knows nothing - including me.

Tuesday Wraps

Another pitiful day. I made money but only because I held AKS though earnings. Of course the fact that it was booming for the past 5 days or so and announced another early pension trust fund contribution on Monday didn't hurt my cause. In fact - if you are thinking about holding a stock through earnings those are the kinds of things to look for. AKS also guided higher so I believe I can hold it without a problem for a bit longer.

GGB on the other hand, the other steel company that I am holding, acted poorly yesterday and started sliding today so I sold it off - all of it. Then I reacquired a starter amount at a lower price and took on a second portion this afternoon. I'll build it up again if it resumes the upward march but I had too much profit in it to let it drift away. It will either go up and remain in the portfolio or drop and be kicked to the curb.

DNDN didn't work out as well as I thought it might - I truly expected another one and a half to two dollar day and it stalled and crashed. I dumped out this afternoon for a small loss ($130). I also dumped out of ANR this morning for a break even (including commissions) and added to KEP. I'm not sure why I like KEP except I expect the Korean's to come back tonight and that will reflect nicely on that stock tomorrow. I'm in it until Friday at the earliest (or stop out if it drops over the next couple of days).

The INDU ATR is at 105.87 and that is rising which is OK. The rally will continue. The VIX remains in neutral and NewMoMo continues to drop.


The model portfolio gained a few today to 15.46 and the benchmark printed 5.51% which is also up a small bit.

The three Amigos reflected the psychotic nature of the day with both AAPL and GOOG dropping a bit and MSFT rewarding its legion of followers with a 1 cent gain. Now that might not be much to you or me but there are over 5 billion shares in institutional hands alone - you do the math. I don't know why those 5 billion + shares are worth one cent more today than they were worth yesterday but - whatever.

The up/down ratio is at 38% so I'm going for another up day tomorrow.

The coin says ... heads - also calling for an up day.

Another tie day - the score stands at Marlyn 26 - 26 and 11 and the coin is 29 - 23 and 11.

The Blow-Off Bottom or BOB

I like to do a post on the BOB about once a quarter so that new readers won't have to search through the posts (I'm bad at organization) looking for the details.

I'd like to say that I "invented" the blow-off bottom (BOB) but that would be totally inaccurate - BOB was always there - all I did was find a particular formation and then describe some rules that could be coded into filtering software and then gave it a name. BOB, therefore, is not so much an invention as it is an observation and since I'm the first (that I know of) to chronicle it - I guess I'll take credit for it.



The rules are simple and the only rules that you can't change are the fact that the second bar's low is lower than the first bar's low and the third bar's low is higher than the second bar's low and the second bar's volume is greater than the first bar's volume. Other than that everything is optional.

I use the first two bars of the BOB to set-up potential day trades (trying to catch the third bar) and that is frequently profitable.

I Get Questions

Jørgen said:

I've been trying to develop an rsi(2) swing trading system now for a while, perhaps some of my findings could be useful to you and I hope you might have some suggestions to how I can improve it.

Buy criteria:
rsi(2) < 5 and volume(not average volume) > 150000

Sell criteria:
when rsi(3) crosses over rsi(5)

Annual ROI from this hypothetical system depends on what the buyprice/sellprice are. If I set it to buy and sell at open, the ROI for the last 3 years is over 180% and set to average price for that day, around 160%. Max drawdown in that period is 23%. It seems to work best on AMEX stocks, why do you think this is?

One of my other questions to you is what price I can realistically set the buy/sellprice to? If the stock gains 10% in the first market hour, I would probably not catch it. I don't have realtime and I'd prefer not to have to spend much time daytrading, so some way to 'set and forget' this system would be the best option for me. I could maybe have a predefined buy level, so if the stock goes below that during the following day I buy it, but I'm unsure as to how I should calculate the buy stop level. Any thoughts?

A lot to work with.

First - the RSI approach is valid but it is missing some elements - for example - what is the price range that you feel most comfortable in? For example if you are trading a small account you might want to use my range of 15 to 35 dollar stocks. Lower priced stocks are generally too cheap for anything other than nickel and dime day trades or long term "I believe in them" trades. Higher priced stocks won't allow you to accumulate the necessary weight to make any real money.

Second - while a single day's volume is OK to make a selection it seldom tells you anything except that the insiders dumped a bunch. You really need to have a consistent high level of volume to ensure that the stock is liked over a period of time and not just one day out of a hundred.

Third - why cut off at RSI(2) < 5? Why not use what we've already tested and found worthwhile on this site - RSI(2) < 2? It outputs plenty of selections and you can be pretty sure that they are ready to bounce.

I've re-written your RSI method as follows -

show stocks where rsi(2) < 2
and volume > 150000
and close is between 15 and 35
and average volume(90) > 500000

This obtains 61% win rate, a 59% ROI (annualized) and a 1.61% reward/risk ratio. These aren't bad but another filter I'm currently exploring -

show stocks where close is between 15 and 35
and average volume(90) > 500000
and close crossed above cma(s2,6) within the last 2 days

Obtains a 66% win percentage, a 78% ROI and 2.05% reward/risk over the exact same test period.

I like using RSI based systems to find stocks that might be depressed enough to buy but there has to be other indicators involved as well. Even for day trades - in day trading the RSI(2) < 2 indicator is very powerful, but it becomes even more powerful when coupled with a tweezer bottom or pivot point or other support point.

Take the price you get. If you think the stock is going to go up over a period of days then pay the price and take the ride. If it goes up 10% at the open wait until it comes back a bit or until the close to make the buy.

Trading is more about risk than anything else. If you want a "set and forget" system then I'd leave the short term indicators (RSI) in the can and look at price based methods - a simple system such as the blow off bottom (BOB) that I posted about earlier today makes more sense. Or perhaps a pivot point based system. Or perhaps the old Donchian channel method. Any of these together or separately will get you stocks on the verge of a run and early enough in the process so you can garner the shank of the move. And then you can use candlesticks to inform your exit point. The sticks always tell you when the run is done.

I use pivot points or the ATR to determine a stop level. When I first enter a trade I usually set the stop very close to the buy point - if the trade goes against me right away I want out. After that I use a pivot point and change it on a daily basis or a multiple of the ATR and trail that. Most often my stops are mental because I don't like to let the market know what I plan to do.

Tuesday Pre-Market

The USDJPY is suggesting an upward trajectory to the day - probably not a good day for day trading - one shot up and then drifting.


Based on some material I read on Notable Calls I'm going to take a position (not day trade) in DNDN. Looks like it might have a winner coming.

Read your notable calls - more good ideas there than in any ten BLogs that I can think of.

UPDATE - Yeah - one shot up and then drifts off to sleep. Looks like it is recovering though so there might be some good day trade action today - keep an eye on the gap ups and return to 4 for the best bets. DNDN looks like it might fit that mold but I'm going to hold it for awhile - I'll just add off the RT4 set-up.

Wraps Monday

Stocks Drop on Rising Oil Prices

You betcha they did - rising oil prices and no volatility and no liquidity and nothing to buy - oh my - oh my.

Still holding AKS and GGB and one went up and the other stayed about the same. Dropped AMAT - actually it hit a very close stop that I put in place because I didn't like the action and I was correct - see I don't need to sell them - I just put my stop up under a pivot and say - this far and no further. Try it - you'll like it.

Added to ANR at the end of the day on an RSI(2) < 2 indicator which was also at a pivot point. And I put KEP in the trading portfolio for a 5 to 10 day ride (or stop out whichever comes first). KEP comes in from my new filter - LRS going up and RSI going down that I wrote about over the weekend. The other pick from that filter was TWX and I don't like Time Warner or AOL.

Day traded DNDN off a gap up, pull back, and reverse crossing formation on the 4 minute charts - I wasn't going to stay in for a buck and change but I did.


The volume increase informed the trade and the hanging man at about 1:30 said let's get out of here. In at 15.12 out at 16.79 not a bad piece of work. I used my "gap-up" filter from stockfetcher to catch it for my gap-up watch list. I like trading stocks I've traded before - I understand how the traders work with them.

The NewMoMo is reversing again (down) and that is good -


The INDU ATR is up a bit to 100.67 which suggests a continuation of the rally. The model portfolio is at 14.97% which is up a little today and the benchmark is 5.4% down a little today.

AAPL is up a couple of bucks on news (see Notable Calls) and GOOG has lost the love from last week and dropped a couple. Still don't know what anyone sees in that stock or what they are expecting from it.

Is range bound one word or two? - Oh that's right, it's one word and it's spelled MSFT.

The VIX remains in neutral and the up/down ratio prints 40%. This is probably enough to get the market up tomorrow but I don't know how far it will go.

My forecast is up -

The coin's guess is ... heads - up also.

Wonder of wonders - technical ability beat luck for a change - the score stands at Marlyn 26 - 26 and 10 and the coin is 29 - 23 and 10.

It Might Be A Good Week

The Weekly BOB filter has a whole bunch of good candidates for this week and I'll just give you the top 5 of 26 (by volume)

SBUX
DHI
PALM
NDE
BPOP

Two of these BPOP and DHI already announced earnings on the 19th. SBUX is coming up on the 3rd of May, PALM isn't until June, and NDE is announcing on the 26th.

None of these appear to be bad on the daily charts but do your own due diligence.

This is not an invitation to speculate in the biggest casino on earth - the U.S. stock exchange where fortunes are lost, hearts are broken and total ruin is the only possible outcome. There is a good reason why the sign - Abandon Hope All Ye Who Enter Here - is posted above the portals of the NYSE. You've been warned.

A New Approach

It was too nice a weekend to sit and update the old BLog so I hope you all did something special with family and friends as did I.

But while I was enjoying the weather and continuing my quest to get my veggie garden ready I came up with a new idea.

Some months ago I showed you all a filter that captured stocks when the MACD first crossed below the 0 line rather than waiting for it to reappear in positive territory. I suggested at that time that by the time you caught the MACD on the upswing most of the move was probably done and you would only be getting the leavings.

This filter is much the same except I'm using the linear regression slope (LRS) coupled with an RSI(2). Again my preference for filters is to use indicators that are as close to real-time as I can get them and the linear regression slope is one of those critters. Also the RSI(2) is about as close to real-time as you can get and still have an indicator of some kind.

Instead of picking a single point in time for either of the indicators I'm looking for a process - I want the RSI(2) to be descending and I don't care what the values are and I want the linear regression slope to be ascending with the only caveat that it was less than zero 5 days ago. In other words the stock is showing some momentum slowdown (RSI) but at the same time it is reversing its course (LRS). As readers of this log know - stocks slow down and stop before they reverse course - in both directions.

The LRS takes a bit to move it - it is a large boat and large boats require a lot of time and water to turn around. The RSI on the other hand is a speedster and it moves pretty quickly up and down. Here is the filter -

Show stocks where close is between 15 and 35
and Average Volume(90) is above 500000
and rsi(2) has been decreasing over the last 1 week
and linear regression slope(45) has been increasing over the last 1 week
and linear regression slope(45) < 0 5 days ago
and draw cma(pp,4)

The line regarding the cma(pp,4) can be ignored for now - it is just something else that I'm working on. Generally speaking from observation only it can be used to enter the stock (close > custom moving average(pp,4)) and as an exit method - (close < cma(pp,4). I didn't test that, I only observed it.

A typical selection looks like this -


It back tests nicely as a good swing trade selector - short term it is merely adequate. The numbers were 61% win ratio, 1.52 reward/risk and 39.11% ROI short term. But where it excelled was in the 30 day region where it returned a 6.94% net and that is fantastic.

So if you are looking for a filter that finds depressed stocks that are on the mend - this is it. It doesn't pick very many - about 1 every other day or so - but those it selects are generally green at the end of a week.

Friday Wrappers

Wow! - I've said it before I'll say it again - when the up/down ratio drops below 35 look out above.

The money just keeps rolling in - the model portfolio is up to 14.08% and the benchmark is printing 5.74%. My trading portfolio is doing very well too. It currently contains GGB, AKS, AMAT, and the new kid - ANR. I think I'm late to the dance on ANR I should have picked up on it about 6 weeks ago but we'll hold for awhile and see where it goes. I'll share the filter I'm using for this one with you over the weekend. It is interesting.

The three amigos are doing their thing as usual and it makes me nervous when the beloved of the beloved can't move out of their own way - MSFT was up 33 cents today while remaining range bound, AAPL managed to make 70 cents today for all of its loyal followers (these are not bad numbers) and GOOG dropped about half of its increase but still managed to close up by 10 bucks. I won't bore you with how much opportunity you GOOG holders missed today - you already know that story - in three part harmony.

Going to be a short post today so let's get to the forecast - the VIX remains in neutral and the up/down ratio is now 63%. And this guy says we remain oversold and vulnerable.


The fact that it bobbed up and down and back up again in the past three days doesn't really mean anything special. The only thing that matters any more is where the up/down ratio sits and that says - down Monday.

The INDU ATR is up to 96.47 and that isn't bad. It means that while we might have a down day Monday it probably won't be multiple down days.

I'm calling for a breather on Monday and then we'll see what happens after that.

The coin meanwhile calls for ... heads - up day Monday.

The score stands at Marlyn 25 - 26 and 10 and the coin is 29 - 22 and 10 - that lucky old coin ain't got nothin' to do but roll around Marlyn's desk all day.

Anything Is Possible

In the Google Zone - or the "thank God GOOG made some money" rally. As I wrote yesterday the fear was so thick you could cut it with a knife - and fear goes both ways - fear that GOOG misses and you lose a hundred bucks just - like - that and fear that GOOG excels and you miss out on a hundred buck rally just - like - that.

Fact is nothing really happened - GOOG opened up 19 and is currently at 16 and drifty. But that kind of describes GOOG - doesn't it?

How many played QID off of Resistance 2 this morning? Come on - show of hands - it was a natural - the counter play to yesterday. The difference being it only dropped to R1.


For a short term play this is where you could use the RSI(2) < 2 indicator as your trade ender. As soon as you get the signal you could close the trade. In my software for Qtracker I turn the bar purple when the RSI(2) gets to the desired level.

I picked up a coal company, ANR, off a new method I've been working. I'll explain more about that this weekend. So far it's sat tight so I'm not sure if it will make any money or not. We'll see.

I'm still holding AMAT but it was very close to a stop out this morning and may get there yet.

AKS continues to run as does GGB.

This is the kind of day when trading sucks - everything happens in the first five minutes and because it is expiry day - there is no more volatility.

Good trading all.

Friday Pre-Market

You don't need me to tell you that we're going to have a positive day on the street. Between the oversold reading as provided by the up/down ratio, the volatility of the ATR reading on the DOW and GOOG's surprise (not really but some people think it was) the market, as a whole has no where to go but up.

The only fly in the ointment is this -


That side-stepping is not encouraging in the least.

As always take what the market gives you and don't ask for what isn't there.

Thursday Wraps

These are the times that try men's souls. A good morning dropping into a bad afternoon. As usual there are a couple of neat things to look at today - but first - business.

The KNOT is untied - I just became so frustrated with the fact that the traders in this stock want it to go down rather than up that I said to hell with it and dumped 'em all at cost. Lost a couple of commissions but it was well worth the cost. The time to sell, naturally, was several days ago at that huge red candle on the 16th - I, of course, was on vacation at that time and couldn't be bothered - and once again this piece of crap cost me money.


And, as normal with this bucket of dog blend, absolutely no news or anything else to cause the sell off. The traders made their money and that's it. But I'm taking a solemn vow here and now - I will KNOT trade in this stock again (until next time).

The trading portfolio now contains AKS, GGB and AMAT. As I mentioned this morning, barring some change of mind which I am capable of doing in an instant, I'm going to hold AKS through earnings.

Now for today's lesson. Here are the Q's -


Note how there was a gap down this morning, a drop below S1 and then a major rebound all in the first 15 minutes. Seeing that I thought to myself - going to go up and close the gap. And it did all the way to R1. Of course another piece of information that I have is that Thursday is the day of the week with the highest percentage of gap fills of the entire week. I won't tell you what that percentage is - you have to get the book - Mastering The Trade by John Carter to find out for yourself.

Now here is the SPY -


And if you notice any similarities between SPY and Q's you are absolutely correct. Bounce off S1 and rebound to close the gap.

Now here is AMAT -


Look familiar? That's because the major indices as replicated by the Q's and SPY don't move on their own - they move because their components move. But the point is when you see the major move you can be pretty sure that the components are moving so it is time to trade.

Finally - XLNX - another breakout stock -


This isn't rocket science or even very hard - it's just a matter of observing the market and taking what it is giving you over and over and over again.

BREAKING NEWS!!!! - GOOG beats! Up a few after hours. And that has to be troubling - 8 - 10 dollars on the huge number they reported is chump change. I don't know what people expected - there is no way this company can support its price.

Meanwhile the other two amigos, MSFT and AAPL trade in their range bound manner. AAPL dropped 13 cents and MSFT went up 9. To put that in perspective AKS, one of my holdings that I added to this morning on a drop of 39 cents went up a buck (1.39 from the low). Maybe I should sell AKS and buy MSFT.

I don't know why AKS went up a buck (there was some news of takeover rumors of other steel companies which is as dumb as it gets) and to be honest it scares me no end that it did because of earnings coming up. This stock traded a half million shares in the last 15 minutes of the day.

The model portfolio lost a little more ground to 12.76 and the benchmark dropped a tad to 4.87%.

The trend on the INDU ATR reversed and it is now printing 89 and change. That's a good sign actually because we want it to stay above 80. If history is our guide - 80 is the volatility (real volatility) break point.

Dow broke another record today but the NewMoMo started down. Remember momentum is related to pace of the market and not absolute price. And pace makes the race.



The VIX remains neutral relative to the 10-period moving average and the up/down ratio (which I thought was going to bring the market up today) is printing 30% and there is no way that the fund managers can let tomorrow go by without adding to all of their depressed holdings.

I'm calling tomorrow up.

The coin is calling tomorrow ... heads - also up.

I'm giving today to the coin because it was more down than up so the score stands at Marlyn 24 - 26 and 10 and the coin is 28 - 22 and 10.

Lenny Re Revisited

Well now he's a hero - he escaped this time - AMGN gapped up this morning and now the calls he is long are worth 8.60 and he is 10.5K to the good on his trade. Wow! Hard way to make a buck.

Good Trading Lenny! Can't wait to follow you on your next suicide mission. Hope it comes out as well.

GOOG Reports

GOOG reports tonight and you can almost smell the fear -


Based on the fear meter reading (that little doji forming up today is a "fear meter" btw) I'm thinking that GOOG not only hits the number plus a buck, it also forecasts 40% growth going forward (for just this quarter) and guarantees a 90 dollar dividend and announces a plan for a zillion share buyback. GOOG will be 550 by this time tomorrow.

Or 450.

Thursday Morning

Added to AKS because it was showing an oversold condition (RSI(2) < 2) along with the SPY this morning. Eventually I'll be up to a full load on that one. I began looking at other steel companies and the ones that have reported to now are all talking high profits (which is known) and guiding higher ahead which is what causes the market to react. As a result, unless something else happens, I'm taking my chances with AKS through its announcement next Tuesday.

Knot put out an oversold reading but I'm still wary of that one and am not going to add until it gets some momentum going. GGB hit S1 and bounced like a rubber ball. It is already a quarter up on the day but I'm overweight GGB already so I'm standing pat.

Last but not least I added AMAT off a breakout scan and an oversold reading this morning. It isn't going anywhere and if it doesn't start climbing the wall I'm selling it before COB. As it is I've got a tight stop.

What caused all of this was the fact that both the SPY and the Q's reversed off their gap downs and are trying their best to close them up. Actually the Q's have already closed the gap but pulled back a bit at this moment. It appears to me at least that we are going to have a net up day or, at worst, another mixed day.

Good trading everybody.

Revisiting Lenny

As usual the blogosphere is on something for a minute then on to something else with no follow-up and I'm just as guilty as everyone else in that regard. So I was thinking yesterday - I wonder how Jimmy Crack Corn Pone's protege Lenny Dykstra is doing with his AMGN deep in the money July 55 calls play now that AMGN looks like this -


Looks to me that Lenny is doing just fine and is having the last laugh on all of us - but wait - let's review the bidding.

He bought 80 contracts at a variety of prices and I could work out the basis for you but I prefer the contract by contract method to present the data - When he first began this play the deep in the money calls were at 12.70 - as of yesterday's close they are 6.90.

Here is a chart that shows the entire play from beginning to the present -


P per S is the price per share he bought at each increment. #C is the number of contracts purchased. Curr P is the current price of the option and Delta is the difference between current price and P per S. The rest is just multiplying out to get to a real value and we find that he is only 3.1K in the hole at the moment. He may even get through this without a scratch thereby proving his point - which is? You can save a bundle of money by avoiding his picks.

Here's the way it shapes up on my pivot point model -


Note that the place where Lenny bought the calls was stupid and if he had bought them at point "a" some nifty things could have happened - 1. He would have had a lower basis, 2. He would be buying on the ascendant trend vice the descendant trend, and, 3. He probably would have already made his buck profit and would have been out because point "a" was 4 bucks ago.

There is nothing inherently wrong with buying deep in the money calls - as long as you buy them on stocks that are going up and not down. Using a double up approach when the stock is declining is just stupid. If the stock is descending why not buy deep in the money puts - same basic principle just a different direction.