October 19, 2022

After a couple of days whereby earnings reports were the star attraction, today it was bond yields which hogged the spotlight, dampening investor appetite for equities.

The benchmark 10-years jumped 12 basis points to the highest level since October '07.

At present, there is nothing overly interesting in terms of pattern setups for breakout traders. There are a few oils, but no real group leadership is putting its stamp on things.

This is a good market for limiting one's long exposure, exercising patience, and making sure we are not getting ahead of our skis.

Institutions are playing coy when it comes to growth stock selection. They have moved en masse into value stocks where they feel comfortable and protected from higher interest rates.

Among the names, the following are believed to be the most attractive for our strategy of speculation in the $13+ market. Click to zoom in.

Comfort Systems (FIX)

Long ProShrs UltraPro Short QQQ (SQQQ). This is an inverse ETF with pullback entry. Entry pivot is today's high of 58.71, suggested stop pivot is today's low of 55.21, and 1R target (for those who use that for a full or partial exit) is 62.21.

System P

About nine years ago, a friend of mine needed help in setting up a hedge fund firm. Over lunch, I outlined how to set it up and how to operate it. He was grateful for my saving him time. At the time, he was teaching a course in trading via a series of live seminars. After lunch, I asked whether I could attend his seminars. He said "sure." I called it "System P."

Some subscribers recall how I considered using the strategy at the time with the current service. As it turned out, I discovered the system had certain similarities to System R, and I decided to shelve it.

Recently, I received an invite from my friend to attend a coaching webinar involving the system. This piqued my curiosity, and I have been studying the system again.

My friend had me sign an NDA as he does everyone at the time they attend his seminars. Therefore, I cannot discuss the system in detail beyond what is discussed here, but I wanted to provide an overview of it, as I believe some of its setups will appear on the Focus List before long. (I continue to test System Seven, but believe System P is an improvement in a number of areas.)

System P seeks to enter a stock transitioning from a down trend to an up trend or vice versa. It is neither breakout, pullback, nor reversal. It is what I would call a "momentum strategy." It relies on several indicators, each measuring a different facet of momentum. An entry is signaled when at least three indicators signal within a few bars of each other. The more, the better. The indicators are not the type that one sees very often, if at all, in one's journey through trading. This does not necessarily make the system better, but I mention it nonetheless.

If a long entry is signaled, either stock or a call option is purchased. Most people who trade the system use it with options. For options, a monthly contract three expirys out is chosen. E.g. if today is May 8, the July contract would be chosen. Once the May contract expires, the August contract is used. An at-the-money option is used, though I do not believe this is material to the system's profitability. I realize some players love their out-of-the-money options.

As a rough estimate, a move in a stock will tend to produce a 10x move in an option. E.g. if a stock goes from 40 to 44, the option can be roughly estimated to have a 100% gain. This 10x relationship is something I observed, but is just a rule-of-thumb, and should not be relied on for anything other than a rough estimate.

One of the exits calls for exiting a trade when one point is gained. Another uses the opposite Bollinger Band as an exit level. The break of a very short moving average can also be used among other exits we have discussed in the past.

The system has a holding period of 1-10 days, though each trader will find what he is most comfortable with. Opening gaps are treated as a trader would treat a breakout gap. In other words, the trade-through and back-door entries do not apply. Stops can be placed the other side of the signal bar or a straight % below entry or any one of a number of methods.

Kevin Marder

Trading Lessons
Introduction to the service (38:00)
Money management and risk management (20:27)
Bread and butter pullback (11:10)
Bread and butter pullback: Pt II (15:09)
Bread and butter pullback: Pt III (31:48)
Bread and butter pullback: Pt IV (30:16)
Bread and butter pullback: Pt V (1:41)
System R
Short-selling (25:53)
Wyckoff spring reversal (2:30) 
5-minute breakup test (8:01)
Screens (21:03)