WATCH: The 4 Stage Stock Market Cycle


Technical Tuesday - Here's How I Became a Millionaire (and how you can too)

By Chris Rowe October 11, 2011 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

You can't lose faith in a systematic approach to trading/investing just because it happened to go against you at some point, or at times. 

Today's article is one of the most important lessons you can learn on investing, and I'm happy that you'll get to witness something that happened to me over the last few weeks, first hand, instead of reading about a hypothetical situation. 

I'm about to invite you into the last few weeks, and how I've traded for myself and for my subscribers.  Again, what you're about to read is one of the most important lessons for any trader, especially traders who have been doing so for less than a decade.

There are two main parts to being a good investor/trader:

1.  Being able to SEE the market.  Most people can't do this.  But what I teach in "TAM", my technical analysis course, makes it possible to "see" the market very, very clearly. 

2.  Being able to TRADE the market.  Even if you are one of the few people that can truly SEE the market clearly, it doesn't mean you can TRADE the market.  It's like anything else in life where you know what the right thing to do is, but you don't do it. 

Many seasoned veterans that have been studying market analysis for decades eventually fall victim to human emotion, and they abandon their system or approach and they stop following their own rules.  This is usually a result of fear or greed overcoming their logic and trading discipline. 

Two weeks ago, when sentiment was overly bearish (a contrary indicator that usually means you are at or near a market bottom) I wrote a Tycoon Report article titled "Heed This Big Buy Signal". 

We were following the formation of a potential "bearish flag" which, once completed, gives the S&P 500 a minimum price objective of 890, about an 18% decline from the price at the time.  There were different indications that the demand side might have been taking back control of the stock market on an intermediate-term basis, while still in a LONG-TERM down trend.

Long story short, as you can see below, the market had a large one day sell off, breaking though the lower part of the channel (two red parallel lines, below), which completed the bearish flag. 

(Click on images to enlarge)

The day that happened, the NYSE BPI that I always talk about flipped to a column of Os, showing that the supply side had taken control of the stock market!!!

I then (1 week ago) wrote an article titled "Heed This Big SELL Signal".

Without context, to the naked eye, it looks like a bunch of flip flopping.

I had been waiting for this to happen since the big summer correction, because it's typically one of the most important times to get bearish and ride one of the STRONGEST bear signals you can get -- a long-term decline with a new intermediate-term decline, as well as the NYSE BPI on a sell signal and in a column of Os.  

If you don't understand what that means, it means lots of stocks breaking down all at the same time. 

Is this a guarantee of lower prices?  No.  You can flip a coin 10 times and have it land on heads all 10 times, but you would be foolish to not bet someone that it would land on tails at least one out of 10 times. 

So what did I do with my trading service?

I got bearish.  I only took ONE bearish position, and then I waited for higher prices to start nibbling.  But as of last night, the NYSE BPI flipped back to Xs, showing the demand side in control -- which typically means higher prices on the way.  

Now I want to visually add some context.  Below, you can see a blue circle where we have the first trading day where we knew the NYSE BPI flipped to Os (bearish).  I took three bearish positions over the two trading days.  

In two out of the three, I recommended taking HALF positions (hypothetically, if a person usually invests $10,000 into an option, they would invest $5,000 and wait for the other half if the price of the underlying advanced causing my put options to get cheaper).

Highlighted in yellow, you can see where I sent out 4 bearish trade alerts, which were sent at the high of the day.  Two were to take the second half of the two positions, and another two were to take the FIRST half of two additional positions.

The market got creamed.  I had some positions up around 90% - 100%. 

Then that HUGE Tuesday came around, where the Russell 2000 small-cap index went from being down 6% to being up 6%.  In hindsight, I probably should have taken a tiny bit off the table, but it was a very serious break in the market.  Even with a big advance, my bearish positions would still be profitable, and I would even get a chance to buy the second half of the other positions I had on.

Anyway, the market came up, and on Friday, it looked like we were hitting a resistance level that had a decent chance of holding the market back.  So, highlighted in yellow, I took a couple more bearish half positions. 

THIS MORNING I EXITED THEM.   (And Murphy's Law states that the market will probably tank now that I did it, but the stock market is no place for superstition.  We must have discipline.)

Keep in mind, the NYSE BPI flipped to Os at the blue dot, and back to Xs at the dark red dot (today).  That's about a 6% difference in the S&P 500.  

I got bearish mostly at the yellow dots (a little near the blue dot) and exited at that final dark red dot. 

On average, my positions were down 11.36%.  Also remember that when we use options for stock replacement, we are only putting 15% - 20% of the money any typical stock investor would put at risk.  So on an absolute basis, the option itself lost, on average, 11.36% -- but assuming that option represents 20% of the actual stock/ETF position, it's like a stock trader losing 2.73%.

This is also a perfect point to remind you of the importance of proper position sizing -- note that I had my members taking half-positions.  This allowed us to be wrong, and yet not "blow up our accounts" as a result.

The most damage done here was the human nature feeling of having profits on the table and then seeing those profits go away.  But that's short-term thinking.

Let me take you behind the scenes for a second with some images my TAM subscribers have studied...

Below is a monthly chart (each bar represents one month) of the NYSE composite (which is just another major stock index like the S&P 500 or Dow-30).  

I highlighted, in green, times when the NYSE BPI (not to be confused with the NYSE composite) was in a column of Xs, and highlighted in red times when the NYSE BPI was in Os.

So if you were trading the NYSE composite, then you would have been profitable on every single column change with one exception (circled in red) from 2000 - mid 2007 (which is only where the chart ends).

Then I zoom in below and the chart picks up back in 2007 again.  Same comparison. 

You can see just about the same thing, but TAM students understand that when the market is in a long-term decline, the O columns are more reliable.  When it's in a long-term advance, the X columns are more reliable. 

Even if you didn't know that, and even if you played 100% bullish positions when in Xs (composite price chart highlighted in green) and 100% bearish when the NYSE BPI was in Os (composite price chart highlighted in red), you would have been very profitable. 

And finally, below you can see the most recent activity. 

The point here is not to defend my calls over the last few weeks.  The point is to not lose faith in one indicator just because you didn't double the size of your account this time around.  

As a trader, or investor, you must view your account as a BUSINESS.  And in a business, there will be trades that go against you, but as long as you are responsible with risk management, the losses will be minimal and the profits healthy. 

If this indicator flips to Os again, I'll reverse to bearish again.  PERIOD.  That is how I became a millionaire at a very young age, and if you are disciplined as I try to be, you will almost certainly multiply your net worth as well.