Exit SSO Trade

The short-term model became overbought before noon today, but I did not have time to post earlier. SSO should be exited now. I will use today's close to calculate the return, but if anyone is in this, I would sell at the open tomorrow, especially if there is a gap up. Closing price is 61.69 up from 59.24 open on Friday for a 4.14% gain.

The recommended GLD option surpassed 100% gain intraday today but then reversed. Many of the commodities advanced today. The question now becomes, is this a real deal reversing attempt, or a sucker play (bull trap). I would certainly set a stop loss to lock in a minimum of breakeven or probably better yet 25% gain on GLD. That way, you are covered and can hope that this is just a fruitless bargain hunt that will be met with lower lows and bigger gains on the option. If you get stopped out, then you at least had not loss and can see if things are right for re-entry or if there is a legitimate reversal happening.


Past Trades using short term model:

QLD 4/9/08-4/16/08 = 2.87% gain

QLD 5/6/08-5/12/08 = 2.73% gain

QID 5/15/2008-5/22/2008 = 2.46% gain

QLD 5/27/08-5/29/08 = 6.40% gain

DXD 6/5/08-6/11/08= 7.6% gain

QLD 6/30/08-7/17/08 = 0.82 % gain

SSO 7/25/08-7/30/08 = 4.14% gain

Looking back at the past recommended trades, there was sometimes some intra trade drawdown, but you can see that every trade I have suggested has been a winner, so this is likely to be a valuable system.

Pete

Follow-Through Day

Today was a big gain day with increased volume. Today met the common parameters of a follow-through day which often signals a new uptrending market.

Today I purchased put options on both USO and GLD. I believe these markets could go significantly lower (gold and oil). Those two markets are correlated strongly, so if you are in one, the other will likely do the same thing.

I will not track these on the blog as I have already posted a trade on GLD. However, I will certainly look for follow up trades if the market goes the way I expect. So there may be more to come as far as specific trades go.

Pete

Update on Oil market and USO chart

Click chart to enlarge

I wanted to update a couple posts I made regarding the oil markets. In my last 2 posts regarding oil, I had suggested that momentum appeared to be waning, and that we may be near some degree of top. The next post highlighted the potentially bullish (though strange in my book) configuration of the commitment of traders on crude oil. In that post, I suggested that the strategy may be to use any pullback in crude prices as a buying opportunity to purchase oil related ETF's, etc. I did not give any time frame analysis or specific trade recommendations.
Since that last post, crude has come down significantly, and the bullish configuration of futures contracts remains similar to how it was in mid June.

The issue I wanted to bring to the table today is the price action of oil futures. The crude oil has been in a major bull market move since January 2007 rising nearly 200%. On the way up, the intermittent price declines have been somewhere in the 10-15% or less range. Then the past few weeks have seen a steeper and greater percentage decline than any decline since January 2007.

Whenever this type of situation occurs, I believe it is prudent to recognize that a significant shift is (or may be) occuring in the underlying market. This idea was developed by WD Gann in what may be referred to as uniform corrections. I refer you to literature on Gann to get further background on this idea. Also, gannglobal.com provides excellent information that is somewhat derived from Gann's ideas.

So, my personal view right now, is that we may be in for a more significant correction in oil prices than we have seen so far.

New SSO Trade

After today's decline, the short-term model is oversold for the S&P 500. So I am suggesting a purchase of SSO which is the double long (2X) ETF for the S&P 500. Will track this from tomorrow's open price. Also, I will not suggest a stop loss on this as I will use the model to provide an exit signal.

So, right now we are tracking QLD, SSO, an Aug 93 Put option on GLD, and an August 45 Call option on QQQQ.

Refer back to previous posts for more info on those trades.

Pete

Today's chart is of IWM which is the Russell 2000 index ETF. I have recently posted a trade going long on QLD which is based off the fact that there are many oversold conditions recently. However, after this recent advance, there is a chance that things have gone too far too fast at least in the short term. So, what I am posting this chart for is to consider either an option trade or short IWM trade to mitigate any loss on QLD if there is a short term pullback.

Technically IWM has bumped up against the upper Bollinger band coincident with overbought fast stochastics and a peak in momentum/rate of change that is higher than any in the past year. Also it is likely that a swing high is forming today on IWM, so a stop loss could be set a penny above yesterday's high on this trade if going short.

As far as exiting the trade, you may get stopped out or you decide to adjust your stop loss lower as the stock moves down. Also, you may decide to exit when price gains are 3X your risk going into the trade. If trading an option, I would exit on any close above yesterday's high, or exit if the trade is not profitable in 5 trading days. Otherwise I would likely let the trade run until fast stochastics are oversold.

The exit is always the hard part, so please ask questions in the comment section if any clarification is needed.

Pete

New QLD Trade, GLD put options

I am going to recommend a trade on QLD that is slightly different than the past ones. The past ones were really recommended at low points on short-term oversold conditions. I am going to suggest using a buy stop to buy a mini breakout that could go much further if this market does in fact follow through to the upside.

For entry use a buy stop order of 72.88. Then use 68.63 as a stop loss. I will suggest using a trailing stop technique on this one to try to capture the bulk of any upward move. I will also continue to recommend short term trades as the model suggests.

I am going to track a trade on GLD as well for the blog. I will use the August 93 put options. The entry price I will use is 2.25 which is today's closing price. GLD is right at 93.00 right now, so it does not have to move far to break even. I had bought puts on GLD early this month and GLD went exactly the wrong way. However, it is a rookie mistake to throw all your analysis out the window and lose sight of the next opportunity. Today the daily MACD made a bearish cross and all the other basic technicals I look at had already given what I use as sell signals.

To make clear, I am not in this trade as of today, so please think through this trade on your own.

As far as exit strategy on a trade like this, I really expect a trade like this to make in excess of 100% profit. That is good because any loss on a short term at the money trade will tend to be substantial. I would sell the option for a loss if today's high is broken before expiration.

Pete

SRS Exit

I was gone on vacation last week. During that time the stop loss on SRS was hit at 100.00. That is a gain of 11% on the trade up from 90.00 at entry.

Pete

QLD Exit

The short-term model is overbought, so that is the exit on a somewhat volatile trade. The current price is 74.91 which is up a bit from 74.30 at the entry for 0.82% gain, but another successful trade all the same.

The way I see it, the trend is shifting to up now in the intermediate term. I would like to see a follow-through day to confirm an uptrend. This involves a price and volume explosion to the upside. There are different criteria to define those, but Investor's Business Daily uses a simple definition where price rises more than 1.7% and volume is higher than the previous day.

That being said, for anyone following these trades, a good strategy to use is to gradually move a stop loss up as the market rises to try to let your winning trade really cash in. So while the short-term model is overbought, realize that the market could still go quite a bit higher in the coming weeks and you may consider a trailing stop technique instead of an exit at this point.

Pete

High Volume Tug of War

A quick highlight of Friday.......

-Very high volume across the board on index ETF's comparable to the bottoming days of January and March corrections

-Close and Open (of SPY, DIA, QQQQ) occur in a narrow range despite a very wide range day and very high volume

-Candlesticks indicating indecision in the market

-15 higher highs in the VIX since the May low in the VIX

-VIX surges above the 3 standard deviation bollinger band intraday but closes below it

There are other indications of bottoming action as well, so any bottom fishers or reversal pattern traders should be alert

Also here is an interesting post from VixandMore. Follow the links to read about the VIX/VXV ratio.
http://vixandmore.blogspot.com/

Pete

Comparing Patterns in the DOW

Today I went through the 2000-2002 bear market and looked at when the intermediate term lows formed in relation to the prior intermediate term low. And I wanted to just mention that general pattern in relation to our market right now.

There were 5 intermediate lows in that bear market where price broke below a prior significant low. The percentage declines from the prior low to the next low were 0.9%, 5.7%, 11.3%, 6.6%, 4.4%. Our current market is about 4.8% below the January 2008 low, so it is in that range.

The more consistent pattern that emerged was that the new low would typically occur around the 127.2-141.4% retracement of the previous uptrend/bear market rally. Our current market is right in that range as well. Today's low was about 60 points shy of the 141.4% retracement of the January to May 2008 bear market rally.

In conjunction with other extreme pessimism currently, past precedent would tell us to be on the look out for an intermediate low soon. What we are missing right now, is a very wide range capitulation type day or a huge up day. The best risk/reward comes when you get a classic candlestick reversal and can enter immediately after that day and set your stop below that day's low.

Pete

Sentiment Surveys (and other stuff too)

For anybody who is serious about learning investing, I would recommend getting aquainted with sentiment surveys. There are a few major surveys that publish survey results each week regarding the opinions and actions of various investing groups. These data can then be quantified statistically and also compared to historical readings to make better judgements on your investments. Two common ways to look at these data are by looking at absolute levels on a percentage basis OR by looking at the data plotted within +/- standard deviation bands to help identify relative extremes and account for long-term trending in the data.

A typical survey will tell how many people are expecting further market declines, how many are expecting market gains, and often how many are neutral.

Investor's Intelligence is a survey that has been around a long time as far as these surveys go. It polls investment advisors. The results of this week's poll show, on an absolute basis, the most % of advisors expecting market declines since 1994 and one of the very highest levels since the 1970's. When advisors have gotten this pessimistic, it has typically coincided with market bottoms and good stock returns in the following months. It remains to be seen whether that will be the case this time.

With that being said, there are other polls that survey different investor populations, and these are not all in agreement currently. So I am not jumping the gun in expecting strong markets for many months to come.

As a side note/update, move the stop loss up on SRS to 100.00.

Also, as a follow up to my post on oil prices I wanted to give a short explanation of a couple oil ETFs.....

USO is the most directly correlating ETF to the price of crude oil.

DIG is a ultra oil and natural gas ETF. It price will depend on both of those commodities, which correlate strongly, but adds the complexity of two underlying markets. Also, the "ultra" means that it will be about twice the volatility as a non-ultra fund. So there is more risk and more reward potential.

Pete

Being Careful

I was running some scans this evening after market close and a number of oil related issues came up with what would appear to favorable candlestick patterns...... Hammer type candles bouncing off lower Bollinger Bands. These are tempting for me to trade, especially when they test the 50 day moving average and close above it. However, from experience I have developed a rule that I don't trade these candles when they are occur in the first pullback after a technically divergent top. This means when RSI, MACD, momentum, etc. all have shown bearish divergence and then price goes down and forms one of these candles, you should be careful. I have seen them fake out many times. People may be refusing to see the beginning of a downtrend and they try to bargain hunt around the 50 day moving average. There appears to be a bullish reversal, but then within a couple days there is a break below the 50 day MA and the trend continues down.

So, the risk reward may still even justify a trade on something like KWK or RRC or COG today, but make sure the stop loss is in place below today's low, because that level should not be touched if the trend goes on to make new highs.

Also, the short term model is nearing overbought, so another up day would probably take it there. It would be safer to wait to see if it can become overbought, then pullback to near oversold again at a higher low than the recent one the last couple days. That's what I would look for to recommend a new QLD trade.

Pete

Quick Update and Perspective

Following the suggested the stop loss on the QLD trade, we would have been stopped out at 71.00. I will continue to track this trade because the purpose of these trades is to use a short term model for entry and exit signals. I suggested entry on a recent oversold signal, however we have not gotten back any where near an overbought signal which would be the exit. So I will post an exit when the model gets back to overbought. As a matter of risk management though, I tend to use stops, and suggest stops on stock trades to eliminate guessing games when possible.

The problem comes when you get stopped out and then that very day or the next you get a new signal to take the trade, but you are too afraid and you pass only to miss a good opportunity. So, with experience and consistency comes the guts and wisdom of when to holdem and foldem.

Also, there is a system I have read about on using highs in the VIX to identify timing of market reversals. If the VIX makes 12-15 higher highs off a bottom in the VIX, that usually is a very stretched market and it has rebounded in the past. We are at a 14 day high right now, so past history would suggest being on the lookout for some degree of market reversal. Even after the huge selloff in the post 9/11/2001 disaster, the market reversed after a 15 day high in the VIX. So there is precedent that it may be useful even in bear market environments.

I am still holding the QQQQ call options waiting for a potential market advance to take the short term model to overbought before selling.

Move the stop loss on SRS up to 96.23.

Pete

Oil, Hedging, Commitment of Traders (and stuff)

I wanted to update a post I made a month or so ago regarding oil prices, and go into some further detail because the price of oil is so important to our markets and economy.

First, a detailed study of oil prices in relation to stock prices shows that if oil rises about 75% or more on a year to year basis, that has been bad for stocks over the next 12-18 months. We are definitely in both of those categories currently (high oil, bad stock performance). Anyone could get much more detail by reading The Oil Factor by Stephen Leeb.

My previous post had suggested that oil prices were starting to show technical weakness and possibly some relative topping behavior. Not much has changed since then as far as technical indiactors. However, I wanted to mention some other data that will better clarify the fundamental outlook and see what the "smart guys" are doing.

There is a report published each week breaking down commodity trading by how many (futures) contracts are being held and who is holding them. The report breaks it down into commercial hedgers, large speculators, and small speculators.

Commercial hedgers are the smart guys. They are traders who are trading for large companies and are hedging against future price increases. So Southwest Airlines, or Fedex, etc. who use huge amounts of oil will buy futures contracts locking in today's price of oil which must be delivered to them at some date in the future. They actually want the oil to physically be delivered for business use. They know their business inside and out and tend to buy contracts near low points in oil prices......they are smart.

Speculators do not actually want the oil, the just try to profit from price swings and have no intention of receiving actual oil. Both large and small speculators tend to be worse (or downright bad) at timing the market turning points and understanding the underlying fundamental supply and demand.

I mention this because we are at an interesting point right now. The smart guys are buying lots of oil (to an extreme level) because they obviously expect the price to go up. The speculators have been selling oil to a relative extreme level. That would indicate that oil is much more likely to go up in the near future. However, the interesting thing is that the price of oil is at all time highs while this is happening, rather than at a low point which is historically when you see such a thing. My basic interpretation of this is that we may be in a still developing "bubble" where prices could rise significantly yet before undergoing a true bear market or large correction.

Time will tell, but if you are interested in profiting from this potential move, USO, DBC, and DIG are ways to basically buy oil through the stock market without actually trading the commodity. There are other funds as well, but USO is the most widely used.

Basic conclusion..........treat any pull back as a potential buying opportunity once things look favorable for your trading system again.

Pete

QQQQ Option Trades

I bought both August and July 45 calls on QQQQ. The current price is about 2.00 for the August and 1.25 for the July calls. I will use those prices to track the trade.

As a side note, I would consider AMZN as a short trade or put option trade.

Also, IPSU is pulling back off what I am considering a breakout move. I would consider this a buying opportunity.

Pete

New QQQQ Option Trade and Other Stuff

Move the stop loss on SRS up to 93.00.

I am purchasing August 45 Strike calls on QQQQ and will track this on the blog. There were market wide signs of at least short-term bottoming today. The April gap ups on the Nasdaq have been completely filled now in conjuction with a high volume bullish candle pattern today.

I think it is time to get aggressive for short-term trading. Stocks I am considering are CMC, ROST, NETL, GGB.

For anyone trading (shorting) GLD that would have been a stop loss today the way I trade. I am holding some (losing) put options on it still. There has been a mixed relationship in gold and stocks in recent months. At some market bottoms gold has topped, and occasionally they have moved together. With the markets appearing to bottom now, I will give GLD a chance to pull back, but the break of what I had suspected to be the "C" leg of a triangle pattern, is not ideal and should be grounds for exiting any trade that does not have limited risk like an option does. At minimum, a relatively tight stop loss should be in place for protection.

Pete