New SDS Trade

The short term model is very very close to overbought. It is close enough that I am going to suggest an inverse ETF trade. I suggest buying SDS the double inverse fund of the S&P 500. This will rise as the markets fall. For anyone trading this, for a risk management standpoint I would use a stop loss of 62.50. The current price is 64.19 and that is the price I will use for tracking the trade.

I had suggesting exiting the previous SSO trade already even though the short-term was not extremely overbought. I would definitely exit it now if you haven't already.

As an aside, I think ENER would be a good put option purchase right now. Also, I have puts on TEX which looks to be forming a triangle pattern that I would expect to break to the downside.

Trade Recommendation: Buy SDS with a market order today, 8/28/2008.

Pete

SSO Exit and Market Update

SSO opened at 61.60 today and that is what I will use as the exit price for this trade. The entry price was 61.66, so this is essentially a breakeven trade. The short-term model never made it to overbought, but everything I have been looking at had suggested that the market would move lower soon (as it has today), so I wanted to err on the side of caution this time.

If the market ends down today in higher volume, as it appears it will, that would be 5 distribution days since the recent follow through in July. Five higher volume selling days in the space of 4 weeks is what Investor's Business Daily suggests is almost always enough to send a market into a deeper correction. So, the volume pattern is another reason to be careful in the market now.

Pete

VIX Update and What I'm Watching

The VIX has made 12 lower lows since the July highs in the VIX. I consider anything 12 and over to be stretched and time to start expecting a reversal in the markets. Also, despite the large price gains today, the volume on QQQQ and SPY was very low, which does not convince me that this rally will last.

The short-term model is close to overbought, but not quite. I am going to suggest exiting it on Monday morning, as a bit of personal judgement on this one instead of waiting for it to get more extreme.

Three trades I would take immediately are STZ, DIS, and DD. All these would be short sales or put option trades.

Pete

Updates on Commitment of Traders Reports

I wanted to give some updates on current CoT data.

Right now the Commercials (smart traders) are net long (meaning they are buying) natural gas to a greater degree than any time in the last 5 years or more. Both the commercials and the large speculators net positions are at extreme levels that have corresponded with bottoming in the commodity the past several years. For non-commodity traders I would look at UNG which is an ETF that tracks natural gas.

Crude oil is also in a similar position to natural gas. Both commercials and large speculators are at extremes corresponding with past buying opportunities. However, I have discussed in past posts, that the commercials were in an extremely bullish position even before the huge sell off the last month or two. Also, I have discussed in past posts, that the price action of crude oil is more consistent with a decline off a major top and may have further to go down before a truly great buying opportunity exists. USO is an ETF that tracks oil for those interested. Also DIG is a leveraged oil and gas ETF that will move about double the amount of oil and gas.

The "smart" commercial traders are continuing to decrease exposure to the US dollar as it has made a dramatic rise the last 2 months. Large and small speculators are both upping there exposure greatly. All three groups are at extremes relative to standard deviation bands of the data. UUP is a relatively new ETF that will rise as the dollar rises. I do not have a lot of interest in this ETF because I would rather trade something more volatile like USO (which will generally go the opposite direction of UUP).

These data raise the possibility that we will see a return to a declining dollar and rising energy prices soon. I trust data over other conceptual arguments, but I think there is something to be said that our country may be moving into a deflationary time as consumer spending drops dramatically with the baby boomers passing their peak spending years. How this will balance out against still relatively strong Asian demographics for several more years I don't know yet.......that's why you always control your risk in any investment. Trust your data, but follow a good risk management plan in case it doesn't pan out.

Pete

QLD Exit (Stopped Out)

Today QLD went below 77.00 which is what I suggested as a stop loss. That is up from 72.88 on 7/23/08 for a 5.65% gain. The SSO short-term trade is still open. If tomorrow is an up day, then it may be close to overbought and ready to exit.

Pete

10 Day Put/Call Ratio Average and Updates

First, the SSO trade and the QLD trade are still active. SSO tested last weeks lows but did not close beneath them. The short-term model is still very near oversold.

I would take any short-term long side trading with caution. The 10 day equity put/call ratio is at an extended low point relative to statistical averages in recent months. This indicates too much complacency. This is one of the simplest and best contrary indicators in my book. Sentimentrader.com plots 5, 10, and 21 day moving averages and standard deviation bands on the same chart. I like that methodology because it will account for longer term trending in the data to highlight relative extremes. I used to just create my own charts on Excel and look for both absolute extremes in the data, and also look for crossovers of the 5 and 21 day averages to indicate intermediate trend change. The short of it is, that this indicator is sending a warning, and the break of the rising wedge pattern off the July lows is another warning that upside potential may be limited. Also, Investor's Business Daily notes several distribution days in the Dow since the recent follow-through. Historically those are not the most successful rallies.

Also, the DMI indicator is used to track trending versus non trending price action. It has not signaled a new uptrend during this rally yet. That indicates to me that this is just counter-trend corrective activity before the next declining phase.

A number of Dow 30 stocks are showing patterns that I would short or buy puts on. Two that look very good are DIS and DD. I would expect the July lows to be broken to the downside.

Pete

What I'm Watching in the S&P 500

Click on the Chart to Enlarge

I'm sure there are many other people looking at the trend line of the August lows as an important support line. If that line gets broken, my particular view would be bearish. Multiple overlapping highs and lows like we are seeing off the July lows is not typical of a strong market that is reversing trend.

Looking forward, I would suggest exiting the SSO trade if it closes below last weeks lows. However, I will still use the short-term model to track the exit price.

Pete

SSO trade entry

SSO opened at 61.66 on Wednesday and that is the entry price I will use for tracking this trade.

Pete

Update and New SSO Trade

I wanted to update the QLD trade entered on July 23rd. That trade is still active and doing great. However, I see some signs that the trend may be ready to shift. Move the stop loss order up to 77.00. 72.88 was the entry price, so that is still good profit. Also, I am going to suggest using a limit order to exit this trade at a price of 85.00. So if the market continues to rise the next day or so, I would get out by 85.00.

There is an unfilled downside breakaway type gap around that level. In fact, I'm sure most people wouldn't notice it on the chart because there is no visible gap, but it is there and is unfilled. I would suspect some downside reaction if/after that gap is filled. I would look to enter an inverse ETF at that point, probably QID.

That being said, the short-term model on the S&P is oversold. So I recommend entering SSO tomorrow at the open, but I will be much more cautious about long trades after that.

Pete

Exit GLD options for 278% Gain

The current price of GLD is a little above 84.00 which was may target price for exiting this trade. The 93 put option I suggested is currently at 8.50 up from 2.25 at entry for 278% gain!!!

I am suggesting an exit now, if there has not been an exit yet. So this is the price I will use to calculate the return on the trade.

Pete

QQQQ Update

Click Chart to Enlarge

Click Chart to Enlarge

Today the short-term model became overbought. It is tempting to suggest an inverse ETF at this juncture, but there are a couple reasons that am not going to.

1) There has been a recent follow-through day indicating uptrending market until proven otherwise

2) Breakout of tight trading range to close above Bollinger Bands

3) Bullish cross on Aroon indicator indicating trend shifting to up


As side notes, I believe that FRO is offering another entry opportunity today after a low volume advance. That would be good for 60 or 55 put options.

Also, I have a couple different strike priced put options on GLD that expire in August. Both are up about 100% or a little less. I have limit orders to sell if price gets to 84.00 on GLD.

Despite the herd mentality to once again look at the pullback in commodities as a buying opportunity around the 200 day MA, I think it is more likely to fail. In my eyes there has been a clear shift in the severity and pattern of price action.

Pete

FRO, GLD Trade Update

FRO gapped down substantially at the open today, so I am going to change the entry price of this option trade to 5.20 which was today's open price. That will more accurately define the risk/reward parameters for anyone in this trade. Obviously it got off to a great start. Stop loss should be set no looser than at 2.60 right now.

I am not in this trade, so right now for trade management sake, I would suggest using a limit order to sell at 150% gain which is 3 times the 50% risk initially. I think that with this big initial move, 100% gain is too conservative. However, if you are willing to immediately set your stop loss to 33% risk, then 100% gain is OK.

The GLD put option I recommended is basically up 100% right now. I would definitely move the stop loss to breakeven or 25% gain. For multiple contracts, it would probably be wise to exit half of them and let the rest ride till expiration or set a 200% sell limit order to exit the second half of the contracts.

Pete

New Option Trade

I am going to suggest a Sept. 60 Put option on FRO. I will use today's (Friday) close to track the trade. The close was 4.70. Stop loss should be 50% on entry. Then use a profit target of 100% gain for exit. As a secondary rule if the trade is not profitable in 5 trading days, exit the trade. There is a short-term head and shoulders pattern forming after a bearish divergence top. Today the stock broke below the up trendline of the right shoulder.

Other options I would suggest are AKS Sept. 60 puts, TOL Sept. 20 puts, BNI Sept. 100 Puts, and ARG Sept. 55 calls. I will not track those on the blog, but if there is any further analysis or explanation anyone would like on these trades, please ask in the comment section.

Other open option trades are GLD put options, QQQQ call option, and TKC call option.

Pete